[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
             MEDICARE PROVISIONS IN THE PRESIDENT'S BUDGET

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 13, 1997

                               __________

                             Serial 105-57

                               __________

         Printed for the use of the Committee on Ways and Means



                    U.S. GOVERNMENT PRINTING OFFICE                    
52-969 cc                    WASHINGTON : 1999



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
JOHN ENSIGN, Nevada                  GERALD D. KLECZKA, Wisconsin
JON CHRISTENSEN, Nebraska            JOHN LEWIS, Georgia
PHILIP M. CRANE, Illinois            XAVIER BECERRA, California
AMO HOUGHTON, New York
SAM JOHNSON, Texas


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of January 31, 1997, announcing the hearing.............     2

                               WITNESSES

Health Care Financing Administration, Hon. Bruce C. Vladeck, 
  Ph.D., Administrator...........................................     5

                                 ______

American Enterprise Institute, Robert B. Helms...................    61
Commonwealth Fund, Karen Davis...................................    66
Reischauer, Robert D., Brookings Institution.....................    51



             MEDICARE PROVISIONS IN THE PRESIDENT'S BUDGET

                              ----------                              


                      THURSDAY, FEBRUARY 13, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:10 a.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE                           CONTACT: (202) 225-3943
January 31, 1997
No. HL-1

                      Thomas Announces Hearing on

             Medicare Provisions in the President's Budget

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on Medicare provisions in the President's budget. 
The hearing will take place on Thursday, February 13, 1997, in the main 
Committee hearing room, 1100 Longworth House Office Building, beginning 
at 9:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be heard from invited witnesses only. 
Witnesses will include Dr. Bruce Vladeck, Administrator of the Health 
Care Financing Administration, budget experts, and actuaries. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Last year, the Medicare Trustees found that the Medicare Hospital 
Insurance (HI) trust fund would become insolvent by the year 2001. More 
recently, the Congressional Budget Office stated that for the Medicare 
HI trust fund to achieve full solvency beyond 10 years, Medicare's 
annual rate of growth must be slowed from 7.7 to 3.4 percent. 
Administration officials have publicly stated that the President's 
fiscal year 1998 budget would reduce Medicare spending by $100 billion 
from 1998 through 2002. Included in the proposal is a shift of a 
portion of home health expenditures from the HI trust fund to the 
Supplemental Medical Insurance trust fund, financed out of general 
revenues. This hearing will review the Medicare provisions included in 
the President's fiscal year 1998 budget, and begin to examine its 
impact on seniors, health care providers, health plans, and taxpayers.
      
    In announcing the hearing, Chairman Thomas stated: ``We are anxious 
to review the specific details of the President's proposal to achieve 
future solvency of the Medicare program. While the President's proposal 
appears to succeed in cutting costs, it may not make some of the 
structural changes to Medicare that would provide powerful market 
incentives to providers and health plans to improve quality and reduce 
costs, in addition to extending the solvency of the HI trust fund.''
      

FOCUS OF THE HEARING:

      
    This hearing will focus on the Medicare proposals included in the 
President's fiscal year 1998 budget and their impact on the Medicare 
Hospital Insurance trust fund.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
copies of their statement and a 3.5-inch diskette in WordPerfect or 
ASCII format, with their address and date of hearing noted, by the 
close of business, Thursday, February 27, 1997, to A.L. Singleton, 
Chief of Staff, Committee on Ways and Means, U.S. House of 
Representatives, 1102 Longworth House Office Building, Washington, D.C. 
20515. If those filing written statements wish to have their statements 
distributed to the press and interested public at the hearing, they may 
deliver 200 additional copies for this purpose to the Subcommittee on 
Health office, room 1136 Longworth House Office Building, at least one 
hour before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
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but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on a 3.5-inch diskette in WordPerfect or ASCII format.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
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    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
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supplemental sheet will not be included in the printed record.
      
     The above restrictions and limitations apply only to material 
being submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1904 TTD/TTY in advance of the event (four business days 
notice is requested). Questions with regard to special accommodation 
needs in general (including availability of Committee materials in 
alternative formats) may be directed to the Committee as noted above.
      

                                

    Chairman Thomas. The hour of 9 having arrived, the 
Subcommittee will come to order.
    Today's hearing will focus on President Clinton's fiscal 
year 1998 budget proposal for Medicare. In light of the fact 
that the President and Congress could not come to an agreement 
on reforms to save Medicare in 1995 and the subsequent 
attention that was given to Medicare in the 1996 elections, it 
is now, in our opinion, largely up to the President to provide 
leadership on Medicare. And I believe that in this budget, he 
has recognized the challenges facing the program and has 
accepted his role in submitting a budget proposal which 
includes significant changes from his original proposal for 
Medicare.
    The Chair takes the President's Medicare mandate seriously 
and views the President's budget proposal as at least ``alive 
on arrival'' for this Subcommittee to examine.
    As the Members of the Subcommittee are keenly aware, in 
health policy, the devil truly is in the details, so it is the 
intention of the Chair, both today and during a series of 
hearings in February, March, and April, to dissect the 
President's proposal and assess its implications with great 
care.
    From a preliminary review of the President's proposal, 
there is much for us to consider. The proposal is not as 
comprehensive as the 1995 congressional Medicare reform package 
and does not, in our opinion, save Medicare. However, it does 
include many of the ingredients of the 1995 Medicare bill which 
remain, obviously, worthy of adoption.
    The President has chosen not as bold a route as we would 
propose in saving Medicare, but he has placed on the table a 
proposal that deserves the time and energy of this 
Subcommittee.
    Our first witness today will be Bruce Vladeck, 
Administrator of the Health Care Financing Administration, at 
least for 1997; we know that he has announced his intention not 
to be around for 1998.
    The Subcommittee welcomes Dr. Vladeck and looks forward to 
working with him as we consider the proposal that the 
administration has prepared. Before hearing from Dr. Vladeck, I 
would recognize the Ranking Member, the gentleman from 
California, Mr. Stark.
    Mr. Stark. Well, thank you, Mr. Chairman.
    I, too, think the President has a good plan. Insofar as we 
know now, it extends the life of the trust fund for 10 years, 
gives some peace of mind therefore to the seniors; it improves 
some benefits, increases fighting fraud, and modernizes the 
payments in a number of ways. Most of all, it avoids shifting 
more health care costs onto seniors, many of whom are 
desperately poor.
    I would like to propose that this is a standard against 
which amendments could be measured. Anyone who wants to change 
it, increase rural or change something else, should be held to 
account as to whether they could keep the program solvent to 
2007, whether they protect the poor in the safety net hospitals 
as the President's plan does.
    I think yesterday Chairman Archer indicated that he felt 
our plan was not 100, it was 115 gross, and I think that that 
is about correct. That is $7.5 billion in extra benefits, which 
I am sure we all want to put in.
    Mr. Chairman, I just propose that we take that range of 100 
to 115--I will split it with you if you want--and let us mark 
it up. And why wait for the Budget Committee? We can figure it 
out. If that is what we have got to come up with, we have that 
laundry list up there; let us just roll up our sleeves and 
figure out how we are going to cut a little here and a little 
there and come up with 100--as I said, we are both saying it is 
100 net or 115 if we want those extra benefits; if we do not 
want them, it is 100. So, let us go. Dr. Vladeck will tell us 
how to do it, and perhaps we can argue, and we will have some 
regional differences and provider differences, but I think we 
can get to work and get this done in short order. I look 
forward to hearing the administration's suggestions, some of 
which I might want to change, some of which you might want to 
change, and we will get to work and deliver them a product.
    Thank you very much.
    Chairman Thomas. I thank the gentleman.
    I have said that the President's program appears to be long 
on reductions and somewhat murky on reform, and notwithstanding 
his enormous abilities, this Chair probably will not be willing 
to turn over to Dr. Vladeck the structure under which the 
changes would be made.
    Dr. Vladeck.

   STATEMENT OF HON. BRUCE C. VLADECK, PH.D., ADMINISTRATOR, 
              HEALTH CARE FINANCING ADMINISTRATION

    Mr. Vladeck. Thank you very much, Mr. Chairman, Mr. Stark, 
Members of the Subcommittee. I am very pleased to be here today 
to present the Administration's plan for modernizing Medicare 
and incorporating some of our initiatives to ensure that the 
program enters the next century in robust condition.
    I am also very pleased in the context of some of my earlier 
experiences before this Subcommittee that we do in fact seem to 
have entered a somewhat different set of circumstances this 
year. All of the conversations, which I have had with Members 
from both sides of the aisle, have suggested to me a kind of 
willingness to talk about specifics and a willingness to work 
on issues. These conversations give us considerable optimism 
that we will, sooner rather than later, be able to work our way 
through the issues and to provide the kind of legislation that 
is needed for the program and needed for the American people. I 
very much look forward to that process and to negotiating with 
the Chairman on just how much discretion we will have over 
defining this structure.
    Let me begin by saying that we always think it is 
important, particularly for those of us who spend most of our 
time inside the beltway, to start by putting a human face on 
some of these issues and to think about the context of the 
impact that our proposals would have on American citizens and 
on the beneficiaries, for whom the program exists and with whom 
we need to be primarily concerned.
    If I could call your attention to the two charts which are 
to my right, copies of which should be with your copies of my 
testimony. Let me remind you that while only 10 to 12 percent 
of Medicare beneficiaries fall below the Federal poverty line, 
more than three-quarters have incomes of $25,000 a year or 
less. Medicare is often described as a middle-class benefit, 
but its beneficiaries are middle class precisely because they 
have Medicare benefits.
    The second chart shows that with the availability of 
Medicare benefits, because of the limitations in the Medicare 
benefit package and because of their constrained incomes, the 
elderly already spend 2\1/2\ times as high a proportion of 
their total income on health expenses as do the nonelderly.
    Our goal with this package is really threefold. We propose 
to extend the solvency of the Hospital Insurance Trust Fund for 
a decade; we hope to contribute in a very significant way to 
reduction of the Federal deficit and to the President's plan to 
balance the budget by Federal fiscal year 2002. But most 
importantly, we need to lay the framework for a major 
modernization of the Medicare Program that will move us forward 
into the next century in some of the directions which we need 
to go.
    First, let me very quickly highlight some of the more 
direct budgetary aspects of the proposal and then speak very 
briefly about some of the more structural reforms, for want of 
a better term.
    In order to contribute to deficit reduction and to extend 
the life of the trust fund, we have a number of significant 
proposals. In the aggregate, these initiatives would reduce the 
per capita growth rate of Medicare outlays from the current 
projected baseline of approximately 7.4 percent per year to 5.3 
percent per year. That number is very close, we believe, to the 
best available estimates of what the growth in the costs borne 
by other health insurers is likely to be over the same period 
of time.
    About $33 billion in total savings over 5 years will come 
from reduction in payments to hospitals, including a reform of 
outpatient payment, which I will say more about in a moment, a 
reduction of the update factors to 1 percent per year below 
market basket, and some relatively modest changes in the way in 
which we reimburse hospitals for the direct and indirect costs 
of medical education. At the same time, some of these 
reductions are offset by our proposal to remove from payments 
to HMOs the costs attributable to medical education and to 
disproportionate share hospital payments and to pay these 
directly to the institutions.
    We are proposing to save $14 billion over the budget period 
through the implementation of a case mix-adjusted prospective 
payment system for home health agencies and some other reforms 
in the way we pay home health agencies. Over the same period, 
we save about $7 billion through the implementation of 
prospective payment for skilled nursing facilities.
    We have a series of interlocking changes in the way in 
which we pay managed care plans under the program. Most of the 
attention so far has focused on the proposal to reduce average 
payment levels in the year 2000 and thereafter from 95 percent 
to 90 percent of the AAPCC. At the same time, as I mentioned, 
we are going to pull out the teaching and disproportionate 
share components of the rates and pay these directly to the 
institutions.
    We are also directly borrowing two concepts that were 
included in the 1995 legislation and that I have often said we 
think are the soundest pieces of that legislation--the proposal 
to reduce geographic disparities in payment rates by a slightly 
different method than that contained in the 1995 legislation, 
which produces essentially the same result of essentially 
averaging in a component of the national rates with the local 
rates on a phased-in basis. At the same time we are proposing, 
beginning in 1998, a floor of $350 a month in the capitation 
payment in any given county in the United States.
    The interaction of all of these changes gets sort of 
complicated, and we also have some specific mechanisms to 
minimize the year-to-year impact of these changes in any given 
county which I would be happy to address further.
    We are also proposing to save $7 billion over 5 years by 
slowing the rate of growth in payments to physicians and other 
providers, primarily by improving and modernizing the index by 
which we update physician fees from year to year in the context 
of moving to a single conversion factor for all physician 
payments.
    We have a number of proposals aimed at reducing fraud and 
abuse in the program, including extension of certain secondary 
payer proposals and some proposals aimed at significant 
tightening of the administration and enforcement of the home 
health benefit.
    Very quickly, let me walk through some of the components of 
our modernization proposals. We group these into seven areas, 
and the rubrics we use are: Prudent purchasing, modernizing 
managed care choices, preventive care, beneficiary protections, 
program improvements, integrated quality management, and 
improving access in rural areas. In my oral statement I will 
not go into any great detail about any of these, but let me 
very quickly mention that under prudent purchasing, we are 
seeking to adopt some of the more effective techniques for 
purchasing of health services that have been used in the 
private sector and applying these to the Medicare Program. We 
need to be able to contract with Centers of Excellence which 
can provide expensive services at very high volume with very 
high quality at some reduction in cost to us.
    We need to have more flexibility in the way we pay for 
various common supplies so that we are not paying retail list 
or something above list, but something closer to an appropriate 
negotiated price.
    We need to use the tools of competitive bidding in 
circumstances in which it is appropriate to create greater 
competition among suppliers to the Medicare Program.
    We are also proposing, as you know, to restore the 
characterization of Medicare home health care benefits to 
something substantially closer to what was in the law prior to 
1980. Under our proposal, the first 100 visits following a 
hospital stay of 3 days or more would continue to be a benefit 
under part A of the program. All other covered home health 
services would be paid under part B, as was the case before 
1980.
    We also have a set of proposals in the legislation that 
would permit us to modernize the administration of the Medicare 
Program, building on the work that was done by the Congress in 
a bipartisan way last year in HIPAA by giving us greater 
authority to pick and choose among the contractors who perform 
various administrative services for the program, to introduce 
greater competition in the world of contractors, and to let us 
employ more specialized services for issues like coordination 
of benefit or beneficiary services.
    On the modernization of managed care, we propose in this 
legislation to open up Medicare contracting both to provider-
sponsored organizations and preferred provider organizations. 
We do provide a mechanism for much expanded efforts at 
structured beneficiary choice by providing for third parties to 
provide beneficiaries with substantially better information 
about the plans available in their communities; toll-free 
consultation, consumer education services, and so forth.
    We would emphasize that our plan extends information and 
open enrollment processes not only to capitated plans but to 
Medigap plans as well, and therefore our legislation also 
includes some proposed reforms in the Federal law affecting 
Medigap policies similar in a number of important ways to the 
legislation that Mrs. Johnson, among other Members, introduced 
late last year to create a level playingfield between capitated 
and Medicare supplemental options.
    We are also building on some work that is already underway 
on a bipartisan basis in this Congress to expand the preventive 
benefits in the Medicare Program. The legislation, which you, 
Mr. Chairman, Mr. Cardin, and Mr. Bilirakis have introduced, is 
not identical to our proposals for expanded preventive 
benefits, but I think we are thinking along somewhat the same 
lines, and we would be happy to talk about some of the 
differences in proposals and to work toward an agreement.
    We are particularly pleased to be able to define a set of 
preventive benefits relative to the management of diabetes, 
which we think will have a particularly important effect not 
only on expenditures in the program over time, but on the 
health and well-being of our beneficiaries.
    We are proposing, as I suggested earlier, to totally reform 
the way Medicare pays for hospital outpatient services. This 
will produce no net savings over the budget window, but what it 
will do is put an end to this growing trend in which 
beneficiaries, solely for hospital outpatient services, pay 
more than 20 percent coinsurance. We estimate that next year, 
in the absence of legislative change, the effect of coinsurance 
involving beneficiaries for hospital outpatient services would 
be 46 percent. Under our proposal, by the year 2007, we would 
be back to the 20 percent where that coinsurance belongs, while 
at the same time putting hospital outpatient services on a 
rational prospective payment system.
    We are proposing a new respite benefit in the program 
beginning in 1998 that will provide caretakers of beneficiaries 
with Alzheimer's disease or other irreversible dementias up to 
32 hours a year of direct care for the beneficiary to provide 
respite for care givers.
    We are making major steps on the quality improvement front 
in both the capitated and fee-for-service side of the program. 
In order to pull together existing authorities and to clarify 
our responsibilities relative to data and quality improvement, 
we have some proposals in the bill under what we define as our 
integrated quality management strategy to bring the underlying 
statutory framework up to date in terms of contemporary notions 
of continuous quality improvement of information-based 
decisionmaking about quality and appropriateness of services.
    Last, we continue to be very concerned about assuring 
access to Medicare beneficiaries in rural areas. In addition to 
the changes that we are making in the payment mechanisms for 
managed care plans, which we believe will have a very 
significant effect on rural communities, we are proposing to 
expand the rural primary care hospital program to all 50 
States, something I know will be of great interest to Members 
of this Subcommittee. We also propose to strengthen and update 
other special payment provisions on the part A side which we 
have for a variety of rural institutions.
    In conclusion, we have tried to look beyond the immediate 
concerns of budget reduction and to keep our sights on the 
long-term goal of safeguarding the vitality of the Medicare 
Program. As our Nation evolves into a society with greater 
numbers of the elderly and infirm, it is critical that we 
preserve Medicare as a strong and vital program, and we believe 
the President's budget contributes to modernizing Medicare 
while extending the solvency of the trust fund for 10 years, 
reducing the rate of growth in spending, and contributing 
importantly to balancing the Federal budget, including 
eliminating the current Federal deficit.
    Our payment reforms and strategies will ensure that 
Medicare continues to be a sound investment in the Nation's 
health security for years to come.
    Mr. Chairman, we are mindful of the overlap between many of 
our proposals and proposals that you have supported in the 
past. We are mindful of other proposals which other Members of 
the Subcommittee have championed in the past, and we very much 
look forward to working with all the Members of the 
Subcommittee to achieve legislation this year that will 
strengthen and improve the Medicare Program for years to come.
    Again, I am pleased to be here today, and I look forward to 
your questions and comments.
    [The prepared statement and attachments follow:]

Statement of Hon. Bruce C. Vladeck, Ph.D., Administrator, Health Care 
Financing Administration

                              Introduction

    Mr. Chairman, I am pleased to have the opportunity to 
present the Administrations plan for modernizing Medicare. I am 
enthusiastic about the initiatives we have undertaken to ensure 
that Medicare is strengthened for the 38 million Americans who 
depend upon it, offers the best possible medical care, and 
enters the next century in robust condition.
    We think it is important to put a human face on the 
equation and to be fully aware of the serious impact such 
proposals would have on Americans least able to bear these 
additional cost burdens. Although only 10-12% of Medicare 
beneficiaries fall below the Federal poverty line, nearly 75% 
have incomes below $25,000. [CHART #1] Medicare is often 
described as a middle-class benefit, but beneficiaries are 
middle class precisely because they have Medicare. Recent data 
indicates that the elderly already spend a formidable 21% of 
their income on health care, compared to 8% spent by the non-
elderly. [CHART #2]
    The Medicare provisions in the President's FY 1998 Budget 
have two primary goals: (1) to extend the life of the Medicare 
Trust Fund into the next decade, which will contribute to 
reduction of the deficit; and (2) to modernize Medicare. 
Through sound judgment and careful planning, we can guarantee 
that the Medicare program of the future will continue to 
provide the same protections to the elderly and disabled as it 
does today.
[GRAPHIC] [TIFF OMITTED] T2969.001

[GRAPHIC] [TIFF OMITTED] T2969.002

                Extension of Medicare Solvency Into 2007

    Under present law, the Hospital Insurance (HI) Trust Fund 
would be depleted early in 2001, based on the Board of 
Trustees' intermediate estimates. The President's budget 
proposals would extend the life of the Trust Fund by another 6 
years. It would provide adequate financing through the next 10 
years, leaving us time to tackle imminent fiscal problems 
precipitated by retiring baby boomers. Savings would be 
achieved through a combination of scored savings from 
reductions in payments to hospitals, home health agencies, 
skilled nursing facilities, managed care plans, and other 
providers. As was proposed in the previous two balanced budget 
initiatives, it would permanently extend the 25 percent Part B 
premium. Finally, the liability associated with some home 
health services would be reallocated to the Part B side of the 
program.

Moderating Medicare's Rate of Growth

    The President's budget includes explicit proposals to 
achieve $100 billion in savings over the next 5 years. Medicare 
per capita spending growth over the next five years (1997-2002) 
will slow from the current projected gross rate of 7.4% to 
5.3%. In 2002, this will lower our average per capita spending 
from $7,800 to $7,100. These savings come from substantial 
reductions in payments to providers.
    Hospitals--We propose a series of hospital savings 
proposals, including a reduction in the hospital PPS update of 
1.0 percentage point each year to account for increases in 
productivity, reinstatement of the reduction in capital 
payments from OBRA 90, reforms to the direct payment for 
medical education to reduce the growth of hospital-based 
residents and encourage more training in primary care, and 
reductions in the indirect medical payment to more closely 
reflect the cost of teaching activities. In addition, we 
propose to use a more up-to-date base year in calculating 
payments to PPS-exempt hospitals, to set ceilings and floors 
for these hospitals's target rates, and to reduce the annual 
update to payments and cut capital payments for PPS-exempt 
hospitals. We also propose a moratorium on new long-term care 
hospitals and to move to a PPS for hospital outpatient 
department services. Overall, these proposals result in $33 
billion in savings from hospitals over 5 years.
    SNF and Home Health--As I will describe in detail later, we 
will be moving to case-mix adjusted prospective payment systems 
for these providers. These payment systems will incorporate 
payment reductions equal to $7 billion for SNFs and $14 billion 
for home health agencies (HHAs) over five years.
    Managed care--Through a series of policy changes, the plan 
would address the flaws in Medicare's current payment 
methodology for managed care. Specifically, the reforms would 
create a national floor to better assure that managed care 
products can be offered in low payment areas, which are 
predominantly rural communities. In addition, the proposal 
includes a blended payment methodology, which combined with the 
national minimum floor, would dramatically reduce geographical 
variations in current payment rates. The plan would reduce 
reimbursement to managed care plans by approximately $34 
billion over 5 years. Savings will come from three sources: (1) 
Because HMO payments are updated based on projections of 
national Medicare per capita growth, when the traditional fee-
for-service side of the program is reduced, HMO payments are 
reduced; (2) The carve-out of the medical education and DSH 
payments from the HMO reimbursement formula (these funds will 
be paid directly to academic health centers); and (3) A phased-
in reduction in HMO payment rates from the current 95% of fee-
for-service payments to 90%. A number of recent studies have 
validated earlier evidence that Medicare significantly 
overcompensated HMOs. A recent HCFA study has validated earlier 
findings by Mathematica Policy Research that Medicare overpays 
HMOs. The reduction does not start until 2000 and it accounts 
for a relatively modest $6 billion in savings over 5 years.
    Physicians--We propose to establish a single conversion 
factor for payments under the physician fee schedule and to 
reform the method for updating physician fees. By creating 
incentives to control physician services in high-volume 
inpatient settings and to make a single payment for surgery 
where an assistant-at-surgery is used, costs will be reduced. 
We also propose to expand the settings in which direct payment 
is made to physician assistants, nurse practitioners and 
clinical nurse specialists to include home and ambulatory 
settings. Medicare currently does not have an expansive 
outpatient drug benefit, though there is coverage of certain 
kinds of outpatient drugs. Our proposed plan will eliminate the 
mark-up charged by physicians and suppliers, limiting payments 
to acquisition costs subject to a limit. In addition to 
eliminating the current statutory x-ray requirement to 
determine the need for a service, we also propose to improve 
access to chiropractic services. These proposals will result in 
savings of $7 billion over 5 years.
Fraud and Abuse

    The President's budget contains a number of proposals to 
reduce waste, fraud and abuse in the Medicare program. Among 
these proposals are provisions to require that insurance 
companies report the insurance status of beneficiaries, to 
guarantee that Medicare pays appropriately. In addition, we 
have several proposals to prevent excessive and inappropriate 
billing for home health services. We are proposing to close a 
loophole in the current payment calculation by linking payments 
to the location where care is actually provided, rather than 
the billing location. When we implement the PPS, we will 
eliminate HHA periodic interim payments (PIPs), which were 
originally established to encourage HHAs to join Medicare by 
providing a smooth cash flow. Since over 100 new agencies join 
Medicare each month, inducements are no longer needed. We will 
develop more objective criteria for determining the appropriate 
number of visits per specific condition, so that we can prevent 
excessive utilization.
    Finally, the President's budget calls for the repeal of 
several provisions in the HIPAA that could hamper our ability 
to fight fraud and abuse. First, the President is proposing to 
eliminate the broad new exception to the anti-kickback statute 
when providers are at a substantial financial risk. These terms 
are undefined and somewhat broad. Additionally, the 
Congressional Budget Office assigned a cost to this provision 
because it could be easily abused by those wishing to profit 
from referrals. Second, the President is proposing to eliminate 
the requirement that advisory opinions be issued in response to 
specific requests as to how certain business arrangements may 
or may not be considered to violate the anti-kickback laws. 
This provision will hamper the government's ability to 
prosecute fraud and is impractical because it is difficult, if 
not impossible, to determine intent based on the submission of 
the requestor. Third, the President is proposing to reinstate 
the ``reasonable diligence'' standard. HIPAA eliminated the 
current standard for use of reasonable diligence and made 
providers subject to civil monetary penalties only if they act 
with deliberate ignorance or reckless disregard.

                    Modernizing Managed Care Choices

    The President's Budget modernizes Medicare and brings it 
into the twenty-first century through major structural changes 
in seven areas: Prudent Purchasing; Modernizing Managed Care 
Choices; Preventive Care; Beneficiary Protections; Program 
Improvements; Integrated Quality Management; and Improving 
Access in Rural Areas.

1--Prudent Purchasing

    As more beneficiaries are choosing to enroll in managed 
care, there has been a lot of talk about fee-for-service being 
the ``residual'' as though it were somehow not important. We 
must recognize that even if we double the rate at which 
beneficiaries are moving into managed care in the short-term, 
the majority of beneficiaries will still be in fee-for-service. 
Therefore, we need to look for ways to improve our purchasing 
power. Over the past several years, private sector purchasers 
of health services have developed a variety of innovative ways 
they pay for health services. It is ironic that HCFA, the 
largest purchaser of health services in the U.S., has often 
been shackled by outdated statutory payment and administrative 
pricing provisions, which prevent us from adapting to today's 
marketplace.
    Beneficiary-Centered Services--Given the pressures on the 
federal budget, it is critical that Medicare look beyond 
traditional purchasing strategies and scan the private industry 
horizon for new ideas. HCFA's ``Beneficiary-Centered Purchasing 
Initiative'' proposals do just that, applying lessons learned 
from the private sector and our demonstrations. With these 
proposals, we will have innovative purchasing arrangements 
which will be powerful tools to control Medicare spending now 
and in the future.
    For example, under our ``Centers of Excellence'' 
demonstration, Medicare achieved an average of 12% savings for 
coronary artery bypass graft procedures performed, with no 
reduction in quality. Despite this success, we do not have the 
authority to make the Centers of Excellence program a permanent 
part of Medicare. Similarly, while other purchasers of health 
care services are successfully using disease and case 
management services to selectively provide services for 
enrollees with specific conditions (e.g. diabetes, congestive 
heart failure), we do not have this kind of authority under 
Medicare fee-for-service. The Office of Inspector General 
reports indicate that Medicare is paying far more for medical 
supplies and DME than other federal purchasers such as the 
Department of Veterans Affairs. Nevertheless, Medicare lacks 
authority to use competitive bidding to establish payment 
rates. I urge Congress to re-examine these issues and give the 
Medicare program the flexibility to pay on the basis of special 
arrangements, as opposed to statutorily-determined, 
administered prices.
    Post-acute Services--Expenditures for skilled nursing 
facility (SNF), home health, rehabilitation and long-term 
hospital services are among the fastest growing components of 
Part A, and, total Medicare spending. These services are often 
referred to as ``post-acute care services,'' even though in 
some cases these services are delivered without a prior 
hospital stay. The increase in expenditures for post-acute care 
is due to demographic changes and improvements in the delivery 
of medicine that allow more care to be delivered in non-
hospital settings. In addition, our prospective payment system 
for hospitals provides the incentives for hospitals to 
discharge patients more quickly, which also fuels the growth in 
post-acute care spending. Further, discharges to post-acute 
care providers may cause Medicare to pay twice for care--once 
for the initial hospitalization, and again for care in the 
post-acute settings.
    The President's budget includes a proposal to end these 
double payments. We propose to limit the definition of a 
discharge, for payment purposes, to discharges from the 
hospital to home. All other discharges, including those to SNFs 
and rehabilitation hospitals, will be considered ``transfers.'' 
We are looking to develop better integrated and more flexible 
financing and delivery systems. These systems will help meet 
the needs of those Medicare beneficiaries with chronic 
conditions and disabilities who receive services from these 
post-acute care providers. The goal is to make the system of 
services ``beneficiary-centered,'' where the needs of the 
patient, rather than the classification of the provider, 
determine what services are provided and how they are 
reimbursed. In the interim, we will move to prospective payment 
systems for home health care and SNFs to assert greater control 
over post-acute spending.
    Beginning in July 1998 and phased in over 4 years, we 
propose to implement a prospective payment system for SNFs, 
which will include payment for all costs related to SNF care 
(routine, ancillary and capital). SNFs will be paid a 
prospective rate per day of care, which will be adjusted by a 
case-mix index to appropriately reflect the resources used by 
Medicare patients. A prospective payment system that 
incorporates all costs will reduce incentives for over-
utilization of ancillary costs which has been the primary 
reason for the rapid expenditure growth we have seen in the 
past few years.
    We are also proposing to implement a prospective payment 
system for home health agencies (HHAs). Beginning in 1999, we 
will pay HHAs a prospective rate based upon the characteristics 
of the patients it serves, not on how many services it 
provides. Because we cannot continue to allow expenditure 
growth at current levels, we are proposing to implement 
additional cost limits until we can implement this prospective 
payment system. Effective FY 1998, we will reduce the current 
cost limits and introduce a new per beneficiary per year limit. 
The Administration is proposing a series of policy changes to 
prevent excessive and inappropriate billing for home health 
care services, which are described earlier.
    In addition, the Administration is also proposing to 
reallocate some of the home health financing to Part B to 
restore the post-acute care nature of Part A. Data from our 
Medicare Beneficiary Survey indicate that home health care 
plays a significant role in the ability of many elderly to 
continue to live at home: 1 in 3 home health users live alone, 
and 4 in 10 have incomes below $10,000. Under the 
Administration's proposal, the first 100 visits following a 
three-day hospital stay would be reimbursed under Part A, just 
as this program covers 100 days of skilled nursing care 
following a hospitalization. All other home health care (visits 
beyond 100 and those not following a hospital stay) would be 
paid under Part B. Prior to OBRA 80, the Part A portion of the 
home health benefit was limited in this way. OBRA 80 
legislation eliminated the three-day hospitalization 
requirement and the Part A and Part B visit limits, and in so 
doing made Part A responsible for almost all of the financing 
of home health. The restoration of non-post acute visits to 
Part B makes the home health benefit consistent with the 
Medicare statute's original intent and its division of services 
between Part A and Part B.
    Contractor Reform--While modernizing our payment methods 
for purchasing health care services for beneficiaries is an 
essential step toward modernization, we must modernize the way 
we purchase administrative services. The President's budget 
contains a proposal that would end the requirement that all 
Medicare contractors (that is, carriers and intermediaries) 
perform all Medicare administrative activities. It gives HCFA 
the tools to take advantage of innovations and efficiencies in 
the private sector when it comes to utilization review, 
beneficiary and provider services, and claims processing. It 
builds upon the authority granted in the Health Insurance 
Portability and Accountability Act (HIPAA), where payment 
integrity activities (such as audits) could be separately 
contracted. This provision also would allow us to use the same 
competitive requirements that apply throughout the government 
when awarding new contracts, and expand our pool of potential 
contractors beyond insurance companies to other entities that 
may be well-qualified to do the work.

2--Modernizing Managed Care Choices

    Under our Medicare Choices initiative, we would expand 
managed care options, provide beneficiaries with comparative 
information on all of their health care choices, ease 
comparison among options by increasing standardization of 
benefits, provide a coordinated open enrollment period and 
other open enrollment opportunities and institute Medigap 
reforms. Let me address each of these components separately.
    Expanded Managed Care Options--Currently, HCFA can contract 
with Health Maintenance Organizations (HMOs) and Competitive 
Medical Plans (CMPs) to serve as Medicare managed care plans. 
The Administration believes that Medicare beneficiaries should 
have more managed care choices, comparable to those available 
in the private sector. Thus, the President's budget would 
expand managed care options to include Preferred Provider 
Organizations (PPOs) and Provider Sponsored Organizations 
(PSOs). We believe that direct contracts with alternative 
managed care models such as PSOs are the key to expanding 
managed care to rural areas.
    Comparative Information--Under current law, beneficiaries 
may obtain comparative information on Medigap options through 
State Insurance Counseling Grant Programs. Some of these 
programs also address managed care options. There are no 
mechanisms, however, to ensure that beneficiaries are aware of 
all their options, in both managed care and Medigap. Under the 
President's budget, the Secretary will develop and provide 
comparative information to beneficiaries on all managed care 
plans and Medigap plans in the area. This information will be 
used by State Insurance Counseling Grant Programs to assist 
beneficiaries in understanding their coverage options. The 
costs of preparing and disseminating this information and 
supporting the State Counseling Grant Program will be financed 
by the Medigap and managed care plans.
    Standardized Benefits--While comparative information will 
be helpful to beneficiaries, making an informed decision among 
the array of available coverage options would be hampered 
unless differences in benefit packages are addressed. Under the 
President's budget, the Secretary will establish standardized 
packages for certain additional benefits offered by managed 
care plans. For example, if the Secretary established a 
standardized package for outpatient prescription drugs, plans 
could offer enrollees this benefit only according to the 
structure established by the Secretary. The development of 
standardized additional benefit packages will make it possible 
for beneficiaries to compare these benefits on the basis of 
cost and quality. The National Association of Insurance 
Commissioners (NAIC) will also review the current standard 
Medigap packages to see if changes could be made to ease 
comparison with the standard managed care benefits.
    Open Enrollment Opportunities--Under Federal law, aged 
individuals have a once in a life-time opportunity to select 
the Medigap plan of their choice when they first join Medicare 
at age 65; individuals who become eligible for Medicare because 
of a disability or end-stage renal disease beneficiaries have 
no such choice. If a beneficiary enrolls in a managed care plan 
and is later dissatisfied, he or she may not have the 
opportunity to select the Medigap plan of his or her choice; 
for example, drug coverage may be unavailable due to the 
individual's poor health status. As a result, some 
beneficiaries are reluctant to try managed care or are fearful 
of being locked into managed care options with no opportunity 
to return to fee-for-service and Medigap.
    The President's budget gives all new beneficiaries, not 
just aged beneficiaries, the opportunity to choose the managed 
care or Medigap plan of their choice when they first enroll in 
Medicare. In addition, each year all Medigap and managed care 
plans will have to be open for a one month coordinated open 
enrollment period. Additional open enrollment opportunities 
will be available under certain circumstances--such as, when a 
beneficiary's primary care physician leaves a plan or when a 
beneficiary moves into a new area. While the concept of 
coordinated open enrollment is not new and was included in the 
1995 Conference Agreement, the key difference in our proposal 
is the inclusion of Medigap plans.
    Other Medigap Reforms--In addition to addressing open 
enrollment, there are other Medigap reforms included in the 
President's budget. We would like to eliminate the ability of 
Medigap insurers to impose pre-existing condition exclusion 
periods. Under the policy in the President's budget, a Medigap 
plan cannot impose an exclusion period for a beneficiary who 
has recently enrolled in another Medigap plan, Medicare managed 
care, or employer-based plan. This is similar to the policy 
included in a bi-partisan bill introduced by Mrs. Johnson and 
others during the last session and we look forward to working 
together toward enactment this year.
    Our final Medigap reform addresses rating. There are 
currently no federal requirements regarding the rating 
methodology used by Medigap plans. As a result, plans can use 
low premiums to entice beneficiaries to enroll in their 
fledgling stages, but as the company matures it raises the 
premiums to unaffordable levels. Under the President's budget, 
Medigap plans would be required to use community rating to 
establish premiums. The movement to community rating would be 
subject to a timetable and transition rules developed by the 
NAIC. Given that managed care plans are required to charge all 
enrollees the same premium, Medigap plans should not be allowed 
to charge differential premiums based on age. Also, if choice 
is an important goal, then premium structures such as attained 
age rating, which in effect make Medigap unaffordable as 
beneficiaries age, should not be allowed.

3--Preventive care

    One of the core elements of our restructuring agenda is 
modernization of Medicare's coverage of preventive care. The 
cost-effectiveness of illness prevention is well-known; in the 
long run, preventive medicine pays for itself. The President's 
budget would make some significant improvements in the area of 
preventive benefits. I would note that there is a bipartisan 
consensus on many of these proposals as indicated by the 
similarities between our initiatives and legislation sponsored 
by Chairman Thomas, Mr. Cardin and Mr. Bilirakis. We look 
forward to working with you to enact these new benefits:
    Colorectal Screening Coverage--Colorectal cancer is the 
second most common form of cancer in the U.S. and has the 
second highest mortality rate. Yet, despite the demonstrated 
importance of early detection, Medicare does not pay for 
procedures used to detect colorectal cancer when used as a 
screening tool. The President's budget would provide such 
coverage, thereby increasing the possibility of early detection 
and treatment of colorectal cancer.
    Mammography Coverage--Forty-eight percent of new breast 
cancer cases and 56 percent of breast cancer deaths occur in 
women age 65 and over. For this reason, the early detection and 
treatment of breast cancer is a high priority for HCFA. 
Although Medicare covers both screening and diagnostic 
mammography, only 40 percent of all eligible beneficiaries over 
age 64 (excluding those in managed care) received a mammogram 
in the two-year period from 1994 through 1995. In addition, 
only 14 percent of eligible beneficiaries without supplemental 
insurance received mammograms during the first two years of the 
screening mammography benefit, which began in 1991.
    The President's budget expands coverage for screening 
mammograms to provide for an annual mammogram for women age 65 
and over. This is consistent with the recommendations of most 
major breast cancer authorities. The budget also proposes to 
waive cost-sharing for mammogram services in order to encourage 
their use.
    Expanded Benefits for Diabetes Outpatient Self-Management 
Training and Blood Glucose Monitoring--The third area where we 
propose to make investments is in services for beneficiaries 
with diabetes. Under current law, Medicare covers diabetes 
outpatient self-management training only in hospital-based 
programs, and covers blood glucose monitoring (including 
testing strips) only for insulin-dependent diabetics. The 
President's budget would expand coverage of diabetes outpatient 
self-management training to non-hospital-based programs, and 
expand coverage of blood glucose monitoring (including testing 
strips) to all diabetics.
    Preventive Immunizations--Current law provides payment for 
the administration of pneumonia, influenza, and hepatitis B 
vaccines, and already waives payment of coinsurance and the 
Part B deductible for pneumonia and influenza. The President's 
budget increases payment amounts for the administration of all 
three types of vaccines, and waives payment of coinsurance and 
applicability of the Part B deductible for the hepatitis B 
vaccine. These measures will improve access to adult 
vaccinations and make the cost-sharing waiver consistent for 
all covered vaccines.

4--Beneficiary Protections: Coinsurance Reform and Enrollment 
Improvements

    Reform Beneficiary Coinsurance for Hospital Outpatient 
Department Services--Coinsurance for Part B services is 
generally based on Medicare's payment amount. However, for 
certain outpatient department services (OPDs), coinsurance is a 
function of hospital charges, which are significantly higher. 
In addition, as a result of a flaw (``formula-driven 
overpayment'') in the statutory formula determining Medicare's 
payment for certain OPD services, hospitals have had an 
incentive to increase their charges. The net effect of charge-
based coinsurance and hospitals' increases in their charges is 
that in 1998, without a change in law, beneficiaries will pay 
an effective coinsurance rate of 46 percent for OPD services 
rather than the 20 percent for other Part B services. This 
effective coinsurance rate is expected to increase to 52 
percent by 2007.
    The President's budget proposes the establishment of a 
prospective payment system (PPS) for OPD services in 1999. 
Total payments to hospitals for OPD services will be 
established so as to equal total payments that would otherwise 
apply, minus the effect of the formula driven overpayment. This 
also assumes the extension of certain OPD policies included in 
OBRA 93 that are slated to expire in 1999. Coinsurance will be 
reduced starting in 1999 using the savings from the formula-
driven overpayment. It would also be gradually reduced in 
subsequent years until it equals 20 percent in 2007.
    Part B Enrollment and Premium Surcharge--Under current law, 
with certain exceptions, beneficiaries who do not enroll in 
Part B when they are first eligible can enroll subsequently 
only during an annual open enrollment period from January to 
March of each year, with coverage effective in July. In 
addition, for each year that they could have enrolled in Part B 
but did not, they face a 10 percent premium surcharge. While 
for most beneficiaries the surcharge is in the 20-30 percent 
range, some beneficiaries face a surcharge of 150 percent or 
more--an amount which is punitive rather than bearing any 
relationship to the cost to Medicare of late enrollment.
    In recent years, flaws in this enrollment process and 
inequities in the premium surcharge have become obvious. 
Beneficiaries who never enrolled in Part B due to availability 
of other coverage have attempted to enroll after their 
circumstances changed. For example, beneficiaries may have not 
have enrolled in Part B because they had generous retiree 
coverage through their former employers. Years later, however, 
they were informed that the former employer was now requiring 
Part B enrollment or was dropping coverage entirely. There are 
also situations where military retirees did not enroll in Part 
B because they could obtain physicians' services through a 
clinic at the military base near their home. Then, years later, 
the closing of their base necessitated Part B coverage.
    The President's budget replaces the annual general 
enrollment period for Part B with a continuous open enrollment 
period. Beneficiaries will be able to enroll in the program at 
any time, with coverage beginning six months after enrollment. 
Also, the Part B premium surcharge for late enrollment will be 
revised based on the actuarially determined cost to Medicare of 
late enrollment. This provision will provide substantial relief 
to thousands of beneficiaries.

5--Program Improvements

    Respite Benefit--The President's budget creates a respite benefit, 
beginning in FY 1998. This much-needed benefit will provide up to 32 
hours of care each year for beneficiaries suffering from Alzheimer's 
and other irreversible dementia. Respite care may be provided at home 
or at a day-care facility, and will serve to ease the emotional 
``burnout'' that is commonly experienced by primary caretakers, 
especially when they are family members. In the spirit of the 
Administration's efforts to improve the quality of family life, this 
benefit is an important step toward a community-and family-centered 
approach to health care.
    Social Security Disability Demonstration--Lack of health coverage 
is often a barrier to the disabled in their efforts to go back to work, 
since after a transition period they are ineligible to receive premium-
free Medicare Part A coverage. The Social Security Disability Insurance 
demonstration (SSDI) will allow certain SSDI beneficiaries to receive 
premium-free Part A coverage for up to four additional years.

6--Integrated Quality Management

    The President's budget will provide authority for HCFA to 
develop an integrated quality management system that will unify 
HCFA's quality assurance activities. Our current quality 
assurance activities are focused on minimum standards rather 
than the goal of achieving the best practicable health outcomes 
for beneficiaries. This new authority will allow us to assess 
the overall quality of care beneficiaries are receiving, and to 
require that care be effectively coordinated among different 
settings, rather than site by site as in our current system. As 
we move to require managed care plans to assess the overall 
quality of care they are providing to beneficiaries, we should 
be able to make the same determinations for beneficiaries who 
remain in fee-for-service Medicare.

7--Improving Access in Rural Areas

    The character of the American experience was formed in 
great part by frontier and rural communities, yet over the past 
century we have become a largely urban society. Almost 200 
million (75%) Americans live in urban and suburban areas, 
compared with only 60 million (25%) Americans living in rural 
areas. This has a profound impact on the type and availability 
of health care services as advancing technology requires ever 
more costly medical equipment. Additionally, there is the long-
standing problem of enticing physicians and other health care 
providers to practice in rural areas.
    This Administration continues to promote Medicare reforms 
that strengthen health care in rural America. For example, our 
plan will expand the extremely successful Rural Primary Care 
Hospital program to all 50 states. To ensure that the 10 
million Medicare beneficiaries living in rural areas do not 
become second-class citizens in terms of access to health care, 
our plan updates the payment for Sole Community Hospitals, 
improves the Rural Referral Center program, and reinstates the 
Medicare Dependent Hospital program to provide resources to 
those rural hospitals that need it most.

                               Conclusion

    We have looked beyond the immediate concerns of budget 
reductions and sought to keep our sights on the long-term goal, 
which is safeguarding the vitality of the Medicare program. As 
our Nation evolves into a society with greater numbers of the 
elderly and infirm, we must preserve Medicare as a strong and 
vital program. The President's budget modernizes Medicare, 
extends the solvency of the Hospital Insurance Trust Fund for 
ten years, reduces the rate of growth in Medicare spending, and 
contributes to a balanced budget in 2002. It is essential that 
we protect Medicare, and our payment reforms and strategies 
will ensure that Medicare continues to be a sound investment in 
our Nation's health security for years to come.
    Mr. Chairman, many of these reforms are initiatives that 
you, too, have championed. We look forward to working with you, 
Mr. Rangel, Mr. Thomas, Mr. Stark, and all the Members of the 
House Ways and Means Committee to further strengthen and 
improve the Medicare program.
      

                                

Modernizing Medicare

                           Prudent Purchasing

     Centers of Excellence
     Competitive bidding
     Global payment for selected services
     Inherent reasonableness authority
     Post-acute services payment reform

                           Improving Choices

     Expanded managed care options
     Annual open enrollment for Medigap and managed 
care plans
     Comparative information on all choices
     Medigap community rating
     Medigap pre-existing condition reform
     Standardized additional benefit packages
     Revised managed care payment

                        Beneficiary protections

     Hospital outpatient coinsurance reform
     Part B late enrollment surcharge reform
     Improved financial protections for managed care 
enrollees

                              New Benefits

     Diabetes education
     Improved mammography benefits with no cost-sharing
     Colorectal cancer screening
     Increased payment for vaccines with no cost-sharing
     Respite benefit for Alzheimer's patients
      

                                

    Chairman Thomas. Thank you very much, Dr. Vladeck.
    Just to clarify the record at the beginning, my colleague 
from California talked about our concern in terms of any 
increases on beneficiaries and that the desperately poor are 
what we need to focus on. I just need to get it straight in my 
head. I do not know exactly how you define ``desperately 
poor,'' but obviously, they would be below the poverty level, I 
would assume, if they are desperately poor.
    If someone is a senior and eligible for Medicaid, for 
example, what out-of-pocket costs are attributed to them in the 
program?
    Mr. Vladeck. For duly eligible, the----
    Chairman Thomas. No--straight Medicaid.
    Mr. Vladeck. Are you talking about QMBs? For Medicare 
beneficiaries who have Medicaid coverage as well, dual-
eligibles comprise about 12 to 14 percent of our beneficiaries, 
and their out-of-pocket health expenditures should be 
essentially zero.
    Chairman Thomas. So, if they are desperately poor, whatever 
we do in this programmatic change will not affect them.
    Mr. Vladeck. That is correct.
    Chairman Thomas. And there is a group called the SLMBs, 
which are slightly higher than the QMBs, and it goes up to 
about 120 percent of poverty. And if we deal with any 
adjustments on part B, don't they get their part B paid for?
    Mr. Vladeck. SLMBs get their premiums paid for, but they do 
not get the supplemental benefits that folks who are fully 
eligible for Medicaid benefits would receive.
    Chairman Thomas. Depending upon how you define 
``desperately poor,'' if it clearly is below the poverty level, 
anything we do in any of these programmatic changes will not 
cost them out of pocket since they do not have any out-of-
pocket costs.
    Mr. Vladeck. I think that is right, and I think that that 
is why we seek to emphasize, Mr. Chairman, that----
    Chairman Thomas. I just want to make sure, as we have these 
great liners about whom we are protecting in terms of changes, 
that in fact the people whom anyone would define as 
``desperately poor'' are not going to be negatively impacted by 
anything we do.
    Mr. Vladeck. No, sir, and that is why our concern focuses 
on those who do not meet the Federal definition of poverty, but 
I believe by anyone's view, they are certainly far from very 
affluent and are primarily living on fixed incomes.
    Chairman Thomas. That is a fruitful area for working 
together to make sure these folks are covered. But the 
``desperately poor'' that I just heard about, whom someone is 
worried about, are already taken care of.
    There is a large group of folks we need to be focused on, 
but I do not think it is the desperately poor, since there is 
not $1 out of pocket that they are going to be affected by.
    Now, let me spend just a couple of minutes on home health 
transfer, and you may not be able to give me the answer right 
away, but we do need to understand the impact on both the part 
A and part B in terms of the transfer.
    I was under the impression that if you set aside--since, 
for budgetary purposes, the transfer does not affect the total 
reduction that the President's package has of $100 billion over 
5, or whatever CBO says OMB's $100 billion over 5 is--if you 
did not do the transfer, the $100 billion of OMB recognized 
reductions would extend the trust fund to about 2004.
    Now, yesterday, the Secretary said that according to you 
folks, it is only about 2002; is that correct?
    Mr. Vladeck. That is correct.
    Chairman Thomas. And you agree with that?
    Mr. Vladeck. That is correct.
    Chairman Thomas. I guess what we need to do, then, is see 
the particulars of what the assumptions are regarding the 
baseline on both A and B in terms of rate of growth, because we 
are going to be asking CBO that question as well. I think there 
is reasonable room for disagreement on how far we go, and the 
difference between 2002 and 2004, I think, is quite significant 
in a timeframe. The administration has staked out a 10-year 
years-for-years' sake strategy in part, and my concern is, as 
you well know, primarily on the programmatic change. Since 2004 
is the last term of the President who succeeds the current 
President, that seems to me at least some kind of timeframe 
that would allow us to continue to look at some changes. If it 
is only 2002 by your numbers, then we need to partially rethink 
the way in which we are looking at whether or not years-for-
years' sake is, in fact, a strategy that we have to adopt, 
rather than wanting to adopt, to reach a particular year.
    Any of those kinds of assumptions and payouts would be 
helpful to us.
    Also, I do not know if you have calculated it this way, but 
you have all the numbers, and we do not, and I would very much 
like to have the answer to this question. You have decided that 
the part B premium, contrary to current law, will be frozen at 
25 percent instead of going down to about 20.8, I think it is, 
in 2002. If you freeze the premium at 25 percent and carry out 
your shift of 78 to 82, 2 billion over into the general fund, 
that will be borne 100 percent by general fund, so it is a new 
general fund obligation in essence. But you argue that the 
premium will be at 25 percent. Well, if it is at 25 percent 
now, and you shift all of that money over to the 100-percent 
side or the 75-percent side in the distribution, what in 
essence would be the real burden between the beneficiary and 
the general fund--because it certainly would not be 25-75. My 
guess is it is pretty close to the 20.8, or 21 percent that 
would have been the case if you had left current law in place.
    Mr. Vladeck. I do not have that exact number for you, Mr. 
Chairman, but we have the numbers you would need in order to 
calculate that, and certainly by the end of the day today, we 
can get you that number.
    Chairman Thomas. That would be helpful because rather than 
say that in fact we are putting an extra burden on the 
beneficiaries as opposed to current law, we are in fact by this 
switch not obligating them any more on a split than would 
otherwise be the case if we did not transfer home health care.
    Now, one other point in terms of this home health care 
transfer. You folks have said it from day one when the 
Secretary held a press conference more than 1 year ago; it was 
said yesterday, and you have just repeated it again today--that 
what you are doing is going back to a pre-1980 structure. And I 
guess what I will say is that the only thing I can recognize as 
a pre-1980 structure is that there is home health care on the 
part B side, because as you know, the part B home health care 
pre-1980 was part of the premium and the deductible, and you 
are not proposing that; you are going 100 percent to the 
general fund. But beyond that, I think I heard you say that in 
terms of the part A, with the 100 visits, all that is being 
transferred over to part B will be the current postacute home 
health care.
    Currently, that is being consumed at significantly higher 
rates by many people than 100 visits a year--in fact, more than 
20 percent according to a 1994 statistical layout that you 
folks were kind enough to provide us. Of those 20 percent who 
consumed more than 100 visits, the average among those folks 
was 227.
    This is a Social Security Act-related law December 1978, 
``Part B Supplementary Medical Insurance benefits, section 
1831. Section 1832. Scope of Benefits. Home health services for 
up to 100 visits during a calendar year.''
    Do you propose to cape the home health care visits that you 
propose to transfer under part A to part B to make it, as you 
have repeatedly said, like the structure pre-1980?
    Mr. Vladeck. No, sir.
    Chairman Thomas. OK. If this transfer is not part of the 
premium, is not part of the deductible, and does not limit it 
to 100 visits how can--well, I know why you say it--how can you 
continue to say this is like it was pre-1980?
    Mr. Vladeck. Because, Mr. Chairman, we think there is a 
significant difference in the characteristic of the 
beneficiaries and the characteristic of the benefit between 
those who are associated with an immediately passed 
hospitalization, including post-acute services associated with 
hospitalization and beneficiaries who are admitted from the 
community into home health services. We think these individuals 
have different needs, receive different services, and 
therefore, they should receive different benefits.
    With regard to the extent to which similarities outweigh or 
do not outweigh the differences between what we are proposing 
and the status of the law prior to 1980, there is a semantic 
distinction which I would be happy to defer to you on, but I 
think the basic distinction----
    Chairman Thomas. Dr. Vladeck, I will tell you it is not a 
semantic difference. The gentleman from California proposed a 
compromise here that was dollars and cents. The difference 
between your proposal and the pre-1980 proposal is dollars and 
cents, number of visits and who pays what reasonable fair share 
of the program. It is not semantics; it is dollars and cents. 
It is programmatic.
    And if in fact you are going to propose a transfer which 
will truly be a pre-1980 transfer, then I think a number of 
people would be more than willing to look at it. But as a pure 
grab for pure general fund support for the fastest growing area 
in Medicare today, it is very difficult for us to try to 
maintain a working relationship when you absolutely refuse to 
recognize the fundamental dollars and cents and programmatic 
differences between what was home health care in part B pre-
1980 and what you are proposing. Either you recognize those, 
and we will deal with them, or it is going to be very difficult 
to try to deal with this part A to part B transfer.
    Mr. Vladeck. We would be happy to discuss that with you, 
Mr. Chairman, and we need to do so, if I can put just one 
qualifier on that, in the context of moving to a prospective 
payment system for home health services in which the number of 
visits becomes less of a driver of payment. But your point is 
well taken, and we would----
    Chairman Thomas. Absolutely. We had a prospective payment 
system for home health care as well as SNFs last time, as you 
did. Neither one is perfect, but we have got to put some kind 
of an imperfect structure there and then continue to deal with 
it. And it makes no sense whatsoever that visits are the 
driver.
    Mr. Vladeck. Well, I think we need to have these two 
conversations together, and we look forward to having them.
    Chairman Thomas. Thank you.
    The gentleman from California.
    Mr. Stark. Thank you, Mr. Chairman.
    Concerning your charts and your discussion on who is old 
and who is poor and the percentages--I do not want to go into 
that again--but I want to, if I can, Bruce, summarize some 
testimony that we will hear in a little bit and see whether you 
care to comment on it.
    Dr. Reischauer is going to tell us the President is prudent 
to expand the range of choice very cautiously; that under 
certain circumstances, HMOs, he is referring to here, could 
result in less and not more choice. He goes on to say that 
``policymakers should not wait until 2002 to begin ratcheting 
down the capitated payments made to HMOs. A gradual phase down 
of possibly 2 percentage points a year should begin in 1998.''
    Karen Davis is going to tell us that even if enrollment in 
managed care plans were to expand more rapidly, it would not 
yield savings to the program. She says, ``It makes little sense 
to overpay HMOs and encourage Medicare beneficiaries to enroll, 
yet have the program lose money on each beneficiary who 
enrolls.'' Further, she says, ``Nor has the long-term success 
of managed care in controlling costs while providing quality 
care to seriously ill patients yet been demonstrated. 
Proceeding cautiously and slowly is in order.''
    Now, the worst probable thing is, she says, ``It is 
important that managed care plans be held to high quality 
standards.'' A recent study--this happens to be a JAMA study--
finding that health outcomes of elderly patients worsened under 
managed care compared to fee-for-service care are particularly 
troubling. There may also be a significant down side to managed 
care enrollment that requires beneficiaries to change 
positions. One of the Commonwealth Fund studies suggested that 
retaining the same physician for a long period of time has had 
benefits.
    Now, this is an area which I think will be discussed a 
great deal--are we paying HMOs too much? Do you agree with the 
tenor of what those witnesses will tell us later and what, if 
any, are the dangers of not cutting HMO payments as the 
President suggests?
    Mr. Vladeck. Well, let me say two things. The first is 
that, again, on average, we believe we are clearly paying HMOs 
too much. On the other hand, because of the enormous variation 
in what we are paying from one county to the next and the 
variation within one county from one year to the next, the 
average level of the payment is not our only problem in this 
regard, and we need to fix the various pieces of the system 
simultaneously.
    The related issue there, and I think implicit in your 
question--and it is really very important to us--I personally 
feel very strongly, and I think this is a fair characterization 
of the Administration's view, that we believe there needs to be 
a level playingfield in which the choice by a beneficiary of 
whether to elect a managed care plan or a fee-for-service 
arrangement is a matter that is financially neutral from the 
point of view of the Medicare Program.
    And then, over time, beneficiaries will choose the kinds of 
arrangements that give them the greatest satisfaction and the 
highest quality. If capitated plans are going to succeed, plans 
will need to succeed by outperforming the fee-for-service 
community within the communities.
    At the moment, we do not believe the playingfield is 
entirely level for several reasons, such as the way in which we 
pay HMOs which is the most significant. On the other hand, we 
have been very concerned with proposals in the past like many 
in the 1995 legislation that we thought would tilt the 
playingfield in specific directions.
    The trick in doing this is to really try to achieve a way 
to save money regardless of the choice the beneficiary makes 
and to make that choice as open, uncoerced, and beneficiary-
driven as we can, and then to let the various kinds of service 
providers compete on quality and customer satisfaction for 
enrollment.
    Mr. Stark. Just two questions, quickly. Does current 
enrollment in HMOs cost us more on average than the fee-for-
service program, and have you had any indication that the 
quality of HMO programs of care on average is as good, better, 
or worse than fee-for-service?
    Mr. Vladeck. In answer to your first question, on average, 
Medicare loses money when people enroll in HMOs as opposed to 
staying in the fee-for-service sector.
    Second, we do have a fair amount of data that on average, 
the quality of care received by Medicare beneficiaries and HMOs 
is as good as or better than the quality of care received in 
the fee-for-service sector.
    We have two studies, however--one, the study that you cited 
from JAMA, and the other, a study done for us by researchers at 
the University of Colorado--that suggest that particular 
subcategories of Medicare beneficiaries with significant 
chronic care or long-term care problems may fare less well 
qualitatively in managed care plans than they do in fee-for-
service.
    Mr. Stark. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. Mr. Ensign.
    Mr. Ensign. Thank you, Mr. Chairman.
    Before I go on to my other questions, I want to address 
what you said last because first of all, you were saying 
qualitatively--is that a scientific study? Are you saying as a 
matter of fact that HMOs provide worse care?
    Mr. Vladeck. I am saying that insofar as anyone----
    Mr. Ensign. You said ``suggest''----
    Mr. Vladeck [continuing]. Is able to measure quality of 
care at the moment, there are two studies--one that looked at 
specific chronic illnesses, one that looked specifically at 
postacute care--which are the best studies of those specific 
subjects currently available, which show that the quality of 
care provided to Medicare beneficiaries and HMOs in those 
instances was inferior to the quality in fee-for-service.
    Mr. Ensign. Do you think the number of senior citizens 
switching to HMOs--do you think seniors talk amongst 
themselves, in other words, saying, Hey, do you like your HMO? 
Do you think that that means anything to senior citizens?
    Mr. Vladeck. Oh, absolutely.
    Mr. Ensign. If they thought they were getting worse care, 
do you think more and more seniors would continue to switch to 
HMOs?
    Mr. Vladeck. Well, let me answer that in two parts. First, 
I do not believe this is the case, and second, unless they 
regularly read the Journal of the American Medical 
Association----
    Mr. Ensign. I said talk amongst themselves.
    Mr. Vladeck [continuing]. The availability at the moment of 
good data about that is very limited.
    Mr. Ensign. No. I was just talking about talking amongst 
themselves.
    Mr. Vladeck. Our data show that most of our beneficiaries 
enrolled in HMOs are extremely satisfied.
    Mr. Ensign. The only reason I asked that was because it 
actually leads to another one of my questions. What percentage 
have you assumed in your budget will be people who are going to 
be switching over the next 5 years to HMOs?
    Mr. Vladeck. Yes. Our actuaries actually have a very 
complicated model that models enrollment growth in managed care 
plans, and they have run the numbers both under current law 
assumptions and on assumptions of all the proposals in the 
President's budget.
    Mr. Ensign. Over the next 5 years under current law.
    Mr. Vladeck. Over the next 5 years, and if I can find the 
page in the book, I will cite those numbers.
    Thank you. Good staff work. Our projections are--we are now 
at about 13 percent. Our actuaries project that under current 
law, total enrollment in managed care by Medicare beneficiaries 
in 2002 would be between 19 and 20 percent.
    Mr. Ensign. OK.
    Mr. Vladeck. But that under the President's budget 
proposal, total enrollment in 2002 would be about 22 percent.
    Mr. Ensign. OK. The only thing I would suggest that you may 
be just a little conservative on is seeing what has happened in 
southern Nevada over the last 2 years. We have gone from pretty 
high numbers, in the thirties, to now over 50 percent. I would 
suggest that seniors talk to each other, and they seem to be 
liking some of the extra services they are getting from managed 
care. I would suggest that you look at the numbers and, as 
managed care becomes more available, those numbers might be 
just a little bit low.
    The second question has to do with your chart over here and 
the 8 to 21 percent. Secretary Shalala yesterday brought the 
same chart, emphasized the same chart, and this seems to be 
like a revelation. That is kind of obvious, isn't it, to 
anybody with any common sense?
    In other words, when you have small children, you have 
higher health care costs; when you get older, you have higher 
health care costs; when you have kids going to college, you are 
going to have higher education costs. Seniors have lower 
housing costs, is that not correct--as a percentage of their 
income?
    Mr. Vladeck. OK, but again, we are talking about--and here 
is the distinction which I think is important--we are talking 
about what Medicare insurance--this is only the out-of-pocket 
cost----
    Mr. Ensign. Yes, I know. I know that. I know that. What I 
am saying is that at different stages of your life, your market 
basket is made up of different things. When you have small 
children, you go to the doctor more.
    Mr. Vladeck. That is correct.
    Mr. Ensign. OK. When you are older, you go to the doctor 
more. When you are going into college, you have higher 
educational expenses. At certain times, you have higher housing 
costs, you have higher car costs, you have whatever. Seniors 
have a tendency to have lower automobile and lower housing 
costs.
    The point I am making is that that chart is meaningless.
    Mr. Vladeck. Well, I would disagree for the following 
reasons, sir----
    Mr. Ensign. Well, let me put it this way. It is obvious; 
without doing any research, that is an obvious chart.
    Mr. Vladeck. But let me make one suggestion that 8 percent 
for people under the age of 65 is relatively constant, 
regardless of family age or family structure for insured 
people.
    Mr. Ensign. Sure.
    Mr. Vladeck. That is to say, for Americans with health 
insurance, the out-of-pocket proportions tend to be the same 
throughout the life cycle until they get to Medicare, at which 
point the limitations on the benefit compared to private health 
insurance cause that number to shift.
    Mr. Ensign. Well, it also might be that they get older, and 
they do happen to get sicker as they get older.
    Mr. Vladeck. That is absolutely correct.
    Mr. Ensign. The last question, since Mr. Stark went over, 
if I may indulge the Chairman----
    Chairman Thomas. The gentleman will yield.
    Mr. Ensign. Yes.
    Chairman Thomas. That is not why you are getting the extra 
time.
    Mr. Ensign. Oh. Thank you.
    Chairman Thomas. It is because the Chair is indulging you.
    Mr. Ensign. Thank you, Mr. Chairman.
    The other question I would ask quickly is that I have 
noticed--and this question was brought up yesterday--that your 
plan does not address any kind of medical malpractice reform. 
Does the Administration feel there is not a problem?
    Mr. Vladeck. I do not know that we have an official 
position. I do think we do feel that----
    Mr. Ensign. Do you as an individual?
    Mr. Vladeck [continuing]. Our Social Security Act is not 
the vehicle through which to address problems of the tort 
system.
    Mr. Ensign. As somebody who is an expert in the health care 
field, do you feel there is a problem in the whole idea of 
malpractice insurance and malpractice lawsuits?
    Mr. Vladeck. Let me narrow my answer if I may, because I 
have a lot of lawyers in my family. Having looked at this issue 
for many years, I do not believe that either the direct 
expenses associated with the malpractice system nor the 
phenomenon of defensive medicine is a significant contributor 
to the cost of health care compared to the cost of liability 
risks in most other enterprises in this society.
    Mr. Ensign. So----
    Mr. Vladeck. I do not believe that the absence----
    Mr. Ensign. I guess you have not talked to the same doctors 
I have talked to, because the doctors I talk to--and it has 
even trickled down to poor, old veterinary medicine--that we 
experience the same kinds of things. I would just spend some 
more time talking to doctors.
    Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman from Nevada. I guess 
what the gentleman from Nevada was saying is that we believe 
the chart would be much more useful if you had 100 percent of 
income on the under 65, 100 percent of income and what their 
out-of-pocket costs are for various activities, and I think it 
would be self-evident that the gentleman from Nevada's point 
would be made that there are different costs in different 
stages of life.
    It still does not change the fact that that is the portion 
for the seniors, but that in fact there are differences in 
terms of what occurs to people in different phases of life. 
That does not give you as much information as you would like, 
and I understand I gave you the information that you would 
like.
    Mr. Vladeck. We would be happy to try to determine that for 
you. I do not know that HHS maintains that----
    Chairman Thomas. No. It would be from somebody----
    Mr. Vladeck [continuing]. But BLS does, I believe, or 
Commerce, and we will try to track it down.
    [The information was subsequently received:]

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    Chairman Thomas. The gentleman from Nebraska is recognized 
for an indulgent 5 minutes.
    Mr. Christensen. Mr. Vladeck, the President has proposed in 
his budget the diabetes prevention benefits similar to our bill 
last year, H.R. 15. I was surprised to see in OMB's scoring on 
the President's budget that it was actually going to cost $1.4 
billion.
    We were under the impression last year, when we passed the 
Medicare Prevention Benefit Improvement Act, that it actually 
would result in a savings, and I was wondering if the savings 
in your analysis of the budget that the President has proposed 
is going to come in the outyears, or was it actually going to 
occur sooner than that, so we can have a better understanding 
of where the President is coming from on diabetes prevention.
    Mr. Vladeck. I believe, Mr. Christensen, that this is the 
case. I believe our actuaries estimate that--actually, I am 
sorry--I am corrected by my staff. We do have a disagreement 
between OMB scoring and CBO scoring on this benefit.
    Mr. Christensen. What is that?
    Mr. Vladeck. Again, CBO has not scored this year's 
proposals. I do recall--you are absolutely right--that last 
year, if I remember correctly, CBO suggested that the first 
couple of years of the benefit would cost money, but then it 
would begin to generate savings.
    Our actuary has scored it as a very modest increase in 
cost, something on the order of $600 million, if I am reading 
my chart correctly, over the 5 years of the budget.
    Mr. Christensen. CBO, or----
    Mr. Vladeck. No. That is the OMB scoring. We do not yet 
have CBO scoring of this year's proposal.
    Mr. Christensen. So, $1.4 billion over the 5 years in terms 
of cost?
    Mr. Vladeck. No. We estimate about $600 million in cost 
over the 5 years.
    Mr. Christensen. OK. It was my understanding that OMB had 
scored these as costing $1.4 billion over the next 5 years. Do 
your projections show a savings anywhere, and why not a 
savings? It was my understanding when we proposed it last year, 
and this is the reason why I think the President is proposing 
it this year, that there would actually be a savings through 
this diabetes prevention; isn't that right?
    Mr. Vladeck. Mr. Christensen, I cannot speak to CBO scoring 
either this year or last year; I can only tell you what our 
actuaries have done, although I cannot tell you why. But I will 
tell you that I am personally convinced that over a long enough 
period of time, this benefit will save lives and save enormous 
human misery. And whether it is a slight coster or a slight 
spender, quite frankly, is the least of the issue to me.
    Mr. Christensen. Well, I guess my point is--and I would 
agree with you, I think it is going to save lives, and I think 
it is going to save money--but I do not understand how these 
actuaries sometimes work, and I thought maybe you could 
enlighten me.
    Mr. Vladeck. I am afraid only within limits. I think part 
of the issue as I understand it--and I do not want to overspeak 
for them, and we would be happy to get you further 
information--as I understand it, many of the benefits from this 
program are anticipated to arise from early interventions for 
which the benefits in terms of reduced expenditures for eye 
disease or for coronary complications and so forth are way out 
into the future. But again, that is a layman talking about 
this, and we will try to get you some more information on the 
issues of scoring.
    [The information was subsequently received:]

    Over time, the diabetes prevention benefits will save lives 
and save enormous human misery. According to HCFA's estimation 
of the President's 1998 budget proposals, the diabetes 
prevention benefits program's projections are: Fiscal 1998 a 
cost of 0.2 billion; fiscal 1999 a cost of 0.3 billion; fiscal 
2000 a cost of 0.3 billion; fiscal 2001 a cost of 0.3 billion; 
fiscal 2002 a cost of 0.3 billion; fiscal 2003 a cost of 0.4 
billion; fiscal 2004 a cost of 0.4 billion; fiscal 2005 a cost 
of 0.4 billion; fiscal 2006 a cost of 0.4 billion; and fiscal 
2007 a cost of 0.4 billion. Totals: 5-year total is a cost of 
1.4 billion, and the 10-year total is a cost of 3.1 billion.

    Mr. Christensen. I have one other quick question. Last 
year, we had an opportunity to use outside accrediting boards 
to survey, certify, and propose some of the guidelines for 
nursing homes. Frankly, some of those outside certifying boards 
use tougher standards than HCFA has used. What is your position 
on this, and do you see HCFA moving more toward using outside 
accrediting boards, or are we going to keep it in-house?
    Mr. Vladeck. Let me phrase that question into two, if I 
may. Our 1996 appropriations accelerated the process for 
recognizing such--the term we use is ``deeming''--such outside 
agencies for everything but nursing homes. Since that law was 
changed, we have had new private agencies deemed for ambulatory 
surgical centers, but we have not seen any great rush of 
volunteers.
    On nursing homes specifically, we owe the Congress a report 
by July 1 of this year as a result of that appropriations bill, 
which will review the whole issue of private accreditation of 
nursing homes. We will meet that deadline. I cannot yet tell 
you everything that is going to be in the report, but we will 
have a report to Congress by the end of June on that subject.
    Mr. Christensen. I am out of time. Thank you, Mr. Vladeck.
    Chairman Thomas. The gentleman from Maryland.
    Mr. Cardin. Thank you, Mr. Chairman.
    Dr. Vladeck, welcome. Following up just very quickly on Mr. 
Christensen's point, it is difficult for us to understand the 
dramatic changes in some of the scoring between last year and 
this year, the diabetes test being one. We understand we do not 
always agree with the actuaries, but it is disheartening to see 
such a radical shift in a 1-year period, and I would also 
appreciate seeing some of those projections of how they were 
arrived at.
    I also want to compliment you on the emergency care within 
Medicare, using the ``prudent layperson'' standard, your 
recommendation to do that. That is certainly encouraging.
    I want to talk a little bit about the home health care 
switch. Secretary Shalala was here yesterday, and I certainly 
agree with her point that we do not want to increase the burden 
on our seniors as far as their already high out-of-pocket 
costs, and I also understand the shift of the home health care 
services into part B and believe that makes sense.
    But I am wondering whether there would not be a more 
efficient way to deal with the out-of-pocket costs of our 
seniors, and rather than take the home health care cost out of 
the part B premium, couldn't there be a more efficient way to 
deal with those seniors who have high out-of-pocket health care 
costs or lower income and use that money in a more directed way 
than to just change the policy and reduce the premiums for all 
our seniors?
    Mr. Vladeck. Let me attempt to respond to your question, 
Mr. Cardin, and if this is not totally responsive, I am sure 
you will let me know. The general issue of the relationship of 
total out-of-pocket expenditures, premiums, deductibles, 
copayments, to income and use of services is very close to the 
other question that has been raised by Members on the other 
side of the Hill with us yesterday about whether the general 
structure of deductibles and copayments in the Medicare Program 
in the aggregate makes any sense. Deductibles and copayments 
were grouped together in 1965. These structures originated in 
two very different sets of proposals.
    I do believe that--and I know that Dr. Davis, among others, 
has advocated for a long time that we rationalize the whole 
structure of copayments, deductibles, and coinsurance within 
the Medicare Program. This approach would also permit us to 
consider the relationship between income and beneficiaries' 
ability to pay.
    We would support careful consideration. Let me just 
conclude my response very quickly by putting in a plug on my 
favorite subject. At the moment, we could not--the Health Care 
Financing Administration, Department of Health and Human 
Services--could not administer such a revised program because 
we do not have the data processing capability to merge A and B 
data. When MTS, Medicare Transaction System, is up and running 
very early in the next decade, it will be technically possible 
to do this much more easily. It would probably be good public 
policy to move in this direction.
    Mr. Cardin. Yes. I understand that, and I understand the 
problems there. I would just urge you to consider, as well 
intended as the policy is to keep it out of the premium base, 
that that could become a difficult or dangerous precedent for 
the future as we look at modifications in the Medicare system, 
if we start going down that road of saying it is not part of 
the premium base.
    I would urge us to try to look at other ways to deal with 
our seniors and out-of-pocket costs.
    I would make one point. If we do not make this transfer, 
the amount of cuts that would be necessary to achieve the type 
of solvency in the Part B Trust Fund would be significantly 
greater. Have you analyzed what you would have to do if you did 
not make this transfer?
    Mr. Vladeck. We have not analyzed it in detail because, as 
you know, part of the problem with trust fund solvency is not 
only the 5-year aggregate, but it is the year-by-year effect.
    I would say that the simple rule of thumb here is that our 
proposed reductions in part A spending in the President's 
budget over the 5-year period are about $78 billion. The 
proposed reduction in part A outlays due to the reallocation of 
home health over the same period is about $82 billion.
    In order to get the same trust fund effect of transfering 
the home health expenditures, you would need to roughly double 
the level of part A provider cuts that are called for.
    Mr. Cardin. And what impact do you think that would have?
    Mr. Vladeck. I think that would then be very significant. 
We are talking about $60 billion for hospitals over a 5-year 
period of time. Again, these are rough numbers which are not 
precise. We are talking about almost $30 billion in cuts in 
payment to home health agencies over a period of time. We are 
up into the 25- to 30-percent range in reductions at the end of 
the budget window, which gets us to a level of reduction that 
would cause me very great concern.
    Mr. Cardin. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. If the gentlelady from Connecticut would 
yield for just one moment, Dr. Vladeck, I appreciate the 
questions and answers that just went on, but this is a 
direction that now appears to be a strategy rather than a 
series of questions from various individuals.
    If we are going to go forward on a bipartisan basis, you 
cannot take credit for the policy changes that have been put in 
place and brag about how you do not have to find as much money 
because of what has already been done, then propose policy 
changes and look forward and not take those into account by 
doing more of the policy changes which will produce a shorter 
path that we need to travel. But rather build these strawmen 
about how much has to be done. If that is what you are doing, 
that is a clear condemnation of the President's plan because it 
is just years-for-years' sake and dollars for dollars' sake to 
buy those years and not heavy enough on programmatic changes.
    One of the reasons I am concerned about how many years we 
get without the transfer is that if we do have 6 or 8 years, 
and we get serious about policy changes--if you have seen that 
new commercial on television about surfing the web, where the 
highway turns into a wave, and it rolls--we will have a policy 
wave in front of us that will buy us those years that you folks 
just, in a very partisan way, cutely talked about the massive 
cuts that would have to be made.
    If we quit talking about cuts and start talking about 
policy changes, then you are going to have that programmatic 
wave in front of you, and it will buy years on a year-by-year, 
policy-change basis.
    If you continue, every time we are sitting in on these 
hearings, to build these strawmen about how much we are going 
to have to cut, then I am going to start talking about how much 
you are condemning the President's program, because there is 
not enough policy change to build the ability to move forward 
on change.
    We are trying to force a policy change so that we can do 
just that--make sure we do not have to find as many cuts in the 
future. If you are just cutting for cutting's sake to buy 
years, which is what I believe the transfer is, then there is 
no question the dialog you just had is a reality. But, it is a 
reality because of the President's program and the failure to 
find policy change rather than the kinds of cuts you are 
talking about.
    Let us rededicate ourselves to finding those policy changes 
that will negate the necessity for this kind of partisan 
strawman building in terms of phoney arguments about what cuts 
are going to occur in the future. OK? [Laughter.]
    Mr. Vladeck. I was just trying to be responsive to a 
question from the gentleman.
    Chairman Thomas. I understand you were trying to be 
responsive, and I want to put it in the context in which we are 
going to deal with those kinds of questions and those kinds of 
responses.
    The gentlewoman from Connecticut.
    Ms. Johnson. Mr. Vladeck, thank you for being here this 
morning. Your testimony combined with the Secretary's testimony 
yesterday raises many, many questions. This is an extremely 
important year for Medicare, and our work together has to be 
very fruitful. We have lost 2 years on the project of making 
Medicare sound, so we have made our problem more complicated; 
and indeed if we fail this year, it will be a catastrophe for 
the seniors of America.
    I would simply point out in followon to my Chairman's 
comments that in the Republican bill--and I think this is 
really important, the context--in the Republican bill, we tried 
to provide very generous premiums so that we would encourage 
the competition of the private sector, offering better benefits 
than Medicare offers, and then we slowed the rate of spending 
growth by slowing the rise in those premiums and in other 
reimbursement rates, and we did it gradually.
    Now, I think that that is very, very important because in 
your proposal, you are proposing very significant changes in 
the reimbursement rates for HMO risk contracts. In fact, of 
your $100 billion in savings, $34 billion comes from the 
changes in reimbursement rates for Medicare risk contracts, and 
yet only 12 percent of Medicare beneficiaries are in those 
contracts. You are hitting that sector of the Medicare delivery 
system disproportionately. In fact, as I would describe it, you 
would dramatically alter the Medicare payment method for HMOs.
    Have you done the county-by-county analysis? When will we 
know the county-by-county figures?
    Mr. Vladeck. I would hope, Ms. Johnson, that we would have 
the county-by-county figures for you next week. We have a 
preliminary run, and we are doing the proofreading and validity 
checks on those now.
    Let me commit that if we do not get them by 1 week from 
today, by the very beginning of the following week, you will 
have them.
    Ms. Johnson. Yesterday, the Secretary said that the 
aggregate reduction would be about 5.3 percent. I just want to 
point out the depth of my concern. In 1995 the rate in King's 
County, New York, would have decreased by $124, or 19.2 
percent, per member per month if teaching and DSH payments were 
removed. Now, it is one thing to take away direct teaching 
payments for the purpose of reformulating how we fund medical 
education, but DSH payments are another issue. That would have 
been a $1,488 reduction per year for each DSH beneficiary 
enrolled in an HMO risk contract.
    Mr. Vladeck. Ms. Johnson, our proposal would prevent that. 
Under our proposal, no county in the year 2000 will receive a 
reduction in its rate of more than 3 percent, and in the other 
years of the budget window, no county may receive a reduction 
from one year to the next at all. So----
    Ms. Johnson. Wait 1 minute. The Secretary said yesterday 
that the reimbursement rates to HMO risk contracts would be cut 
5 percent. I consider that a reduction.
    Mr. Vladeck. Yes, ma'am, but we also have on all the other 
things--this is complicated because of all the things going on 
at once--but we cut the national rate on average by 5 percent, 
we are phasing in this geographical shift, so there is an 
offset associated with that, and the way the bill is 
constructed, in 4 of the 5 years, none of the rates in any 
county will go down. In the year 2000, the rates in a number of 
counties will go down as much as 3 percent, but not any more 
than that.
    Ms. Johnson. But you are saying that until the year 2000, 
the rates will not go down?
    Mr. Vladeck. That is correct.
    Ms. Johnson. I do not understand how the rates cannot go 
down, and the Secretary can say the rates on average will go 
down 5 percent.
    Mr. Vladeck. The rates in the year 2000 will go down----
    Ms. Johnson. No, no. She said the HMO risk contracts 
starting this year will be reimbursed at 90 percent instead of 
95 percent. That is a 5-percent cut. Then, in the year 2000, 
additionally and on top of that, there will be a 5-percent 
reduction, and if the budget does not balance, 2.2 percent on 
top of that.
    Mr. Vladeck. No----
    Ms. Johnson. Under nothing the Secretary said yesterday was 
there any indication at all that there would either be a hold 
harmless or any freezing of current rates, and in fact if you 
apply her formula to Cook County, Illinois, the 1995 rate would 
have decreased by $51 or 10.4 percent per month per member.
    I do not know how you can tell me it is not going to go 
down, and you are going to hold everybody harmless and make the 
savings that the Secretary said you are going to make because 
you are going to reimburse at 90 percent instead of 95 percent.
    Mr. Vladeck. Well, let me just suggest that, again, on a 
year-to-year basis, all other things being equal, the rates go 
up by the average rate of increase in fee-for-service costs.
    Ms. Johnson. I hear what you are saying, I hear what you 
are saying. You are saying rates are not going down because the 
rate is going to stay the same; you are just going to take 
medical education and DSH out of it.
    Mr. Vladeck. No, it is more complicated than that, Ms. 
Johnson. There are four things going on simultaneously. We have 
a phased renewal of the medical education and DSH components. 
We have the geographic equalization and the application of the 
floor, and we have the reduction in the year 2000 from 95 
percent to 90 percent of AAPCC.
    Ms. Johnson. OK, let me just stop you right there.
    Chairman Thomas. Let us hear the fourth one; what is the 
fourth one?
    Mr. Vladeck. And the fourth one is we have the hold 
harmless built into the formula as well.
    Ms. Johnson. Now, wait 1 minute, wait 1 minute. This is 
unbelievable. You cannot hold harmless if every factor in your 
formula hits the--Connecticut has some of the poorest cities in 
the Nation, with big DSH payments. You take away the teaching 
hospital component from the nonteaching hospital, but one that 
still serves poor people; you phase out the DSH payment; you do 
the equalization, which is going to hurt New England because 
New England is high cost--we get, by your standards, 
overreimbursed, so we are going to get a cut under that--and I 
have forgotten the fourth one, but that will hurt us, too. What 
is the fourth one, again?
    Mr. Vladeck. The overall reduction in the AAPCC.
    Ms. Johnson. Oh, yes, the AAPCC; that will hurt New 
England. Do not sit there and tell me you are going to make 
these four changes and save the money from them, but you are 
going to hold us all harmless. We will get into this in more 
detail, I am sure, as we go forward, but I can tell you----
    Mr. Vladeck. We would be happy to walk through the 
illustration in any particular county with you.
    Ms. Johnson. OK. Your answers raise far more questions than 
they answer, and I will just remind you that we did do the 
calculation for two of the Nation's biggest innercity 
hospitals, and the result was a 10.4-percent cut in rate in one 
and a 19-percent cut in rate in the other, and that is just for 
starters; that does not reach 2000.
    Mr. Vladeck. But we have looked at these for the Bronx, Ms. 
Johnson, which is very close to my heart, and the fact is that 
if you apply all of the provisions in the bill over the 5 years 
of the budget, the Bronx receives about one-half the rate of 
increase that it would under current law, and still the payment 
rate in the year 2002 for HMOs in the Bronx is higher than it 
is in 1998 under our proposal, and we would be happy to walk 
through all the specifics of that with you.
    Ms. Johnson. We will certainly have to walk through those 
details, because the way the material is presented in your 
testimony and what was referred to by the Secretary does not 
indicate any of those facts to be true.
    I also want to go back to the contrast between the way we 
dealt with the need to slow the rate of growth. Remember, the 
First Lady sat here in this very room and testified in 1993--we 
are now into 1997, 4 years later--to the effect--and she was 
absolutely right, and to her credit and to the President's 
credit, they both got out there and talked about this when they 
were, frankly, young, naive, and I guess more honest--but she 
sat there and said we have got to slow the rate of growth in 
Medicare.
    Now, the best way to do that for the system is gradually 
but firmly. In your budget, a third of your savings comes in 
the very last year, 2002. Now, you know us well enough to know 
that we cannot save one-third of the savings in the last year. 
It is not possible. So you are bankrupting Medicare. Don't you 
get it? You can't put out a program that is not going to save 
Medicare for America's seniors. And when--we have to win this 
time. We lost 2 years. It was 4 years ago that the First Lady 
sat here. We have got to be honest this time, and one-third of 
the savings in the year 2002 is not honest.
    Let me go to some more particulars----
    Mr. Vladeck. Ms. Johnson, may I say something to that 
point?
    Ms. Johnson. Yes.
    Mr. Vladeck. If you take a program that is growing at a 
rate of 8 to 10 percent a year, and you take level cuts across 
the 5 years, you will get more than 35 percent of your savings 
in the fifth year. That is the simple arithmetic of the way we 
do budget scoring and the way that savings work when you are 
saving off a growing baseline.
    Ms. Johnson. I hope you are right, and I certainly would be 
open to the figures because this is real, we have got to get it 
right this time, and we are going to have to spend a lot of 
hours in the seminar form so that we really do understand it.
    Off the top of my head, I am disappointed in my mind and 
heart. I intend to work with you to get a good plan that I can 
be proud of and you can be proud of, and we can tell our 
seniors we put this program back on track.
    I have some specific questions, but there will be another 
round.
    Thank you very much.
    Chairman Thomas. Thank you.
    Dr. Vladeck, I think this underscores the fact that we need 
the legislative language as soon as possible. You were able to 
cite the Bronx in terms of the adjustment of the four 
categories that you named; we are not. And I am not going to 
hold these hearings so you guys can go back and change your 
program to try to make sure the errors that may be in it, at 
least the ones we have touched on, will be corrected by the 
time we get it.
    I will tell the gentlewoman from Connecticut that what she 
does not understand is, and what I believe we will find in the 
legislative language is, that all the subtractions occur and 
then, after those subtractions occur, there is a hold-harmless 
provision that is put in for the rest of the time. In other 
words, after the furniture is removed, after the house has 
burned down, then the policy kicks in in terms of a hold 
harmless. If that is not the case, then we certainly need to 
see the legislative language, because if you have four separate 
components interacting from day one, we have got to look at the 
legislative language to understand it. It will save both of us 
a lot of wear and tear as we try to maintain the bipartisan 
cooperation as we go forward, because listening to you, we do 
not understand what you are proposing. Give us the legislative 
language, and then we can have a more fruitful discussion.
    Mr. Vladeck. As soon as we can.
    Chairman Thomas. I understand.
    The gentleman from Louisiana.
    Mr. McCrery. Thank you, Mr. Chairman.
    Dr. Vladeck, before I get into some of these areas that I 
want to talk about, I want to compliment the administration for 
coming up with a plan that does have some tough decisions in 
it--it was not easy for you to create this proposal--so in some 
respects, I think we should say thank you for at least coming 
forward with some specific proposals to create savings in the 
Medicare Program.
    Having said that, let me address the malpractice question 
for just a second. I do not want to let your characterization 
of malpractice costs in the system be the final word here 
because I think you are seriously in error.
    I am a lawyer, and I certainly am in favor of a strong 
liability system in this country. However, I think the way the 
liability system in this country is currently structured, 
particularly with respect to the health care field, it lends 
itself to some mischiefmaking, and mischiefmaking in the health 
care field leads to higher costs.
    Now, you say that you do not personally believe it is a 
significant factor in rising health care costs. You may or may 
not be correct. There are those who disagree with you. Two 
studies have recently been included, in fact, say just the 
opposite. The American Academy of Actuaries studied specific 
reforms in States and found that in those States that have 
undergone serious medical malpractice reform, the malpractice 
liability premiums are significantly less than those States 
that have not undertaken those reforms.
    Also, David Kessler and Mark McClellan of Stanford 
University recently concluded a study in which they also looked 
at States that have undertaken medical malpractice reforms and 
found that indirect costs in those States have been 
significantly less than in States that have not undertaken 
medical malpractice reform. In fact they conclude that the 
Medicare system in this country could save up to $600 million a 
year on heart disease alone if we put reforms in place.
    I think there is significant evidence out there that your 
conclusion is in error, and even if it is not a big cost 
driver, it certainly is a cost driver. And if we are going to 
solve the problem of escalating health care costs in this 
country--and I think we ought to try to do that as best we can, 
and it is so complex that none of us really want to try to get 
our arms around it--but we are going to have to try, and if we 
are going to do it, we are going to have to attack not only the 
big cost drivers that we all agree on, but maybe some of the 
less significant cost drivers. We are going to have to do the 
whole thing.
    I would encourage you to take another look at your family 
members' opinions on medical malpractice reform.
    Next, I just want to say a word--and it has been beaten to 
death, I guess--on the premiums and the shift from part A to 
part B. I really encourage--and I asked the Secretary 
yesterday--I really encourage you to take a second look at your 
decision not to include those costs in the calculation of part 
B premiums. The financing structure of Medicare is not perfect, 
but at least it does instill some sense of discipline in the 
system. You do have some recognition of the costs on the part 
of seniors because of their out-of-pocket costs and because of 
their premium costs, and to the extent that you lessen that, 
you are going to lessen this panel's ability and future 
Congress' to control costs.
    And just out of curiosity, have you figured out what the 
premium increase would be if you included those costs in part 
B, in the calculation?
    Mr. Vladeck. Yes, sir, we have.
    Mr. McCrery. What would that be? What would it increase the 
premiums?
    Mr. Vladeck. I have to find the right piece of paper here. 
In 1998 it would be an increase in the premium of about 18 
percent, or about $8.50 a month, $100 per year, roughly. In 
2002 the percentage would come down, and there would be an 
increase in the premium of about $11 a month, or about $120 per 
year per beneficiary.
    Mr. McCrery. OK. Thank you.
    I agree with Mr. Cardin that rather than just take a 
blanket approach, maybe we ought to look at some specific way 
to help those seniors who are on the edge of poverty. I think 
that that would be a much better approach to solving their 
problem.
    Mr. Vladeck. I think I have heard that message from both 
sides.
    Mr. McCrery. Good. One last question on the matter of 
graduate medical education. As you know, we proposed last year 
to essentially go to a broad-based financing structure for 
graduate medical education. Does your administration proposal 
include anything on that?
    Mr. Vladeck. We do not, sir, very frankly, because we have 
not been able to identify in the context of this year's 
budgetary process a source of contributions which is a more 
broadly based mechanism than Medicare's payments.
    We continue to believe that in principle, the kind of trust 
fund which emerged from this Subcommittee and was included in 
the 1995 legislation, has a lot to be said for it as part of 
the long-term approach to financing graduate medical education. 
There are a number of issues associated with the trust fund 
that will still need to be worked out and I think are very 
troublesome, but the real issue in the accounting sense is not 
the uses part of the trust fund design, rather it is the 
sources part. We have not in the current environment, other 
than what Medicare is now spending, been able to identify other 
sources of revenue for this trust fund, and therefore, have not 
proceeded with a proposal along these lines.
    Mr. McCrery. Generally, though, do you agree that a broad-
based approach to financing it would be superior to the 
approach we have now?
    Mr. Vladeck. Absolutely, yes, sir.
    Mr. McCrery. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. Dr. Vladeck, it just astounds me that you 
would move a specific benefit for a particular person to the 
general fund, the home health care transfer, and you would not 
take something that has a broad-based societal benefit like 
graduate medical education and look for it from that broader 
general fund. It is the kind of concern the gentleman from 
Louisiana and I share in terms of the real logic of working our 
way out of a 1965 A-B box. What you are doing only gets us 
deeper. We are looking for ways to try to figure out a rational 
use of general fund money for a broader societal benefit.
    Mr. Vladeck. Mr. Chairman, if I could make an observation, 
I think that that is a commentary on some of the ways in which 
all of us act as a result of the Budget Enforcement Act and the 
way we define some of these things. I think that in some 
aggregate sense, you are absolutely right that in fact what we 
are doing on home health in accordance with the budgetary rules 
under which we all operate, has no net effect on the Federal 
deficit, whereas the creation of a trust fund, however, as wise 
a policy as it might be under current budgetary rules, would 
have a very different kind of consequence. I share your 
frustration about some of the constraints that these rules 
impose on us.
    Chairman Thomas. All of us should struggle to deal with 
reality rather than the virtual reality of the budget rules.
    It is my pleasure to yield now to the newest Member of the 
Subcommittee, the gentleman from California, Mr. Becerra.
    Mr. Becerra. Thank you, Mr. Chairman. I am looking forward 
to working with you on these issues.
    I thank Mr. Vladeck for being here as well and look forward 
to continuing to work with you. I appreciate the work you have 
done in helping Los Angeles County cope with its health care 
problems.
    Let me ask you about a couple of issues that relate mostly 
to public hospitals. Obviously, Los Angeles County, with its 
recent experience, is trying to come up with a different way of 
providing health care to its indigents and has been searching 
for ways to try to cut costs. And I know you are doing things 
on DSH--can you give me a better sense of how you are going to 
provide a formula that will better target DSH dollars toward 
those hospitals that are absolutely providing that care versus 
hospitals that at some point do provide some of that care, but 
the bulk of it is going to those public hospitals and those 
charitable hospitals that are in low-income areas?
    Mr. Vladeck. This is one of the areas of the President's 
bill, sir, where I think some of the concerns about not yet 
having all the details available are relevant because--although 
I cannot answer your question very well--on this issue in the 
Medicare Program, frankly, we have proposed something of a 
punt. We are very much concerned that merely by the effect of 
the changes in welfare reform, our ability to measure 
disproportionate share services or uncompensated care services 
in the way it has been defined in Medicare over the last decade 
or so is substantially weakened. We need a much better way of 
measuring disproportionate share and targeting it for both 
Medicare and Medicaid, and frankly, we do not have the answer 
to that at the moment.
    What we do propose in the legislation, therefore, is that 
essentially, we freeze the level of DSH funding for the 
Medicare share for all hospitals for 2 years and require the 
Secretary to make an additional recommendation back to the 
Congress on how to fix and improve the formula.
    I have proposed to my colleagues that we write the 
legislation so that the onus for a new formula was not on us, 
but that we assign that responsibility to the Prospective 
Payment Commission or someone else, because it is very 
difficult to do. However, we were not able to totally get 
ourselves off the hook.
    I guess that is a long answer to the question to say we 
know that we have a problem--we have had a problem for a long 
time in the best way to measure and target DSH dollars. This 
problem is significantly exacerbated by changes in the income 
maintenance systems for low-income people which were the heart 
of the measurement process for DSH in the past.
    We need to come up with a new way to measure and target. We 
need to mandate on ourselves in the statute the need to come up 
with a new way, but we do not have it yet.
    Mr. Becerra. That AAPCC carve-out that you are making for 
DSH and graduate medical education and so forth, those 
hospitals, do you think you are headed in the right direction 
trying to pull out the dollars you need for that? With this 
welfare bill that recently was signed with the growing tendency 
toward managed care, how do public hospitals that are also 
teaching hospitals survive?
    Mr. Vladeck. I think that is a very real issue. What we 
have proposed--I know I am getting near jurisdictional turf 
here--but what we have proposed on the Medicaid side, for 
example, is actually a reallocation of some of what have been 
Medicaid DSH dollars to safety net institutions. Because of 
concern with the growth of capitation in both Medicare and 
Medicaid, some of the subsidies which we have built in in the 
past for these institutions are endangered, as HMOs steer their 
patients to other kinds of providers.
    With regard to Medicare, we believe that if we pull the 
money out of the capitation payments, and if we can obtain a 
better measure to target these dollars, we can do what we can 
to address this problem. The Medicaid issue also requires more 
targeting.
    The other problem is that many hospitals like hospitals 
located in Los Angeles County, which are major academic centers 
and major providers of services to low-income people, have a 
relatively small share of their business on the Medicare side, 
so that the ability to help these hospitals directly through 
the Medicare Program is somehwat constrained.
    When I was a trustee of the public hospital system in New 
York City, we kept talking about Medicare rate enhancements, 
because we did not have many Medicare patients. I think that 
that is why a trust fund sort of direction, in which we pool 
sources from all payers and reallocate funds based on the 
nature of the program or the nature of the services being 
provided is where we need to go as soon as we can figure out 
how to do it.
    Mr. Becerra. But doesn't the trust fund still leave, in 
effect, the possibility of having an inequitable formula that 
ultimately drives dollars in the wrong direction and constantly 
causes you to have to turn to a trust fund, which will probably 
have to grow and grow and grow?
    Mr. Vladeck. Well, the fundamental problem is a twofold 
problem in that we have a large and growing number of people in 
the United States without health coverage at all, and as we try 
to reduce the expenditures on both public and private health 
insurers for people who do have coverage, the ability to 
subsidize the services for the uninsured is getting 
increasingly strained. I think that that is why, again, over 
time, in the longer term, we have got to get to the root cause 
of this problem, which is the growing number of people without 
health insurance, and address that issue.
    Mr. Becerra. If I could add just one last question, there 
are all sorts of ideas floating around these days on how you 
can try to get--I guess the estimate is 10 million children who 
do not have health insurance--some folks are talking about some 
form of tax credit for kids that goes to a family so they can 
afford to get their kids into some kind of program.
    I know the Secretary mentioned that her program would bring 
in an additional 5 million children under some form of health 
protection. I was wondering if you could tell me how you plan 
to do some of that outreach that apparently is going to bring 
in 1.3 million children just through outreach. I am interested 
to know what is so new and novel that we have not done or known 
about that is going to get us 1.3 million more kids into the 
system.
    Mr. Vladeck. We are just starting to meet with the 
Governors and some of the public health agencies and so forth 
to work on that, but my own sense of it is that the 
opportunities we are missing--we have a pretty hard number that 
there are about 3 million children in the United States at the 
moment who are legally eligible or entitled to Medicaid, but 
not enrolled, and that is the target population for trying to 
enroll 1 million to 1.3 million children.
    I think that if you want to enroll children, then you go to 
the schools, and for children below the age of 5, then you go 
to the preschool arrangements. We are expanding Head Start, and 
we are expanding subsidies for child care, so that increasingly 
we will know where they are in that sense.
    In the past, individuals operating these services may or 
may not in a pro forma way have worried about the coverage of 
the children they were serving. However, I think that this is 
going to be where a lot of this action occurs in the short 
term. Just as we have used the schools as a vehicle for seeing 
that at least by age 5 or 6, children are immunized, it is the 
vehicle through which we have got to see that children who are 
potentially eligible for health insurance get it, and I think 
that that will be the primary focus, at least at the outset.
    Mr. Becerra. And if I could just encourage you, as you try 
to get the local governments to focus on how they can try to 
help you capture these kids, to think about where you are 
going, these areas that you are going, and look at the 
demographics, and if you ask folks to be a little bit more 
linguistically and culturally sensitive to the areas where they 
are traveling, they will probably have much more success in 
capturing some of these kids.
    Mr. Vladeck. No. We cannot do this from Washington or 
Baltimore. This has to be done on the street. We understand 
that.
    Mr. Becerra. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. Certainly.
    Bruce, yesterday, I asked the Secretary when she was in 
front of the Full Committee about the operational policy letter 
that is going to be issued or which has been issued, clarifying 
for Medicare managed care plans the requirement that outpatient 
mastectomies or lymph node dissections not have a fixed maximum 
length of stay in the hospital for inpatients. I believe the 
letter says that these kinds of decisions ``are better made by 
the patient and her physician after assessment of the patient's 
individual circumstances.'' And I know the American Cancer 
Society has said that under certain conditions, an outpatient 
procedure is entirely appropriate for mastectomies, but always 
referring back to the patient and the physician decisionmaking 
structure.
    I tried to get the Secretary to explain to me--and it is 
very tight in the 5 minutes we have in that kind of Full 
Committee structure--what the purpose of the issuance of that 
operational policy letter was in contrast to the President's 
stated position in his State of the Union Address of supporting 
the DeLauro legislation and other legislation of that type, 
which would require a specified hospital stay. And she did not 
really have enough time to explain it. She was talking about 
the fact that under Medicare, we have the ability to do certain 
things versus other areas.
    What is it that you did--for example, my understanding is 
that this letter was addressed just to the managed care HMOs. 
Does the letter go to fee-for-service as well, or not?
    Mr. Vladeck. No, Mr. Chairman. There needs to be another 
series of letters addressing this issue on the fee-for-service 
side, and the process of generating these letters is underway. 
We are probably 1 week or so behind because that is a more 
cumbersome process.
    Chairman Thomas. Here is my problem, and I am trying to be 
as objective as possible in looking at your responses, because 
frankly, I think HCFA and Medicare have served a useful purpose 
in the last year or so about issuing directives that were 
reasonable and appropriate--and notwithstanding the gentleman 
from Maryland applauding you for your emergency care definition 
of a ``prudent layperson,'' while your definition of a 
``prudent layperson'' is significantly different than his 
definition--I do not know whether it is the ``prudent'' or the 
``layperson'' that is the significant difference--I do think 
your proposal helps bridge the gap between us.
    When organizations align themselves with your declarations, 
we do have to see if in fact it filters down to actual behavior 
change, performance change and standards. But you have offered, 
I think, a way out of this business or the penchant or the 
recent desire to lock into legislation practices that really 
should be left to, in my opinion, and I think a lot of 
peoples', physicians and patients.
    As I looked at the directive that just went out to managed 
care plans on mastectomies, we looked around for some 
statistics in New York State because they do a good job--I am 
sure you had some part in making sure that that data was 
collected. For example, in 1995, there was a total of 7,016 
mastectomies. Of that 7,016, 6,892 were inpatient, or 98 
percent. Of the 2 percent that were not, the 124 that were 
outpatient, the mastectomies performed under a Medicare HMO as 
an outpatient were 2.
    I am just wondering why you were--and if this is replicated 
across the country, I am sure the numbers might adjust here or 
there--but 2 out of 7,000 in the State of New York versus the 
fee-for-service number would seem to me that when you deal with 
issuing these kinds of directives, you might focus on where 
``the problem is,'' notwithstanding the bureaucratic difficulty 
of generating it because, quite frankly, when you put this out, 
there was enormous press generated, and to be as objective as I 
can be, it sure made it look like the HMOs were in the rip-off 
business, and that they did not have quality medical standards 
and that you folks had to go after them. And here I am looking 
at 2 out of 7,000 mastectomies that you are going to clean up 
with the directive that you sent out in the State of New York, 
and we are trying to compile data countrywide.
    I liked your earlier level of performance and objectivity. 
I do not know why and how this was driven to be sent out when 
it was. But if you were going to have a fee-for-service 
directive going out, it might have been wise to hold both of 
them and release them at the same time.
    Mr. Vladeck. I think that point is well taken, Mr. 
Chairman, and I would acknowledge that we should have had both 
letters ready to go simultaneously; you are absolutely correct.
    Chairman Thomas. Now, just let me say also--I know you are 
going to do it as soon as you can--but we have a hearing 
scheduled for February 25 with ProPAC and a number of 
actuaries, looking at the whole question of the AAPCC and how 
we might revise it. If we could get those county-by-county 
numbers before then, it would be a lot more fruitful.
    Mr. Vladeck. You will have them, you will have them. Again, 
you will have them no later than the Friday before, but I hope 
you will have them earlier than that. We would not want Dr. 
Kahn and others to work over the weekend on that, so we will 
try to get it midweek.
    Chairman Thomas. Thank you. At the very least, the 48 hours 
we talked about.
    Mr. Vladeck. At the very least.
    Chairman Thomas. Thank you.
    The gentlewoman from Connecticut.
    Ms. Johnson. Thank you, Mr. Chairman.
    As the hospitals have been under more pressure, Mr. 
Vladeck, most of them have included their staffs to a far 
greater degree in meeting the challenge of reducing costs, and 
as the staff has focused more on how the hospital operates, 
they have become far more critical of how Medicare operates. I 
want to throw out a couple of little things that I would ask 
you to get back to me on.
    For example, the requirements under Medicare for Neupogen 
in the treatment of cancer. According to the physicians in one 
of my hospitals, instead of it costing $900 a course, it could 
be down to $100, if we would allow them to just write a 
prescription and deal with it in a simpler fashion. I will be 
getting back to you on that.
    Those little things are very distressing, when people can 
see that we have pushed the costs up 90 percent.
    In mammograms, if a senior wants to have an annual 
mammogram, although Medicare only provides it every other year, 
and is paying for it herself, Medicare requires she sign a 
waiver of liability under part A and a waiver of liability 
under part B. Now, first of all, this is more paperwork for the 
hospital. It takes time to explain this all to the senior, and 
it scares the senior, when in fact, Medicare has absolutely 
nothing to do with this situation, we do not cover annual 
mammograms, and the mammogram the person is buying, they are 
paying for.
    I would like HCFA to review that policy and I would hope 
repeal it, but certainly I would like to hear from you on that 
requirement because for small hospitals, that is significant.
    [The following was subsequently received:]

    The President's fiscal 1998 Medicare budget proposals 
include provisions to expand Medicare's coverage of mammography 
screening for beneficiaries age 65 and over. This expanded 
coverage would be effective for services provided on or after 
January 1, 1998. Current law already provides coverage of 
annual screening mammograms for women ages 50-64, and those at 
high risk, ages 40-49. Screening mammograms for women age 65 
and over are now covered only biennially, even though breast 
cancer mortality increases with age. This President's proposal 
would remove this anomaly in current law and make coverage 
consistent with the frequency recommendations of most major 
breast cancer authorities.

    Ms. Johnson. On bone density testing, very important to 
preventing osteoporosis, the HCFA policy goes back to 1984. It 
is so outdated that it lists technology that is no longer 
available. As a result of the outdatedness of our policy in 
regard to bone density testing, coverage policy across the 
Nation is very inconsistent. I would like to have HCFA get back 
to me on when you intend to update that policy; it should not 
be hard. The knowledge in this area now is very advanced. There 
are whole groups of seniors who do not need bone density 
testing and so on and so forth, but we need a modernized policy 
so there will be more consistent access across the Nation for 
seniors who need bone density testing, which is very important 
to their well being.
    [The following was subsequently received:]

    HCFA is committed to reevaluating coverage policy for bone 
mineral density (BMD) studies. Currently, Medicare's national 
coverage policy pertaining to coverage of BMD studies does not 
include any discussion of dual-energy x-ray absorptiometry 
(DEXA) BMD scans for use in monitoring the treatment of 
osteoporosis. Since there is not a national coverage policy on 
DEXA scans, the local Medicare contractors make coverage 
decisions on claims for these tests, which may result in some 
variation in coverage in different parts of the country.
    As part of its effort to evaluate coverage policy of BMD 
studies, HCFA requested five technology assessments from the 
Center for Health Care Technology (CHCT) in the Agency for 
Health Care Policy and Research (AHCPR). Four of these 
assessments address bone mineral densitometry for patients with 
secondary osteoporosis, specifically patients with asymptomatic 
hyperparathyroidism, patients with chronic end-stage renal 
disease, patients on long-term steroid treatment, and patients 
with vertebral abnormalities. (Patients with secondary 
osteoporosis comprise less than 5% of the population with 
osteoporosis.) HCFA also requested a technology assessment for 
patients with primary osteoporosis (osteoporosis brought on by 
age and postmenopausal changes).
    Three of the four assessments of BMD studies for secondary 
osteoporosis have been completed by CHCT. The assessment of BMD 
studies for primary osteoporosis, which is the assessment of 
greatest concern because it pertains to 95 percent of the 
Medicare population with osteoporosis, has not been completed.
    When the medical assessments have all been completed by 
AHCPR, we will reevaluate Medicare's coverage policy for BMD 
studies, including DEXA, and take appropriate action based on 
that evidence.

    Ms. Johnson. Those are three little examples of things that 
I would like to get to, and then I do want you to comment on 
the policy you have just announced, or perhaps are about to 
announce, in regard to mastectomies. Again, as my Chairman 
said, you have announced a number of very thoughtful policies 
that are relevant to the problems we face, but you do point out 
in this policy that conclusive medical research and evidence 
does not exist sufficient to conclude that women derive any 
benefit, pro or con, from a definitive number of hours in the 
hospital following a mastectomy or a lumpectomy. In the 
research that does exist, very little is applicable to Medicare 
beneficiaries, who are generally 65 years or older, and 
therefore decisions of length of stay following a mastectomy or 
a lumpectomy should be left to the discretion of a doctor and 
patient on a case-by-case basis.
    It is a curious contrast between the actions of the 
Department and the endorsement by the First Lady of a bill that 
sets specific hours. I think it is a problem from the national 
level to set specific hours. I think your policy directs itself 
at guaranteeing Medicare beneficiaries appropriate care, and I 
commend you for it, but I would appreciate your comment on 
that.
    Mr. Vladeck. Well, thank you. I believe as a general matter 
that enrollees in Medicare managed care plans currently have 
much better consumer protections than do privately insured 
individuals as a general rule. I believe this example 
illustrates the extent to which we can ensure that Medicare 
managed care plans both have grievance and appeals procedures 
and have other sets of rules about how decisions are made which 
are not uniformly required on managed care plans in the private 
sector elsewhere in the country.
    Ms. Johnson. Thank you. I see the red light is on, and 
there is just one little thing I want to mention.
    I appreciate that because we are looking at the issue of 
appeals procedures and managed care plans, and I think those 
kinds of protections are probably the right answer. I would 
also like to say that I look forward to working with you on the 
issue of respite care policy. I know many seniors who are 
carrying the burden of full-time care of a spouse who has 
Parkinson's or a stroke or cancer, and I think we do not want 
to create an inequitable benefit, and we also want to be sure 
that as we develop postacute care bundling, we do it in such a 
way that the small agencies at the local level will have just 
as good an opportunity to serve, and we do not preference 
regional providers.
    And as we move forward, I do hope to have the opportunity 
to explore much more in depth your approach to establishing 
preferred-provider service organizations. We worked on that at 
great length in our bill because it will provide a nonprofit, 
noninsurance company competitor to insurance company-provided 
managed care plans--not that they are not good, but you want 
competition from plans where the power of medical decision is 
clearly with the provider, and unless you do antitrust relief, 
unless you adopt new asset standards for PSOs, you will not get 
them developing in the market, and they are very much afraid 
that by the time they get in, the big plans will have already 
taken all the patients.
    It is imperative, again, that we not let another year pass 
without making those changes, but I would hope that your 
proposal when it comes to us in detail will show some 
sensitivity to the antitrust problems that impede the 
development of provider services organizations where doctors 
and hospitals do have the power both economically and 
medically.
    Thank you.
    Chairman Thomas. The gentleman from Nevada.
    Mr. Ensign. Thank you, Mr. Chairman.
    I want to get into a little bit about the whole idea of 
skilled nursing facilities and the 3-day hospital stay. Dick 
Durbin and I last year introduced some legislation dealing with 
that. I would like you to discuss what the administration feels 
about certain DRGs being classified and waiving that 3-day 
hospital stay for savings for Medicare.
    Mr. Vladeck. Thank you. I guess there are three pieces to 
the answer. As I am sure you know, OBRA 1990 says the Secretary 
has the authority to waive the 3-day hospital stay, if she can 
certify that doing so would be budget-neutral for the program.
    The last time we looked at that systematically was in 1994 
and 1995, and our actuaries would not provide an opinion to 
that effect. We had not, prior to the suggestion that emerged 
last year, looked at whether that legal provision would permit 
us to waive it on a DRG or a diagnosis-specific basis. But with 
the development of a prospective payment system for Medicare 
SNF services, I think that changes the ball game. We would be 
happy to consider this issue with you as we go through the 
process this year because to the extent that the prospective 
payment system is going to work appropriately for some of those 
diagnoses, we may well be able now to talk about the 3-day stay 
no longer being necessary. However, I think we would have to 
tailor it a little to reflect the characteristics of the new 
payment system, and I will confess we have not figured that out 
yet, but it is something we ought to address.
    Mr. Ensign. Thank you.
    We have gotten a little contentious occasionally today, but 
I also want to compliment the administration on some of its 
proposals on the preventive side. I think one of the things 
about Medicare is that it does provide a model for a lot of the 
other private health insurance companies to follow, and the 
more we can turn what has been termed our ``sick care system'' 
into a health care system, I think the better quality of life 
people will have, and I think that overall in the long run, it 
is going to save a lot of money. When we start getting farther 
into this and worrying about trying to reimburse people for 
keeping people healthy instead of only reimbursing them when 
people get sick, if we just change our paradigm and our mindset 
to think in those terms--and the mammography portion, although 
it is still somewhat of a ``sick care,'' it is trying to catch 
something earlier, so at least you are trying to keep people as 
healthy as possible--but the diabetes and the colorectal and 
the rest, I applaud your efforts and what the administration 
has brought forward on those areas.
    Thank you, Mr. Chairman.
    Mr. Vladeck. Thank you very much.
    Chairman Thomas. Thank you.
    Let me ask a couple of questions and probably ask you for 
some materials, and this will be back on the legislative 
language, Dr. Vladeck.
    We are going to be with ProPAC next month looking at the 
DSH adjustment payment structure. I know you folks really did 
not do anything on that--you are simply pulling it out. If we 
can sit down and work around the ProPAC suggestions, it just 
seems to me that as we move through reconciliation, this is 
something that if we are all able to close on, we ought to 
close on, because we are going to continue to redefine what 
``low income'' is, and there are going to be some outreach 
efforts.
    I think it would be fruitful if we did that.
    Mr. Vladeck. Mr. Chairman, I would love it. Let me just 
say--and I do not mean to be off-putting at all, but as you 
know, I am a ProPAC alumnus myself; it has been at least a 
decade that I have been involved on and off in looking at this 
issue--it is really hard. If we can do something over the next 
6 months, if you can do something that makes sense, or if 
ProPAC can, we would be delighted. I just do not want to give 
any false impressions of feasibility. Anything anybody can do 
to contribute, we would eagerly support.
    Chairman Thomas. But we can certainly make a good faith 
effort in this area because of the changes that we are making 
in terms of shifting pots of money; we should at least make the 
effort.
    Mr. Vladeck. Absolutely.
    Chairman Thomas. The other thing I am concerned about, and 
I do not know exactly what you are doing, although it is fairly 
easy to understand in a general sense, is that you are talking 
about as you make these other changes in HMOs, examining the 
benefits that they use as inducements or additions, and you are 
going to try to standardize them. One of the concerns I have in 
that process is that as you are cutting down whatever margin of 
ability the HMO has to put a package together that makes it 
more attractive, which you are doing by reducing and squeezing 
out those areas. At the same time, if you are going to move 
forward with the standardization--my hunch is that you may wind 
up, because you are standardizing and prioritizing them to a 
certain extent as well, that is, if you are going to do them, 
you have got to do this one first, this 1 second, and so forth, 
or at least this one first--I am concerned that while you are 
talking about creating an increased choice for the consumer, 
and you are concerned about the ability to compare, you may 
wind up killing the goose that laid the golden egg because you 
do not have anything to compare it, because they are not 
offering it, or they cannot meet your standard which is now an 
additional criterion, since they have to actually meet what it 
is you offer on the fee-for-service side.
    My concern has always been that if you really want to 
increase changes, let us talk about good oversight of a 
structure which moves toward an actuarial equivalent to a 1965 
concept of what you need to make sure you get benefit for your 
money, but you do not standardize everything, which really 
loses that whole concept of change in choice that you are 
beginning to focus on.
    Mr. Vladeck. Your points are very much on target, Mr. 
Chairman. We recently reviewed a little informal work which we 
did and would be happy to share with you regarding the dynamics 
of change in some of the Medicare markets that have occurred 
over the last 5 years. You will find a couple of things that 
have occurred--and I will not identify particular markets here; 
we would be happy to talk to you about them--that have 
influenced our thinking quite a bit.
    The first is that we have had several markets in which the 
existing plans were offering some limited supplemental benefits 
at some modest premiums, and aggressive new entrants have come 
in, and after 2 or 3 years, lo and behold, everybody in town is 
offering more generous benefit packages at a zero premium, 
which is the basic. If your barriers to entry are not too high, 
you will get new competitors who will drive the market, and 
that is why you need more competition.
    The other thing we find, which is worthy of some more 
explanation, is that plans in the markets which we are watching 
do not tend to seek to differentiate themselves in terms of a 
benefit package. It does not seem to be, as part of a marketing 
or long-term strategy, one of the things they do; in fact, 
there does tend to be enormous convergence around the 
supplemental benefit package, and they seek to differentiate 
themselves in other ways.
    Now, that does not mean that over time, we should not allow 
for opportunities for plans to make their marks or to build 
their market share or whatever by being more creative on the 
benefits side. It is just that, again, our observations of what 
is happening in these actual markets in recent years suggests 
that that is not one of the three or four top number of things 
by which a plan seeks to distinguish itself.
    Chairman Thomas. I would only say that obviously, all of 
them will try to reduce or eliminate an out of pocket. That is 
a very attractive immediate. We have seen them then move to 
paid prescription, which obviously is not on the regular 
program, and then it begins to diminish in what you do. And 
obviously what you do is try to line up with your competitors 
so that you are not significantly different.
    I guess to me, the value of that, although you may not see 
it as a value, is that it is the marketplace that is 
determining what it is that people want, and to the degree you 
move toward standardization, it becomes more a bureaucratic 
structuring that determines what is available to the 
beneficiary than it does the market forces. I am just concerned 
that we almost always go to the direction of standardization 
for comparison purposes which we view as a good which may not 
necessarily reflect itself in the market.
    Mr. Vladeck. No. I understand the balancing act there, and 
we need to work with you because there are two conflicting 
valid goals there, and I agree with you.
    Chairman Thomas. Yes.
    The gentleman from California wanted to get back in.
    Mr. Becerra. Yes. Thank you, Mr. Chairman.
    Mr. Vladeck, let me ask you to comment on some discussion 
that has taken place over the course of all this health reform 
discussion about moving the Medicare Program into a defined 
contribution plan scenario where you are really giving that 
beneficiary a lump sum or a certain bag of goodies, and once 
they use up the goodies, they have to turn to their own 
resources to try to come up with their payment of health care 
costs.
    You do not go in that direction, from what I can tell, with 
the President's proposal, and if you could tell me what your 
thoughts are and what the administration's position is on that, 
and then if I could ask a couple of questions after that.
    Mr. Vladeck. Thank you. Yes, I think we can be very direct 
and try to be very specific. We believe the basic social 
contract embodied in the Medicare statute implies a defined set 
of benefits. It is for the availability of a defined set of 
benefits for their parents and eventually for themselves that 
we have asked people to contribute part of their wages over the 
last 30 years.
    It is true that from the point of view of budgetary 
neatness or predictability, the problem with the defined 
benefit program, particularly in health care, is that it 
introduces something of a wild card into your budgetary 
calculations because you can never control the government's 
outlays as precisely as you could if you said, We are going to 
spend x dollars and no more per beneficiary.
    On the other hand, we believe that a defined contribution 
plan would in effect transfer the risk of excess rise in health 
care costs or excess epidemiological phenomena are driving up 
the health care costs from anything else would transfer that 
risk from the government and the public at large to 
beneficiaries, which is exactly the wrong thing to do. It is a 
way of picking on the weak.
    We are very strongly opposed not only to anything that 
would explicitly turn Medicare into a defined contribution 
plan, but anything that would implicitly or indirectly move it 
in that direction.
    Mr. Becerra. What if we placed on top of that scenario a 
balanced budget amendment in the Constitution that required us 
every year to balance the budget without regard to the costs of 
medical care?
    Mr. Vladeck. Well, my concern would be more indirect. I 
think if we did that under current law, we would be putting 
many of the providers of service to Medicare at risk in a way 
that would be very destructive not only to the program but to 
the health care system over time. But again, even there, I 
would rather live under a scenario in which we said if we bump 
up against some kind of external ceiling, we are going to take 
across-the-board hits from providers--that would be a real 
problem, but it would be in my view not as bad a problem as 
saying if we bump up against a ceiling, we are going to 
increase the out-of-pocket liabilities of beneficiaries, which 
a defined contribution plan would do.
    Mr. Becerra. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. Certainly.
    The gentleman from Louisiana is fond of saying that people 
will consume all the health care other people are willing to 
pay for, and whether we like it or not, that will be an ongoing 
societal debate--what is the appropriate amount that other 
people are willing to pay for other people's health care.
    If we have a structure which defines it as those people who 
receive the care rather exclusively rather than those people 
who pay for it, you will not only be exacerbating the problem 
of controlling the largest and the fastest growing area of the 
Federal budget, but you will be exaggerating the problem we now 
have between generations in the most significant and largest 
transfer of wealth in the history of the world between 
generations.
    My question: The Federal Employees Health Benefit Program, 
which is held up as a model constantly--in fact, a Senator 
whose name I will not mention used it as an example of where he 
would like to go with his reforms in Medicare--is the Federal 
Employees Health Benefit Program a defined benefit or a defined 
contribution program?
    Mr. Vladeck. It is really neither, sir, but it is closer to 
a defined benefit program than to a defined contribution 
program.
    Chairman Thomas. And so I get a number of benefits 
regardless of the price, or do I get a dollar amount that is 
paid by the government?
    Mr. Vladeck. Neither. Every year, the amount of the dollar 
contribution paid by the government is determined by a very 
complicated formula that is essentially benefit and price 
driven, not by any external budgetary formula. It is an effort 
to assess--it is very analogous to what we do in Medicare, 
although more complicated, in the sense that it basically 
prices a benefit package in any given year and then establishes 
an equivalent contribution level for capitated or other plans 
tied to the price of the fee-for-service benefit package.
    Chairman Thomas. Notwithstanding its complexity, is it 
better than what you do in Medicare?
    Mr. Vladeck. No. I think it is inferior in a couple of 
ways, but it has one enormous advantage over Medicare----
    Chairman Thomas. Because it is more dollar driven than 
benefit driven, and Medicare is more benefit driven?
    Mr. Vladeck. No. It is inferior to what we do in Medicare 
because it pays a lower proportion of the cost of the basic 
benefit plan.
    Chairman Thomas. Well, notwithstanding what portion it 
pays, the way in which it determines what is the appropriate 
contribution by others to support an individual's health care 
needs.
    Mr. Vladeck. I think if you really tried to take apart the 
formula by which that is done, and if it were applied to 
something as visible to the Medicare budget, I think it would 
be hard to defend over a period of time, just as a mechanical 
way of setting the contribution level.
    Chairman Thomas. Any additional questions?
    [No response.]
    Chairman Thomas. Thank you very much.
    Mr. Vladeck. I appreciate it, Mr. Chairman.
    Chairman Thomas. We look forward to all that data so we can 
move forward.
    Mr. Vladeck. You will have it.
    Chairman Thomas. Thank you.
    It is my pleasure now to announce the second panel, which 
consists of folks we know well and are pleased to have back.
    Dr. Reischauer, who is now a senior fellow with the 
Brookings Institution, was Director of the Congressional Budget 
Office for half a decade, recently leaving to assume the senior 
fellow position.
    Dr. Bob Helms is director of health policy studies at the 
American Enterprise Institute and involved himself in the 
structure of HHS for a number of years.
    And Dr. Karen Davis, who has been with us both formally and 
informally over the years to assist us in understanding 
different ways of looking at the program, is currently 
president of the Commonwealth Fund.
    Let us just start with the way you are lined up. Dr. 
Reischauer, we will begin with you and move across the panel.
    Welcome, and you can inform us in any way you see fit. 
Thank you for your written testimony, and it will be made a 
part of the record.

  STATEMENT OF ROBERT D. REISCHAUER, SENIOR FELLOW, BROOKINGS 
                          INSTITUTION

    Mr. Reischauer. Thank you, Mr. Chairman. It is a pleasure 
to be here before you again.
    My prepared statement addresses three issues--structural 
reform in Medicare, the role that Medicare should play in the 
effort to balance the budget, and the President's Medicare 
proposals. Let me say a few words about each of these.
    First, with respect to structural reform, I would like to 
make four points. First, structural reform is clearly 
unavoidable. Second, the extent or ultimate shape of that 
structural reform for Medicare is at this point unknowable; it 
will depend very much on how the employer-sponsored marketplace 
evolves over the course of the next 10 or 15 years, and we 
really do not know where that will lead.
    Third, just because we do not know the ultimate shape of 
the structural reforms that are needed in Medicare, we should 
not delay initiating change. The longer we wait to begin 
structural change, the more rapid those changes will have to 
be, the more wrenching the adjustments will be, and the more 
constrained the policy options available to the Congress and 
the President will be.
    It is in my judgment that this year is an appropriate time 
to begin restructuring for several reasons. First, the 65 and 
over population is going to grow very slowly over the next 
decade--about nine-tenths of a percentage point a year, slower 
than it has grown in the previous 10 years, slower than it will 
grow starting 10 years from now. What that means is that any 
new structures that are put in place will not have to cope with 
a demographic tsunami as they are trying to root themselves.
    Second, there is clearly an excess of providers available 
now. What this means is that if structural reform slips or 
makes a few mistakes, there is a very low risk that that will 
affect the quality of care or the access to care that 
beneficiaries face.
    Moving to the role that Medicare should play in the effort 
to balance the budget by 2002, I will make three points. The 
first of these is that it is far more important that the 105th 
Congress start the process of structural reform than that it 
achieves 150 billion dollars' worth of savings for Medicare 
over the next 5 years rather than $50 billion.
    Second, it is clear that Medicare should be expected to 
make a significant contribution to the deficit reduction effort 
because it is a big and very rapidly growing program.
    And third, the way to achieve most of the savings that are 
needed over the next 5 years is through the mechanisms that 
have been used quite effectively in the past to reduce the 
growth of Medicare spending--not savings through structural 
reforms, but rather, savings through reduction in provider 
payments.
    Let me move now to the President's budget proposals. The 
President has provided you with a good base upon which to 
build. Overall, I feel positive about his proposals, but I want 
to focus on three areas where I think there could be 
improvement.
    The first of these has to do with the benefit expansions 
and policy changes that would reduce the costs on 
beneficiaries. In the former category is colorectal screening, 
in the latter category is the reduction in effective 
coinsurance on outpatient hospital services.
    I think the policies the President has proposed in these 
areas make a lot of sense, but I think the President is sending 
the wrong message to the beneficiary population. He is sending 
a message that says beneficiaries can expect more for less in 
an era of fiscal austerity at a time when the HI Trust Fund is 
running a deficit and when we know Medicare faces big problems 
in the future.
    I think a more responsible way of offering these benefits 
would be to ask beneficiaries to chip in and pay for them. This 
could be done by raising the part B premium by about $10 a 
month in the year 2002. At that point, premiums would be about 
29 percent of costs. That would still be below where they were 
in 1995. I also would urge you to consider raising premiums 
back up to where they were in 1995, as well as imposing an 
income-related surcharge.
    The second area that I would like to say a few words about 
is the President's proposal for changing the way HMO capitated 
payments are made. First, he would mix a national and a local 
AAPCC, which is a good first step, but the local component 
really should be based on a multicounty average rather than on 
a county average for costs.
    Second, he would put a $350 floor under the capitated 
payments in rural areas, which is intended to increase choice 
in these areas. There is a possibility that this well-
intentioned move might not produce the desired result. We could 
find that Medicare costs go up and choice is unchanged in these 
areas. This would happen if rural providers banded together, 
set up a PSO, and decided to see Medicare patients only through 
their new PSO. Then we would have a system that was largely 
unchanged except that the income received by providers would be 
higher.
    The third change the President would make in this area is 
that he would reduce, after the year 2000, the capitated 
payments for HMOs from 95 to 90 percent of the AAPCC. My 
testimony suggests that it would be appropriate to begin this 
adjustment sooner, in fact to begin in 1998 by reducing the 
AAPCC payment by 2 percentage points a year. Two reasons are 
given for this. The first is that because the overpayment to 
HMOs will grow as HMO market share increases, it is important 
to get this started early because HMOs are growing very rapidly 
at this point. My testimony provides a rather extreme 
illustration of this, not intended to be realistic at all, but 
shows you the dynamic that occurs.
    The second reason for acting sooner rather than later is a 
political one. HMOs devote part of the overpayment they receive 
to supplementary services to Medicare beneficiaries such as 
prescription drug coverage. When the Congress begins to ratchet 
down the capitated payments, plans are going to have a harder 
time providing members with these services without imposing 
additional costs. What will happen then is HMOs will tell their 
beneficiaries that policies being considered by Congress are 
going to lead to higher payments or reduced services, and you 
will face a political backlash and pressure, which will be hard 
to fend off.
    Let me close by saying a few words about the President's 
proposed shift of some home health costs from part A to part B. 
From a conceptual standpoint, I think this is appropriate, but 
in my judgment, it is not a wise policy for two reasons.
    The first of these is because it would put even more of 
Medicare in direct competition with discretionary spending and 
other mandatory spending in the effort to balance the budget. 
The political power of Medicare will almost ensure that these 
other areas of government service will be cut back more than 
otherwise would be the case if this shift did not take place.
    The second reason is that the shift could put off the date 
at which the issue of structural reform would have to be 
addressed by Congress and the President. I know some of my 
colleagues here think that that is a good idea; I think it is a 
bad idea. Congress and the President are going to avoid this 
set of decisions as long as they can, and as I suggested 
before, we have a window of opportunity now which is actually 
quite good for beginning these structural reforms. Waiting 
until 2000 or 2002, when we have a new President concerned 
about reelection and when many of the baby boomers are staring 
retirement in the face, is not going to be an easy time to 
begin to make these structural changes.
    That ends my summary, and after my colleagues have spoken, 
I will be glad to answer questions.
    [The prepared statement and attachments follow:]

Statement of Robert D. Reischauer,* Senior Fellow, Brookings 
Institution

    Mr. Chairman and members of the Subcommittee, I appreciate 
this opportunity to discuss the future of the Medicare program 
with you. My statement addresses three issues:
---------------------------------------------------------------------------
    * Senior Fellow, The Brookings Institution. The views expressed in 
this statement are those of the author and should not be attributed to 
the staff, officers or trustees of the Brookings Institution.
---------------------------------------------------------------------------
     The need for structural reform of Medicare and the 
challenge such reform will represent.
     The contribution Medicare might make to the effort 
to balance the budget by 2002, and
     The Medicare proposals contained in the 
President's fiscal 1998 budget.

                     The need for structural reform

    From a fiscal, an institutional, or a political 
perspective, the Medicare program is not sustainable as it is 
currently structured. There is no immediate crisis; rather 
there are problems that will grow in severity over time. While 
there may be no need for precipitous action, the sooner the 
nation begins the inevitable process of restructuring Medicare, 
the less disruptive or wrenching the changes will be and the 
more options policymakers will be able to consider.
    The fiscal problem is straightforward. Spending by 
Medicare, as it is currently structured, is projected to grow 
at a faster pace than the economy is expected to expand. The 
Administration expects that, over the next 5 years, spending on 
an unchanged Medicare program will grow at an annual rate of 
8.9 percent while the economy will expand by 4.9 percent a 
year.\1\ The Congressional Budget Office's (CBO) projections 
show Medicare growing by 8.8 percent annually and the economy 
expanding by 4.7 percent annually over the next 10 years. The 
Board of Trustees of the Medicare Trust Funds estimates that 
Medicare's disbursements will grow about 2.8 percentage points 
a year faster than the economy over the course of the next four 
decades. This somewhat more sanguine but still unsustainable 
projection rests on an optimistic assumption that there will be 
a sharp slowdown in the growth of spending per capita.\2\ A 
program of Medicare's size can not grow significantly faster 
than the economy expands for a sustained period of time without 
requiring either drastic reductions in other government 
activities or significant tax increases.
---------------------------------------------------------------------------
    \1\ Net of part B premiums.
    \2\ The 1996 Annual report of the Board of Trustees of the Federal 
Hospital Insurance Fund (pages 8 and 71) states that HI program costs 
are based on an assumption that the growth rate of costs per unit of 
service will decline over the next 25 years until it reaches the rate 
of growth of average hourly earnings. The growth of per enrollee SMI 
costs is assumed to decline gradually after 2008, reaching the rate of 
growth of GDP per capita by 2020 where it is assumed to remain. Both of 
these assumptions represent a sharp slowdown from recent experience.
---------------------------------------------------------------------------
    The institutional problem arises because rapid changes are 
taking place in the non-Medicare insurance marketplace. 
Medicaid, employer-sponsored plans, and individual insurance 
are becoming, for the most part, capitated systems involving 
panels of providers and some management of care. Medicare, on 
the other hand, remains largely an unmanaged indemnity 
insurance program open to virtually any licensed provider of 
services. The institutional infrastructures needed to support 
these two very distinct types of insurance are different. The 
information requirements, regulatory needs, and management 
procedures of the two approaches will increasingly diverge, 
creating a certain amount of complexity, confusion, and 
inefficiency. The existence of two very different approaches 
may create incentives that affect, in a positive or negative 
way, the access to or quality of care available to Medicare 
participants. Incentives that increase cost pressures on 
Medicare could also develop.
    If the Medicare and non-Medicare portions of the health 
insurance market continue to evolve along different paths, the 
strong political support Medicare has enjoyed since its 
inception could begin to erode. As originally conceived, 
Medicare was to provide the elderly, and later the disabled, 
with insurance coverage similar in structure and scope to that 
enjoyed by members of the working population and their 
dependents. In recent years, increasing numbers of those 
covered by Medicaid, employer-sponsored plans, and individual 
insurance policies have found their choice of providers 
limited, their access to specialists controlled, their 
selection of prescription drugs confined to those available 
through a formulary, and their ability to obtain certain 
expensive procedures constrained. These restraints have not 
been greeted with enthusiasm. If Medicare costs continue to 
escalate necessitating tax increases or reductions in other 
programs, some may begin to wonder why the elderly and disabled 
enjoy more in the way of unrestrained access to providers and 
services than that which is available to the balance of the 
population. If this happens, Medicare's support among taxpayers 
could begin to wane.
    While these developments imply that Medicare will not be 
able to avoid restructuring, it would probably be unwise for 
policymakers to attempt at this point to specify all of the 
details of a restructured Medicare program. As a general 
principle, the health insurance system that government provides 
for the elderly and disabled should be similar to, or at least 
compatible with, that available to the balance of the 
population. In recent years, the structures of Medicaid, 
individual insurance, and employer-sponsored plans have been 
changing at warp speed. This change could continue at a 
breakneck pace along the same path, come to an abrupt halt, or 
veer off in an entirely new direction. It would be unwise for 
policymakers to assume that they can forecast now where the 
private marketplace will settle when the convulsions cease. 
This suggests that restructuring Medicare should be viewed as 
an evolutionary process rather than a ``big bang'' event.
    The fact that the ultimate destination is uncertain should 
not be taken as an excuse for delaying the journey. The general 
direction in which Medicare must move is fairly clear. Market 
incentives must be incorporated into Medicare. Participants 
will have to be given greater choice of plan types and 
incentives that encourage them to obtain their care from those 
providers who are both efficient and high quality. Institutions 
will have to be developed that can measure and monitor the 
quality of competing plans, disseminate information on the 
services offered by and performance of the different plans, 
enroll and disenroll participants, adjudicate disputes, and 
regulate the financial soundness of plans. It takes time to 
build such institutions, to get the kinks out of their systems, 
and to get participants, providers, and plans comfortable with 
the new structure. It would be best if this were done gradually 
and not when the new institutional infrastructure is required 
to bear the burden of fiscal restraint, which will be the 
situation a decade from now. In short, the time to begin the 
structural reforms that Medicare will have to undergo is now.
    Current demographic and market conditions, which suggest 
that the risks and dislocation associated with restructuring 
are much lower now than they will be later, reinforce this 
point. For the next decade the nation will experience something 
of a lull before the demographic storm. The population that is 
65 and over is projected to grow by 0.9 percent a year between 
1997 and 2007 (or from 12.7 percent of the total population to 
12.8 percent). This is less than the growth experienced during 
the previous decade. This suggests that any nascent 
institutional structures that are created will have a period to 
take root before being faced with the rapid expansion in number 
of participants that will take place after 2010. In addition, 
providers--particularly hospitals, physicians and other health 
professionals--are currently in excess supply. Furthermore, in 
contrast to previous periods, Medicare payment levels are not 
far below those of most private payers. Taken together, these 
conditions suggest that there is little likelihood that the 
introduction of structural reforms, even with a few slips and 
stumbles, will adversely affect access or compromise the 
quality of care received by Medicare participants. This was not 
the case a decade ago and may not be the case a decade hence.

         Medicare's Contribution to the Balanced Budget Effort

    With respect to Medicare, the 105th Congress should focus 
its efforts on initiating the structural reforms that will be 
needed to ensure that the program remains viable over the long-
run. Unfortunately, most of the recent debate has centered on 
the contribution that Medicare might make to balancing the 
federal budget by 2002 rather than on structural reforms. Of 
course, restraining Medicare spending must be an important 
component of the deficit reduction effort because Medicare is 
such a large and rapidly growing program. The extent of these 
savings is limited only by the nation's commitment to providing 
the elderly and disabled with access to high quality, 
affordable health care and its concern about excessive 
disruption of the health care infrastructure.
    Some notion of the amounts that Medicare might be expected 
to contribute to deficit reduction can be obtained by examining 
the various budget balancing plans that have been proposed 
during the past two years. These plans called for Medicare 
savings that ranged from $100 billion to $270 billion. (Chart 
1) These amounts constituted between one-fifth and one-third of 
the non-interest outlay reductions proposed by the various 
plans. (Chart 2A) Medicare spending would have been between 11 
and 22 percent below baseline levels by 2002 under these 
proposals. (Chart 2B)
    One can not make simple comparisons of the numbers in the 
charts because some involve seven year's worth of savings, some 
six years, and one five years. In addition, the baselines 
against which the savings are measured are different. In fact, 
between March 1995 and January 1997, CBO lowered its estimate 
of baseline Medicare spending during the 1996 to 2002 period by 
$104 billion. (Chart 1)
    The current Medicare budget debate is likely to revolve 
around savings that range from $90 billion to $140 billion over 
the 1998 to 2002 period. Spending restraint in this range is 
achievable and should not be too disruptive of the provider 
community. Ultimately, the magnitude of the savings that 
Medicare might realize from restraining the growth of payments 
to providers and instituting certain efficiencies depends 
crucially on what happens in the private insurance marketplace. 
If employer-sponsored health plans continue to hold down the 
annual rate of growth of their per-capita costs to under 4 
percent, larger Medicare savings might be possible. On the 
other hand, if the growth of private health care costs rebounds 
to the rates experienced during the last half of the 1980s, 
even $90 billion in savings would prove difficult to realize.

[GRAPHIC] [TIFF OMITTED] T2969.008

[GRAPHIC] [TIFF OMITTED] T2969.009

      The Medicare proposals in the President's fiscal 1998 budget

    The Medicare proposals in the President's 1998 budget 
constitute a good foundation upon which to build. The President 
calls for restraining the growth of payments to providers 
through many of the mechanisms that have been used effectively 
in the past. Most of the short-run savings are realized from 
these devices. While the savings proposed by the President are 
quite large relative to those that have been adopted in 
previous reconciliation acts, conditions are quite different 
now. It is likely that the restraints proposed in the 
President's budget could even be increased somewhat without 
risking any serious adverse consequences for participants.
    The President's budget also proposes a number of new 
benefits and cost reducing measures for participants. The 
former include coverage of colorectal screening, a diabetes 
self-management benefit, annual mammograms, respite relief for 
families of Alzheimer's patients, and improved availability of 
preventive injections. The latter include eliminating cost-
sharing for mammography services, reducing the cost-sharing for 
hospital outpatient services, lowering the premium surcharge 
for late enrollment in Part B, and changing the rules governing 
Medigap to make the premiums charged those leaving HMOs for the 
traditional fee-for-service system more affordable.
    There are sound reasons for each of these benefit 
expansions and cost reduction measures. Nevertheless, the 
President's proposal sends an inappropriate message to Medicare 
participants. It tells them that they can expect to get more 
for less even in an era of fiscal austerity, even when the 
Hospital Insurance Trust Fund is spending more than it is 
taking in, and even when Medicare faces severe fiscal problems 
in the not-too-distant future. Under these circumstances, it 
would be appropriate to ask participants to bear the cost of 
the proposed Medicare expansions. These costs could be added to 
the Part B premium. This would raise premiums by about $10 a 
month in 2002. At that time, premiums would represent roughly 
28.8 percent of costs, which is still below the 1995 level. 
Increasing premiums to their 1995 level and adopting an income-
related surcharge on participants whose incomes are over twice 
the median would represent a responsible way of requiring 
Medicare participants to contribute to the efforts to balance 
and preserve the program for future retirees. For some this 
could represent a hardship, but many of the most needy would be 
shielded by Medicaid, which must pay the premiums of 
beneficiaries whose incomes are below 120 percent of the 
poverty threshold.
    The President's budget proposal also contains a number of 
nascent structural reforms, some of which would affect the 
traditional fee-for-service component of Medicare and some of 
which would affect the capitated component. While the 
President's structural reforms are a positive step, they are 
too timid and tentative. On the fee-for-service side, the 
President proposes to replace the cost-based reimbursement of 
home health care, nursing home care, and outpatient hospital 
services with new prospective payment systems. The effort to 
move to prospective payment for post-acute care is commendable 
but fraught with technical difficulties which were discussed in 
a recent CBO study.\3\ Unless movement to a PPS system is done 
with great care, costs could increase, individuals with heavy 
service needs could have difficulty obtaining care, and quality 
could deteriorate. Nevertheless, it is important to accept the 
fact that any measures which successfully curb the explosive 
growth in post-acute care spending will lead to some reduction 
and redistribution of services.
---------------------------------------------------------------------------
    \3\ Congressional Budget Office, Medicare Spending on Post-Acute 
Care Services: A Preliminary Analysis, January 1997.
---------------------------------------------------------------------------
    The President's budget also proposes that the Health Care 
Financing Administration (HCFA) be given greater authority to 
use negotiated prices and competitive bidding to set payments 
for non-physician Part B services. Such a procedure, which the 
President has proposed before, is long overdue. However, giving 
this authority to HCFA does not mean that it will be used. HCFA 
will be under intense political pressure to delay or make only 
very limited use of this authority. A bolder initiative would 
could promise more significant savings. One option would be to 
include minimum thresholds in the legislation. For example, 
Congress could require that at least 30 percent of the 
laboratory services paid for by Medicare in 2002 be purchased 
through competitive bids or negotiated prices unless HCFA 
provides evidence that such procedures would not be cost 
effective.
    The structural changes the President proposes for the 
capitated portion of Medicare are more modest than those 
suggested for the fee-for-service program. The President would 
expand the choices available to participants to include 
Preferred Provider Organizations (PPOs) and Provider-Sponsored 
Organizations (PSOs) that meet certain standards as well as 
HMOs. While other plan types might be included, the President 
is prudent to expand the range of choice very cautiously. Until 
we are confident that HCFA can risk-adjust the capitated 
payments paid to plans sufficiently to avoid serious adverse 
selection problems, the expansion of options must be done very 
deliberately.
    The budget also calls for the dissemination of comparative 
information on the plans available to Medicare participants. 
From the information available, it is not clear whether a new 
entity would be established to collect, evaluate, and 
disseminate this information or whether the enrollment and 
disenrollment functions would be handled centrally by Medicare 
or would be decentralized to the plans. There are good reasons 
to establish a new entity to preform these responsibilities.
    The budget also calls for significant changes in the way 
HMOs and the new types of capitated plans would be paid in the 
future. Rather than having payments strictly related to the 
local costs of fee-for-service Medicare, payments would be a 
blend of national and local fee-for-service costs. Local costs 
would still be calculated on a county basis, which does not 
make a great deal of sense when health market areas are much 
larger. The local cost component of the President's proposal 
should be based on multi-county averages. This would reduce 
some of the random year to year variability in payments and 
make payments more equitable. Why, for example, should a 
Medicare HMO operating within the Washington metropolitan area 
receive about $2,200 less a year for an enrollee living in 
Fairfax County, Virginia than for an enrollee residing in 
Prince Georges County, Maryland?
    The President's plan would also place a floor beneath 
capitated payments in rural counties to encourage expansion of 
managed care into these areas. On the surface, this proposal 
seems both equitable and efficient. Under certain 
circumstances, however, it could result in less not more 
choice. If the capitated payment for the area were considerably 
above the average fee-for-service Medicare expenditure in the 
area, providers would have an incentive to band together and 
see Medicare patients only through their PSN, PPO, or HMO. In 
this way providers could maximize their Medicare incomes.
    The President's proposal also calls for gradually reducing 
the average payment made to capitated plans from 95 percent of 
the AAPCC to 90 percent starting in 2000. This initiative 
responds to research evidence that suggests that if those 
selecting Medicare HMOs had remained in fee-for-service 
Medicare, they would have incurred costs somewhat below 95 
percent of the average fee-for-service costs. If this is true 
and there is any positive correlation between the proclivity to 
enroll in an HMO and health status, the gap between the 
capitated payments received by HMOs and the costs of providing 
services to HMO enrollees is likely to grow as HMOs increase 
their market share.
    Charts 3 and 4 provide an admittedly extreme and 
unrealistic illustration of this point. Chart 3 provides a 
picture of the distribution of per beneficiary Medicare costs 
in 1996. As is well known, costs are highly skewed with the 
most expensive one percent of the enrollees accounting for 
roughly 14 percent of the program's costs and over half of 
costs being incurred by the most expensive five percent of 
beneficiaries. Chart 4 depicts what would happen if Medicare 
participants enrolled in HMOs strictly according to their 
health status. The HMOs' costs to care for these individuals 
would rise as an increasing share of the population joined HMOs 
but the AAPCC would rise even faster because of the skewed 
nature of Medicare costs. When only the healthiest individual 
in the Medicare population, one who would incur no Medicare 
costs, participated in an HMO, the HMO would receive 95 percent 
of the AAPCC--or about $4,500 a year--and the individual might 
not use any of the HMO's services. If all but the most 
expensive one percent of the Medicare population joined HMOs, 
the capitated payment made to HMOs would be over $50,000 per 
participant, but the costs incurred per member by the HMOs 
might be only around $4,000.

[GRAPHIC] [TIFF OMITTED] T2969.010

[GRAPHIC] [TIFF OMITTED] T2969.011

    Medicare HMO enrollment has been growing by leaps and 
bounds. In 1996 enrollment expanded by 36 percent and CBO 
projects Medicare HMO enrollment to grow by 30 percent in 1997 
and 25 percent in 1998. Evidence suggests that Medicare HMO 
enrollees are younger and healthier than other Medicare 
participants. It is reasonable to expect that the dynamic 
illustrated in its most extreme form in Chart 4 is occurring 
and will grow in significance until the Medicare HMO population 
stabilizes and ages. If this is the case, policymakers should 
not wait until 2002 to begin ratcheting down the capitated 
payments made to HMOs. A gradual phasedown of possibly two 
percentage points a year should begin in 1998. As this 
reduction in capitated payments takes place, a substantial and 
continuous research effort should be mounted to measure the 
extent to which HMO participants are (or are not) less costly 
than their fee-for-service comparison groups. Congress should 
also instruct HCFA to devote more resources to developing risk 
adjustment mechanisms that could be used to modify capitated 
payments in an environment in which the payments made to 
capitated plans are decoupled from fee-for-service costs.
    In addition to the analytical, there is a political reason 
for moving expeditiously to reform the capitated payment 
mechanism. In part because of the generous level of capitated 
payments, many HMOs have been able to provide their Medicare 
members with additional services at little or no additional 
costs. Low cost sharing, vision services, prescription drug 
benefits, and routine check-ups are among the most common of 
these benefits. As HMO enrollment grows and more and more 
Medicare beneficiaries come to regard these benefits as an 
entitlement, it will be increasingly difficult to reduce HMO 
payments. Plans will tell their members that actions being 
considered by Congress threaten their prescription drug benefit 
or their vision care. The pressure will be intense. This 
suggests that moving soon and in small steps is preferable to 
waiting and taking larger leaps.
    A final element of the President's proposal that merits 
some attention is his proposal to shift a significant portion 
of the costs of home health services from Part A, which is 
funded by the payroll tax, to Part B, three-quarters of which 
is supported by general revenues. Conceptually, the services 
the Administration would shift do not fit in the Part A 
hospital insurance program. However, the Administration's 
motive for this shift does not appear to be a quest for 
conceptual purity. Rather, it reflects political expediency--
the need to make good on the promise to keep the wolves of 
insolvency from the trust fund's door for a decade without 
raising payroll taxes or imposing too much of a burden on Part 
A providers. The President's refusal to either increase Part B 
premiums to reflect the transferred costs or to subject 
transferred home health services to the deductible or 
coinsurance that most other Part B services face underscores 
the impetus behind the proposal. So too does the apparent 
failure to limit the home health services available to those 
beneficiaries who have only Part A coverage to the services 
that would be paid for from the Hospital Insurance Trust Fund.
    But the real issue is not the motive behind this proposal 
but rather its consequences. The shift of home health 
expenditures to Part B will place an even larger portion of 
Medicare spending in direct competition with other programs for 
scarce budgetary resources. In a constrained environment, this 
inevitably will mean that discretionary and other mandatory 
programs will be cut more deeply in the effort to balance the 
budget. Equally important, the shift will serve to delay 
consideration of the types of fundamental structural reforms 
needed to preserve Medicare for the babyboom generation. 
Anachronistic as the Part A trust fund mechanism is, it serves 
the important function of forcing reluctant policymakers to 
restrain this popular program when Part A spending outpaces 
payroll tax receipts and the trust fund's solvency is 
threatened. Shifting a portion of the fastest growing component 
of Medicare into Part B, which can dip into the Treasury's 
bottomless well for funds, will only delay the unavoidable and 
make the needed adjustments all the more wrenching when they 
occur. The longer we wait to make these changes, the more 
constrained our options will be and the more prominent a role 
tax increases will have to play in the solution. If the 
political pressures are great now, they will be even more 
intense in a decade when the babyboom generation is facing the 
realities of retirement.
      

                                

    Chairman Thomas. Thank you very much, Bob.
    Dr. Helms.

STATEMENT OF ROBERT B. HELMS, DIRECTOR, HEALTH POLICY STUDIES, 
                 AMERICAN ENTERPRISE INSTITUTE

    Mr. Helms. Thank you, Mr. Chairman.
    This little sign says: ``Robert Helms, Assistant Secretary 
for Bureaucratic Fast Food.'' This was on my door at HHS some 
years ago. The origin of this little sign was an op-ed piece in 
the Washington Post that referred to one of the Reagan budget 
plans as ``warmed-over policies and bureaucratic fast food.''
    I was reminded of this when I looked at the President's 
Medicare proposals. They consist of warmed-over proposals from 
last year and a bureaucratic shuffling of funds designed to 
extend the life of the so-called Part A Trust Fund. What the 
administration would describe as a prudent proposal to save 
Medicare and to give us time to debate fundamental reform, I 
would describe as another head-in-the-sand proposal that would 
distract us from the real problems we already know are coming 
and should be addressed now.
    We are now at a crossroads regarding the future of 
Medicare. The road that takes us across the President's bridge 
is a well-worn route to direct government controls of the type 
used in Canada and most European countries. In the long run, I 
do not think this is in the best interest of Medicare 
recipients, taxpayers, or, I might add, Members of Congress.
    We have the opportunity to take a different road, a road to 
fundamental reform that uses the best of what we know about the 
delivery of quality health care, the economic behavior of 
consumers and providers, and the performance of competitive 
markets, to help save the Medicare Program in the next century. 
Such policies can do a lot to improve the efficiency of health 
care markets, but they may not be enough given the enormity of 
the problem.
    As numerous other people have pointed out, the longer we 
delay facing the real problems in Medicare, the more difficult 
it will be to achieve what we all want, and that is a Medicare 
Program that is affordable and provides realistic choices to 
beneficiaries.
    I see two fundamental problems with this proposal. The 
first is its emphasis on direct controls. I do not object so 
much to the amount of the reductions as I do the perverse 
incentives that I think these controls create. In particular, I 
think they threaten to create situations of excess demand where 
providers will have strong incentive to get around the 
controls. I think they will also have incentives to 
discriminate among potential recipients, in particular, picking 
those that have fewer medical problems.
    Consumers will also have strong incentives to get around 
these controls, and, I might add, the controls create 
particular difficult enforcement problems for the agency.
    There is little doubt that a government can reduce outlays 
if it is willing to devote increasing amounts of resources to 
enforcement. You can see examples of that in the current 
budget.
    The alternative to controls is the kind of system I think 
we could get through competitive reforms. A competitive 
approach would create strong incentives for patients to choose 
health plans on the basis of quality and value, and strong 
incentives for providers to compete for patients on the basis 
of quality, service, convenience, and value.
    The second major problem I have is the failure to deal with 
Medicare's long-term demographic problem. I have some quotes in 
my testimony from the trust fund trustees that I think are 
pretty alarming. One way to illustrate this is to convert their 
percent of payroll figures to actual dollar amounts. For 
example, the differences between Medicare expenditures and 
receipts under current law are $48 billion in 2000; $91 billion 
in 2005; and $154 billion in 2010. At this point we are not to 
the point yet where the baby boomers start to turn 65. These 
annual deficits then jump to $268 billion in 2015 and $456 
billion in 2020.
    By whatever standard you use, these are large numbers. They 
make the point that Robert Reischauer has already made, that it 
is time to get started on Medicare reform.
    Let me also say a word about the transfer of home health 
care benefits. I think focusing on the home health care benefit 
in terms of which fund it ought to be in misses the main point. 
The most important effect of this proposal is on the source of 
funding for Medicare. Since the payroll tax now funding part A 
is not reduced after this shift and the part B premium is not 
increased, the net effect of the transfer of home health is to 
transfer general funds from the overall budget to part A. This 
has the effect, as Robert Reischauer has already said, of 
further reducing the discretionary portion of the Federal 
budget. I think this shift creates longer run problems for the 
Congress and for the future of the program.
    In conclusion, let me point out there are lots of market-
based solutions we could follow that have been proposed. My own 
preference is a defined contribution plan. I think that that 
would be much more efficient than direct controls. I have seen 
Karen Davis' testimony and her emphasis on protecting the poor. 
I do not think such a defined contribution plan has to penalize 
the poor, but it will force us to be more explicit about what 
we are willing to pay for the poor.
    Thank you.
    [The prepared statement follows:]

Statement of Robert B. Helms, Director, Health Policy Studies, American 
Enterprise Institute

    Mr. Chairman, this little sign reads, ``Robert Helms, 
Assistant Secretary for Bureaucratic Fast Foods.'' This was on 
my door at HHS when I was an assistant secretary in the Reagan 
Administration. The origin of this sign was an op-ed in the 
Washington Post which described HHS's part of one of the Reagan 
budgets as, ``warmed-over policies and bureaucratic fast 
food.''
    I was reminded of this description when I looked at this 
Administration's Medicare proposals. They consist of warmed-
over proposals from last year and a bureaucratic shuffling of 
funds designed to extend the life of the so-called Part A Trust 
Fund. What the Administration would describe as a prudent 
proposal to save Medicare and give us time to debate 
fundamental reform, I would describe as another head-in-the-
sand proposal that will distract us from the real problems we 
already know are coming and should be addressing now.
    We are now at a crossroad regarding the future of Medicare. 
The road that takes us across the president's bridge is the 
well-worn route to direct government controls of the type used 
in Canada and most European countries. In the long run, this is 
not in the best interests of Medicare recipients, taxpayers, 
or, I might add, Members of Congress.
    We have the opportunity to take a different road, a road to 
fundamental reform that uses the best of what we know about the 
delivery of quality health care, the economic behavior of 
consumers and providers, and the performance of competitive 
markets, to help save the Medicare program in the next century. 
Such policies can do a lot to improve the efficiency of health 
care markets, but we should not promise too much. Given the 
enormity of Medicare's unfunded liability, even competitive 
reforms may not be enough. We will have to do even more to 
change people's expectations about what is realistic.
    As numerous others have pointed out, the longer we delay 
facing up to the real issues in Medicare, the more difficult it 
will be to achieve what we all want--a Medicare program that is 
affordable and provides realistic choices to beneficiaries.
    The critical choice for Medicare is between a system that 
relies on direct controls and one that relies on the incentives 
of providers and consumers. To illustrate why I think it is 
important that we start on the road to reforms based on market 
incentives, I would like to briefly describe two fundamental 
problems I see with the President's Medicare proposals.\1\
---------------------------------------------------------------------------
    \1\ For a more complete treatment of this topic with numerous 
references to the economic and health policy literature, see my 
testimony to this committee on February 10, 1994.
---------------------------------------------------------------------------

                        Two Fundamental Problems

    While the President's Medicare proposals present numerous 
detailed policy issues, I want to concentrate on what I think 
are two fundamental shortcomings in the basic policy approach 
being followed by the Administration.
    1. The emphasis on direct controls: The President's budget 
proposes reductions from current law Medicare outlays by $132.4 
billion over five years (FY 1998-2002) and additions of $32.3 
billion, for a net saving of $100.2 billion.\2\ The bulk of 
this reduction is from reducing payment rates for hospitals 
($33 billion), physicians ($7 billion), home health agencies 
($14 billion), and skilled nursing facilities ($7 billion), and 
reducing payment rates to Medicare managed care ($34 billion).
---------------------------------------------------------------------------
    \2\ President's FY 1998 Budget: Medicare Savings and Investment 
Proposals, Background Materials, February 1997. Decimals do not equal 
due to rounding.
---------------------------------------------------------------------------
    The objection to this approach is not the amount of the 
estimated reductions, but the perverse incentives they will 
create over the next several years. It is the nature of what 
budgeteers call ``the wedge effect''--policies that force a 
lower rate of growth have continually larger effects as the 
years go by. The problem here is in knowing what wedge to 
measure when we are making comparisons between proposed 
policies and current market conditions. Both CBO and OMB 
measure savings against a baseline of what they estimate will 
happen under current law. But the actual effect on providers 
may be larger or smaller depending on what providers would have 
charged had they had more freedom to do so. If existing 
controls have had any effect on what providers actually 
receive, as seems logical for most medical markets,\3\ then the 
effect of direct controls can be expected to increase over 
time.
---------------------------------------------------------------------------
    \3\ Medical markets can be defined for numerous medical providers, 
types of procedures, and for different geographical locations, so it is 
likely that specific Medicare controls have had different effects in 
different markets, and even no effect in some markets.
---------------------------------------------------------------------------
    There is a large literature about the effects of controls 
that push prices lower than would exist in a competitive 
market.\4\ Controls affect providers on the supply side, 
consumers on the demand side, and the agency that is charged 
with enforcing the controls. Providers usually receive the most 
attention because the controls have a larger per capita effect 
in the income of providers and because they are usually better 
organized to complain about the controls. Effective controls 
give providers incentives to reduce the supply of the products 
or services being controlled. Even if it is against the law to 
reduce supply, there are many subtle ways to reduce the quality 
or convenience associated with the product or service.
---------------------------------------------------------------------------
    \4\ Any economist can be expected to point out that the effects of 
direct controls are not the same if a market is less than perfectly 
competitive. That is theoretically correct, and I will not argue that: 
medical markets are perfectly competitive; that monopoly power may not 
exist in some contemporary medical markets; or that the extent of 
monopoly power did not exist in medical markets in the past. For 
today's policy discussions, I think it is reasonable to look on most 
medical markets as highly competitive. Two AEI studies present evidence 
relating to the competitiveness of medical markets: H.E. Frech, III, 
Competition & Monopoly in Medical Care, Washington, D.C.: The AEI 
Press, 1996; and Michael A. Morrisey, Cost Shifting in Health Care, 
Washington, D.C.: The AEI Press, 1994.
---------------------------------------------------------------------------
    One aspect of producer behavior in medical markets that 
should be of particular interest to policy makers is the 
incentive to discriminate among potential consumers (patients) 
on the basis of their medical condition. If both the provider 
and the patient are prevented from using higher prices to 
ration the available supply, then there will be strong 
incentives for the provider to pick only those patients that 
satisfy his or her own preferences, whatever they happen to be. 
The result is likely to be increasing problems for Medicare 
beneficiaries to gain access to the providers they would prefer 
to see. This lack of access could be expected to be greater for 
patients with more serious medical problems which expose the 
provider to increased risks.
    In addition to these effects on providers and patients, 
controls also can be expected to cause increasing problems for 
the agency charged with enforcement. All markets have some 
degree of what can be called fraud and abuse. Direct controls 
which increase in their effect over time create a new 
definition of what may be considered illegal as both providers 
and patients have growing incentives to charge and pay illegal 
payments to circumvent the effects of the controls.
    There is little doubt that a government can reduce outlays 
if it is willing to devote increasing amounts of resources to 
enforcement, and is willing to try to block the efforts of both 
providers and Medicare recipients who want to avert the 
controls. But the ``opportunity cost'' of such an approach is 
the efficiency that could be obtained if both providers and 
Medicare recipients had positive incentives to improve both the 
quality and the cost-effectiveness of medical services. The 
objection to controls is not the amount of the savings, but the 
method of getting there. A competitive approach could create 
strong incentives for patients to choose health care or health 
plans on the basis of quality and value. And, at the same time, 
providers would have the incentive to compete for patients on 
the basis of quality, service convenience, and value. 
Meanwhile, the agency administering the program has a much 
easier time with enforcement.
    2. The failure to deal with Medicare's long-term 
demographic problem: Much has been written and said about what 
will happen to Medicare once the baby boom generation begins to 
become eligible for Medicare after 2010. But in my view, 
nothing is more alarming than the last report of the HI 
trustees, a document typically known for its dry and technical 
language. Some examples follow:
    The HI program remains severely out of financial balance. 
As we have said since 1992, we must report that the HI trust 
fund does not meet even our short-range test of financial 
adequacy.
    The long-range outlook also remains extremely unfavorable. 
The trust fund fails by a wide margin to meet our long-range 
test of close actuarial balance, . . . To bring the HI program 
into actuarial balance, over just the next 25 years under the 
intermediate assumptions, would require either that outlays be 
reduced by 39 percent or that income be increased by 63 percent 
(or some combination of the two) throughout this 25-year 
period.
    . . ., substantially stronger steps will be needed to 
prevent trust fund depletion after 2010 as the baby boom 
generation reaches age 65 and starts receiving benefits. At 
that time, the ratio of workers to HI beneficiaries, currently 
about 4 to 1, is projected to begin declining rapidly to a 
ratio of about 2 to 1.\5\
---------------------------------------------------------------------------
    \5\ All three quotes taken from the 1996 Annual Report of the Board 
of Trustees of the Federal Hospital Insurance Trust Fund, p. 15.
---------------------------------------------------------------------------
    My own way of illustrating the magnitude of Medicare's 
problem is to convert trust fund reports' income and cost 
figures as a percent of payroll into actual dollar amounts and 
look at the annual difference between Medicare projected 
revenues and expenses. Based on the latest Trustees Report, 
these annual differences are:





                        2000..............  $48 billion
                        2005..............  $91 billion
                        2010..............  $154 billion
                        2015..............  $268 billion
                        2020..............  $456 billion\6\

\6\ Intermediate projections of the 1996 HI Trustees' Report, Table
  II.E2; Payroll figures from the Office of the Actuary, HCFA.


    By whatever standard you want to use, these are large 
numbers. They illustrate the size of the problem that we have, 
a problem so large that we need to get started on finding a 
solution now rather than wait until 2007. We now have about 13 
years to start our transition into a different kind of Medicare 
program. Waiting even five years to start the transition to a 
new program will make it even more difficult to achieve 
efficient reform. Whether we choose direct controls or 
competitive reforms, all providers and consumers will 
experience large changes in the way Medicare operates. The 
sooner we get started, the easier it will be.
    Another aspect of this failure to face up to the long-term 
problem with Medicare is the one item proposed in the 
President's budget to extend the solvency of the Part A trust 
fund, the transfer of home health care from Part A to Part B. 
The Administration has defended this on the basis that the home 
health benefit is more like Part B benefits so should be part 
of that program.
    I think focusing on where the home health benefit should be 
misses the main point. The most important effect of this 
proposal is on the source of funding for Medicare. Since the 
payroll tax now funding Part A is not reduced, and the Part B 
premium is not increased, the net effect of the transfer of the 
program is to transfer general funds from the overall budget to 
Part A. This has the effect of further reducing the 
discretionary portion of the federal budget. Regardless of 
where home health care is located, is this shift of the sources 
of funding in the best interest of taxpayers?

                               Conclusion

    There are numerous policies that have been proposed to 
start us down the road to efficient market reform of the 
Medicare program. My own preference is that we should adopt a 
defined contribution plan for Medicare and let Congress decide 
how much they want to spend on it. I do not think such a system 
has to penalize the poor, but it would require us to be 
explicit about the cost.
    Unlike direct controls, all such proposals seek to create a 
more competitive health care market and give consumers stronger 
incentives to choose among competing plans. If the profession 
of economics has anything to contribute to this debate, it 
should be that no one can predict exactly what should be the 
most efficient method of delivering, organizing, and financing 
health care in the future. The best we can do is try to create 
the right incentives so all players in these markets will 
attempt to adjust their behavior to meet the needs of 
consumers. We know from economic history that competitive 
markets are much more efficient than the political process in 
finding out the most efficient way to satisfy consumers. It is 
time we started down that road.
      

                                

    Chairman Thomas. Thank you, Mr. Helms.
    Ms. Davis.

  STATEMENT OF KAREN DAVIS, PRESIDENT, COMMONWEALTH FUND, NEW 
                         YORK, NEW YORK

    Ms. Davis. Thank you, Mr. Chairman.
    I am delighted to be here to testify on the President's 
Medicare proposal and to look at it in the context of the long-
term changes in Medicare that are required.
    I would like to highlight some points that are in a set of 
charts at the back of my statement. In chart 1, the 
Subcommittee has discussed the fact that the elderly pay 21 
percent of their income now on health expenses. I would point 
out that for low-income beneficiaries, even with Medicaid 
supplementation, the average they spent out of income is 30 
percent.
    Chart 2 points out that the Medicare benefit package has 
deteriorated over time and not kept pace with certainly what 
employer plans have been doing. For example, in 1966 when 
Medicare was introduced, the part A deductible was $40; in 
current dollars, that would be $190. But because we have 
indexed it to the cost of hospital care, the elderly pay $736 
for a hospital stay. The part B premium when it started was $3 
a month; in today's terms, that would be $171, but in fact, we 
charge beneficiaries $510 a person. The elderly are paying more 
now than they paid when the program started, and benefits for 
the most part have not been improved. Ninety-five percent of 
employer plans, for example, cover prescription drugs, which 
Medicare does not.
    Chart 3 notes that the amount that beneficiaries now pay 
for their own health care expenses is $2,600 per person.
    Chart 4 shows the distribution of the cost to Medicare of 
beneficiaries, depending upon how sick they are. The sickest 10 
percent of beneficiaries cost the Medicare Program $37,000 per 
person. The healthiest 20 percent incur no Medicare expenses. 
The mean is $4,700 per person.
    This has tremendous implications for managed care. If we 
set a capitation payment based on the mean, HMOs will make 
money if they enroll beneficiaries who are in the healthiest 80 
percent, and they will lose money if they enroll the sicker 
beneficiaries. It is those that they tend not to enroll and 
that cost the Medicare Program.
    But the point I make in chart 5 is that those 10 percent of 
beneficiaries who are the sickest are also the ones who are 
paying the most themselves. They spend $8,800 per person on 
average for their own health expenses.
    In chart 6 we have mentioned that Medicaid is there to pick 
up the premiums and the cost sharing for the Medicare 
beneficiaries with incomes below poverty. I would say two 
things about that. First, only about two-thirds of those 
eligible are participating. It is a little like Medicaid 
children who are eligible but not enrolled, so we are not 
getting to all the elderly who are eligible for this.
    But the other thing I would just remind the Subcommittee is 
that the poverty level for a single elderly person is $7,500, 
so you are talking about beneficiaries above that amount having 
to pay these out-of-pocket costs. And the premium subsidies 
under the SLMB Program only go to 120 percent of poverty, so we 
are really only protecting beneficiaries up to about $9,000 
income, and these out-of-pocket costs are very high for a 
beneficiary with a $10,000 or $15,000 income.
    Chart 7 just looks at the history on how Medicare expenses 
per person have grown compared with private. Medicare did 
better in the late eighties. Private insurance expenditure 
growth has been the same or a little better in the early 
nineties.
    Chart 8 is the CBO projections on managed care enrollment. 
We are expecting a lot of growth in Medicare managed care 
enrollment, and therefore, some of the changes in the 
President's budget to change the way HMOs are paid, to tighten 
up on that because there is overpayment, are worthy of 
consideration by the Subcommittee.
    I raise some of my concerns about vouchers or moving toward 
a defined contribution approach to Medicare, which would put 
beneficiaries at risk. Instead, in the long run, we certainly 
need to think about improving Medicare benefits, improving 
protection for low-income Medicare beneficiaries, moving 
forward with the structural reforms, such as prospective 
payment for all Medicare services and reforming the Medicare 
managed care options, particularly providing better information 
to beneficiaries and setting better quality standards, which 
the Health Care Financing Administration is beginning to do but 
which I think are really currently in a very rudimentary stage.
    Thank you.
    [The prepared statement follows:]

Statement of Karen Davis, President, Commonwealth Fund, New York, New 
York

    Thank you, Mr. Chairman, for this opportunity to testify on 
budgetary savings to the Medicare program and considerations 
that should shape long-term changes in the Medicare program. 
Medicare has brought health and economic security to elderly 
Americans for over 30 years. Before it was enacted half of 
older Americans were uninsured, leaving them and their families 
at risk of financial catastrophe in the face of major illness. 
Medicare has improved access to health care, contributed to 
better health for millions of elderly Americans, and protected 
against the financial hardship of medical expenses. These 
fundamental goals should be preserved.
    Consideration of Medicare budgetary savings should be in 
the context of desired long-run changes to assure Medicare 
better meets the needs of an aging population in the 21st 
century, encourages preventive care, promotes efficiency, and 
adapts to the changing American health care delivery system. 
Principal issues include:
     Medicare premiums, cost sharing, and benefits
     Prospective payment methods for all health care 
providers
     Medicare's managed care options
     Financial solvency.

             Medicare Premiums, Cost Sharing, and Benefits

    The President's budget protects beneficiaries from 
additional out-of-pocket costs for health care. The President's 
five-year budget proposal includes:
     $10 billion savings from holding the Part B 
premium at 25 percent of outlays
     A cost of $7 billion for gradually reducing the 
coinsurance on hospital outpatient care to 20 percent from 46 
percent currently
     A cost of $6 billion for improved preventive 
services coverage and an Alzheimer's respite benefit.
    The net impact on beneficiaries is about a wash--although 
some beneficiaries will pay slightly more than under current 
law, and some will have out-of-pocket costs reduced.
    Concern for beneficiary financial burdens is appropriate. 
About three-fourths of all Medicare beneficiaries have incomes 
below $25,000. On average Medicare beneficiaries already spend 
21 percent of their income on health care. For those with 
incomes below the poverty level, elderly beneficiaries spend 30 
percent of income on health care.\1\
---------------------------------------------------------------------------
    \1\ Marilyn Moon, Crystal Kuntz, and Laurie Pounder, Protecting 
Low-Income Medicare Beneficiaries, The Commonwealth Fund, December 
1996.
---------------------------------------------------------------------------
    These high costs come in large part because the Medicare 
benefit package has deteriorated rather than improved over the 
last 30 years. The structure of benefits is fundamentally the 
same today as it was when it was implemented, but cost-sharing 
is considerably higher. In 1966 the hospital deductible was $40 
($190 in 1996 dollars); in 1996 it was $736. The deductible for 
Part B (Supplementary Medical Insurance) services is $100, also 
up from $50 in 1966, but lower in current dollars than it was 
in 1966 ($238 in 1996 dollars). The Part B premium was 
originally set at $36 ($171 in 1996 dollars), representing 50% 
of SMI outlays; in 1996 it was $510 a year representing 25% of 
program outlays. These premiums and cost-sharing are also 
higher than faced by most workers. In addition most employer 
plans include a ceiling on out-of-pocket expenses; Medicare 
does not.
    The Medicare benefit package is essentially unchanged over 
the last 30 years. The only major new services include hospice 
care, rural health clinics, drug coverage for immunosuppressive 
drugs, erythropoietin for persons with chronic kidney failure, 
outpatient chemotherapy, and some limited preventive services 
(subject to the Part B deductible and 20% coinsurance).
    The application of cost-sharing to preventive services such 
as mammograms has restricted access to this service, especially 
for those without supplemental coverage to Medicare. A recent 
study supported by The Commonwealth Fund found that elderly 
women without Medicaid or supplemental private health insurance 
were much less likely to get mammograms.\2\ The financial 
barriers posed by deductibles and coinsurance for cancer 
screening contribute to failure to detect cancer in an early 
stage when recovery chances are higher.
---------------------------------------------------------------------------
    \2\ Janice Blustein, ``Medicare Coverage, Supplemental Insurance, 
and the Use of Mammography by Older Women,'' New England Journal of 
Medicine 332:1138-1143, April 27, 1995.
---------------------------------------------------------------------------
    Medicare does not cover prescription drugs (covered by 95 
percent of employer plans). Not covered, for example, are 
insulin, cholesterol-lowering drugs, hormone replacement 
therapy medication, and pain medication for cancer patients. 
Medicare also has limited long-term care benefits (only 16 
percent of nursing home and home health care is paid by 
Medicare; another 38 percent is paid by Medicaid.\3\
---------------------------------------------------------------------------
    \3\ Harriet L. Komisar, Jeanne M. Lambrew, and Judith Feder, Long-
Term Care for the Elderly, The Commonwealth Fund, December 1996.
---------------------------------------------------------------------------
    The high cost-sharing and limited benefits expose seriously 
ill Medicare beneficiaries to high out-of-pocket costs. In 1996 
Medicare beneficiaries paid $2,605 per person for their own 
health care costs. Medicare expenditures and out-of-pocket 
costs, however, are highly skewed. The sickest 10 percent 
account for 75 percent of Medicare outlays. In 1996 the sickest 
10 percent of Medicare beneficiaries averaged $37,000 in 
Medicare outlays; the healthiest 20 percent incur no Medicare 
expenses.\4\
---------------------------------------------------------------------------
    \4\ Marilyn Moon, Restructuring Medicare's Cost-Sharing, The 
Commonwealth Fund, December 1996.
---------------------------------------------------------------------------
    But the sickest beneficiaries also spent the most 
themselves. Their out-of-pocket costs for Medicare covered 
services was $5,600, and their out-of-pocket costs for all 
health services was $8,800. Any increase in cost-sharing would 
fall disproportionately on these beneficiaries and add to this 
considerable financial burden.
    Since a major purpose of Medicare is to provide financial 
protection for beneficiaries, a good case could be made for 
improving benefits, lowering cost-sharing, and raising premiums 
in the long-term. This would improve financial protection, 
especially for the 10 percent of Medicare beneficiaries who 
have no supplemental retiree or Medigap coverage and for those 
chronically ill Medicare beneficiaries with major health care 
expenses.
    One possibility would be giving Medicare beneficiaries the 
choice of a comprehensive benefit package with little or no 
cost-sharing and a commensurately higher premium so that 
beneficiaries would not be forced to purchase costly private 
MediGap coverage. With some important exceptions, MediGap plans 
often deny coverage to elderly people with pre-existing 
conditions. MediGap plans are required by federal law to limit 
administrative costs to 40 percent for individual plans and 25 
percent for groups plans; yet in 1993, 38 percent of plans did 
not comply with minimum loss ratio standards.\5\ Combining 
supplemental coverage with Medicare into a single comprehensive 
Medicare benefit package would lower administrative costs, 
reduce paperwork burdens, and the necessity of coordinating 
Medicare and MediGap payment. At a minimum MediGap plans should 
be required to accept all Medicare beneficiaries without 
underwriting, excluding bad risks, or charging higher premiums 
to sick or very old beneficiaries.
---------------------------------------------------------------------------
    \5\ General Accounting Office, MediGap Insurance: Insurers' 
Compliance with Federal Minimum Loss Ratio Standards, 1988-1993, August 
1995.
---------------------------------------------------------------------------
    Low-income elderly and disabled beneficiaries have 
increasingly relied on the Medicaid program to supplement their 
Medicare benefits. The Qualified Medicare Beneficiary (QMB) 
program entitles all poor Medicare beneficiaries to 
supplemental Medicaid coverage to pick up cost-sharing and 
premiums. Beneficiaries with incomes up to 120 percent of the 
poverty level are eligible for Medicare Part B premium 
subsidies from Medicaid (Specified Low-Income Medicare 
Beneficiary [SLMB] program). These provisions are quite modest. 
The poverty level for a single elderly person in 1996 was 
$7,525 and $9,484 for a couple.
    Only about two-thirds of those eligible for QMB coverage, 
however, participate, and only about 10 percent of those 
eligible for SLMB do so.\6\ A Commonwealth Fund study found 
that the most common reasons why elderly poor are not covered 
by public benefit programs are that they are unfamiliar with 
the programs or do not think they are eligible.\7\ Better 
outreach to those who are qualified for Medicaid 
supplementation to Medicare is important.
---------------------------------------------------------------------------
    \6\ Marilyn Moon, Crystal Kuntz, and Laurie Pounder, Protecting 
Low-Income Medicare Beneficiaries, The Commonwealth Fund, December 
1996.
    \7\ The Commonwealth Fund Commission on Elderly People Living 
Alone, Old, Alone, and Poor, April 1987.
---------------------------------------------------------------------------
    Poor and near-poor elderly are more likely to be 
experiencing health problems that require medical services than 
elderly people who are economically better off. Yet, they are 
less able to afford needed care because of their lower incomes. 
For those who do get care, large out-of-pocket medical expenses 
can lead to impoverishment.
    Medicaid could be improved to assure better benefits and 
financial protection for low-income Medicare beneficiaries. 
Federalizing this portion of Medicaid, improving supplemental 
coverage (including prescription drugs), and increasing 
eligibility to, say, 150 percent of poverty are options worthy 
of exploration. Federalization of the QMB and SLMB programs 
would permit better coordination with Medicare and likely 
increase participation of those eligible.
    In short the President's budget represents modest steps 
toward improving benefits and protecting beneficiaries 
financially. It provides for annual mammograms without cost-
sharing. It provides respite benefits for families of 
Alzheimer's patients. But more significant steps over the long-
term will be required to modernize the Medicare benefit 
package, including prescription drugs, lower cost-sharing, and 
assure the adequacy of supplemental coverage for poor and near-
poor beneficiaries.

                            Provider Payment

    The President's budget obtains the bulk of its projected 
five year savings by tightening provider payments: $33 billion 
from hospitals, $7 billion from physicians and other 
practitioners, $14 billion from home health agencies, $7 
billion from skilled nursing facilities, $2 billion from other 
providers, and $9 billion from measures to curb fraud and 
abuse.
    The extent to which Medicare can tighten payments to 
providers without jeopardizing access to quality services for 
beneficiaries and introducing serious financial instability in 
the health sector is a judgment that is difficult to make with 
any precision. As a general principle Medicare can not depart 
too fundamentally from payment rates in the private sector 
without risking the deterioration of its fee-for-service 
coverage.
    Because Medicare is a major source of revenues to health 
care providers, nearly all qualified health care providers and 
increasingly nearly all HMOs have opted to participate--despite 
the fact that payment rates have historically been set by 
Medicare below private sector rates. In the last few years 
managed care plans have followed Medicare's practice of using 
significant purchasing power to obtain ``price discounts'' from 
providers.
    Medicare has been an innovator in provider payment. Its 
system of physician payment has been increasingly accepted by 
physicians as payment in full. Its innovations in physician 
payment in fact have contributed to the growth of managed care 
plans who use it as a basis for establishing fee schedules for 
physicians participating in discounted fee-for-service managed 
care plans. A survey of managed care plans finds that Medicare 
still obtains the best ``discounts'' from physicians--with most 
managed care plans paying physicians in excess of Medicare 
rates.\8\
---------------------------------------------------------------------------
    \8\ Physician Payment Review Commission, Annual Report to Congress 
1995, p. 83.
---------------------------------------------------------------------------
    A good comparison of the performance of Medicare and 
private coverage for the working population is difficult 
because of the age differences in those it covers. Instead 
analysts have focused on comparing the rates of increase in 
Medicare and private sector outlays. Prior to the mid-1980s 
both Medicare and private health expenditures grew rapidly, 
with Medicare growing slightly faster. Starting with the 
introduction of prospective payment for hospitals, Medicare 
grew more slowly than private health expenditures in the mid-
1980s to early 1990s.\9\ Employers complained regularly that 
Medicare was ``cost-shifting'' to the private sector because it 
achieved price ``discounts'' from hospitals and physicians.
---------------------------------------------------------------------------
    \9\ Marilyn Moon and Stephen Zuckerman, Are Private Insurers Really 
Controlling Spending Better than Medicare? The Urban Institute, July 
1995.
---------------------------------------------------------------------------
    The development of private sector managed care plans that 
used their collective purchasing power to obtain price 
discounts appears to have moderated the growth in employer 
premiums in the 1990s. Recent reports suggest, however, that 
this period of moderation may now be ending, as both Medicare 
and private plans become subject to the underlying forces that 
have driven health care costs historically--labor-intensive 
services and improving health care technology.
    Over the long run both Medicare and private health 
insurance are driven by underlying trends in health care costs. 
A sustainable rate of growth of Medicare outlays, therefore, is 
one that assures that Medicare expenditures per capita adjusted 
for the aging of the population grows over the long-term at the 
same rate as the rest of the health sector. Otherwise the 
quality and accessibility of services under Medicare are likely 
to deteriorate relative to that of other patients. To define 
``sustainability'' as a rate of growth of Medicare outlays that 
obviates the need to increase taxes or increase beneficiary 
financial contributions is to ignore the fundamental goal that 
Medicare is trying to achieve--access to quality health care 
services and financial security for beneficiaries.
    Rather than continue the attack on Medicare's fee-for-
service option, it is important that the innovations of 
prospective payment for hospitals and physicians be extended to 
other Medicare services. Growth in Medicare hospital and 
physician expenditures have moderated considerably. The major 
areas where Medicare is now growing rapidly are for those 
services not covered by prospective payment approaches--
particularly home health, skilled nursing facilities services, 
subacute hospital care, and hospital outpatient care. 
Developing new methods of prospective payment for these 
services should be a top priority, and the President's budget 
recommends steps in this direction. Other techniques such as 
profiling patterns of utilization of different physicians, 
appropriateness guidelines, and high cost case management may 
also generate further savings.
    Nor should we lose sight of the fact that growth in health 
care spending nationally and in Medicare have brought 
improvements in life expectancy and quality of life. Life 
expectancy at age 65 has increased by three years since 
Medicare was enacted, and the U.S. is a world-leader in life 
expectancy of older adults. Technological innovations such as 
cataract surgery, joint replacements, and advanced methods of 
treating coronary artery disease have prolonged life and 
improved functioning for millions of Americans. Medicare, in 
particular, has contributed to technological advances not only 
by directly financing health care for older Americans but 
through payments to academic health centers which are on the 
forefront of developing and testing new advances in medicine.

                    Medicare's Managed Care Choices

    The President's budget also proposes to achieve $34 billion 
over five years in savings under its managed care options. This 
is to be achieved by: tightening fee-for-service provider 
payments, which lowers the managed care capitation rate ($18 
billion); a proposal to lower the capitation rate from 95 
percent to 90 percent of the fee-for-service cost ($6 billion); 
removing the allowance for teaching and disproportionate share 
from the managed care capitation rate ($10 billion); and 
reducing the wide geographic disparities in the payment rates 
(budget neutral). In addition, the proposal would expand the 
kinds of managed care plans eligible to participate in 
Medicare.
    Managed care plans are aggressively marketing to Medicare 
beneficiaries. Medicare permits qualified health maintenance 
organizations, including point of service plans, to participate 
in the program. Seventy percent of HMOs offer coverage to 
Medicare beneficiaries. Currently 10 percent of Medicare 
beneficiaries enroll in HMOs, but this number is growing 
rapidly. The Congressional Budget Office estimates that by the 
year 2000, 20 percent of Medicare beneficiaries will belong to 
HMOs.\10\
---------------------------------------------------------------------------
    \10\ Congressional Budget Office, January 1997 Baseline: Medicare/
Medicaid, January 18, 1997.
---------------------------------------------------------------------------
    Genuine choices between quality managed care and fee-for-
service care for Medicare beneficiaries are important to 
preserve over the long-term. Fee-for-service care has the 
disadvantage of creating incentives for too much care at too 
high cost; managed care has the disadvantage of creating 
incentives for too little care at substandard quality. 
Providing a genuine informed choice for beneficiaries of both 
options may counter the harmful consequences of either extreme. 
If either part of the program deteriorates in the quality and 
level of service available, neither beneficiaries nor the 
government will be well served. Careful attention, however, 
will need to be paid to issues of risk selection since sicker 
beneficiaries are more likely to opt for fee-for-service 
coverage while healthier beneficiaries are more likely to 
enroll in managed care plans.
    While most Medicare beneficiaries have managed care options 
available to them, familiarity with this option is not 
widespread. Medicare could systematically make information 
available to beneficiaries about choices in their geographic 
area, and conduct a formal annual enrollment process.
    It is important, however, that managed care plans be held 
to high quality standards. A recent study finding that health 
outcomes of elderly patients worsen under managed care compared 
to fee-for-service care is particularly troubling.\11\ There 
may also be a significant downside to managed care enrollment 
that requires beneficiaries to change physicians. A study 
supported by The Commonwealth Fund found that continuity of 
care from retaining the same physician for a long period of 
time has benefits. Medicare beneficiaries who had seen the same 
physician for ten or more years had fewer hospitalizations and 
lower Medicare costs.\12\
---------------------------------------------------------------------------
    \11\ John E. Ware, Jr., Martha S. Bayliss, William H. Rogers, Mark 
Kosinski, and Alvin R. Tarlov, ``Differences in 4-Year Health Outcomes 
for Elderly and Poor, Chronically Ill Patients Treated in HMO and Fee-
for-Service Systems: Results From the Medical Outcomes Study,'' Journal 
of the American Medical Association 276:1039-1047, October 2, 1996.
    \12\ Linda J. Weiss and Jan Blustein, ``Faithful Patients: The 
Effect of Long-Term Physician-Patient Relationships on the Costs and 
Use of Health Care by Older Americans,'' American Journal of Public 
Health, December 1996.
---------------------------------------------------------------------------
    Starting slowly is important. Expanding coverage to loosely 
organized managed care plans such as preferred provider 
organizations does not seem warranted, until many of the 
problems with current capitation payment are resolved and 
adequate quality standards established and an enforcement 
mechanism instituted. The Health Care Financing Administration 
is taking important steps to require that participating managed 
care plans provide standardized information on quality 
indicators, but an effective quality information and assurance 
system is a long way from realization. Nor does the program as 
yet require accreditation of HMOs. One protection for 
beneficiaries is the right to disenroll from a managed care 
plan on a monthly basis. This ability to ``vote with their 
feet'' is an important protection until better quality 
standards are in place.
    Even if enrollment in managed care plans were to expand 
more rapidly, it would not yield savings to the program. The 
best study on the issue finds that the actual cost of serving 
Medicare beneficiaries who opt for HMO enrollment is 5.7 
percent more than Medicare would have paid for these same 
beneficiaries had they been covered under fee-for-service 
Medicare coverage.\13\ Instead of saving Medicare money, the 
program loses almost 6 percent for every Medicare managed care 
enrollee.
---------------------------------------------------------------------------
    \13\ R. Brown et al., The Medicare Risk Program for HMOs: Final 
Summary Report on Findings from the Evaluation, Mathematica Policy 
Research, February 18, 1993.
---------------------------------------------------------------------------
    Nor is there compelling evidence that managed care 
generates health system savings over the long term. Most 
savings such as price discounts or reduced hospitalization are 
one-time savings and do not offset the rate of increase over 
time. Managed care administration costs, furthermore, average 
15 to 20 percent, compared with Medicare's 2 percent 
administration costs.
    Medicare loses money on managed care to the extent that 
plans enroll and retain healthier than average beneficiaries. 
Given the extreme variability in health outlays among 
beneficiaries, there is great leeway for plans to select 
relatively healthier beneficiaries for whom capitated rates 
exceed true costs. If managed care plans succeed in attracting 
and retaining relatively healthier Medicare beneficiaries 
(which they have very strong incentives to do), Medicare will 
be overpaying for those under managed care, and yet paying the 
full cost of the sickest Medicare beneficiaries who are 
unattractive to managed care plans. Managed care plans have the 
option of switching out of the risk contract program if they 
experience adverse selection.
    The current method of paying managed care plans for 
Medicare patients is seriously flawed. Its primary weakness is 
that it does not adequately adjust for differences in the 
health status of beneficiaries. Unfortunately, a good method of 
setting capitation rates to adjust for differences in 
beneficiary health status still seems years away.
    Tying Medicare HMO payment rates to local fee-for-service 
experience is neither equitable nor tenable in the long-term. A 
national rate with appropriate geographic adjustment for 
differences in the cost of practice would be preferable. 
However, rates are currently so widely variable across 
geographic areas that a long transition period will be 
required.
    The current method of Medicare HMO payment includes 
allowances for the direct and indirect costs of medical 
education, even though managed care plans do not incur these 
costs; The payment rate also includes an allowance for 
disproportionate share payments even though managed care plans 
do not cover the uninsured, and in general are open only to 
those who can afford the premium or have employers or public 
programs that pay the premium on their behalf.
    It makes little sense to overpay HMOs and encourage 
Medicare beneficiaries to enroll, yet have the program lose 
money on each beneficiary who enrolls. If adequate measures to 
adjust for health status can not be developed in the short run, 
serious consideration should be given to lowering the Medicare 
HMO payment rate. It is currently set at 95 percent of Medicare 
projected expenditures for beneficiaries with average health 
status. Given the favorable selection that occurs, reducing 
this to 85 to 90 percent could be considered.
    The extent of managed care abuses could be curbed by 
lowering capitation payment rates and imposing penalties on 
plans for high disenrollment rates, but the basic underlying 
incentives are unlikely to be substantially altered. Nor has 
the long-term success of managed care in controlling costs 
while providing quality care to seriously ill patients yet been 
demonstrated. Proceeding cautiously and slowly is in order.

       Vouchers, Medical Savings Accounts, Catastrophic Coverage

    Another approach is to convert Medicare from a defined 
benefit program to a defined contribution program. Currently, 
Medicare sets payments to hospitals and HMOs; this payment is 
payment in full. Hospitals and HMOs may not charge 
beneficiaries on top of what Medicare pays. Physicians have 
strict limits on balance billing over the fee schedule (no more 
than 15 percent above the fee schedule); and about 90 percent 
of all claims are now assigned. Most defined contribution 
approaches would eliminate this feature and permit managed care 
plans and health care providers to set their own charges, with 
beneficiaries financially at risk for the difference between a 
fixed voucher and what providers and health plans charge.
    In a difficult federal budgetary climate, capping the 
federal budget obligation for Medicare on first examination has 
appeal as a policy option. Vouchers or giving beneficiaries the 
actuarial value of Medicare to purchase private coverage 
permits the government to control its expenditures regardless 
of the trend in health care costs. However, this approach 
shifts financial risks to beneficiaries, and undermines the 
financial security that Medicare is intended to provide. By 
freeing managed care plans, hospitals, and physicians to charge 
whatever they choose in the marketplace, the benefit of the 
large purchasing power that Medicare has, as well as the 
governmental authority it represents, no longer would be 
available to help beneficiaries obtain care at lower cost.
    Proposals to change Medicare into catastrophic coverage 
with, for example, a $2,500 combined deductible could pose 
major barriers to care for low-and modest-income beneficiaries. 
A high deductible with no ceiling on out-of-pocket costs is 
especially of concern.
    Vouchers to purchase catastrophic health coverage with the 
balance invested in medical savings accounts raise particular 
concerns. Such provisions are likely to be costly to the 
Medicare program. While a mandatory voucher system could be 
designed to guarantee savings, a voluntary voucher program is 
almost certain to be attractive only to relatively healthier 
beneficiaries. Setting the voucher at an average level could 
result in very substantial overpayments. Medicare currently 
spends very little on the healthiest 50 percent of Medicare 
beneficiaries. If they were to take vouchers, the cost to the 
program could be extraordinary. Skimming off the healthiest 
Medicare beneficiaries undermines the advantages of risk 
pooling that Medicare as a universal program now achieves.
    The most serious potential problem with vouchers is that 
the market would begin to divide beneficiaries in ways that put 
the most vulnerable beneficiaries--those in poor health and 
with modest incomes--at particular risk. If vouchers or other 
types of specialized plans like medical savings accounts skim 
off the healthier, wealthier beneficiaries, many Medicare 
enrollees who now have reasonable coverage for acute care 
costs, but who are the less desirable risks, would face much 
higher costs due to the market segmentation. A two-tier system 
of care could result in which modest income families are forced 
to choose less desirable plans.
    Catastrophic coverage is unlikely to be attractive to many 
beneficiaries. After all, 90 percent of Medicare beneficiaries 
now obtain supplemental coverage to avoid the $736 Part A 
deductible and $100 Part B deductible. Few beneficiaries who 
truly understand that a plan has a $5,000 or $6,000 annual 
deductible are likely to find it attractive. Many of the 
chronically ill would be required to pay this deductible not 
just once, but year after year. Nor is it affordable for the 
three-fourths of Medicare beneficiaries with incomes below 
$25,000. If beneficiaries were to experience a serious illness, 
they could face financial bankruptcy and bad debts to 
providers. Providing financial protection for beneficiaries was 
the major rationale for creating Medicare. It should not be 
abandoned now.
    Further, the experience with sale of private MediGap 
coverage to beneficiaries is that without stringent safeguards, 
marketing abuses are likely. Confused or scared, some 
beneficiaries could take options which are not in their best 
interests--nor genuinely preferred by them.
    On balance, vouchers offer little in the way of guarantees 
for continued protection under Medicare. Further, the federal 
government's role in influencing the course of our health care 
system would be substantially diminished. For some, this is a 
major positive advantage of such reforms. But the history of 
Medicare is one in which the public sector has often played a 
positive role as well, first insuring those largely rejected by 
the private sector and then leading the way in many cost 
containment efforts. But most troubling is the likelihood that 
the principle of offering a universal benefit afforded by 
social insurance would be seriously undermined.

                 Financing Medicare in the 21st Century

    The President's budget would ensure the solvency of the 
Part A Trust Fund until the year 2007 by shifting about half of 
home health services from Part A to Part B. While this has been 
criticized as an accounting ``gimmick,'' there are sound 
analytic and pragmatic reasons for making this shift.
    Pragmatically, the alternative short-term options for 
preventing the looming exhaustion of the Part A Trust Fund come 
down to: increasing beneficiary cost-sharing for hospital and 
other Part A services, tightening provider payments 
substantially further than those contained in the President's 
budget, and increasing payroll taxes. The deductible for Part A 
services is already exorbitant ($736 in 1996) and cost-sharing 
already falls heavily on those who are seriously ill enough to 
incur a hospitalization or need post-acute services such as 
home health or skilled nursing facility services. There is a 
limit to how rapidly the health sector can adjust to tighter 
provider payment rates, and how sharply Medicare can curtail 
provider payment rates relative to the private sector.
    The fiscal problem of the Hospital Insurance Trust Fund is 
directly related to the fact that hospital, home health, and 
skilled nursing facility care are financed by a payroll tax, 
while general tax revenues and beneficiary premiums are used to 
finance ambulatory care. The payroll tax will always fall short 
of covering Medicare hospital and post-acute care outlays--for 
the simple reason that the number of older people is growing 
faster than the number of workers and health care costs 
historically go up faster than earnings. According to the 
Congressional Budget Office, the Hospital Insurance Trust Fund 
could be solvent for an additional 25 years if the payroll tax 
were increased by an additional 0.65 percent on both employers 
and workers (from 1.45 percent now).\14\ More modest increases 
of, for example, 0.15 percent on both employers and workers, 
would generate about $10 billion annually.
---------------------------------------------------------------------------
    \14\ June E. O'Neil, ``The Financial Status of the Medicare 
Program,'' testimony before the Committee on Ways and Means, U.S. House 
of Representatives, May 2, 1995.
---------------------------------------------------------------------------
    Analytically, there is no reason why hospital and post-
acute care benefits for the elderly should be financed by a 
payroll tax and physician and other ambulatory services should 
be financed by general revenues and premiums. Nor does it make 
much sense that visits by a nurse to the home should be paid 
for by a payroll tax while visits to the home by a physician 
should be paid for by general revenues and premiums.
    The real issue is the rapid growth of home health spending 
in recent years, and what changes in the Medicare program would 
help assure that appropriate services are being provided 
efficiently. Changing from cost reimbursement to prospective 
payment is an important improvement. But the levels of service 
vary widely across geographic areas and by type of home health 
agency. For-profit agencies provide twice as many home health 
visits per beneficiary as nonprofit agencies.\15\ Home health 
visits annually range from over 24,000 per enrollee in 
Louisiana to less than 3,000 in Wisconsin.\16\ Setting 
guidelines for numbers of services based on patient health or 
functional status, and perhaps establishing an overall 
expenditure target such as the Volume Performance Standard 
incorporated in the prospective payment system for physicians 
are worthy of exploration.
---------------------------------------------------------------------------
    \15\ General Accounting Office, Medicare: Home Health Expands While 
Program Controls Deteriorate, March 27, 1996.
    \16\  Genevieve Kenney and Marilyn Moon, ``Reining in the Growth in 
Home Health Services under Medicare,'' draft report to The Commonwealth 
Fund, February 1997.
---------------------------------------------------------------------------
    Shifting some or all of home health services into Part B 
creates an opportunity to apply methods appropriate to 
ambulatory services to home health care. By making a one-time 
reduction in the fiscal burden on Part A it also provides much-
needed time to address the more fundamental problems created by 
the division of Medicare into Part A and Part B.
    In the long-term it will be imperative to make changes in 
the way Medicare is financed. Division into two parts is a 
historical artifact. In part the division arose from the fact 
that it was modeled on Blue Cross (BC)/Blue Shield (BS) plans 
which separately covered hospital and physician services; 
subsequently most BC and BS plans have merged, but Medicare has 
not. Another reason that Medicare has two parts is that Part B 
was tacked on late in the legislative process as a political 
compromise. Whatever its origins, it is fair to say that the 
dual structure serves little useful purpose today and is even 
counterproductive.
    How we choose to finance Medicare benefits is a policy 
choice, not a given dictated by history. Merging Part A and 
Part B into a single Trust Fund would improve the rational 
operation of the program, especially as managed care grows. 
With managed care providing both hospital and physician 
services, a combined benefit makes more sense. A single ceiling 
on out-of-pocket expenses is also facilitated by a single 
benefit.
    In the long-run, payroll taxes may not be the best source 
of financing Medicare. It would be useful to have a revenue 
source that grows automatically as the population ages--whether 
that is greater reliance on general revenues, new taxes such as 
consumption taxes or value added taxes, a health sector tax, or 
greater taxes on the elderly (e.g., taxing the actuarial value 
of Medicare or an income-related Medicare premium). Payroll 
taxes can continue to be a portion of financing, but will 
always generate periodic crises as Medicare expenditures 
outstrip payroll tax revenues.
    Nor can Medicare's long term problems be solved by raising 
the age of eligibility for Medicare. Employer retiree health 
benefits have been dropping precipitously in the last decade. 
Today only about one-third of retirees have such coverage. 
Early retirees between the ages of 55 and 64 are already at 
risk, and those with major health problems find it difficult to 
obtain affordable coverage.\17\ Consideration should be given 
to permitting those under age 65 to purchase Medicare coverage. 
Subsidies may be required for low and modest income retirees to 
make such coverage affordable. Raising the age of Medicare 
eligibility would exacerbate this already serious problem.
---------------------------------------------------------------------------
    \17\ Pamela Loprest and Cori Uccello, Uninsured Older Adults: 
Implications for Changing Medicare Eligibility, The Commonwealth Fund, 
January 1997.
---------------------------------------------------------------------------

                    Building on Medicare's Strengths

    At present, too little attention is being focused on how to 
improve the functioning of the Medicare program, rather than 
departing radically from its basic structure. The goal should 
be preserving genuine choice for all Medicare beneficiaries to 
be cared for by physicians or a health system of their choice 
while guaranteeing quality care at a reasonable cost to 
beneficiaries and to taxpayers. Steps can be taken in the 
short-term to: 1) improve benefits and financial protection for 
beneficiaries; 2) institute prospective payment methods for all 
Medicare services; 3) improve Medicare's payment system for 
managed care plans, set and enforce quality standards, provide 
standardized information to beneficiaries, and manage an annual 
enrollment process with genuine choices for beneficiaries; and 
4) extend the solvency of the Part A Trust Fund while beginning 
an indepth examination of the merits of alternative sources of 
financing Medicare over the long term.
    What should be preserved is the essential role that 
Medicare plays in guaranteeing access to health care services 
and protecting from the financial hardship that inadequate 
insurance can generate for our nation's most vulnerable elderly 
and disabled people. No American should become destitute 
because of uncovered medical bills nor be denied access to 
essential health care services. Medicare is a model of success. 
It should be strengthened and improved, and any fundamental 
restructuring should occur only after a full array of options 
is carefully analyzed, critiqued, and debated.
    Thank you.
      

                                
[GRAPHIC] [TIFF OMITTED] T2969.006

[GRAPHIC] [TIFF OMITTED] T2969.007

      

                                

    Chairman Thomas. Thank you, Ms. Davis.
    On your chart 8--and we are going to have a hearing so that 
we can get CBO estimates--I notice that you use the CBO 
baseline for projection of percentage participation. Whether 
you view it as good or bad, don't you believe the changes that 
the President's program advocates, or any that we might adopt 
similar to those, would in fact change the percentages of 
people going into HMOs? It certainly would not make them more 
attractive to go into them; would you agree with that?
    Ms. Davis. I think if you tightened up the payment rate and 
made it 90 percent instead of 95 percent, the HMOs would be 
able to offer fewer supplemental benefits, and it would be 
somewhat less attractive.
    On the other hand, if Medicare is losing money for every 
person who enrolls, it makes little sense, from the government 
taxpaying point of view, to want more people to enroll.
    I think the basic objective is to make it neutral, and one 
could do that by trying to find a way of adjusting the current 
payment rate for health status. In the absence of a good way of 
doing that, I think that just lowering the rate has merit.
    Chairman Thomas. And you did use the phase, ``if we are 
paying more,'' and you cited a study in your written testimony 
about the fact that perhaps we are. I just lament--and in your 
written testimony, you also lament--the search for the ``Holy 
Grail,'' which is a risk-adjusted mechanism that would allow us 
to make more objective comparisons within that structure. And 
it is just unfortunate that we do not have tools. I am ready 
for an imperfect tool if I cannot get a better tool for doing 
those kinds of measurements.
    Also in your chart--and you alluded to the number of 
children who are eligible for Medicaid insurance who are not 
under it--similarly, seniors who are dual-eligible are not--why 
are we not doing a better job of getting a higher participation 
rate? What is it? And I ask anybody. You folks, especially Dr. 
Helms and you, have been in the inside business on this. Why 
can't we pick up a higher percentage in a program that already 
exists?
    Ms. Davis. I think part of the problem is the Federal-State 
nature of Medicaid. The States do not want to pick up what they 
view as the Federal Government's responsibility of paying for 
the elderly, so they are the ones who have to go out and tell 
the elderly that they are eligible for this benefit, which 
costs the State governments money, so they view it as a 
mandate, as a higher cost on them.
    When you look at the SLMB feature in New York City, the 
Medicaid officials did not have the form if somebody asked for 
it. It is not in the State's interest economically to make it 
known to these beneficiaries that this is available.
    Chairman Thomas. If the Feds would in essence hold the 
States harmless for any increase in the enrollment, if we are 
in fact going to talk about legislating in this area, either 
for children or for seniors, don't you think the most cost-
effective way to spend Federal dollars would be to pass through 
and encourage the States, who are the primary contact points, 
to do a better job of enrolling, rather than starting Federal 
programs for these recipients?
    Ms. Davis. Well, as I say, the States have an economic 
disincentive to do it.
    Chairman Thomas. But if we passed through and did not 
create that disincentive, and we held them harmless--we have a 
Federal dollar, we can pass it through to encourage the States 
to enroll more, or we can use the Federal dollar to start a 
program at the Federal level which in fact may cover those 
people who are in essence already covered. Which way would be a 
better way to spend that Federal dollar?
    Ms. Davis. Well, I think for the dual beneficiaries, those 
who are eligible for both Medicare and Medicaid, you get 
problems of coordination across two programs, and there are 
some arguments administratively for making it a single program. 
But if you were to keep it as a State level, certainly, to 
increase the Federal share on that would be a way to give 
States more of an incentive to deal with it.
    Mr. Reischauer. Can I suggest that this really is a Federal 
responsibility? The motivations that Karen alludes to are 
perfectly correct, but let us remember that the States have no 
idea who is on Medicare and who is not among their populations. 
The Federal Government does; the Federal Government sends 
notices saying what changes in Social Security are going to be 
made in the next year, what changes in part B premiums are 
going to be made. It would not be hard to include in that 
notification a statement that if your income is below 120 
percent of the poverty level, and the dollar value of that 
income could be given, that you could go to your State 
enrollment agency for Medicaid and provide an address, and you 
could, at a minimum, have your part B premiums paid for. If you 
were below poverty, you could have your deductibles and 
coinsurance paid as well.
    I see no reason to expect the States to be the parties 
responsible for this kind of enrollment.
    Chairman Thomas. Karen, on your chart 1, where you break 
out the out-of-pocket burden and you emphasize clearly that the 
poor and the near poor are about 60 percent, I look at the 
chart and see that somewhere around 30 percent are middle 
income and high income.
    Currently, we have a general fund contribution of about 75 
percent of part B costs. It is a subsidy to everybody in part 
B. And your concern is with the lower end. If in fact we have 
this contribution, doesn't it make more sense to take the total 
dollars and redistribute them to increase the protection for 
those who are least able to pay and reduce the subsidy for 
those who are best able to pay?
    Ms. Davis. I certainly agree with that. I certainly have no 
problem, if that is your question, with including the home 
health benefit in the part B premium and taking that added 
revenue and using it to improve the premium protection at the 
low income or possibly, as Mr. Reischauer suggests, an income-
related premium surcharge at the very high end.
    I think you want to think about the income ranges you are 
talking about. Twenty-six hundred dollars, which is the average 
for everybody, is a lot of money today for an elderly person 
with a $20,000 income or a $30,000 income. You have to look at 
how it is borne, but certainly the basic notion of having 
better protection at the low income, if you have got to raise 
more money through beneficiaries, doing it through premiums 
rather than cost sharing that falls on those who are very sick 
and if necessary, getting more money out of the high-income 
level.
    Chairman Thomas. Now, that changes the program, and there 
are a number of folks who are kind of adamant about not 
changing this subsidy for everybody. But as we get into the 
scarce dollars and looking for where and how we are spending 
it, I just do not understand those who will look at this chart 
and be willing to maintain problems at the lower end while 
providing a subsidy for those who, with any--400 percent of 
poverty income getting 75 cents out of every dollar subsidy out 
of the general fund is just--I do not understand why people are 
not willing. And the best statement we have been able to get 
out of the President is that he is not unopposed to looking at 
something like that.
    Somebody--and I do not want to say on your side--but 
somebody has got to start talking about doing things that are 
prudent, like taking the fixed amount of money we currently use 
and spending it better. We have just got to start talking about 
that, or we are never going to close on problem areas.
    Ms. Davis. Mr. Chairman, at a Ways and Means conference I 
think in 1984, I supported an income-related premium.
    Chairman Thomas. That is good enough; I just wanted to get 
something on the record.
    Ms. Davis. The point I would make is that only 5 percent of 
Medicare beneficiaries have incomes over $50,000, so you are 
not going to generate a lot of revenue from it.
    Chairman Thomas. If it is one penny, how can you defend the 
kind of program that continues to do that? It is done in large 
part by some folks for philosophical reasons, and I think we 
have got to get beyond some of these philosophical standards 
and look at where and how scarce resources are being allocated.
    Dr. Reischauer, you were talking about options that are 
available to us, and when you boil it down, you either raise 
more revenue, increase the age, or you look at the programmatic 
topography and talk about change which will lead to changes in 
the future.
    I was at an AARP meeting, and one of the women said, I do 
not know why you did not just freeze the premium when it was at 
the 31.5 percent; it was just a couple of bucks for everybody, 
and they would not have noticed it.
    It is amazing now that the administration is moving at a 
25-percent freeze, and I think it is interesting that the 
difference between the 31.5-percent freeze and the 25-percent 
freeze equals at least half of the $82 billion home health 
transfer. The simple timing of when we froze the premiums would 
have cut the problem in half.
    From your perspective and how you have watched the system 
over the years, do you think there is any chance to go back to 
something closer to the original 50-50, or is 25 percent in 
your opinion about as high as we are ever going to get unless 
we rethink the way in which we structure?
    Mr. Reischauer. That is a political judgment. I guess I am 
optimistic----
    Chairman Thomas. Well, now that you are no longer director 
of the CBO, you can proffer a political judgment if you want 
to.
    Mr. Reischauer. I am hopeful that the part B premium can be 
raised above 25 percent, particularly for those who have the 
capacity to pay. We have in the Medicare Program a program that 
subsidizes participants rather significantly. CBO's estimates 
are that the part B premiums and the payroll taxes paid by an 
average-wage individual retiring at age 65 in 1995 amounted to 
only 34 percent of their expected costs to this program. This 
is an issue of a tradeoff. Somebody is paying that subsidy. Is 
the person paying that subsidy, the average American taxpayer, 
or the average American beneficiary of some other program that 
is being cut back, more in need of relief than the top half of 
the income distribution of the Medicare recipients? I think the 
answer to that is yes.
    Chairman Thomas. Just let me say in terms of rethinking 
what we are doing, that in our proposal last year, we worked 
closely with Taft-Hartley unions who were quite concerned about 
people who, through contract negotiations and others, are 
moving into a 55-retirement period, and they have an enormous 
gap for 10 years, an exposure, as they are no longer under an 
employer benefit program. And they were very excited about our 
structuring and union participation retirement program that 
would blend in from the workplace to Medicare.
    We had a couple of other initiatives, and it is interesting 
to me that the original argument was that we want to maintain 
fee-for-service because that is more like what people have in 
their place of employment than managed care, and that slowed 
down the movement toward managed care, and all of a sudden, 
when no one was looking, 75 percent of those people who 
received their health insurance from their employers are now in 
managed care. And if we do not create a reach-back from the 
workplace to the rocking chair and create a seamless blend in 
those kinds of programs, we are going to lose a real 
opportunity to be innovative.
    I noticed it was not in the President's program, although 
he has moved toward the provider-sponsored organizations, but I 
think if we focus on who it is that is offering it, and for 
those who are willing and need a transition kind of structure, 
if we can work with employers through the 100-percent writeoff 
incentive that is in the Tax Code, we might be able to create a 
more receptive atmosphere for folk to build these programs that 
move from the workplace to retirement because when people talk 
about raising the retirement age--and I know Dr. Davis was 
concerned about that--similar to Social Security--I do not know 
why, mentally, we are locked into a 65 starting point for 
Medicare or a 67 starting point for Medicare and not looking 
more creatively. I am looking to you folk and your institutions 
for a more creative blend of moving from the workplace to the 
retirement program.
    Are you looking at that in any way now?
    Mr. Reischauer. I am not, but I think developments in that 
area would be fruitful, and of course, the way to go would be 
to do something similar to what Social Security has done and 
will do in the future, which is not to change the age at which 
initial eligibility occurs, but rather, reduce the benefits at 
each age up until the normal retirement age. An analogous 
approach in Medicare, if one thought it was appropriate to 
change the age for full benefits, would be to have the age at 
which you receive full benefits rise to, say, 67, but if you 
wanted to participate in Medicare between the ages of 65 and 
67, you would be asked to pay more substantial premiums.
    Chairman Thomas. These are the kinds of discussions that I 
think need to take place in this Subcommittee and in Congress, 
and I share your concern that to the degree we take easy outs 
like moving money to buy time for time's sake, we are going to 
leave them to a commission, and in my historical analysis of 
the commissions, even the much praised 1983 Social Security 
Commission, did not do a really good job. I hope you keep the 
pressure on us to try to make as much policy change as we can 
in the short run.
    The gentleman from California.
    Mr. Becerra. Thank you, Mr. Chairman.
    Ms. Davis, if I could ask you to turn to chart 4, I have a 
question regarding the costliest decile of beneficiaries. Do 
you know what the characteristics of that group might be? Is it 
that they are the oldest and therefore the sickest, and they 
are needing the most intense treatment? Are they the folks who 
are at that last stage of life, or are they wealthy individuals 
who make use of services more because they are informed about 
their access to these things, or are they the poorest of 
individuals who do not get the care until the last moment, when 
the illness is worst and therefore costs most?
    Do you have any sense of what makes up that particular 
grouping of individuals who are very costly?
    Ms. Davis. Well, we need to learn more about that. I am 
sure it is a little bit of everything you name. The 10 percent 
who are the sickest account for 75 percent of Medicare outlays. 
It is not just care in the last months of life. About 6 percent 
of Medicare beneficiaries die in any given year and account for 
about 25 to 30 percent of Medicare outlays, so some of it is 
care of the dying, but that is not the bulk of it. More of it 
is chronically ill people, people with conditions like chronic 
obstructive pulmonary disease, advanced heart disease, cancer, 
and it just requires a lot of care for those people.
    Mr. Becerra. And I pose this question to any of the three 
panelists. Is there some way we can grasp or some method we can 
get hold of to try to reduce the costs that we see associated 
with the highest decile there? I know the President, for 
example, is proposing a lot more preventive care. He is talking 
about mammography services and injections and so forth, and any 
time you go toward preventive care, I suspect you do save quite 
a bit in terms of intensive care. But are there any proposals 
out there that you all are aware of that would help us try to 
reduce the costs of the costliest beneficiaries?
    Ms. Davis. In the employer sector, the main technique is 
something called ``high-cost case management,'' which is when 
somebody crosses a given threshold, you basically have a person 
whose job it is to really work with the family as they 
encounter different situations--maybe something is not in the 
benefit package, but they will cover it if it means it avoids a 
hospitalization or some other high cost.
    But basically, I think a lot of this cost is just given, 
that when things go really wrong, people need a lot of care, 
and some of it can be helped through preventive care--if 
diabetes is well controlled, maybe it does not wind up in a 
hospitalization; certainly, a mammogram may find something at 
an early stage and avoid all of the care and human suffering 
that goes with terminal cancer. But I think some of this is 
inevitable. We see this even with children, where expenditures 
are very skewed. We have had some recent work that tried to 
break it down by condition, like diabetes, and pulmonary 
disease is very skewed within those chronic conditions, so 
there is just a subset of people who are just going to have 
enormous complications that require a lot of care.
    Mr. Becerra. Mr. Helms, do you want to respond?
    Mr. Helms. Yes. If you look at Karen's chart 4, I think it 
is worth remembering something about the economics of 
insurance. For any one individual, it is difficult to say where 
you are going to be in this chart next year or 10 years from 
now. What you are doing when you are buying insurance is asking 
what is the probability that you are going to be in the last 10 
percent as opposed to the first 10 percent. You buy insurance 
to protect yourself, if you end up in the expensive category.
    As Karen was saying, the private sector has shown us that 
there are probably lots of things that can be done to reduce 
costs. But, the problem with Medicare is that it is still an 
open-ended system where neither providers nor consumers have 
very strong incentives to ask about the cost effectiveness of 
the care they choose. The reason why I think we should go to 
more market-type principles and a more competitive system is 
that it would put this problem into the hands of competing 
plans. They would have to attract people to their plans, but 
they would also have to control cost.
    Ms. Davis. But I think that that is the problem with 
managed care. Managed care plans do not want people in that top 
10 percent, and they have techniques for figuring out how to 
screen them out. It is illegal just to refuse to take somebody 
because they have a preexisting condition in a Medicare HMO, 
but if you have an ad in the New York Times that says come for 
coffee on Tuesday morning at 10 a.m. at Broadway and 42d, only 
those people who read the New York Times know it is Tuesday and 
can get there are going to be exposed to that pitch. They have 
techniques, whether it is the way they advertise, the kinds of 
specialists that are in their plans, where their facilities are 
located, encouraging people to disenroll. We know from the 
Physician Payment Review Commission that those who disenroll 
have 60 percent higher expenses than the average beneficiary.
    They have ways of discouraging people who are very sick 
from enrolling. I am saying if they are ethical and want to 
take everybody, of course, there are HMOs out there what will 
not use these techniques, but others see that very strong 
profitability that can be made by skimming off the healthier 
and will respond to those incentives.
    Mr. Becerra. If I could continue, Dr. Helms, how would you 
try to discourage in a market-oriented system, if you have 
Medicare and go toward that market-oriented system, a provider 
seeking only those--as we see in some cases now--individuals, 
those beneficiaries who are healthiest to avoid--if you are 
going to use the market principles to try to drive your 
decisions, obviously, as Ms. Davis has said, you are going to 
avoid the folks who are the costliest, and you may, in making 
choices about how to reduce costs, not look so much at a 
preventive procedure as much as an approach to seek out only 
those who are healthiest.
    Mr. Helms. I am certainly not going to defend every 
practice of every HMO in today's market. I do think they 
presently have some incentives to avoid the expensive people. 
But we are talking about the future. If we continue to grind 
down on reimbursement rates, we are going to get more access 
problems.
    It will not be easy, but I do think you can create the kind 
of competition where providers and health plans are going to go 
after the sicker population, and they are going to be 
encouraged to keep them. Inevitably, as people get older, they 
are going to have more and more problems. Health plans are 
going to have to convince people that they are the plans that 
can take care of them.
    What we are really talking about is developing competition 
more on the basis of quality. I see quality competition 
happening in most other nonhealth care markets, and I think 
that eventually, it can happen here, too.
    Mr. Becerra. I would think that under that approach, 
though, if you do go toward a market-based approach, you are 
still going to have to find a way to have competition almost by 
segment of that population of those beneficiaries, so that 
there is almost a competition for the healthiest, and there has 
to be some form of competition for those who are most ill.
    Mr. Helms. That is right, and it gets back to the question 
that was raised earlier about trying to have some kind of 
health status risk adjustment. If people have an incentive to 
adjust, then we will get more research on this. I think we 
could begin to make some progress in this area.
    Chairman Thomas. Xavier, I will tell you that it is illegal 
to do that. There is no question it is done subtly, and our job 
is to make sure we have a very strong and appropriate 
punishment mechanism for those who would in fact try to 
cherrypick or select.
    One of the things we do not have, and it is very 
frustrating, and you will get more frustrated as we go along 
with this line of questioning, is that we really do not have 
good computer patient records. Managed care companies have as 
good as any, and we need to acquire them. We are paying for the 
collection of that, and they hang onto them, so they must have 
some proprietary value. We want them, because our problem is we 
do not have the kind of outcomes research models that we need 
that would lead us to guidelines for heroic intervention or 
others. But fundamentally, the problem is that this society 
refuses to have a meaningful dialog about life and living, 
quality of life versus quantity of life, and that there is to a 
degree, at this last period, a failure for the society to face 
quality versus quantity and offer reasonable and appropriate 
alternatives that are not just cost centers, but that focus on 
the way you deal with people on the quality side versus the 
quantity side. Our job is to create a structure with 
malpractice reform and others that the providers feel 
comfortable about, and we push them to engage folks in this 
discussion--but unless we can provide them with clear outcomes 
research that if you continue this, this is the outcome, it is 
going to be very difficult for us to begin to slow down the 
process of continuing to put money in these particular areas.
    Mr. Becerra. Absolutely.
    Chairman Thomas. It is very tough for decisionmakers. We 
are certainly not going to lead the society in determining who 
gets what, but the society has got to have a dialog with us. It 
is a very, very tough area, but we have got to engage in it, 
because if we do not, current medical technology will be a 
black hole that will consume every dollar that this society 
can----
    Mr. Becerra. Everything has to be on that table. Mr. 
Chairman, if I could ask one last question of Ms. Davis.
    Chairman Thomas. Surely.
    Mr. Becerra. You mentioned the problems we have trying to 
get the elderly poor to participate in the QMB and the SLMB 
Programs, and the panel raised the concern that perhaps the 
State should not be the entity that tries to promote 
utilization of those two programs. Do you have any other 
thoughts on what we should be doing to try to increase the 
number of elderly eligible individuals to get them to 
participate in those two programs to make sure they get the 
health care they deserve?
    Ms. Davis. Well, there are ways of doing outreach to low-
income seniors that are effective in increasing enrollment, and 
actually just putting a notice in their Social Security check 
is not the most effective way.
    We supported at the Commonwealth Fund a demonstration that 
was managed by the American Association of Retired Persons that 
had campaigns in communities, including things like putting it 
in their electric bill, television campaigns, and ads letting 
people know. But if you make a real intensive effort to tell 
people this benefit is available, people will sign up for it, 
if they hear about it. The main reason they do not join is not 
that they do not want it; they just do not know about it, or 
they do not think they are eligible.
    The second point, I think, from the participation is just 
the low level of this. Even the SLMB only goes up to 120 
percent of poverty, so you are really helping a very narrow 
segment, and there are many just above that who are already 
finding the kinds of premiums and out-of-pocket costs 
burdensome.
    Mr. Becerra. What about--and I asked Mr. Vladeck this--
trying to ensure that anything you do to reach out to people is 
sensitive to the communities' profiles, so that if you are 
trying to reach out in parts of Los Angeles, and you provide 
some information that is solely in English, there is a good 
chance you are not going to get to a large sector of the Asian-
descended or Spanish language-descended communities there, so 
you have to try to tailor your message a little bit to make 
sure you are getting to a lot of these elderly, low-income and 
in many cases somewhat removed communities to get them that 
message.
    Ms. Davis. Yes, I think that that is right, too. Certainly, 
among minority communities, there are even lower rates of 
participation. Language can be a problem. One way you can get 
the people is to work with some of the providers in those 
communities, clinics that are located and catering specifically 
to both low-income nonelderly and elderly populations and try 
to get people signed up that way.
    Mr. Becerra. I know that in parts of Los Angeles, the 
Latino community, Asian community, and the Jewish community 
have been doing quite a bit of work to try to make sure that 
some of the elderly--for example, the Russian Jews who have 
come over recently as refugees--who are not going to have an 
opportunity to learn English as quickly and perhaps as 
proficiently as others might, still have access to the 
information through some of the centers that they may go to, 
some of the community-based organizations that provide 
services. A lot of folks are trying to target information to 
these elderly populations through some of those service 
providers that are already out there, providing them other 
services.
    Ms. Davis. Yes.
    Mr. Becerra. Thank you.
    Thank you, Mr. Chairman.
    Ms. Johnson [presiding]. Thank you. I am going to go ahead 
with my turn to question in the absence of the Chairman, as he 
asked me to.
    I would like all of you to comment on Ms. Davis' chart, 
which I think is sort of commonly accepted. At least you 
predict, Ms. Davis, that by the year 2000, 20 percent of 
seniors will be in managed care, 19.9. On what data do you base 
that, and particularly on what year of data do you base that? 
And then I am interested in knowing whether the others agree 
with that estimate.
    Ms. Davis. On chart 8, in terms of the Medicare projected 
enrollment in managed care plans and HMOs, that is from the 
Congressional Budget Office and their baseline update in 
January 1997; so just about 1 month ago.
    I listened to Mr. Vladeck from the Health Care Financing 
Administration who had slightly different numbers. He had 
slightly higher numbers in 1996 of 13 percent instead of 10 
percent are currently in HMOs----
    Ms. Johnson. I think that that was because he was looking 
at HMOs and was also predicting inclusion of his PPOs and PSOs. 
That is my understanding of why his numbers were higher.
    Ms. Davis. Well, under current law, HMOs, including point 
of service, can participate, and then there are some 
demonstrations of other models. But PPOs are not currently an 
eligible plan.
    Ms. Johnson. But presumably, at least according to Mr. 
Vladeck's testimony, he is trying to open up the system and put 
more plans out there----
    Ms. Davis. Yes, but I think he was talking about under the 
President's budget, he expected 22 percent of Medicare 
beneficiaries to be in HMOs by the year 2002. He estimated that 
19 to 20 percent would be in there in current law. I think CBO 
by the year 2002 has 25 percent in.
    Ms. Johnson. What I am interested in----
    Ms. Davis. Under any of these, we are talking about a 
doubling.
    Ms. Johnson. What I am interested in is, Do you have any 
idea what data and how recent the data is that they are basing 
those estimates on? That is what I am interested in.
    Dr. Reischauer.
    Mr. Reischauer. I think that what we have here is simply 
what the trends have been over the last couple of years. 
Medicare HMO enrollment grew by 36 percent in 1996. CBO has 
laid out growth rates of 30 percent for 1995, 25 percent for 
1998, 20 percent for 1999, and so on.
    Ms. Johnson. Why do they decline?
    Mr. Reischauer. Now, the nature of those numbers--25, 20, 
and so on--should make you realize that these are rather crude 
approximations, and of course, much will depend on changes that 
are taking place in the marketplace.
    This is a question of how attractive HMOs are relative to 
the fee-for-service world. Much will depend on how rapidly 
Medigap insurance premiums rise. If they rise very, very 
rapidly, then one would expect HMO enrollment to grow even 
faster.
    Ms. Johnson. I think that that is exactly what I was trying 
to get at. In my State of Connecticut, where we have been slow 
to develop managed care products and particularly in the senior 
category, the number of HMO risk plans has just exploded, and 
the number of options seniors now have and the aggressiveness 
of the marketing has totally changed the environment. And this 
is at a time when Medigap premiums are now beginning to go up. 
And there is just absolutely no way, in my mind, that we are 
not going to be way ahead of 20 percent.
    I think those kinds of figures underestimate our experience 
in managed care where market maturity now takes place far more 
rapidly than it did 5 years ago, 4 years ago, 3 years ago. In 
other words, where these plans get in and get marketing, the 
pace of enrollment goes much more rapidly. We saw this in the 
private sector, and one section of Connecticut went from zero 
managed care participation to a very high level in 6 months. 
The maturation of that market now that we know more about it 
and the plans are more sophisticated takes place much more 
rapidly than it did in the early years of managed care or even 
the midyears.
    My guess is that these figures are way low. We are not 
going to solve that here, but I want it clearly in the record 
that, really, the data they are using and the interaction of 
the facts make these estimates very, very unreliable.
    Mr. Reischauer. I think you are right, they are very 
uncertain. There are factors moving in the other direction. We 
know that HMOs are more attractive to relatively healthy 
younger groups of retirees. As those retirees age, the question 
is will they find fee-for-service relatively more attractive 
and higher fractions of them disenroll. Right now, 
disenrollment is very, very low. A lot of the proclivity to 
disenroll will be affected by what happens to Medigap premiums 
for those who disenroll. Right now, they effectively could lock 
one into the HMO because they would be risk based. But if you 
changed the policy as the President has proposed, you might see 
more of this churning. So, I think----
    Ms. Johnson. But as one who has actually introduced the 
first bill to assure portability so that seniors can come back, 
I think that is important, and I think we will do it. But it is 
also very interesting to watch what is happening on the other 
side. One of the disadvantages of HMOs was that you were sort 
of locked into their doctors. Now, all of a sudden, at least in 
Connecticut, HMOs are saying you can go to any doctor you 
want--not all of them, but some of them. They are now in the 
competitive market beginning to break down the very barriers 
that in a sense help them control costs or gave them an 
advantage, but also gave the consumer disadvantage.
    For instance, in my area of Connecticut, there are a couple 
of very big physician groups; they are now in every plan. Your 
access to, in a sense, the largest number of specialists in 
every area is the same no matter what you are in.
    I think we are underestimating the power of the fact that--
and this goes right to the heart of this business of protecting 
low-income seniors--I see seniors much more interested in this 
because Medigap covers some costs but they cannot afford the 
premium. And I do not see a single new managed care risk 
program on the market that does not cover Medicare copayments 
and deductibles and that does not provide some prescription 
coverage, that does not actually improve the benefit package 
quite significantly and reduce out-of-pocket costs quite 
significantly.
    If the managed care sector keeps this up, not only will it 
grow more rapidly than anyone is projecting, but people with 
high medical costs will stay if all their doctors are part of 
the plan, as is evolving now, at least certainly in my small 
part of the country.
    I want to contrast that to--and I am curious, Ms. Davis, 
that you really prefer the old model of concentrating on 
expanding benefits and expanding protection and regulating 
rates, because I have here a page from the administration's 
worksheets, and this only has to do with overhead costs. But 
one possible proposal--and nothing has been settled on--but one 
possible proposal would cut reimbursement rates for cardiac 
surgery and cardiology, two of the big use areas for seniors, 
anywhere from 32 to 44 percent.
    Now, this is going to reduce access. If we keep regulating 
rates this way--internal medicine, they allow a 1-percent 
increase, and 1 percent to 4 percent are the options there. 
Truly, we are squeezing down, and we saw this in Medicaid. In 
Medicaid, we reduced access for poor people dramatically. In my 
hometown, they went from having a full range of access to all 
obstetricians down to just the one public clinic. Now that we 
are into Medicaid managed care plans, they are back up to all 
the physicians who participate in those plans.
    We are really at a point now where we have to keep two 
systems running, but we also have to look at how rate 
reimbursements are going to reduce fee-for-service access 
versus how managed care plans may have the opportunity to not 
only increase access to benefits through managing care, but 
provide rates that are comparable to private sector rates, 
because the HMOs are going to be covering not just seniors but 
everybody else eventually.
    I do not know why you would want to keep going down this 
path of micromanaging rates when we have the opportunity now to 
begin moving gradually down the path of a uniform set of rates 
covering all of society, with government assuring, through 
appeal procedures and oversight, access to specialty care and 
those kinds things that we know need to be watched in 
integrated care systems, and focusing on prevention, which has 
never been part of the fee-for-service system in history.
    Ms. Davis. Well, first of all, I do not favor fee-for-
service over managed care. What I think is healthy is a healthy 
competition between both, where you have quality in both a fee-
for-service option and a managed care option.
    What I say in my testimony is I think what we all know--
fee-for-service does have an incentive for too many services at 
too high a cost. Managed care has an incentive for too few 
services at too low quality. And you do not want to have 
seniors forced into managed care and not have a viable fee-for-
service alternative. You do not want to undermine the quality 
of fee-for-service by setting prices so low that no doctor 
wants to practice under those circumstances.
    I think the point you make, that you do not want to drive 
fees in the fee-for-service level too far below the private 
sector, currently--and I am sure you will get the latest update 
from the Physician Payment Review Commission, but their reports 
show that Medicare pays 70 percent of what private insurers pay 
physicians. You cannot keep squeezing that and driving it down 
to Medicaid levels of 30 or 40 percent and not affect the 
willingness of physicians to take Medicare over the long term.
    Ms. Johnson. Absolutely.
    Ms. Davis. I noticed in the CBO baseline estimates out to 
2002 that even under current law, the typical physician fee 
will basically be the same 6 years from now as it is today. I 
am concerned about squeezing too much, and that is why I think 
the President's proposals are adequate savings, and I would not 
try to do more than what he is proposing in the way of payment 
squeezing under this.
    Ms. Johnson. But you think he is not proposing too much?
    Ms. Davis. Excuse me?
    Ms. Johnson. You think some of his proposals are adequate?
    Ms. Davis. I am saying that if you tried to, say, double 
the provider payment savings he is proposing, you will really 
have to worry that Medicare is getting too far out of line with 
what physicians and other providers are paid in the private 
sector, and it would reduce willingness to participate.
    Right now, physicians in fee-for-service are perfectly 
willing to take Medicare patients. There is a point of 
squeezing provider payment that you do not get provider 
participation.
    The point you made about managed care aggressively 
marketing to Medicare patients, they are giving extra benefits, 
prescription drugs out of pocket, I think it should also raise 
a question in your mind as to whether we are overpaying HMOs, 
and that is one of the reasons why they want this Medicare 
market. I think you have to look at both. You have to both 
worry about paying physicians too little on the fee-for-service 
side, and you have to worry about overpaying HMOs and not being 
able to keep them from cream-skimming this healthier 
population.
    Ms. Johnson. My point is, Ms. Davis, that if you are trying 
to control future cost, which is primarily our goal, and do it 
in a way that improves the benefit package and improves 
protection for poor people, we are better off with keeping the 
premium payment for the managed care plans high enough so they 
can improve the benefit package and give our low-income seniors 
the option of just the Medicare premium, not additional Medigap 
premium, getting a much better, lower out-of-pocket cost plan.
    I do not want to ratchet that down because that achieves 
both of your goals of better benefits and better protection for 
low-income folks, and I think that that is what we ought to be 
focusing on because we can do a better job there than we can 
micromanaging all of these rates. It is simply appalling--
dermatology goes up, the general internist, the family 
practitioner. This has created endless problems in the last 20 
years, and they get worse every single year.
    I think from the point of view of consideration of the poor 
and consideration of a modernization of the benefit package, it 
looks to me like we are having far greater and more success in 
that with overseeing managed care plan development than we are 
with micromanaging reimbursements. I guess that is really my 
point.
    And my time has certainly expired; I guess they forgot to 
turn the light on. Let me yield to Mr. McCrery.
    Mr. McCrery. Thank you.
    Dr. Reischauer, why do you say it is more important to do 
structural reforms now, or start some structural reforms now, 
than it is to worry about the number of $50 billion or $100 
billion or $150 billion in savings?
    Dr. Reischauer. Because the real problems Medicare faces 
are not the problems that will exist over the next 5 or 7 
years; they are the problems that will begin to mount after 
about 2010. And I do not think we can wait until 2005 or 2008 
to begin to address those problems because by that time, it 
will be too late to, in a deliberative way, start changing the 
structure of the program.
    Mr. McCrery. The cumulative effect is what is needed over 
the years of those structural reforms.
    Dr. Reischauer. Well, structural reform is not an easy 
thing to bring about. It requires building an institutional 
infrastructure. That takes time, and it is best to build that 
infrastructure at a time when you do not have inordinate 
pressures put on the infrastructure, either the pressures of an 
expanding number of recipients, or the pressures of having to 
say to this new infant structure, ``You are going to have to 
save a lot of money as well as sort of transform incentives.''
    I think it would be wise to start the process now and get 
plans, participants, providers used to this new structure over 
a period of a decade before you had to really put heavy weight 
on that structure. But we are going to have to put heavy weight 
on that structure within 15 years.
    Mr. McCrery. At the same time, though, you recognize our 
immediate problem with the trust fund balance in the HI Trust 
Fund, and we have got to address that one way or the other. Our 
preference is to create savings and see that the trust fund 
does not go bankrupt.
    Mr. Reischauer. As Administrator Vladeck pointed out 
earlier, if all you consider are the President's actual savings 
in part A, you have really extended the life of the trust fund 
1 year or maybe 2 years. The way that they are getting 
breathing room or salvation is really a bookkeeping device. You 
could do the bookkeeping at any point. That is not a 
complicated issue. You could even look back and credit the Part 
A Trust Fund for moneys that were spent before. Anything in a 
sense can be changed by a law.
    Mr. McCrery. Except that if you want to include those costs 
in the calculation of the part B premiums, you have to do it 
prospectively; you cannot do it retroactively.
    Mr. Reischauer. No, you could not do that, no.
    Mr. McCrery. That would create an additional problem that 
you do not want to deal with.
    When we have more time, I would like you to expound on what 
structural reforms you would recommend, but I do not want to 
get into all that right now. I have some idea from your 
testimony and from your verbal remarks.
    I think the point you made, though, about shifting more of 
Medicare expenses into the general fund is an excellent one and 
one that I have tried to make in the past. The example that I 
give is like the Pac-Man machine. Do you remember the Pac-man 
game, where the Pac-man would go across and eat all the other 
Pac-men? If we shift Medicare into the general fund, Medicare 
and Medicaid will to a much greater extent than they are doing 
now, act like Pac-Men and eat up the rest of the budget. And 
you are right, the political pressure is much greater to 
maintain these benefits than any array of other benefits you 
can think of, and I do not think that that is a very good way 
for policymakers to do business.
    I appreciate your making that point, probably better than I 
have with my Pac-man example, but for some of our constituents, 
the Pac-man example is better.
    Dr. Helms, you said your preference for a structural reform 
I guess is the ultimate structural reform, and that is to go to 
a defined contribution plan. I assume that you have given this 
a good deal of thought. How would you arrive at the defined 
contribution, and do you see problems when you go to a defined 
contribution plan in creating a two-tier health care system, 
one for the poor and one for the wealthy, or one for those who 
can get extra health care? Have you thought about that, and I 
would appreciate your remarks on that.
    Mr. Helms. Yes, I have thought about it. A basic criticism 
of Medicare is that it is an open-ended entitlement where 
everybody has an incentive to keep spending more money.
    One of the objectives, quite frankly, of going to a defined 
contribution is to put the issue back onto the Congress. The 
Congress should decide, in the context of making other 
decisions about discretionary funding, how much you really want 
to pay for Medicare. And in the process, I think that would 
make people be more realistic and focus on the issues that 
Karen is raising about helping the poor.
    In other words, we now have a system where the net 
subsidies from the tax policy and from Medicare go to higher 
income people. A defined contribution would force Congress to 
consider who we really want to subsidize. Do we want to 
continue an open-ended subsidy for higher income people, or do 
we want to take care of poor people? It is a complicated 
matter, but it is not any more complicated than some of the 
things we are trying to do in the President's budget proposal.
    Ms. Davis. I think the point you raise about defined 
contribution leading to a two-tier system is my number one 
concern with the defined contribution approach to Medicare. 
Medicare, historically, was to guarantee beneficiaries, 
regardless of income, access to a defined set of benefits, and 
I think that once you go to a defined contribution, you are 
going to have the lower income beneficiary forced into lower 
quality plans, managed care plans, they will have difficulty 
getting appointments--they are not going to have their 
diabetes, their hypertension, and their heart disease managed 
appropriately. They are going to be discharged from the 
hospital before they can really take care of themselves. I 
think we are really getting into different medicine for 
different populations.
    Mr. Helms. I do not think you have to end up with a two-
tiered system. As a matter of fact, I think you will get those 
results if you continue on this course of more and more 
controls.
    Mr. McCrery. Dr. Reischauer.
    Mr. Reischauer. Henry Aaron and I wrote a piece in ``Health 
Affairs'' in the summer of 1995 which suggested an approach 
that I do not think creates the problems that Karen has alluded 
to. The approach would have a defined benefit, a package of 
required benefits. Within each market area, plans would make 
bids for covering Medicare beneficiaries with that defined 
package. The contribution the Federal Government made toward 
this package could be set at the 50th percentile bid or the 
70th percentile bid or some bid other than the lowest bid, 
which would then give the low-income participants a choice of 
plans just like everyone else's. I think some of the problems 
would be mitigated by such an approach.
    But it is a fact that right now, Medicare is a classless 
system. A provider really does not care what side of the tracks 
you come from because he or she receives the same payment. And 
any movement to plans, even an HMO type of arrangement that we 
have now, could, over time, break down that classless nature of 
the system.
    Ms. Davis. And I think that that is a hypothetical that 
Congress would set the voucher at the 50 percent or the best 
plan level, but I think there is always a temptation in a 
budgetary environment to set it at the minimum level, and that 
is all, then, that the low income could afford, and higher 
income would add to that. I think you do inevitably introduce, 
in anything that just guarantees the elderly a fixed amount of 
money to buy health care as opposed to buying health care, this 
kind of introduction of income differentials in the care 
available to seniors.
    Mr. McCrery. Let me tell you my concern, Ms. Davis, if we 
do not go to some different system than the one we have now--
radically different. My concern is that ultimately, we will 
reach the point where everybody will get lower quality health 
care in this country, because I just do not see how we can 
afford as a society to give everything the health care system 
has to offer to everybody on the same basis. If you do that, 
you are going to reach the lowest common denominator for 
everybody, and that means that health care quality is going to 
go down for everybody in our society, and that is not a 
desirable goal to me as a policymaker. Now, somebody in the old 
Soviet Union may like that idea; I do not think it worked too 
well there.
    I am trying to figure out a way we can avoid that result 
and yet not create a system in which we have a great many 
people in our society not getting an adequate level of health 
care, and I am hopeful that smart folks like you will help us 
figure out a way to reach that middle ground.
    Ms. Davis. Well, I think we all share the same goal of 
wanting quality care for all of our seniors, and I do not think 
anybody defends the current system. I just think we need to 
move slowly on managed care, and we need to adopt the 
prospective payment approaches Medicare has used successfully 
with hospital and physician services to the other services, 
which is really where the Medicare costs are going up quickly--
home health, hospital outpatient department, and other 
services.
    Mr. McCrery. Yes. I want quality health care, too, but I do 
not necessarily want the same level of health care for 
everybody, and I think that that is a key question that we have 
got to broach and discuss as policymakers and as a society.
    Ms. Johnson. I share a lot of Mr. McCrery's concerns, and I 
am not sure you are as realistic as perhaps you need to be 
about what is happening in the system out there now. There are, 
for example, five reimbursement rates for office visits, and 
what I have seen happen, year after year, as we get closer to 
the end of the budget year, is that HCFA simply just pays the 
lowest rate for office visit, which is something like $32 in my 
part of the country, and it does not matter whether you have a 
complete physical, it does not matter whether you can document 
a higher rate. The provider is caught between do I write five 
letters now to document rate 3 or rate 4 which I should have 
had, because HCFA keeps coming back to me with, We are going to 
give you $25 or $32 or whatever the lowest rate is?
    That is what is happening out there. Recently, HCFA 
announced to physicians in my area that they are no longer 
covering certain preventive things that they used to cover 
routinely, and now they are saying, Oh, they are preventive, 
and we do not cover preventive.
    There is a lot of cost cutting going on behind the scenes 
that is denying seniors the care they used to just take for 
granted, and it is beginning to affect access particularly in 
internal medicine.
    I think this issue of moving forward into plans that serve 
people of all ages with the same premium for seniors as younger 
people is absolutely a healthier answer, but I want to ask you 
one thing, because this is the heart of and a very big part of 
the administration's proposal. What is your opinion--and you 
may not know much more than I know, so it is hard to make 
judgments--but if in 1 year, you remove GME, IME, DSH from the 
AAPCC, you will have a very dramatic effect on the 
reimbursement rates of certain hospitals. Now, I do not know 
much about how they feed some of this back in--maybe you know 
more about that than I do--but basically, IME and DSH are there 
because we do not really know how to compensate the system well 
enough for uncompensated care, and to just suddenly drop these 
out of the AAPCC and believe that you are going to have a 
system providing the same level of care seems to me very unwise 
and not in harmony with our discussions about those factors in 
the payment system in the past. If you have any comment on 
that, I would be interested to hear it.
    Ms. Davis. Well, I do think we have to be concerned about 
how these changes affect teaching hospitals and those that 
serve low-income communities. As I understand the proposal, 
those savings will be put into a special fund and then go 
directly to the teaching hospitals to cover the indirect and 
direct graduate medical education costs. As I understood it, 
they were not being used for general budget savings but were 
being put into an earmarked fund that would go directly to 
those institutions.
    Ms. Johnson. But, as you well know, you are into a new 
distribution system and the administrative cost of that and the 
inaccuracy and accuracy of that.
    Mr. Reischauer. What we are talking about here is taking 
money out of the capitated payments going to HMOs and 
distributing that money directly to the provider hospital. It 
is likely now that some of that money never reached the 
teaching hospital because the HMO was not using the teaching 
hospital, in which case if the distribution mechanism is 
appropriate--and I do not think it is very complicated to get 
one that is appropriate--teaching hospitals should be better 
off than they were.
    Now, the HMOs, of course, will have to tighten their belts 
a little because they will have a little less in the way of a 
capitated payment which they can use to provide services or 
increase their profits, but I do not think there is anything in 
the administration's proposal which should cause great concern 
for the teaching hospitals or DSH hospitals, as well, if this 
money is simply recycled.
    If anything, those institutions should be better off under 
the administration's plan rather than worse off.
    Ms. Johnson. Well, I can certainly see that in regard to 
the IME and DME. I really worry about the DSH payment as well, 
because there are hospitals with a lot of DSH money that do not 
have a lot of DME money; in other words, the line is not clear.
    Mr.Reischauer. But I think there would be a separate 
mechanism for distributing the DSH money. This once again is 
payment taken out of the capitated amount given to HMOs, and 
the question is, ``Were the HMOs using facilities that were DSH 
facilities?'' The answer is probably, ``Not very much.'' They 
were in a sense pocketing this money.
    Ms. Johnson. Yes, and philosophically, the larger issue of 
DSH money is for people who cannot afford very good care. Don't 
you want some of that to go to the premium that you offer HMOs 
so they will provide broader protection which lower income 
people need? I need for them to be able to provide a package to 
all those seniors who are eligible for Medicaid coverage that 
will take care of their copayments because they cannot afford 
their copayments and will offer them some prescription 
coverage.
    When we worked on this for a couple of years recently, we 
just took the money out of the general fund, saying education 
is something not just seniors should be concerned about, but 
medical education is everybody's business, and that is a 
legitimate taxpayer fund. And I think that philosophically, it 
is important at this time that we try to make those 
distinctions between what serves us all, and therefore, is 
general revenue as opposed to general revenue now picking up 
home health care for seniors. I think we need to keep the cost 
of home health care for seniors in Medicare so that we are 
clear what it is costing us to deliver care to seniors, and 
also encouraging HMOs to better integrate hospital and home 
care and all those kinds of things, and then separate out the 
teaching costs and bear some of those costs across the general 
taxpayer. To me, that is philosophically cleaner, and I think 
that eventually, it could be system cleaner.
    Mr. Reischauer. I think you are right on about that. I 
agree with you 100 percent, and I think the Balanced Budget Act 
measures to do that were in fact quite sensible. I also agree 
with your feeling that it is good to have HMOs providing a 
comprehensive benefit package, more than Medicare requires, 
with low cost sharing by participants. But we have got to 
remember that that is in conflict with the desire to save 
money. HMOs are able to do this because we are overpaying them 
relative to what these individuals would have cost in the fee-
for-service sector where these ancillary services and the low 
cost sharing would not be available or would be available only 
if the individual purchased a Medigap policy or had an employer 
wraparound retiree policy.
    There is this tension between what is good and the desire 
to get Medicare spending under some kind of control.
    Ms. Johnson. Yes, but your issue of overpaying depends on 
whether or not the HMO is able to deliver more benefits because 
they are more efficient and they do a better job--and some of 
that is certainly true. It is also true that managed care is 
our only hope of delivering better preventive care because the 
fee-for-service system does not look at a patient holistically; 
it looks at it physician by physician, incident by incident. So 
that if prevention is every going to mean anything--and of 
course, you see this in Medicaid managed care, where for the 
first time, we really are looking at prenatal care and able to 
demand and deliver prenatal care that reduces the number of 
low-birth-weight babies, and you get extraordinary savings--so 
a more holistic approach to medicine is one of the 
opportunities we have in managed care, and rather than talking 
about we are going to overreimburse, let us talk about what we 
need to get, because our real challenge is to slow the rate of 
growth at the same time we improve the quality of the package 
and turn to prevention.
    And if you look at that chart about their high costs, maybe 
the one thing we ought to be looking at it is, How does 
government take care of the outlier. One of the things that 
concerns me in the President's package is that they are going 
to eliminate any reimbursement for outliers, which I think is a 
problem for very small hospitals.
    I think maybe we have got to keep pushing ourselves to 
broaden our thinking so that we get the low-income concern, and 
we get the better benefit package, and we in the future 
gradually control costs.
    Incidentally, would you all agree as economists with Mr. 
Vladeck's statement--which was new to me, and I do not know a 
lot--that if you put the savings in place now, it is not 
surprising to get one-third of your savings in the last year--
because one of the things that does concern me about this 
budget is that $34 billion of the $100 billion is all in the 
last year. Does that mean there is a precipitous cut, or is 
that the cumulative impact?
    Mr. Reischauer. No. It is true that savings compound over 
time, so well over half of the savings that result in sort of 
equal percentage reduction in spending occur in the last 2 
years of a 5-year package, so that is not----
    Ms. Johnson. Fifty percent in the last 2 years----
    Mr. Reischauer. Well, not--actually, I am not talking about 
Medicare now. I am talking about if you wanted to balance the 
budget solely by reducing the growth of spending, and you 
reduced the growth of spending by an equal percentage in each 
of the 5 years, 62 percent of the total saving would occur in 
2001 and 2002.
    Ms. Johnson. Thank you. That is very helpful.
    Mr. Reischauer. That is just arithmetic.
    Ms. Johnson. Thank you.
    Mr. Helms.
    Mr. Helms. Yes, my testimony refers to this as the ``wedge 
effect.'' If you have 2 trendlines going off at different 
rates, as they diverge, you are going to have bigger effects in 
the outyears. But that is different from the criticism of this 
budget of its backloading policies, that is, putting in 
policies which only kick in the last year or two after 
President's Clinton's term is over.
    Ms. Johnson. Those are two different things. I am pleased 
to have confirmation. I have been aware of the compounding, but 
I did not quite realize that, generically and generally 
indicated, it was that high. Thank you very much.
    Thank you for your thoughtful testimony this morning. We 
look forward to your input as we work through this challenge. 
As I said earlier, I know I feel, and I know that particularly 
Jim and some others feel, very strongly that this year, we 
absolutely have got to try to do this job right because of the 
compounding effect of problems created or not addressed. We 
thank you for your input.
    The Subcommittee is adjourned.
    [Whereupon, at 12:37 p.m., the hearing was adjourned.]

                                  
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