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



 
                  PREPARING THE HEALTH CARE FINANCING
                  ADMINISTRATION FOR THE 21ST CENTURY

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 29, 1998

                               __________

                           Serial No. 105-86

                               __________

         Printed for the use of the Committee on Ways and Means




                     U.S. GOVERNMENT PRINTING OFFICE
60-839                       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., Connecticut       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
JOHN McCRERY, Louisiana              BENJAMIN L. CARDIN, Maryland
JOHN ENSIGN, Nevada                  GERALD L. 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 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.
                            C O N T E N T S

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

                               WITNESSES

Health Care Financing Administration, Hon. Nancy-Ann Min DeParle, 
  Administrator..................................................     7
U.S. General Accounting Office, William J. Scanlon, Ph.D., 
  Director, Health Financing and Systems Issues, Health, 
  Education, and Human Services Division; accompanied by Leslie 
  Aronovitz, Associate Director, Health Financing and Systems....    41
                               __________
Bulter, Stuart, Heritage Foundation..............................    64
Center for Studying Health System Change, Paul B. Ginsburg.......    77
National Academy of Sciences, Institute of Medicine, Marion Ein 
  Lewin..........................................................    87
National Academy of Social Insurance:
    Paul B. Ginsburg.............................................    77
    Michael E. Gluck.............................................    77

                       SUBMISSIONS FOR THE RECORD

Home Care Association of America, Jacksonville, FL, Dwight S. 
  Cenac, statement...............................................   121
National Association of Health Underwriters, Thomas P. Bruderle, 
  statement......................................................   131
Oklahoma Association for Home Care, Karen Rogers, statement......   135
Retired Public Employees Association, Inc., Albany, NY, statement   140


PREPARING THE HEALTH CARE FINANCING ADMINISTRATION FOR THE 21ST CENTURY

                              ----------                              


                       THURSDAY, JANUARY 29, 1998

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:08 a.m., in 
room 1100, Longworth House Office Building, Hon. William Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]
    [GRAPHIC] [TIFF OMITTED]60839.001
    
    [GRAPHIC] [TIFF OMITTED]60839.002
    
    Chairman Thomas. If the Subcommittee would come to order--
I'd like to welcome our guests and witnesses to today's Health 
Subcommittee hearing with a rather broad title: Preparing the 
Health Care Financing Administration for the 21st Century. And 
I do want to welcome the Health Care Financing Administration's 
new Administrator, Nancy-Ann Min DeParle, who is going to take 
quite a large role in setting the tone for the underlying theme 
of the hearing.
    In the past few months, the Health Care Financing 
Administration has undergone three significant changes. 
Obviously, a new Administrator. Secondly, the agency recently 
underwent a comprehensive reorganization affecting virtually 
every one of the more than 4,000 employees. And third, pretty 
obviously, the Congress passed and the President signed the 
Balanced Budget Act of 1997 which contains the most 
comprehensive Medicare reform since the inception of the 
program.
    These reforms have, and will have, a dramatic impact on the 
Medicare program. Our seniors will be able to choose from a 
vast array of privately run, Medicare-plus-choice plans like 
Medicare savings accounts, provided-sponsor organization plans, 
health maintenance organizations, private fee-for-service 
plans, while maintaining the option of remaining in traditional 
fee-for-service Medicare.
    The latest Congressional Budget Office estimates predict 
that many of our seniors will choose to leave fee-for-service 
Medicare and enroll in a privately-run plan. In just four 
years, one-quarter of beneficiaries are expected to choose to 
enroll in a private plan, and by 2030, it's projected that 
perhaps half of all beneficiaries will make a similar choice.
    As a result of the Balanced Budget Act, there will also be 
significant payment changes, as many of us have heard about, to 
modernize the fee-for-service part of the program; shifting 
from a 1960-style cost-based reimbursement to prospective 
payment systems. There will also be several new preventive 
benefits, like the diabetes self-management, prostate 
screenings, and others, that need to be implemented.
    Finally, the agency must ensure that taxpayer dollars are 
spent wisely by implementing some of the historic steps 
Congress has taken in the past two years. For example, the 
Health Insurance Portability and Accountability Act--and the 
fraud and abuse sections of that act--and the Balanced Budget 
Act combined offer about 65 concrete steps to fight waste, 
fraud, and abuse in Medicare and the American health care 
system.
    Clearly, Ms. DeParle, you have your work cut out for you. 
In the short-run, you have to implement these new provisions. 
However, you also have to continue those structural changes to 
the management of the Health Care Financing Administration, 
some of which we are only now beginning to appreciate the depth 
and breadth of in operating a private-plan-focused environment 
in the 21st century.
    I am concerned that an agency that historically focused on 
regulation and micro-management and paying the bills may have 
some difficulty without a lot of open understanding and 
positive critiques in transforming itself into one that 
protects seniors and fosters innovations among private plans. 
It is not easy for bureaucracies to make these kinds of 
fundamental shifts which go at the core of the culture of a 
particular bureaucracy.
    This is the issue that we will begin to explore today with 
Mrs. DeParle, Mr. Scanlan from the General Accounting Office, 
and our panel of experts who will help us understand the 
changes that are needed to prepare the Health Care Financing 
Administration for the 21st century. And before we recognize 
the new Administrator, I'd ask my colleague from California, 
Mr. Stark, if he has any remarks.
    Mr. Stark. Thank you, Mr. Chairman, I do have remarks. I'm 
not sure which you want first--good news or bad news. But I 
appreciate, on the good news side, I appreciate your holding 
this oversight hearing on HCFA's ability to administer the 
Medicare program and implement the changes required in the 
Balanced Budget Act. The bad news is that HCFA's administrative 
budget is inadequate to do any of the things that many of us 
might want. I hope we can work on a bipartisan basis to urge 
our colleagues who are the appropriators to give the agency the 
resources it needs. We're all aware that the best way to end an 
agency in this town, is to starve it for funds. If we really 
don't want HCFA to do anything, then we ought to just let the 
appropriators not give it the money. If we really want to get 
them to a program that we can agree on, we've got to see that 
they get adequate funds. We'll talk about that in a little bit.
    But basically, the money HCFA gets to review claims, or the 
pennies per claim, is now 43 percent lower than it was in 1989. 
And I don't care how you slice that, when you cut the per-claim 
dollars darn near in half, the agency can't keep up. We've also 
added the fight for fraud which gets more sophisticated all the 
time. Still, with an ever declining budget, their volume of 
work goes up. Now, HCFA must get some volume discounts, but I 
think we have a responsibility to see that they get the funds 
to do whatever it is that this committee charges them to do--or 
this Congress does.
    The administration is proposing a package of antifraud 
legislation, and I hope we'll enact it. Included in it is an 
idea that I'd like to advocate and that's doubling the number 
of audits for cost-based providers and paying for it with a fee 
to cover those costs. Many of those providers--Columbia and 
it's private accounting firm, KPMG in Florida--have proven that 
there's more than just smoke there. Audits there would have 
saved us a lot of money.
    Part of the cost of doing business with Medicare must 
include the cost of an independent audit. By charging a fee, 
we'll be able to provide some of the resources it takes to 
protect the Medicare trust funds.
    Explaining the new Medicare choice programs to seniors will 
be a daunting task for HCFA or anybody else. If they don't have 
the money to explain it, they can't do it. We authorized $200 
million this year, but the appropriators only gave them $95 
million. This fall, HCFA is likely to be flooded with calls 
from confused beneficiaries about the new array of plans and 
the wave of advertising that will come out. We all know that's 
going to happen.
    Our staff this week just placed calls to HCFA's 800 number, 
and the results were troublesome. There were lengthy delays, 
and that was the rule not the exception. And as any of you who 
have tried to get past 800 numbers to check your credit card 
know, I'm not sure whether money will solve all those problems. 
But I do know that these plans will be complex they will be 
confusing. Our own offices will hear from beneficiaries and we 
ought to do whatever we can: one, to encourage HCFA to see that 
the phones are answered promptly and there are people who can 
give you good information, and secondly, that we see that they 
get the resources to be able to do it.
    Finally, you asked, Mr. Chairman, whether HCFA's 
reorganization produced a structure that is appropriate for the 
21st century; and I'm afraid it isn't. We've got a situation 
like we've had--and criticized often--within the FAA. HCFA is 
in the business, or will be in the business, of promoting 
managed care at the same time it is trying to regulate it. And 
those are conflicting roles. You can't order people to promote 
something on the one hand, and then on the other hand come back 
and say you've got to investigate them and tell people when 
they aren't working correctly. I think we have to look at that 
issue and look for independent patient's counsel, or 
separating, if not explicit, implicit promotion of managed care 
and its regulation.
    While the Cshairman may not like the ideas for regulations 
that are currently being circulated, we do need them. We've got 
to stop the cheers in the movie ``As Good As It Gets'' and 
somehow make the public convinced that they do have somebody on 
their side. And I hope our Subcommittee will look at that 
important issue.
    Thank you for starting out the year with this hearing and I 
look forward to hearing from our witnesses.
    Chairman Thomas. I thank the gentleman.
    This is a new year and a second session and I believe the 
spirit in which the gentleman made his comments is a 
constructive one and I did not go into any detail in my opening 
remarks rather than to just set the frame. I think you'll find, 
and now I guess I'll prompt our first witness, that our 
intention was to make sure that there was adequate funding for 
the administrative changes. We have tried to work in a 
cooperative way to make sure that if necessary the movement of 
money within the structure, and indeed additional money, could 
be made available. I had no intention whatsoever of creating 
new ways to deliver services and then not make sure they 
weren't adequately financed to do that. You and I could share 
some time discussing the appropriators and the way in which all 
of us have concerns about the appropriators.
    Beyond the gentleman's concern for an organization that's 
not only going to regulate managed care but also supervise and 
run it, the same might be true for fee-for-service, and in fact 
they have almost a monopoly on that. We will have panelists who 
have looked at this problem and who have the same concern from 
adjustment within the culture of HCFA to eliminating HCFA. And 
I just think it's appropriate at this stage, maybe, to remember 
that the President has played a relatively significant role in 
getting us to refocus on the question of health care delivery 
in Medicare and in putting people first.
    On page 21, the President said as part of his vision, if he 
were to be elected president, quote, ``We will scrap the Health 
Care Financing Administration and replace it with the Health 
Standards Board made up of consumers, providers, business, 
labor, and government that will establish annual health budget 
targets and outline a core benefits package.'' He didn't use 
the phrase, ``whither away''; he used the phrase, ``scrap.'' 
But what we're trying to do is make sure that these bold 
visions, although the end product might be something that we 
would agree with, the hastiness of a phrase like scrap clearly 
would not serve the beneficiaries.
    What we need is planned change. And Mrs. DeParle is now in 
charge of an immense bureaucracy that has major 
responsibilities, frankly, significant economic impact if 
things aren't done correctly for the economy, and she's anxious 
to tell us about what she's already done as a new administrator 
and what she plans to do.
    So, if my colleagues have any statement, we'd be willing to 
put a written statement in the record, but I'd like to turn now 
to the new director of the Health Care Financing 
Administration, Mrs. DeParle. The time is yours. Your written 
statement will be made a part of the record as always, and you 
can address us in any way you see fit.

  STATEMENT OF NANCY-ANN MIN DE PARLE, DIRECTOR, HEALTH CARE 
                    FINANCING ADMINISTRATION

    Ms. DeParle. Thank you, Mr. Chairman.
    Mr. Chairman, Mr. Stark, and Members of the Subcommittee, 
I'm very pleased to have this opportunity to discuss with you 
my priorities as Administrator of the Health Care Financing 
Administration and their relationship to your theme today in 
preparing HCFA for the 21st century. Before getting into my 
priorities, I want to begin by describing what HCFA's recent 
reorganization is all about and how it's helping us meet our 
goals.
    When HCFA was created in 1977, running the Medicare program 
primarily meant paying bills on time. After 20 years of 
significant changes in the health care environment, it is time 
to address whether the agency was organized in the best way to 
fulfill it's responsibilities.
    Chairman Thomas. Nancy-Ann.
    Can you hear in the back? You need to turn that mic 
directly towards you and speak directly into it very closely. 
For some reason, the sound system, although we didn't have the 
best before, has gotten worse and it's no fun sitting there not 
hearing because what you have to say is important. You are 
going to have to talk directly into it and get relatively 
close. I'm sorry, go ahead.
    Ms. DeParle. Thank you.
    After 20 years of significant changes, we felt it was time 
to address whether we were organized in the best way to fulfill 
our responsibility. So, in 1996, the agency began a process 
that included consultation with a broad spectrum of individuals 
and groups with whom we interact: beneficiaries, the States, 
and health plans and providers. These are our three core 
markets.
    We looked at private sector health plans and insurance 
companies. And the primary focus of the reorganization which 
was implemented last July was to structure the agency in such a 
way that these three core markets are at the center of what we 
do and that they have a one-stop shopping to address their 
needs.
    The processes involved in reorganizing are difficult, as 
you all know. Even positive change can be traumatic. But we 
consider them to be growing pains; and I consider the 
reorganization to be something that was long overdue.
    Our ultimate goal is to ensure that changes to the agency 
are implemented in a manner that makes Medicare and Medicaid 
stronger and more efficient, not only for today's 
beneficiaries, but for future generations.
    My priorities as the Administrator of HCFA are simple to 
state but much harder to accomplish. I think they are very much 
consistent, Mr. Chairman, with your theme today, ``Preparing 
HCFA for the 21st Century.'' They are: first, to reform and 
strengthen Medicare and Medicaid starting with implementing the 
Balanced Budget Act which expands choices for beneficiaries and 
guarantees Medicare's solvency until 2010; second, to implement 
the new Children's Health Insurance Program; third, to sharpen 
our focus against fraud and abuse; and, fourth, to ensure that 
HCFA's information systems are ready for the millennium.
    Since the Children's Health Insurance Program and Medicaid 
are not within the oversight of this subcommittee, I'm going to 
focus on the other priorities.
    My first priority is to ensure that we implement the 
Medicare reforms in the Balanced Budget Act, and not just that 
we implement them, but that we do it right. As you well know, 
Mr. Chairman, there were about 300 separate provisions that 
must be carried out to fully implement this law. Some of the 
provisions are simple, but some of them are extraordinarily 
complex. Our staff is working tirelessly to meet the deadlines, 
and they are working with your staff here very well. We're 
doing everything we can to get the job done with the resources 
we have, but as both you and Mr. Stark have acknowledged, the 
fact remains that our resources have diminished in real terms 
while our responsibilities have grown.
    Let me put this in perspective. Between 1993 and 1997 
Medicare's administrative spending in real dollars decreased by 
around 11 percent while the number of claims that we processed 
has gone up by about 25 percent. The number of managed care 
plans with Medicare contracts has more than doubled and the 
number of skilled nursing facilities and home health agencies 
has increased by over 30 percent.
    Despite the new responsibilities that we received in the 
Balanced Budget Act and the Health Insurance Portability and 
Accessibility Act, our program management budget for this 
fiscal year increased only one-half of 1 percent. Many of our 
new responsibilities will require additional work in Fiscal 
Year 1999 and subsequent years.
    And I do want to say that I thank the members of this 
subcommittee for their help with the 1998 budget, because, as 
the chairman noted, you and your staffs were helpful in trying 
to work with the appropriations committees and express to them 
the importance of the work that we're doing.
    When the administration's budget is released next week, I 
hope we'll be able again to work together to ensure that we 
have adequate resources to do the good job of running these 
programs that you want us to do.
    I'm committed to a smooth implementation of the Balanced 
Budget Act. I want to continue to work closely with this 
subcommittee and its staff.
    Mr. Chairman, I am committed to stepping up the crackdown 
on fraud and abuse begun by the President in 1993. Since I've 
been at HCFA, we have taken several new steps to combat fraud 
and abuse. Just last week, we published a proposed regulation 
to tighten standards and strengthen enforcement against 
unscrupulous durable medical equipment suppliers. We are 
requiring on-site inspections before these new suppliers are 
approved. And also this month, we set tougher requirements for 
home health agencies and lifted a moratorium that we imposed 
last September on new agencies entering Medicare.
    Beginning next month, the Inspector General's toll-free 
number--1-800-HHS-TIPS--will appear on every statement that we 
send to Medicare beneficiaries, so that they will know where to 
call to report Medicare fraud. And later this spring, we will 
host a National conference to bring together our colleagues in 
the Federal Government and the private sector as part of a 
process to develop a comprehensive anti-fraud and abuse plan.
    We've made some good progress, but, as you know, the nature 
of health care fraud demands that we continuously find new ways 
to stay ahead of those who would misuse Medicare trust fund 
dollars.
    I want to thank this committee for its support in the past 
and the work that you did last year in the Balanced Budget Act 
to give us some tools that we need, and we look forward to 
continuing to work with you this year in this effort.
    Mr. Chairman, your theme today, ``Preparing HCFA for the 
21st Century,'' could not be more in tune with my third 
priority, which is the year 2000. I view the threat of a major 
problem with our National information flows and the potential 
impact that could have on Medicare with the utmost seriousness. 
And, I want you to know that we're working to do everything we 
can to ensure that the 74 mission-critical external systems 
that we have are millennium compliant no later then December 31 
of this year. We're using on-site inspections and we're 
monitoring our contractors to ensure that we make the 
transition smoothly and in a timely manner.
    In the next few years, HCFA will be challenged as it has 
never been before. But I believe we can do the job. The list of 
HCFA's accomplishments and innovations is long and 
distinguished, as this subcommittee knows.
    I look forward to working with all of you to achieve our 
mutual goals of strengthening Medicare, extending the life of 
Medicare's Hospital Insurance Trust Fund, and providing 
beneficiaries with the best possible care in the most efficient 
manner. And I view this hearing today as good news, because I 
view this as a sign that you'll be working together with us as 
partners in this effort. Thank you.
    [The prepared statement follows:]
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    Chairman Thomas. Thank you very much. And obviously in your 
oral presentation, you could not go into the depth or the 
breadth that your written statement provides, and I urge all 
members to, if they possibly have time, not just look at but 
read the written statement, because it does provide, I think, a 
clear understanding of the magnitude of the problem in front of 
us. And I don't think anyone should take lightly the difficulty 
in one, running this organization, and two, in getting it to 
change, as I've said several times now, the basic culture.
    And my friend from California points out rightly, and I'm 
pleased that you indicate, that if we're going to ask you to do 
certain things that we ought to provide you with the 
wherewithal to do them. We will continue to try to do that 
since there are a number of people who have differing 
priorities than we might, and we have to get other people to 
buy our priorities and change theirs.
    So there is, to a certain extent, always going to be tight 
dollars, and I'm always willing to fight for sufficient funds 
to run a program right. But what would concern me is if I 
fought to try to get funds to run a program, and then I found 
out that those funds were being used for something else. I do 
not think in the long run it's wise to rob Peter to pay Paul. 
For example, I'll ask a hypothetical and hopefully elicit a 
reaction from you.
    We obviously had some priorities in making changes and 
funded some areas perhaps adequately with a concern that some 
other areas that someone else's priorities would indicate 
needed more money were not funded as adequately. And my hope 
would be that you would never use, for example, Medicare 
program integrity dollars to finance fee-for-service contractor 
training, outreach activities, physician-provider satisfaction 
surveys; things that really are more administrative in nature 
from a program that we had kind of indicated should go in a 
particular direction. I would invite a response from you about 
trying to move money from areas that we've cooperated to put 
money in to run other areas.
    Ms. DeParle. Well, sir, the area that you mentioned in 
particular, Medicare program integrity funding, is one of my 
top priorities, as I've said. And we fought hard together to 
get that money, and it is very important that we have it. As 
Mr. Stark pointed out, we are not able to review the number of 
claims and audit the number of providers that we want to do 
right now, so I would not be pleased to hear we were using 
those moneys on other things. I can understand the chairman's 
view on that.
    Chairman Thomas. I understand you would not be pleased to 
hear that, but you are, I think, in a position to assert 
yourself so that it doesn't happen, or at least make it clear 
that it is not your desire if it is imposed.
    Ms. DeParle. I would make that clear.
    Chairman Thomas. Thank you very much.
    You have not been on board that long, I want to make it 
clear. I believe your confirmation was November 10.
    Ms. DeParle. I believe it was November 8.
    Chairman Thomas. November 8. Good. Because on November 7, I 
asked GAO to investigate the Technology Advisory Committee in 
terms of the manner in which it was meeting. I believe that the 
GAO has provided us with what I thought was the case: that it 
was, in fact, in violation. And I would invite a brief reaction 
from you, on the record, of the GAO's finding of the manner in 
which the Technology Advisory Committee was meeting.
    Ms. DeParle. Well, sir, as you know, I'm a lawyer, and I'm 
not acting as a lawyer in my current job, but I learned a lot 
about the Technology Advisory Committee in my first week on the 
job, thanks to you, and I think that the GAO is exactly right. 
It was not operating in a lawful manner and we won't operate 
that way in the future. And I believe our response from the 
staff acknowledged that, sir.
    Chairman Thomas. Thank you very much.
    Mr. Stark. Do you wish to inquire?
    Mr. Stark. Thanks, Mr. Chairman.
    Some of these home health agencies are apparently now 
frightening seniors into calling our offices. They are 
frightening the seniors with a story that says that their 
benefits will be cut off and they'll no longer be eligible for 
services. Now, we know that's not correct, but is there 
anything that you can do--when we can identify these scare 
tactics to end them? Could suggest to these groups that it 
doesn't help their case?
    Ms. DeParle. It does appear, Mr. Stark, that there is a 
concerted campaign going on to scare some of our home health 
beneficiaries on a couple of these provisions that were enacted 
in the Balanced Budget Act. I've confronted it myself when I 
was traveling last week and meeting with beneficiaries.
    We're writing a letter to all the home health companies 
warning them that if they persist in trying to scare 
beneficiaries and we have evidence of that, that we will 
consider that to be a complaint that would require an 
investigation of the agency. And we're also doing everything we 
can to let beneficiaries know that it's not accurate to say 
that they're going to all lose their services. We've also met 
with the industry representatives here in Washington to let 
them know of our view on that.
    Mr. Stark. That's great. And could I ask a favor? I know 
most of my colleagues are more adept at understanding these 
regulations than I am, but could I get from you a letter or a 
memo with some short declarative sentences of what these 
complaints are and why they are wrong? It would be helpful for 
me to use either in a newsletter or in answering my own 
constituents to be able say ``Here's what the Government says; 
you are being unnecessarily frightened by these people, please 
report to me if that happens.'' And it would be helpful to us 
to put those rumors to rest. I'd appreciate that.
    Now we've got another problem. There is a fund-raising 
group known as the United Seniors Association who are spreading 
false information on the issue of private contracting and the 
Kyl amendment. Could you state for the record, and I'll clip it 
out later, as concisely as you can, what the law is. Do my 
constituents need a private contract for something that 
Medicare doesn't cover?
    Ms. DeParle. No, sir, they don't and they never have.
    Mr. Stark. And if it is questionable whether Medicare 
covers a particular service or not, can you explain what this 
advance beneficiaries notice option is, again for the record, 
so I can tell my constituents?
    Ms. DeParle. I think I can, sir. In a case where Medicare's 
coverage is questionable--an example would be a test that might 
be for screening purposes instead of diagnostic purposes, where 
the physician just isn't sure--the law provides that the 
physician should give the beneficiary an advance beneficiary's 
notice. That's just a statement that says that they acknowledge 
that Medicare might not cover the service and that if Medicare 
doesn't cover it, the beneficiary is responsible. And then the 
carrier medical directors make the decision about whether it's 
actually covered.
    So, that's a simple process in those few instances where 
there's some question about it. And it's done that way to 
protect both the beneficiaries and the physician, because in 
that way the physician has notified the beneficiary that they 
may be responsible for paying for it. It is not necessary that 
a private contract be entered into for a physician to supply a 
service to a beneficiary in that way.
    Mr. Stark. Thanks. Before the light goes, let me just ask 
you then to comment on the fact that in 1998, we're going to 
spend $216 billion in benefits. By 2008, almost regardless of 
what the various commissions do, we're scheduled to spend some 
$450 billion in benefits. That is almost a 100 percent increase 
over the next 10 years. The CBO estimates that we'll spend $3.7 
billion for administration in 1998. That will only increase to 
$5.8 billion in 2008. This is an increase of maybe 50 percent--
55 percent. So the administrative resources will decrease from 
1.7 percent to 1.3 percent. At the same time, all the other 
private plans spend 20 percent on average in administrative 
costs. One of the lowest cost plans is in California--Kaiser. I 
think they are at 12 percent Administrative costs. HCFA is 
running this in single digit. Some people might want to do the 
intermediaries' costs, but you're still in single digit 
overhead.
    Can you give us some idea of what you think that portends 
for our ability to go after fraud and to administer the variety 
of new plans that are coming? Are you prepared to give us some 
idea of how much more money HCFA will need to handle the 
increased volume and the increased complexity?
    Ms. DeParle. Well, it's not a very pretty picture. The 
numbers that you have cited don't portend well at all for our 
ability to do the job that we need to do. I think we are 
managing now, but we are just managing. I don't think we're 
able to do everything that this subcommittee wants us to be 
able to do, certainly not in the area of combating fraud and 
abuse. And with a ratio like the one you mentioned, the number 
of claims that we could review, the number of audits that we 
could conduct, will be even less. Now, one answer to that is 
doing a better job at the front end, which is what we're trying 
to do with some these new provider enrollment standards.
    But, sir, even that, at the order of magnitude that you've 
talked about and with the growth of claims and growth of the 
program, won't allow us to keep up. So, we have some very 
serious work ahead of us. And I think this year's budget, if we 
can work with this committee and your colleagues to get it 
enacted, is a step in the right direction. But we certainly 
need more help there.
    Mr. Stark. Will you indulge me for one more request, Mr. 
Chairman?
    What I'm leading up to, for my colleague's sake, is that in 
the Medicare plan we probably have fewer employees than most 
large insurance companies and we are spending less, or at least 
the same. Yet, we're often criticized for running big 
bureaucracies. I think that the HCFA bureaucracy is a 
reasonable bureaucracy by any private industry standard. To 
that end, Nancy-Ann, would you send me information about how 
many employees are active in administering Medicare, and 
include how many employees the fiscal intermediaries have? 
We'll then try to see what we can get from the private side to 
see how HCFA compares. I will provide that to my colleagues to 
have some measure of how efficient or inefficient the 
bureaucracy is. That will come up anyway and we might as well 
face it headon. I'd appreciate whatever you could send to the 
chairman and myself on that issue.
    Thanks very much. Thank you, Mr. Chairman.
    [The information was not available at the time of 
printing.]
    Ms. DeParle. Thank you.
    Chairman Thomas. That would be useful.
    Does the gentleman from Louisiana wish to inquire?
    Mr. McCrery. Yes, thank you, Mr. Chairman, and welcome Ms. 
DeParle.
    Ms. DeParle. Thank you.
    Mr. McCrery. We look forward to working with you. Just a 
brief follow-on to Mr. Stark's last line of questioning, 
though. It would also be interesting, I think, if we could get 
reliable data on the level of fraud and abuse in the Medicare 
program as opposed to private sector plans, and also, perhaps, 
overutilization in Medicare programs compared to private plans. 
But, that's not what I wanted to ask you about.
    Two things, since you brought up the BBA, I'd like for you 
to address the practice expense relative values for the 
physician fee schedule, and payment methodology for EPOGEN 
under the ESRD program.
    With regard to practice expense, as you probably know, the 
BBA outlined two specific mandates on HCFA: No. 1 to require 
HCFA to use to the maximum extent possible generally accepted 
costing principles and those principles would recognize all 
staff equipment, supplies, and expenses, not just those which 
can be tied to specific procedures; and, No. 2, it required 
HCFA to develop actual data on equipment utilization and other 
key assumptions for the May rulemaking.
    So, if you could comment on those two requirement in the 
BBA, I'd appreciate it. And then, when you get through, I'll 
follow up with the EPOGEN question.
    Ms. DeParle. Yes, sir. Well, as you know, the practice 
expense requirement is something that has been in place for 
some time but this year Congress asked us to hold up on 
implementing it to give more time for the kind of data that you 
just mentioned to be produced. We published a notice of pre-
rulemaking in the Federal Register back in October asking for 
help from the physician community and others in obtaining the 
kind of information on actual resource use that you're talking 
about.
    We've conducted three major activities involving the 
physician community regarding data. On October 6 through 
October 8, we held 17 medical specialty panels in Baltimore and 
they were charged with validating the resource data for the 
high-volume CPT codes for each specialty. And all the major 
medical specialty societies were represented. We held a forum 
on indirect practice expenses on November 21. And again, all 
the major medical specialty societies were there. And we held a 
cross-specialty panel in December--for two days in December--
and the main purpose of that was to standardize the resource 
inputs for the direct practice expenses across specialties.
    I'm also aware, sir, of the comments about the accounting 
principles because we have started getting comments in to our 
pre-rulemaking. And we will continue to look at that and to 
work with the physician community on it. But I do believe we 
are doing what Congress asked us to do in terms of meeting with 
these groups and making sure that we give them a process and a 
forum to get their input into this process.
    Mr. McCrery. And do you anticipate that you are going to 
incorporate data--new data--into your May rulemaking?
    Ms. DeParle. I cannot comment at this time on where that 
process is. I, in fact, have a briefing on this on Friday. So, 
I don't know where they are after the December meeting, but I'd 
be happy to get back with your staff on that.
    Mr. McCrery. Okay. We would appreciate it if you would give 
that some attention. It is of some interest to the physician 
community.
    No. 2, on the question of EPOGEN. And, again, if you're not 
prepared to address this specifically, I understand, but I do 
want to bring it up because it is important. I've heard from a 
number of constituents, including a treating nephrologist from 
the Oschner clinic in Louisiana, that some patients have to be 
hospitalized as a result of this change in policy. I believe 
the entire provider population is unified behind a position in 
support of changing this policy and have offered some specific 
changes to HCFA. Could you comment on where that is and what 
your opinion is on it?
    Ms. DeParle. We're looking at it, sir, and I have seen, in 
addition to letters from the provider community, on a 
bipartisan basis, letters from you and your colleagues about 
this which is what brought it to my attention. There was a 
program integrity problem in this area. We want to make sure we 
have the best procedure possible to make sure that the patients 
get what they need, but also that we don't create a situation 
that is subject to abuse. And if we need to make some changes, 
then we'll do that.
    Mr. McCrery. Well, I would ask you to make sure that in 
analyzing the potential costs, that you look at overall costs, 
including hospitalization and transfusions, as well as just the 
cost of the hematocrits, because it could make some difference 
in your analysis.
    Ms. DeParle. Yes, sir.
    Mr. McCrery. Thank you.
    Chairman Thomas. Does the gentleman from New York wish to 
inquire?
    Mr. Houghton. Thank you very much, Mr. Chairman. Ms. 
DeParle, it is nice to see you. Thank you very much for coming 
here.
    I guess I want to hone in for a second on the question of 
fraud and abuse. You have it with the fee-for-service; you 
really don't have it for the managed care because the incentive 
are--there isn't any incentive----
    Chairman Thomas. Amo, I apologize, but these mikes aren't 
working. You need to really get close to them, because I can't 
even hear you.
    Mr. Houghton. You don't like my soft, dulcet tone?
    Chairman Thomas. I do, if I knew what it meant. [Laughter.]
    Mr. Houghton. Well, anyway, let me start again by saying 
I'm delighted you are here; thank you for being with us today.
    Ms. DeParle. Thank you.
    Mr. Houghton. I guess I wanted to concentrate on the issue 
of fraud and abuse because as you move more toward managed 
care, there is probably less incentive, because of the direct 
payments to the government, as contrasted with the fee-for-
service. But I guess the question I've got, as you lessen that 
input, the question is one of quality and how we're able to 
ensure and emphasize the quality aspects where the money 
aspects are taken care of in an entirely different way. You may 
want to comment about that. And also, maybe you might talk a 
little bit about child care expansion in the limited period of 
time you have. Thank you.
    Ms. DeParle. I'm sorry, about what?
    Mr. Houghton. Child care expansion, you mentioned that.
    Ms. DeParle. Child care expansion?
    Mr. Houghton. Child care expansion program is one of your 
main goals, as I understand it.
    Ms. DeParle. Oh, I'm sorry; the Children's Health Insurance 
Program.
    Mr. Houghton. Yes, right.
    Ms. DeParle. Yes, sir, I thought you meant day care for a 
second. I was trying to think about what I knew about that.
    Mr. Houghton. No, that's only for senior citizens like me.
    Ms. DeParle. I'd be happy to talk about the Children's 
Health Insurance Program.
    We are off to a good start. We have 16 plans from States 
around the country that are in and being reviewed on a very 
tight time-frame. And we're moving along very quickly on that. 
And, we've also been out meeting with a lot of the States to 
provide them with technical assistance. There is a lot of 
enthusiasm out there, and at this point, my prediction is that 
all 50 States will come in some time before the end of the year 
with a plan, and I hope we'll be able to approve them so 
they'll be able to get their funding and we can begin to cover 
as many of the 10 million uninsured children as possible.
    I'm not sure sitting here whether New York is one of those 
plans or not. Is it? New York has been submitted. And I know we 
talked about that when I met with you earlier.
    On your other question on quality--that is, of course, one 
of the big questions that I didn't even get to in my opening 
statement--we are certainly trying to move in the direction of 
ensuring that the new Medicare-plus-choice format for managed 
care plans in Medicare will include a focus on quality. And I 
think this subcommittee supported that effort with some of the 
provisions in the Balanced Budget Act. We have acquired all of 
the science to submit on quality. We're also going out in the 
field to our consumers with the consumer assessment of health 
plans that will be incorporated into the kind of data that we 
provide them when they get their new Medicare-plus-choice 
information through the beneficiary campaign this fall.
    So, I believe those kinds of indicators will be available 
to our beneficiaries, and then the issue is: how do we focus 
our resources on ensuring that quality is occurring. And that 
is a big problem and I hope your colleague sitting two down 
from you, Dr. Cooksey, can help with that. So we do have 
efforts underway there but we will need to continue working 
with the subcommittee to make sure we're going in the right 
direction.
    Mr. Houghton. Thank you very much.
    Chairman Thomas. Does the gentleman from Georgia wish to 
inquire?
    Mr. Lewis. Thank you very much, Mr. Chairman.
    First, let me welcome you in your new position and wish you 
well.
    Ms. DeParle. Thank you.
    Mr. Lewis. Your agency is facing many important challenges 
and I am very confident, with your background, your talent and 
skill, and your smarts, that you will lead the agency very 
well. And I also want to add that I think HCFA has done a very 
good job in many areas. But I do have one or two questions.
    Like many Members of Congress, I have been contacted by 
individuals who are concerned about the provision in the 
Balanced Budget Act regarding venipuncture. They're concerned 
that very needy people will lose their home health benefit. I 
would like to see HCFA monitor this situation. In light of your 
new responsibility, and in light of GAO testimony, I am 
concerned that you do not have enough resources to monitor this 
situation. Do you feel that HCFA has enough resources to 
monitor this situation, or what do you think you need to do 
about this?
    Ms. DeParle. Well, as you know, sir, the venipuncture 
provision was designed to reduce unnecessary utilization in the 
home health program. And what our Inspector General and our 
staff were finding was that a number of people were getting the 
full range of home health care services--24-hour nursing care 
and things like that--simply because they needed their blood 
drawn. Now if a Medicare beneficiary needs his or her blood 
drawn, Medicare will pay for that; and if they cannot leave 
their home or don't want to leave their home to get it, 
Medicare will pay for that too. But the point is that Medicare 
can't afford to bear the cost of several hundred dollars--
multiples of hundred dollars a day--for them to get the full 
array of home health services if they simply need their blood 
drawn.
    The unfortunate thing is that some of the home health 
companies are trying to scare many of these beneficiaries, and 
perhaps that's what you've been hearing, and other members have 
been hearing.
    Someone who's diabetic, someone who is frail and elderly, 
is likely to qualify for home health. And it's not fair for the 
home health companies--in fact, it's wrong for them--to go out 
and tell the beneficiaries in your district that none of you 
are going to get this anymore, because that is not the case. If 
they are qualified, if they are homebound and they need skilled 
or intermittent nursing care, they will be qualified for this 
benefit. The people who will no longer be qualified are simply 
those who only need their blood drawn, and the actual drawing 
of the blood of course will continue to be covered by Medicare.
    And we do want to work with you, sir, to monitor the 
situation and make sure that beneficiaries who need this 
service are continuing to get it. And I hope once this 
confusion is cleared up, that problem will not be as apparent 
any more.
    Mr. Lewis. Thank you. Let me ask you another question. 
Nearly 40 percent of the end-stage renal disease population are 
African-American, even though we make up only about 11 percent 
of the population. It is my understanding that the outcome for 
the African-American end-stage renal disease population is not 
as good as with other populations. Could you comment on this 
situation? What steps could you take that might improve this 
situation?
    Ms. DeParle. I'm not as familiar with the situation on end-
stage renal disease, sir, but I do know that in many of the 
health indicators--health status indicators--that we look at 
for our population, we find that African-American beneficiaries 
don't get the services they need as often. Immunizations is an 
example; flu shots; mammograms. In many of those areas, we find 
that that community is not as well served.
    We are working in partnership with historically-Black 
colleges and universities around the country to try to do some 
focused campaigns to reach that population. And I might also 
add that we've been talking today about HCFA's reorganization, 
and one aspect of that that I think is positive for our ability 
to do a better job here is that we've created for the first 
time a center for beneficiary services. That center will be the 
one conducting the beneficiary information campaign. And one of 
their goals is to try to make sure that they do things not just 
for the population as a whole, but that they try to figure out 
what the best ways are to reach other populations that may be 
particularly needy or vulnerable so that, with the new 
preventive benefits that Congress just enacted that are very 
positive, we can make sure that our African-American 
beneficiaries receive the full promise of those new benefits.
    Mr. Lewis. I appreciate you responding. I look forward to 
working with you.
    The Surety Association of America has reported that the way 
home health agency surety bond regulations have been written, 
their members are unwilling to write bonds. Will you describe 
for the committee your understanding of the situation and what 
will be done to resolve this issue before the bond due date of 
February 27?
    Ms. DeParle. Well, as you know, Mr. Lewis, this provision 
that we are talking about here is the new surety bond provision 
that was enacted in the Balanced Budget Act, and it gives us 
the ability to require a home health provider to post a surety 
bond so that if Medicare is defrauded that Medicare will have 
some ability to recover from them. And that is a good step 
forward. That's been done in the State of Florida, and it has 
had a very good result.
    There appears to be an issue with the surety companies 
about the cumulative liability that they might have and the 
length of the liability. And our staff met with the surety 
companies recently. Our goal is to have the best regulation 
possible that protects Medicare. And we are working with them 
on it. And if we need to make some technical changes, we're 
willing to do that.
    Mr. Lewis. Thank you very much. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman from Georgia for his 
inquiry in that area. We are working. This is a specific 
example of where everyone on all sides, I believe, is honest 
and willing, it's just that the technicalities and the way in 
which the conditions have to be set clearly have to be adjusted 
so that folks can enter into arrangements with a clear 
understanding. And I'm convinced that we're going to clear this 
up before any critical date might arrive. I appreciate the 
gentleman's question on the matter.
    Does the gentleman from Texas wish to inquire?
    Mr. Sam Johnson of Texas. Thank you, Mr. Chairman.
    We've been having an argument up here, so I would like to 
ask you the question and let you straighten the facts out. Do 
you have a board that helps you run this HCFA operation, or are 
you----
    Ms. DeParle. No, I don't.
    Mr. Sam Johnson of Texas. Okay, but there is a Part A and 
Part B board, correct? Advisory board, or trust board?
    Ms. DeParle. Yes, sir, there are trustees. There is a trust 
fund board for Part A and Part B; yes, sir.
    I am the Administrator and we have an executive council 
that is the leadership of our organization that runs it. But we 
do not have an outside board. But we do have trust funds for 
Part A and Part B and those have trustees.
    Mr. Sam Johnson of Texas. Okay, and your internal 
organization sets the rates for each county. Is that correct?
    Ms. DeParle. Well, not exactly, sir. Most of the fee-for-
service payments, and for that matter managed care payments, 
the payment methodology for everything Medicare buys is pretty 
much set in statute.
    Mr. Sam Johnson of Texas. Yes, but you change it every 
year.
    Ms. DeParle. According to a formula; yes, sir. Some of 
those things are changed every year according to a formula.
    Mr. Sam Johnson of Texas. Are there any doctors involved in 
that change process?
    Ms. DeParle. There are a number of doctors in our agency, 
sir. And we also have a----
    Mr. Sam Johnson of Texas. Yes, but that didn't answer the 
question. Are they involved in the change process?
    Ms. DeParle. I don't know. I believe there are some----
    Mr. Sam Johnson of Texas. You see, you're a lawyer and 
you're trying to run a medical organization. I'm trying to find 
out if you've got any medical expertise in your organization to 
advise you.
    Ms. DeParle. We do have medical expertise in the agency 
that advises me.
    Mr. Sam Johnson of Texas. And who is your closest medical 
advisor?
    Ms. DeParle. Well, each one of the centers has a medical 
advisor.
    Mr. Sam Johnson of Texas. You're dodging the question 
again. I want to know who advises you personally.
    Ms. DeParle. Probably the one who I work with the most is 
Dr. Jeffrey Kang, who is the medical advisor for the Center for 
Health Plans and Providers.
    Mr. Sam Johnson of Texas. Do you know if he's ever 
practiced medicine, or is he an academic?
    Ms. DeParle. I believe he has practiced, yes. I believe he 
practiced in the Boston area.
    Mr. Sam Johnson of Texas. In Boston?
    Ms. DeParle. Yes.
    Mr. Sam Johnson of Texas. Thank you for that.
    Let me ask you another question that we're discussing. I'm 
getting a lot of complaints from my military retirees about 
Tri-care. How does Tri-care interface with Medicare? And when 
they become 65, does Tri-care still have any jurisdiction over 
the retired veteran population?
    Ms. DeParle. Well, I would like to get you more information 
for the record, sir, but I can tell you that Tri-care doesn't 
interact with Medicare very much, except that now, as a result 
of the Balanced Budget Act, we are entering into a 
demonstration with the Department of Defense to enable some of 
the military retirees who are not able to take advantage of 
Tri-care to come to the Medicare system and use their Medicare 
dollars to go to Tri-care.
    Mr. Sam Johnson of Texas. Before 65, or after 65?
    Ms. DeParle. After 65.
    Mr. Sam Johnson of Texas. Okay. So what you're telling me 
is Tri-care should continue after 65. I thought it was a law 
that everybody had to get on Medicare at 65.
    Ms. DeParle. It has been. But, what I'm saying is there is 
a demonstration that will allow a military retiree to take his 
Medicare coverage and go to a Tri-care facility. And that will 
be starting, I think, sometime in the next year.
    Mr. Sam Johnson of Texas. And that means a veterans' 
hospital, does it not?
    Ms. DeParle. No, it means probably a DOD facility and they 
contract in various areas. There is not a provision for 
veterans at this time, although I think this subcommittee has 
been working on that.
    Chairman Thomas. Will the gentleman yield on that point?
    Mr. Sam Johnson of Texas. Sure.
    Chairman Thomas. The Department of Defense has been 
interested in the retired military and its possibility of 
utilizing Medicare dollars for military retirees at military 
hospital facilities or contracting out through the military in 
an effort to broaden the support structure for military 
hospitals. That is the program that you've been discussing.
    Veterans, in what they call a vision program, worked on by 
the Veterans' Administration, have wanted to have a 
demonstration program, similar to the military retirees, for 
those veterans that fall into the category of A versus C kind 
of a veteran; that is those who have the wherewithal normally. 
We are--Chairman Stump of the Veterans' Committee and I the 
chairman of this subcommittee are going to offer--a piece of 
legislation which will model a veterans' demonstration program 
for that aspect of the veterans' hospitals with the upper-
income veterans, like the Tri-care demonstration. But we will 
go beyond that, and in dealing with the low-income Medicaid-
eligible-type veterans, we're going to create a permanent 
program, rather than a demonstration because there is a clear 
need. And Dr. Kizer of the Veterans' Administration is in full 
agreement that we can go to a contracting-out basis so that 
veterans can get the filled prescription, outpatient medical 
care that normally had been delivered by outpatient clinics or 
veterans' hospitals closer to home, since we can't continue to 
invest in bricks and mortars for the veterans.
    The short answer is: there is a degree of innovation going 
on among other government medical programs principally focused 
on the DOD and the veterans, to see if, since every World War 
II veteran is a Medicare-eligible person as well, if we can't 
tend to integrate these programs from the senior level back in 
so that we can mainstream some of these Government medical 
programs that have remained distinct and separate.
    Mr. Sam Johnson of Texas. Thank you. I appreciate that. 
That leads to another question though. If there is private 
contracting within the Tri-care or Medicare system, how do you 
distinguish between what private contracting is and what it 
isn't? And how are you going to stop a doctor from doing a 
private contract with Veterans' Administration for a person 
that's over 65 and keep him from it in the Medicare system?
    Ms. DeParle. Sir, I don't believe what we're talking about 
is private contracting in the way that you----
    Mr. Sam Johnson of Texas. I know, I just brought it up.
    Ms. DeParle. I don't believe the two are the same thing. 
What the chairman is talking about is a demonstration to allow 
certain veterans to use their Medicare dollars in a veterans' 
hospital.
    Mr. Sam Johnson of Texas. I understand, but you were 
talking with Mr. Stark earlier about private contracting and 
you indicated that if the Medicare program does not cover 
something and a person can make that payment on his own it's 
not considered private contracting. The docs don't know that by 
the way. You need to get that word out. I'm getting a lot of 
complaints in my district over that--that they're, in fact, 
stopping their Medicare service because of that threat. So when 
you're going to authorize them to privately contract with the 
Veterans' Administration for care, I don't see the difference.
    Ms. DeParle. Well, sir, as I understand the demonstration, 
and I'd be happy to provide a briefing for you and your staff 
on it, but as I understand it, it isn't private contracting. 
What we're saying is that veterans--it is more like allowing 
the veterans system to be one of the new Medicare-plus-choice 
plans. But it's on a demonstration basis. So, I don't believe 
it's the same thing as private contracting.
    Mr. Sam Johnson of Texas. Well, then define private 
contracting for me.
    Ms. DeParle. Well, as I understand private contracting as 
enacted in the Balanced Budget Act, what that says is that if a 
physician and a beneficiary want to enter into a private 
contract to cover some benefit that Medicare would ordinarily 
cover, then they can do that. That has not been something that 
has been allowed in the past. So that's what private 
contracting is. This is different. This is saying that a 
Medicare-eligible veteran or military retiree could chose a 
health plan that is provided by DOD or VA.
    Mr. Sam Johnson of Texas. Or a doc.
    Chairman Thomas. No, let me interject again, and I 
apologize. But when I used the term ``contracting,'' it was 
contracting out its managed care services. It is a requirement, 
pretty obviously, in a military hospital that if you're going 
to treat Medicare-eligible patients, you have to be able to 
offer those services that are part of the Medicare package. If 
the military hospital does not have the ability to deliver all 
of those aspects of the required Medicare package, they can 
contract out for those aspects. But it is primarily envisioned 
as contracting out to those entities in those communities where 
there are military retirees that do this on an ongoing basis 
with ordinary Medicare beneficiaries. So it would be 
contracting out, but it is primarily managed care services. But 
I'd be willing to sit down with the gentleman and go over what 
I consider to be some relatively positive innovative approaches 
already underway at the DOD and the possibility of beginning at 
the Veterans' Administration to make sure that his concerns, if 
at all possible, could be addressed in the way in which the 
demonstration is designed.
    Mr. Sam Johnson of Texas. Thank you, I appreciate that. You 
know, I would just like to know your views on that too, because 
private contracting is private contracting, you know, any way 
you cut it.
    Chairman Thomas. I understand that. And given the 
gentleman's background and current status, he's a practitioner 
and I want to listen to him.
    Mr. Sam Johnson of Texas. Well, I tell you what, the guys 
in the military complain about the system and the way it's 
operating. And we need to protect them. And that's part of 
HCFA's job, I believe.
    Ms. DeParle. We'd like to work with you on the 
demonstration and with the committee.
    Mr. Sam Johnson of Texas. Thank you, ma'am. And thank you, 
Mr. Chairman.
    Chairman Thomas. Thank you very much.
    The gentleman from Maryland.
    Mr. Cardin. Thank you, Mr. Chairman.
    And let me welcome you here in your new responsibility. 
This is your first appearance, I believe, and we look forward 
to working with you, following up on last year's work of this 
committee in trying to improve the Medicare system and the 
other areas that fall under your responsibility. It is a 
pleasure to have you here.
    I just want to make a comment about one of Mr. Johnson's 
statements, and that is I know we got a little bit off on the 
private contracting, but it is my understanding that you have 
sent notices to all physicians indicating that if it's a non-
covered service there is no need for a private contract. And 
that notice has gone out.
    Ms. DeParle. Yes, we did. That went out in November, and we 
sent it out to all the physicians in the country.
    Mr. Cardin I want to change gears and talk about the 
prudent lay person's standard for emergency care. And we very 
much appreciate the help of the administration last year in 
putting that standard in law for the Medicare and Medicaid 
programs in requiring that on the renewals that there be that 
standard adopted. And I'm just wondering if you could update us 
as to what steps you're taking to make sure that all of the 
plan administrators and States are complying with the prudent 
lay person's standard in their managed care programs?
    Ms. DeParle. Let me just say, Mr. Cardin, that we 
appreciate your work on that. And that's been something that I 
know that you have championed for many years, and I was glad 
that we could get it enacted last year. I think it's a good 
step forward.
    We are working to make sure that all the State Medicaid 
directors are aware of the new standard and that they have it 
in place. And I believe your staff has made us aware that some 
of them may not be where they need to be, so we will take some 
steps to remedy that, and I will report back to you on it.
    Mr. Cardin. I appreciate that. It's been brought to our 
attention and we've got some material, from the State of Maine 
and the State of Georgia, which appears to be out of compliance 
with Federal law. We understand there may be some confusion, 
but we would urge that you give this a high priority to 
implement the law. It's becoming more and more common around 
the Nation for more and more managed care plans to adopt the 
prudent layperson's standard, so it should not be as difficult 
as perhaps it would have been a few years ago. And I would just 
urge you to continue your efforts in that regard.
    Ms. DeParle. We will do that. Thank you.
    Mr. Cardin. Let me return, if I might, and spend a little 
more time on the private contracting issue. There has been a 
lot of misinformation out on the private contracting issue, and 
I really do applaud you for getting information out to the 
physicians. We may need to take a look at what we did last year 
in order to clarify the position, to make it clear that we 
haven't impacted the ability of a Medicare beneficiary to use 
private services and pay for it if it's not under the Medicare 
program. I would just urge you also to work with us, if we need 
to, to clarify that law without removing the protections that 
seniors currently have on balance billing protections. Because 
I don't think anyone here wants to subject our seniors to 
charges beyond what the Medicare system allows for services 
that are provided under the Medicare system.
    Ms. DeParle. We'll be happy to work with the committee.
    Mr. Cardin. Thank you. Thank you, Mr. Chairman.
    Chairman Thomas. Thank you.
    Does the gentlewoman from Connecticut wish to inquire?
    Mrs. Johnson of Connecticut. Thank you, and welcome.
    Ms. DeParle. Thank you.
    Mrs. Johnson of Connecticut. We look forward to working 
with you. You certainly have many challenges facing you, as do 
we as a legislative body, to make good on our often repeated 
promise of making Medicare secure, not only for current 
retirees, but future retirees.
    There are two little issues I want to raise with you, and 
then one larger issue. First of all, during the break I visited 
a large oncology office in my district and it is very clear to 
me that we are not reimbursing for many of the costs associated 
with delivering oncology drugs. And, it's my understand that 
HCFA has been reviewing the RBRBS in this regard and 
acknowledges that delivery services are not covered in the 
RBRBS. They have traditionally been covered through the drug 
costs. If that isn't going to be the case, I mean, we're going 
to have to get this together and look clearly at what's covered 
by the RBRBS and what's been covered by the drug cost. And if 
we're going to look at drug costs as the Inspector General's 
report does without regard to the cost of delivery, then we 
need to reexamine the RBRBS and make sure that it is an honest 
one and does cover all the services delivered by the physician. 
So, I would hope that you wouldn't move on the drug costs 
without a review of the RBRBS. I understand that the Department 
is in the process of that, or has at one time in the not too 
distant past been involved in that issue, and is cognizant that 
the RBRBS has problems. Are you conscious of that problem?
    Ms. DeParle. I did hear about this, in fact just yesterday. 
And as the representative knows, there has been a problem with 
Medicare overpaying for some of these drugs, and that is a 
concern of ours, that I'm sure is of the committee's as well. 
But certainly, we want to be fair in the way that we provide 
reimbursement, and I will take a look at what you are pointing 
out.
    Mrs. Johnson of Connecticut. I am very, very concerned 
about this, because if we do it wrong, then these services will 
simple move from the doctor's office to the hospital where they 
will be more expensive to deliver. Because infusion therapy 
takes time and a lot of that is now going on on an out-patient 
basis, if we do this wrong, we will simply shift the venue and 
increase our cost even though it might look to the public like 
we are saving. So, I look forward to working on this with you. 
I think it's an absolutely solvable problem. We want to be fair 
to everybody. We want to be sure that we don't overpay 
providers of drugs, or services. But I think in this situation, 
we have allowed reimbursement for services to slip under 
reimbursement for drugs, and we have to sort that out. So, I 
look forward to working on this with you because I'm very 
concerned about access to care. If we do it wrong, access will 
plummet, hospitals will have to gear up, and we'll have a 
significant problem on our hands for very sick patients. And we 
just have got to make sure that that doesn't happen.
    Then, a second thing that's been of concern to me is that 
there's more than two-dozen regulations and reports that are 
due that haven't been completed, and one of them is in regard 
to the functioning of the Medicare select plans, and some of 
the other regulations that are so key for home health agencies. 
I wonder what your program is to get caught up on some of 
these?
    Ms. DeParle. Well, if I can brag a little bit, we have made 
a lot of progress. In the month of December, we identified 18 
priority regulations that we needed to get out, and I think we 
got 16 of them out in December, which is more than double what 
we normally do. And of course, that was supposed to be a 
holiday month. So our staff is really working hard.
    I place a high priority on being as timely as possible. 
Given our resources and the priorities that this Congress has 
set and that I have to set, sometimes it's not possible, but, 
I'm going to do my very best to see that we are timely. And I 
wasn't aware that there were two-dozen reports that were 
overdue. I am very aware of the Medicare Select Report, and 
have personally reviewed it, and I hope that we will be able to 
get it to you soon. I believe that one was due on December 31, 
so we are behind on that.
    Mrs. Johnson of Connecticut. Yes, it was. Thank you very 
much, I look forward to seeing that move. I assume that's out 
of your shop at this point, since you have reviewed it?
    Ms. DeParle. I believe it is.
    Mrs. Johnson of Connecticut. Is it then at OMB?
    Ms. DeParle. Yes, I believe that's where it is.
    Mrs. Johnson of Connecticut. Well, we'll certainly look 
forward to the completion of this work. And any way we can help 
you, we're happy to because I believe timeliness is important. 
And it's a big problem. I chair the Oversight Subcommittee of 
the IRS. I can tell you, they are much further behind than you 
are.
    Chairman Thomas. That's not a compliment.
    Ms. DeParle. I know that.
    Mrs. Johnson of Connecticut. It's like justice delayed is 
justice undone, you know. If we don't keep the flow of 
information going we don't win. And I see, unfortunately, my 
time has expired, because I do want to just point out to you 
the terrible problem we're having with dual-eligibles. And I 
see you are reorganizing in a way that will create a more one-
stop shopping approach to managed care and fee-for-service 
policy, but we really have to look at the dual-eligibles and I 
think we have to look at what I consider to be a real rip-off 
of Medicare: the Medicare maximization program. The States are 
spending tons of money on this. They are squandering their 
resources and ours on all the legalities. The home health 
agencies are really disadvantaged by the problem of going back 
for these records, of copying them, of reviewing them. It's 
really a tragedy. And when the whole system is under so much 
pressure to reduce costs, deliver quality services, I think we 
need to sit down about that Medicare maximization program and 
come to terms with it and settle it out, which we can do and we 
started doing three years ago, and it still isn't completed. 
Then that folds right into the dual-eligible project that we've 
got to start piloting in some of the states in order to give 
better service to low-income seniors, but also reduce the cost 
for federal and state government. So I'd like to work on that 
project with you.
    Ms. DeParle. I'll look forward to working with you on it.
    Mrs. Johnson of Connecticut. Thank you very much.
    Chairman Thomas. It's my pleasure to indicate that a Member 
who is not a member of this subcommittee is with us today. He 
is a freshman Member of Congress, but I have a hunch that one 
of the reasons he's more interested in this is not in that 
capacity, but because he is a medical doctor, doctor of 
ophthalmology. Gentleman from Louisiana, Mr. Cooksey, I assume 
wishes to inquire.
    Mr. Cooksey. Thank you, Mr. Chairman. And Ms. DeParle, 
welcome to the committee. This is my first committee meeting 
too.
    I'm on the Health Subcommittee of Veterans Affairs, and 
there's a lot of confusion about some of the overlap here.
    My question--the question I would like for you to answer--
and I'm going to drive toward that--is, do you ever step back 
and look at the overall picture? There are a lot of programs 
that are government paid, that are government financed. There's 
Medicare, there's Medicaid, there are veterans hospitals. 
Incidentally, I've asked the same questions in my health 
subcommittee.
    There are many providers, there are many recipients. There 
must be some duplication occasionally. I personally think 
there's a lot of duplication, a lot of overlap. And I think 
there are a lot of regulators and a lot of regulations, and 
these solutions have always been done piecemeal to solve some 
problem. And it's been my impression when I was out in the 
private sector that there's been a lot of micromanagement by 
people in the bureaucracy, like yourself; a lot of lawyers, a 
lot of people that are in government, that are micromanaging 
the problems as they come up.
    But I feel that we do need to eliminate this duplication. 
We need to downsize some of the bureaucracies. We definitely 
need to reduce the cost. And the way to do that is by quality 
health care. When you have really quality health care, a 
patient won't have to go back to have the same procedure 
repeated because it was not done right the first time, and that 
will reduce cost.
    But my question is, is there anyone that is out there that 
ever steps back, and looks at the overall picture, and say, 
gee, who is representing the patients?
    When the Balanced Budget bill was coming through, there was 
a firestorm of activity. You were not here then, I know. But 
there was every group being represented, except the patients, I 
feel. There were bureaucrats here, there were the managed care 
people, there were the insurance companies, there was organized 
medicine, there were physicians, there were specialists, home 
health, and yes, even the trial lawyers. But they were there ad 
infinitum. But nobody really seemed to be representing that 
patient that is out there in some rural area or some inner city 
metropolitan area that truly needed health care. And you've got 
a lot of special interest groups that are still micromanaging 
things for their best interest.
    What is your agency doing to look at the big picture, and 
to really address the number one stakeholder, the patient?
    Ms. DeParle. Well, I think one thing we've done, and I 
described it at the beginning of my statement, was, our 
reorganization was partly designed to try to get at those 
questions of, are we serving beneficiaries, and how do we 
organize ourselves so that we're thinking more about 
beneficiaries. That is why we created this Center for 
Beneficiary Services.
    If we had not done that reorganization, the new Medicare 
Plus Choice Plan and the information campaign that we're going 
to do this year, those activities of providing the information, 
and the toll free lines, and the things that the Congress has 
asked us to do to interact with beneficiaries, would have been 
in five or six different locations within HCFA. Now we have 
centered in one place an organization that is designed to look 
at that.
    I also think in respect to your comment about the veterans 
area, that's actually an area about which I think the Congress 
can feel good trying to look at what's best for the 
beneficiary, as opposed to how do these structures in 
Washington work. And the reason I say that, is because what 
that demonstration is designed to look at is, if you are a 
veteran and you are Medicare eligible, why shouldn't you be 
able to go to a veterans hospital if you want to, and take your 
Medicare dollars with you? You couldn't do that before. You 
could only go there if you were in the high-priority category 
of veterans. And as you know, even though there are 171 
veterans hospitals, not everyone can get to one, and not all 
veterans have a high enouogh priority to obtain VA care when 
needed.
    But the beneficiary shouldn't have to worry about that; the 
beneficiary should be able to choose where they might want to 
go. And that's what that demonstration is designed to 
investigate. So, I agree with you that it is very difficult to 
get beyond the structures that we operate in, and I think we 
need to do a better job at that. And I think we can do a better 
job of that, and I think members like those on this 
subcommittee are going to help us with that.
    Mr. Cooksey. Good. One other quick question. Where does 
HCFA stand on implementing the BBA for telemedicine and for 
broader plans for telemedicine?
    Ms. DeParle. We have some demonstrations that we had 
already started in telemedicine. I think they are in five 
states. In the BBA we got authority for 1 more demonstration, 
and I believe we have a rule that is on track, to go out in May 
that will announce how that new authority will be used, and how 
folks can become eligible for the telemedicine programs.
    Mr. Cooksey. Thank you, Ms. DeParle. Thank you, Mr. 
Chairman.
    Chairman Thomas. Certainly. Thank you.
    Apropos the comments by a gentlewoman from Connecticut, 
what would your reaction be when we deal with--and hopefully we 
don't have to deal with them in the near future--reports or 
information that was required by the statute in terms of 
getting work product done? Your initial response is the one 
that we always get; it's in the process.
    Given your experience, both being in OMB, and now over at 
HCFA, as an example, what does it mean when it's in clearance? 
How many different steps, not micro steps, but major steps, 
does a policy like Medicare, for example, have to go through 
before we get it, since it was our request in the first place?
    Ms. DeParle. Well, in that particular instance, we were 
required to conduct some studies of Medicare Select, the 
demonstration, to see how it worked and whether it met your 
objectives.
    Chairman Thomas. Is that a good example or do you have a 
better example that would explain to us how the process works?
    Ms. DeParle. I think it's a pretty good example--
    Chairman Thomas. Okay.
    Ms. DeParle [continuing]. Because it was pretty matter-of-
fact. We have done some studies and done some analysis. And 
then there are two processes. Most of these things are not 
reports from the HCFA administrator, but they are reports that 
you have requested from the secretary. And so, the secretary 
obviously is briefed, and her staff looks at whatever report it 
is, and then it goes from there over to the Office of 
Management and Budget. And at the Office of Management and 
Budget there are two processes.
    Chairman Thomas. Why does it go there?
    Ms. DeParle. There is I believe an executive order that's 
been in place for 30 years--
    Chairman Thomas. A long time.
    Ms. DeParle [continuing]. that requires that kind of 
review, and there are actually two review processes. One of 
them is the--
    Chairman Thomas. Just as the budget from HHS has to go 
over--
    Ms. DeParle. Right.
    Chairman Thomas [continuing]. And be reviewed by OMB before 
its incorporated in the structure, these kinds of things do as 
well.
    Ms. DeParle. That's right. And there are two processes 
generally. One is the Office of Information and Regulatory 
Affairs, which looks at whether something that we're putting 
out imposes a paperwork burden. For example, a regulation or 
that kind of thing. And then there is a substantive review of 
the policy by budget and program policy staff. And it's 
generally a fairly quick process.
    Having been there, I know that the folks at OMB often feel 
that we give them very little time to review things to get them 
up here to you. But the purpose of the review is supposed to be 
to ensure that the report has been done in an adequate fashion 
and that it is consistent with the programs of the President; 
that's the general policy.
    Chairman Thomas. And then does it often times or 
occasionally go back for revision, refocus, adjustment, or does 
the adjustment, refocus occur at OMB in consultation with 
folks?
    Ms. DeParle. It can operate either of those ways. In 
general, I think it probably goes back with comments and 
suggestions, and we often have meetings with the staff from the 
agencies to discuss comments and suggestions.
    Chairman Thomas. All this leads up to my question, from 
your experience--and it's useful because you've been in both 
areas. And I don't want to overly complicate the process. But 
it would be useful for us sometimes to know when, for example, 
you folks were finished with something. And I don't know that 
it needs to be more structured--if it does, we'll talk about 
putting it in legislation--so that we know that at least from a 
policy point of view it's out of HHS, and that it's someplace 
else, almost always OMB.
    Or do you believe that that's a transparent enough process, 
that if you ask the right questions you know it anyway? Does it 
need to be more formalized in terms of our ability to know when 
it moves through stages?
    Ms. DeParle. I don't think so, Mr. Chairman. I think that 
the process generally works pretty well. I think there's 
generally value added from the process, and it works pretty 
well. I regret that we're behind in scheduling these reports to 
you, and perhaps we should have gotten them over there earlier. 
I think that is maybe sometimes the reason why they're late.
    Chairman Thomas. Well, and I've discovered that you can 
eliminate a lot of legislation and a lot of particulars if you 
have honest people working together and you get honest answers. 
When you don't get honest answers, it's very, very difficult to 
put confidence in what people have to say.
    It pains me a little bit to bring up, earlier in my 
chairmanship a time of visiting HCFA in Baltimore, and not 
getting what I considered to be honest answers about the 
Medicare transaction system, which I believe has finally been 
owned up to. And in your written testimony, I'll refer to once 
again, a clear indication that you have finalized the contract 
with that, and that perhaps the concept at some time may have 
had a degree of viability, but it is no longer the case.
    Ms. DeParle. That's right.
    Chairman Thomas. You're looking for another way or perhaps 
a fundamental rethink of the way of dealing with the tracking 
system, is that correct?
    Ms. DeParle. That's right.
    Chairman Thomas. Would you consider you're entering into, 
fill in the blank, a $50 million, $70 million effort, which has 
really produced nothing, a kind of a failure, or did we learn 
something out of it?
    Ms. DeParle. Well, I think we learned something; it was 
painful. I think we learned what a lot of private sector 
companies have learned, that a big effort like that was too big 
and too risky.
    Chairman Thomas. And I guess then, we're involved with 
questions of judgment; how things get started, how they get 
perpetuated, where you make decisions, where you stop. In 
private sector when you have failures of that magnitude, 
usually someone's out of a job.
    My concern is, that for the last several years you--not 
you, the agency--has been run on a kind of a pass/fail basis, 
and I'm just wondering if anybody failed on the pass/fail 
judgment, based upon this multimillion dollar program that has 
now been completely terminated, with very little residual 
benefit?
    Ms. DeParle. Well, I think, as you know, Mr. Chairman, 
because you visited us, we have a lot of talented people at the 
Health Care Financing Administration, and they're all committed 
to trying to do the best job they can for our beneficiaries. 
And I think that everyone who was working there learned a 
lesson from the Medicare transaction system, and we aren't 
going to do it that way again.
    Chairman Thomas. Has anybody received a failure on any of 
those evaluations on a pass/fail basis in terms of the staff at 
HCFA?
    Ms. DeParle. I don't know the answer to that. I do know 
that most of our employees, since that pass/fail system was 
initiated, have received a pass. I haven't looked through the 
3,000 or so evaluations to see how many of them got a failure. 
There have been some failures. I don't know if they were 
connected with that particular program.
    Chairman Thomas. And I don't want anyone to assume by my 
line of questioning that I don't think that there aren't a lot 
of talented hardworking people over there. It's just that when 
you're dealing with a fundamental change in the direction and 
culture of a bureaucracy, you have to look at your ability to 
be flexible in dealing with employment, and frankly, to make 
changes.
    My concern is, the manner in which employees are evaluated, 
probably doesn't give you a sufficient ability to make 
decisions, except that you probably, as is the case when the 
formal monitoring structure's not adequate, you do it in an 
informal way, which is the way we want to do it, because then 
that can be argued to be subjective rather and objective. And I 
know through GAO examination that a simple bifurcated pass/fail 
maybe doesn't tell you as much as you'd like to know. You need 
more categories in which to evaluate folks, so that you can 
reward people who clearly are superior and show initiative. 
Because it's very difficult when you have people sitting next 
to each other, and someone's doing work, and someone else isn't 
doing quite as much or even any work at all, and they both get 
the same grade. The morale in that kind of an environment is 
very difficult to deal with.
    Let me ask you a question which I don't consider unfair, 
some might, but it's clearly a hypothetical given the current 
situation. And that is, if Congress gave you the authority to 
examine critically a fixed number of folks, 5 or 10 percent of 
your entire work force, and you would make the decision on 
whether to keep them or remove them on purely a merit analysis, 
not constrained by any contract obligations, union, or 
otherwise, is that something that's desirable, not necessary, 
you would rather not talk about at this point?
    Ms. DeParle. Well, let me just say that your questions are 
going to the issue that I think is the most critical one for us 
over the next few years, which is how do we manage our human 
resources. How do we make sure that people are getting 
recognized for the work that they do, which is very difficult 
in government, frankly.
    It's hard for them, frankly when they continually hear that 
they're not doing a good job. They want to be recognized for 
improvement that they make and for the effort that they put 
forth. And that is a big challenge to me as a manager.
    As to whether or not it would be a good idea to change the 
evaluation process, we discussed that, and it's certainly 
something that I'm willing to look at. I have operated under 
different evaluation processes. There have been times in my 
life when I liked pass/fail, like when I was in college, but I 
think in general it probably doesn't give us the kind of 
information that we need. But most of our problems are problems 
of managers being able to make those kinds of decisions, and I 
want to do everything I can to empower our managers to do that.
    Chairman Thomas. My interest and concern I want to place 
very carefully out front and objectively.
    HHS and HCFA have extremely important jobs to do. We are 
dealing with a changing environment in the private sector, and 
obviously now in the government sector. Flexibility in dealing 
with the management and the employees who oversee this I think 
is as critical as flexibility in the marketplace on product. 
For us to be locked into, old-fashioned government and union 
regulations, which don't allow us to do the kind of innovative 
change that I think is going to be necessary, will ill serve 
the agency, and frankly fundamentally the beneficiaries.
    I am not interested in busting up anything at all; I am 
interested in a viable functioning agency, carrying out a very 
critical job that's going to be more difficult in the near 
future. And I believe the gentleman from Louisiana wanted me to 
yield, and I'll yield to him.
    Mr. McCrery. Thank you, Mr. Chairman.
    Ms. DeParle, just one more question. With regard to the MSA 
demonstration project, can you give us an update on how it's 
going? And when you answer the question, please tell us whether 
under an MSA Medicare product physicians or providers, 
generally, must bill according to the Medicare fee schedule or 
are they allowed to bill higher than 115 percent of the 
Medicare fee schedule?
    Ms. DeParle. Well, I'm happy to report that the MSA 
demonstration project, our plans for that are on track. And in 
fact, I believe we've done some briefings of some of the 
committee staff on that, and we have been working with the 
folks at the Treasury Department, who have done a similar 
demonstration as you know in the private sector.
    With respect to the balance billing limits, I believe that 
they would not apply, because the whole concept of an MSA is to 
have the beneficiary bearing more of the cost, and the idea is 
supposed to be that they will then be more sensitive to cost. 
And I believe that in that demonstration they will be, so to 
speak, on their own.
    Mr. McCrery. Thank you.
    Chairman Thomas. Gentleman from Maryland, a brief 
intervention.
    Mr. Cardin. Thank you.
    One additional point under BBA that I just want to bring to 
your attention, that is the GME payments to quality non-
hospital providers gives you an opportunity for the first time 
to move into a somewhat different area. What we're concerned 
about is that we do have some public health departments that 
would be interested in looking at establishing residencies in 
public health that could help us in this area. It's probably 
not going to be allowed because they don't have contracts under 
Medicare.
    But I would ask that you would take a look and work with us 
as to whether it would be worthwhile to look at a demonstration 
in this area. And I just really wanted to bring it to your 
attention, and hope that we could work in that area.
    Thank you, Mr. Chairman.
    Mr. Stark. Could I follow up?
    Chairman Thomas. This is a first, not a last. So if 
anybody's got anything--she's going to be back. Go ahead.
    Mr. Stark. Well, I just wanted to follow up on the question 
that Mr. McCrery asked regarding Medicare MSAs. I understand 
how that works when beneficiaries are spending their own 
deductible--let's say it's a $2,000 deductible. But after that, 
would Physicians not then be required to, bill Medicare under 
the standard procedure? Would the balance billing limits apply? 
Would the Medicare DRGS be applicable?
    Maybe you could enlighten me there? After the out-of-
pocket-deductible is spent.
    Ms. DeParle. I understand your question, Mr. Stark, and I 
know that this came up a month or so ago, and our Office of 
General Counsel was looking at it. And if I could, I'd like to 
get back to you for the record on it, because I don't want to 
say the wrong thing here. But I do understand the subtlety of 
your question.
    Mr. McCrery. Could you copy me on that?
    Ms. DeParle. Oh, certainly.
    Mr. Stark. Yes. I mean, I----
    Chairman Thomas. Would you submit it to the subcommittee?
    Mr. Stark. Yeah, that is----
    Ms. DeParle. I would submit it for the record.
    Mr. Stark. I don't know how else you would pay.
    If it were my Medicare MSA and I'd paid the $2,000 
deductible how would my physician collect after I paid my 
personal check for any future treatment? Wouldn't he bill 
Medicare in the standard way that he or she does now?
    Mr. McCrery. Well, the way I understand it--and this is why 
we need to have this clarified. The way I understand is that 
under the MSA product, that government would give the patient, 
the beneficiary, a lump sum to cover the cost of the insurance 
product; therefore the doctor would bill the insurance company, 
not Medicare, for amounts above the deductible, but I could be 
wrong on that.
    Chairman Thomas. Yes, basically----
    Ms. DeParle. I think I need to get back to the committee 
with a fuller answer. I understand the question. Thank you.
    Chairman Thomas. And let me for all the members of the 
subcommittee, thank you. I personally want to thank you for 
your availability, prior to be being formally I may had and 
since, and I look forward to working with you. You have an 
extremely difficult job that's challenging. I'll know you'll be 
up to the task, but in anyway that we can help, especially with 
fine tuning what was, as I said at the beginning, the most 
comprehensive change in Medicare. People vote and move on, and 
people don't realize that after you've voted we have a lot of 
work to do. And I look forward to working with you. 
Congratulations.
    Ms. DeParle. Thank you. I will need the support and the 
constructive criticism of this committee, in doing what you 
want us to get done, as well as of all of our employees. So I 
appreciate this opportunity.
    Chairman Thomas. Thank you very much.
    The next panel will be, once again, a panel of one, or one 
and a half, or two perhaps.
    Dr. Scanlon, who is the director of the Health Financing 
Systems, part of the General Accounting Office, who has done 
some recent work for us at our request, and they have had an 
ongoing program as well. And with him is Leslie Aronovitz, who 
is the associate director in the same area of the Health Care 
Financing Systems of the GAO.
    Dr. Scanlon, thank you. Your written testimony, as always, 
will be made a part of the record, and you can address us as 
you see fit.

   STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR, HEALTH 
       FINANCING SYSTEMS, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Scanlon. Thank you very much, Mr. Chairman, and members 
of the subcommittee.
    We are very pleased to be here today as you discuss HCFA's 
readiness to manage Medicare for the 21st century.
    Chairman Thomas. And let me indicate to you as well, 
although normally that distance would be appropriate, you're 
probably going to have to get a little closer to the mic, so 
people can hear you. Thank you.
    Mr. Scanlon. Okay. All right, I'd be happy to.
    The Congress and this subcommittee in particular has heard 
from GAO and others regularly about Medicare's vulnerabilities, 
including program management weaknesses, excessive spending, 
and trust fund deficiencies. You also heard from us in October 
that the Health Insurance Portability and Accountability Act 
and the Balanced Budget Act provided HCFA excellent new tools 
to fight fraud and to fix broken payment methods. However, 
substantial agency effort, as you indicated, will be required 
to implement the new provisions promptly and effectively.
    In addition, the agency has undergone a major 
reorganization. In that context you asked us to comment on 
HCFA's capacity; that is, the ability of its work force to meet 
its newer challenges, while responding to the chronic problems 
of the past.
    To provide a quick response, we spent the past month 
reviewing agency documents, conducting focus groups, and 
interviewing individuals. We heard from more than 60 senior 
level and mid-level managers at HCFA's Washington and Baltimore 
headquarter offices.
    We want to thank Ms. DeParle and the HCFA staff for being 
so cooperative and congenial as we imposed our demands upon 
their already existing daunting workload. On the basis of the 
information we gathered, as well as the information that we 
have gathered over the years of working on different elements 
of the Medicare program, we make the following observations.
    To begin, HCFA clearly has a lot on its plate. Under the 
Balanced Budget Act it must implement the new Medicare Plus 
Choice Program. It must develop multiple prospective payment 
systems, and improve Medicare's pricing of goods and services 
consistent with the concept of inherent reasonableness.
    For each there's a considerable volume of choices about 
design details that must be formulated, evaluated, selected, 
and implemented. There's been a long-standing consensus that 
implementing changes, such as prospective payment or improved 
risk adjustment for managed care, are essential steps. What we 
have lacked is consensus and confidence in how to do these 
effectively and fairly. Now HCFA must seek to do so within 
tight timeframes.
    HCFA's attention is also required to effectively implement 
the new contracting authority provided by the Health Insurance 
Portability and Accountability Act, the Medicare Integrity 
Program, the anti-fraud program under that act. The Inspector 
General's estimate of $23 billion in inappropriate payments 
dramatically underscores the urgency of this task.
    At the same time the agency must solve its year 2000 
computer problems, and start from scratch to develop a 
comprehensive information management strategy that will deal 
more effectively with identifying problems with inappropriate 
fee-for-service claims, and support the information 
requirements of the expanded Medicare Plus Choice Program.
    Concurrent with these implementation challenges, HCFA is 
handicapped in a number of ways. Managers are feeling pinched 
by the Balanced Budget Act's command of existing resources. 
They express fears that because of the agency's concentrated 
efforts on the Balanced Budget Act, the quality of other work 
might be compromised or tasks might be neglected altogether. 
They also felt disadvantaged by HCFA's limited expertise to 
carry out certain new Balanced Budget Act initiatives, such as 
the upcoming nationwide comparative information campaign for 
the Medicare Plus Choice plans, or the Balanced Budget Act 
related work that was already underway, such as new prospective 
payment systems for home health and skilled nursing facility 
services.
    Some of this work involves the need for new skills and 
expertise that HCFA did not require previously; however, 
managers also felt the agency's capacity has been compromised 
by the loss of experienced staff resulting from a work force 
turnover of nearly 40 percent over the last 5 years.
    Regardless of the benefits that may ultimately accrue from 
HCFA's reconfigured structure, the reorganization also 
compounds the challenges for the agency. The normal stresses 
people experience with organizational restructuring have been 
accentuated by the full agendas and the tight deadlines of 
HCFA's new workload.
    Managers feel that during this transitional period the 
situation is particularly acute in light of the fact that 
people have not yet even moved to the actual location of their 
new units. Physical proximity would help forge the new working 
relationships among individual staff essential to achieving the 
objectives within the new structure.
    From some perspectives HCFA's substantial and growing 
responsibilities appear to be outstripping its capacity. Before 
such a conclusion about the extent to which the tasks are 
exceeding its capacity are made, it must be noted that the 
agency lacks a comprehensive plan, one that senior decision-
makers could use to strategically handle the agency's workload 
and resource management. As a result, it appears that senior 
management is not in a position to assess fully the adequacy of 
its resources, whether they are properly distributed, or which 
activities could be at risk of being neglected.
    In contrast, top management's expectations for completing 
Balanced Budget Act-related activities are very explicit. HCFA 
has a tracking system for the Balanced Budget Act mandates that 
enumerates activities, identifies responsible agency units, and 
specifies completion dates. It is also requiring lead units to 
prepare detailed project plans, outlining tasks, time periods, 
and resource needs. We did not find similar plans for other 
mission--critical functions.
    In conclusion, while the Health Insurance and Portability 
and Accountability Act and the Balanced Budget Act have given 
HCFA many tools to tame and police excessive spending and 
abusive billing, HCFA appears to be struggling for various 
reasons to get them all assembled.
    The concern is that while HCFA's responding to implement 
the Balanced Budget Act, other parts of Medicare may get only 
back burner attention--which they can ill afford. We believe 
that a detailed strategy that involves not just a planning 
document, but an approach that encompasses an ongoing process 
of focusing on objectives and priorities similar to what the 
agency has undertaken with respect to the Balanced Budget Act 
is a key first step in preparing for the next century.
    Mr. Chairman, that concludes my statement, and I'll be 
happy to answer any questions you or members of the 
subcommittee have.
    [The prepared statement follows:]
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    Chairman Thomas. Thank you very much. And I would once 
again refer members to the written statement. Although the oral 
one clearly covered key areas, there's still some very valuable 
information in the written statement.
    Just to put in context, your statement that the work force 
has turned over 40 percent in the last 5 years, I have another 
hat I wear around here, which is the Joint Committee on the 
Library, and we're working with the Library of Congress because 
of the inordinate number of staff that will be retiring. And 
it's just one of those anomalies of when you were hired, and 
how long you worked, and who was leaving at the same time.
    Is this 40 percent turnover in the last five years similar 
anomaly? That is people who have been there for a period of 
time, the agency was created, they started, they've reached the 
end of their employment. You used the phrase ``turnover,'' 
which could mean disgruntled employees, lack of morale, 
uninteresting work, failure to recognize achievement. Or it 
could be that folks started in the program and are leaving 
because they're retiring.
    Mr. Scanlon. It's a combination of factors. One is the 
problem that the agency in some respects is graying. The 
Medicare program, as you know, is 33 years old, and many people 
who began their careers at HCFA or its predecessor working with 
the Medicare program have reached the point of retirement. 
Managers expressed to us the concern that that's going to even 
become a more pronounced problem in the near future; more 
senior experience personnel will be leaving the agency because 
they've reached retirement age.
    In addition, there are concerns about morale. How much that 
contributed to turnover, we could not assess. But there are 
concerns that the workload is considerable, the ability to 
reward employees and to recognize employees has some 
limitations, and that in that context you rely upon the 
dedication of employees to ensure that work is completed in a 
timely and effective way.
    Chairman Thomas. Well, your operation is none like that. 
You've got to make sure that quality work is produced, and 
there's always a deadline, which creates difficulties, and you 
have management problems.
    What do you do in terms of rating folks? Do you have a 
pass/fail system?
    Mr. Scanlon. We don't have a pass/fail system. We still 
have a system that maintains different categories of 
performance, and we also do not look at a person overall, we--
--
    Chairman Thomas. How am I suppose to take the context ``you 
still have''? Does that mean that you're----
    Mr. Scanlon. Well, I'm sorry.
    Chairman Thomas [continuing]. You're going to change?
    Mr. Scanlon. No.
    Chairman Thomas. Okay.
    Mr. Scanlon. Though I would say that in looking at 
personnel practices, our General Government Division group has 
identified that a number of private sector firms have switched 
to pass/fail systems. But I think there's an issue of how your 
appraisal system fits into your overall reward and incentive 
structure.
    GAO has a system where we do have categories of 
performance, and we look at different dimensions of 
performance, so there's not a summary judgment, but there's 
some sense of a report card for performing. There's also a very 
careful examination of individuals' contributions to the work 
of the agency. And both of those things play a major role in 
determining the rewards that individuals receive because of 
their performance. And I think that's the key, is that you have 
to take the overall picture into account.
    Chairman Thomas. Well, let's go back then to your general 
statements about HCFA, and then the overall picture. Does their 
ability to recognize extraordinary work or excellent work, and 
reward for that--does that system tend to allow them to do that 
or does it inhibit their ability to do that?
    Mr. Scanlon. We heard from a number of managers that there 
was difficulty in terms of recognizing outstanding work in a 
very visible, tangible way. While managers may reinforce the 
fact that individuals are excellent producers, the system 
doesn't necessarily make it easy to reinforce that.
    HCFA does provide bonuses, but the bonus system--the amount 
of money in the bonus system is relatively limited, and the 
process for awarding bonuses involves a relatively deliberate 
process that interferes, in many managers' minds, with their 
flexibility of being able to respond quickly, and to identify 
that someone's performance was really outstanding.
    Chairman Thomas. What about peer group recognition or 
awareness? Is there a general understanding among people who 
would be considered peers, that people who do good work get 
recognized and move forward, or is there an understanding that 
there are people who don't do much at all still get moved 
forward as well, either in remuneration or otherwise?
    Mr. Scanlon. Within HCFA's career ladder, which you have 
grades 5 through 12, there was concern that with the pass/fail 
system and the other personnel rules, there was considerable 
amount of sort of movement forward on a regular basis. And 
while most of that movement----
    Chairman Thomas. Regardless of performance?
    Mr. Scanlon. Well, we couldn't assess how much might be 
regardless of performance. The concern was expressed that some 
may be regardless of performance, which would impact on the 
morale of others.
    Chairman Thomas. You heard the discussion between the 
doctor and myself about Congress' ability to track where inside 
the executive branch approval of various materials that 
Congress has requested are approved, and there is a 
multifaceted approval structure.
    Is that because they don't have an internal tracking 
system? Should we try to make it more transparent? Her 
indication was maybe we should try to get it to OMB sooner. 
That creates a whole series of questions about how do they 
track stuff inside; what is the procedure.
    What did you find about the ability to, at any time, no 
where they are, where they need to be? Tracking programs, 
deadline management, that sort of thing. What do they look like 
inside?
    Mr. Scanlon. Knowing your interest specifically in 
congressional reports, we sought information about both what 
reports they had to provide you, and their status as well as 
their systems for tracking such reports. And what we found is 
that the information is not systematically available. And 
despite our efforts to get that information from various parts 
of the agency, we were not successful in doing that.
    We do understand that there may be some information of that 
type in some offices, but it's not known at a senior management 
level where you would like it to be known widely, so that 
senior management could accept responsibility for ensuring 
reports get to you in a timely way.
    Chairman Thomas. Well, since your job is to critique 
others, my assumption is you have a tracking program in place, 
and it would be used as a model for others?
    Mr. Scanlon. Well, we have a tracking program, and we think 
that it does an effective job. There is a great deal of 
accountability within the General Accounting Office, in the 
sense that every piece of correspondence or request that comes 
from the Congress is tracked. It's immediately logged in and 
assigned to a unit within GAO, and then that unit is 
responsible for ensuring that the request is dealt with 
appropriately, and the tracking system is updated to reflect 
that we have taken appropriate actions.
    And I can tell you that management above me is constantly 
asking about what is happening in terms of anything that is out 
of place with respect to jobs that are assigned to us.
    Chairman Thomas. As we continue to request various agencies 
and departments to make change, although your model may not be 
the appropriate one because of size, or scale, or content, if 
we're going to critique, we've got to provide options or clear 
real world options available to these folk. And frankly, this 
is an area that I'm going to ask you to continue to look at.
    It's one thing to simply say you don't have a good system; 
it's another to try to provide them with some guidelines as to 
where they can go, or at least some options. And if they don't 
follow the options, they should have a good reason as to why 
they don't.
    So I appreciate very much what you've done for us in a 
relatively brief period of time, and look forward to visiting 
with you once again.
    Mr. Scanlon. Thank you, Mr. Chairman. We'll be happy to 
follow up on that as well.
    Chairman Thomas. Does the gentleman from California wish to 
inquire?
    Mr. Stark. What's your turnover rate in recent years at 
GAO?
    Mr. Scanlon. Right. GAO's turnover is really not something 
that would be useful to compare at this point in time, because 
GAO has undergone a significant downsizing over the last five 
years. And so we have had a number of buyouts and early outs, 
and we have not done any hiring for about a six-year period.
    So, I don't know the answer in numerical terms, but if I 
did, I'm not sure it would be a useful comparison.
    Mr. Stark. Twenty-five, 30 percent, maybe?
    Mr. Scanlon. Well----
    Mr. Stark. It's not relevant. As you say, it may not be 
relevant----
    Mr. Scanlon. If you deal with it in terms of people 
leaving, it's much harder than that, because we've gone from an 
agency that was 5,300 people to an agency that's 3,200 people.
    Mr. Stark. Let me go over some math with you, and see if I 
can get you to start an audit.
    We used to have AAPCCs average county payments. It would be 
within your province to audit how we calculate those county 
payments, right?
    Mr. Scanlon. Right.
    Mr. Stark. Try this. Somebody has suggested that there's 
around 14 percent incorrect payments; some of it's fraud, some 
of it's just mistakes. But we are overpaying in the whole 
Medicare system by 14 percent, right? Have you heard that?
    So, take a county where we're paying $3,000 as the county 
payment, what we used to call the AAPCC. The government pays 95 
percent of that rate which would be a payment of $2850, right? 
If my math is right.
    Mr. Scanlon. That's correct.
    Mr. Stark. Wait a minute. If you all were doing your job, 
you'd knock 14 percent out of that $3,000. Because why should 
we pay the HMO 95 percent of that 14 percent that's fraudulent 
payment? You follow where I'm going? And therefore, my 
contention is that we are overpaying the managed care plans in 
each of these areas, regardless of what you think about the 95 
percent. By my cakulation, the payment would be reduced to 
$2,550. We'd be saving about $300 a patient if we just took out 
the fraud and abuse.
    Could you review that for me in terms of what the law says 
we ought to pay, and what do we account in there for this fraud 
and abuse? It may be that a simple reinterpretation of the 
present law, based on whatever you can certify is fraudulent 
overpayment, would reduce our managed care payments 
substantially.
    Mr. Scanlon. We'd be happy to look into that, both from a 
legal perspective, and I think there's also a question of the 
potential impact. Because fraud and abuse, at a 13 or 14 
percent rate, which was identified in the Inspector General 
study, represents a national rate. And we know from our prior 
work that there are very great differences in the incidence of 
fraud and abuse in different areas of the country.
    So in terms of the equity that one would want do in 
adjusting payments, we need to think about how to take that 
into account.
    Mr. Stark. Oh, I have no quarrel with how you take it into 
account, but it's a big enough chunk that it ought not to be 
ignored.
    Mr. Scanlon. It certainly--I'm sorry.
    Mr. Stark. Yes. And so to the extent that you could shed 
some light on that, it would be helpful. I'd like a comparison 
among counties. For instances, in Minneapolis the AAPCS is 
$3,000. In Miami, it's $8,000. If you reduce 14 percent of 
$8,000, you're getting up to thousands of dollars that we've 
overcalculated for the payment of managed care. It is arguable 
that in a capitated system there isn't any room for fraud and 
abuse. We just pay them that fee, and it's up to the managed 
care plan to do as best they can. If they have fraud and abuse, 
it's their worry. The Government shouldn't be financially 
compensating them that. It certainly is something I hope you'll 
look into.
    Mr. Scanlon. We can look into it. The other thing I would 
notice, that in the 14 percent it's important also to remember 
that the basis for that is really inappropriate payments, not 
just fraud and abuse.
    Mr. Stark. No. I said that at the beginning, Doctor.
    Mr. Scanlon. Right.
    Mr. Stark. I'm not suggesting it's all theft, but even if 
it's an inappropriate payment, that doesn't happen in managed 
care. It's a monthly capitated rate, and if we calculate that 
rate, knowing that there are inappropriate payments in the fee-
for-service community, we are overpaying the capitated rate. 
You're right on target.
    Mr. Scanlon. I was just going to add though that a 
significant number of the inappropriate payments were due to a 
lack of documentation documentation that might be provided if 
there were greater effort.
    Mr. Stark. Again, no quarrel as to why. I'm not finding 
fault here, I'm just trying to deal with the fact that, if you 
and I agree that there is overpayment, for whatever reason--sun 
spots, the tooth fairy, that is creating an overpayment in the 
capitated payment, we shouldn't be paying it. We calculated the 
payment on the idea that they should collect a reasonable 
percentage of what we spend on health care in a community for 
managed care. But that phantom amount for fraud, whatever it 
is--and let's say it's 14 percent just for argument--whether 
it's theft or whether it's just entropy, we ought not to be 
including that.
    Please----
    Mr. Scanlon. We will look into it.
    Mr. Stark [continuing]. Please give me some background on 
how those things are calculated, it would be helpful to the 
committee.
    [The information was not available at the time of 
printing].
    Mr. Stark. Thank you, Mr. Chairman.
    Chairman Thomas. Certainly. Does the gentleman from 
Louisiana wish to inquire?
    Mr. McCrery. Thank you, Mr. Chairman. Just a note about Mr. 
Stark's line of questioning. The law does require, I believe, 
one-third of the managed care plans to be audited, if you will, 
every year; and if they are found to be charging more than the 
cost plus a reasonable amount, they are required to give more 
benefits. We don't cut the premiums that we pay, we require 
them to give more benefits. So we are looking at that already 
in the law.
    Dr. Scanlon, have you had an opportunity to examine the 
work-at-home policies of HCFA? And if so, I have been told that 
HCFA management is currently considering expanding their work-
at-home policy to a much greater number of employees.
    Are you aware of that, and can you give us any opinion on 
that?
    Mr. Scanlon. We are aware that the agency is in the process 
now of considering the inclusion of central office staff under 
the arrangement of flexi-place or kind of a telecommunicating, 
where there would be some work allowed at home. Within the 
regional offices this has been true in the past, but there's 
been great differences in the share of employees in those 
offices that have been participating in these kinds of 
arrangements, from a very, very small number in some regions, 
to a more significant number, but still a much modest fraction 
in other areas.
    We've also heard from managers about the flexi-time 
arrangements, which allow individuals to adjust their work 
schedule in terms of time of reporting: for example, whether 
they would work five days within a week, four 10-hour days 
within a week, or over a two-week period arrange their days 
differently than doing 10 days and two weeks.
    There were some concerns expressed on the part of managers 
about the potential interference with needed work that the 
flexi-time arrangement may introduce, in that there was not an 
opportunity for people to have critical meetings because of 
certain individuals not being available.
    In looking at this at other agencies and as well within 
GAO, the issue is one where these policies by themselves may be 
fine. The issue is managerial use of these policies. In both 
cases, flexi-place and flexi-time, there is a requirement for 
managerial approval of an arrangement. And a manager needs to 
consider the needs of the agency in terms of what arrangements 
can be approved or should be approved.
    Mr. McCrery. But right now, I think in GAO and HCFA as 
well, the work-at-home policies apply to very few of the staff, 
mainly professional employees, Ph.D.s that might need to do a 
lot of reading at home, you know, things like that. And as I 
understand the proposal at HCFA, it's going to be much broader 
than that. It will apply to just general staff in HCFA. Is that 
correct?
    Mr. Scanlon. Let me ask Ms. Aronovitz, who did more of the 
interviewing--or who did all of the interviewing up in 
Baltimore, to respond to this.
    Mr. McCrery. Please.
    Ms. Aronovitz. We heard that this is a provision that's 
under negotiation with the union right now. We don't know 
specifically how the provision will read. One of the concerns 
that the managers said, was that if in fact they had final 
judgment about whether somebody could work at home, then they 
wouldn't be quite as concerned, because there are occasions 
when, as you say, if there are proposals that need to be read, 
there are certain occasions when it's very conducive to working 
outside of the office.
    The managers were concerned that they would not have the 
ultimate control in approving these, and that is a concern that 
is still unsettled in the negotiation process. So we're not 
sure yet how that's going to work out.
    Mr. McCrery. What's your opinion of such a policy?
    Ms. Aronovitz. We really support flexi-place, to the extent 
that it furthers the goals of the organization. But it's very 
important that there's a very strong balance between the 
individual's needs and the needs of the organization, and the 
organization absolutely has to be considered. And where it's 
not, then we would have concerns.
    Mr. McCrery. So what does that mean? Does that mean 
managers ought to have the final say or----
    Ms. Aronovitz. The policies are set up in a way to make 
sure that when people work at home it's only to further the 
needs of the organization, that is, in instances where, if they 
couldn't work at home, they wouldn't be able to be doing work 
at all.
    Mr. McCrery. Yes, that makes sense. But are you telling me 
that managers then within the organization ought to have the 
say so on who gets work at home, or flex time, or whatever, and 
make sure that they do have work that they can do at home, and 
that the work that they do complements the overall goal of the 
agency?
    Ms. Aronovitz. Yes.
    Mr. McCrery. Thank you.
    Chairman Thomas. No other member of the subcommittee wishes 
to inquire?
    The gentleman from Louisiana, Mr. Cooksey.
    Mr. Cooksey. Thank you, Mr. Chairman.
    The direction of my questions is about information systems. 
And my concern is that yours may be inadequate and can it be 
improved.
    Prior to my joining this august body, I understand that 
there was a time when the people on the other side of the aisle 
were running Congress; they ran Congress with--the business of 
Congress with pen and paper, and a ledger book, presumably 
because that's the way it'd been done the previous 200 years. 
If my memory is correct, there were even some fraud and abuse 
in the banking--Congress' bank and their post office, but I 
can't really remember that in detail. But they had no 
information system. It was only after 1995 and eight-month 
transition, that they put Congress' business on an information 
system, on computers.
    I have the feeling that probably HCFA's information systems 
could be modernized, updated to eliminate some fraud and abuse. 
What have your plans been? What would the cost be? And what 
would the timeline be?
    Mr. Scanlon. We would agree with you wholeheartedly. In 
looking in the past, one of the real tragedies of the Medicare 
transaction system effort was that there was a real need for 
improving the management of information produced by HCFA's 
claims processing systems. Because a share of the fraud and 
abuse--the share of the dollars that we lose to fraud and 
abuse--comes about because we are not able to process 
information as effectively as we might, given today's 
technology.
    The concern that we've expressed when the Medicare 
transaction system effort was underway was that there had not 
been a comprehensive plan, dealing with the kinds of objectives 
that you just stated, in terms of identifying the goals for 
this system, identifying the essential features that such a 
system would need in order to accomplish those goals, setting 
up a timeline, and identifying the cost of sort of putting that 
kind of system in place. Those were not done well, or at all, 
with respect to the Medicare transaction system. They need to 
be done with a system that HCFA needs for the 21st century.
    At this point in time, our understanding is that HCFA is 
starting this process over, though given all the other things 
that they're doing, it's not receiving the highest attention; 
it does not have the highest priority. But it is something that 
they are fully aware of, and that they really need--that they 
recognize they need to address this quickly because it is 
critical.
    The year 2000 problem is something that is of the highest 
priority, and is something that is related to the information 
systems, but I think that they will have to probably do this in 
two steps. One is deal with the year 2000, and then, secondly, 
design an information system that really is the system for the 
21st century.
    Mr. Cooksey. Well, I'm not worried about the 2000 problem. 
I am convinced that some 18- or 23-year-old entrepreneur will 
come up with that problem, and will become a billionaire 
overnight. But the experience with the IRS has not been very 
good in developing an information system. They spent--I forget 
what--several billion dollars, and said, we give up.
    The magnitude, the complexity of your problem I would think 
would be equal, or your responsibility. Do you think that you 
could do a better job in coming up with a system? Or would you 
do it yourself, or would you go to the private sector, or what 
would your plan be to come up with a better state-of-the-art 
information system?
    Mr. Scanlon. Well, this will be HCFA's responsibility, and 
we will do the best we can in terms of providing constructive 
oversight of how they undertake this.
    It's been a task of GAO for a number of years to monitor, 
not just for HCFA, but for the agencies of government, the 
movement towards improved information systems. And we've done a 
considerable number of reports on those. We can share some of 
that information with you about the principles that we've 
identified that are critical to this task.
    In some respects there's no one solution, and HCFA's 
challenge is certainly unique. There's an estimate that by--or 
in--their early 21st century they will be paying over a billion 
claims every year. In addition to the challenge of dealing with 
the Medicare Plus Choice plans, where we would anticipate there 
will be more than 500 plans, we'll have a quarter of the 
beneficiaries in those plans, and have the freedom to change 
plans. And the net result will be that there will be 
considerable amount of work in tracking enrollments, 
disenrollments, and payments.
    So the challenge isn't perhaps as daunting as the one 
facing the IRS. We have established some guidelines as to how 
agencies may proceed in pursuing this, and will be happy to 
share them with you; but at the same time we do need to wait 
for HCFA to take the lead in terms of laying out their initial 
plans, and then we can work with them to refine them.
    Mr. Cooksey. I would like to see where you are, if I could 
have that information.
    One closing question, yes or no answer. Do you think you're 
doing a better job of managing your information system and your 
business than Congress did before 1995? You're not doing it on 
pen and paper, are you?
    Mr. Scanlon. Beg your pardon?
    Mr. Cooksey. You're not managing it with pen and paper?
    Mr. Scanlon. We are not managing with pen and paper. So I 
guess then the answer is yes.
    Mr. Cooksey. You can get out without answering it.
    Thank you, Mr. Chairman.
    Chairman Thomas. Thank you very much. Thank you very much 
Dr. Scanlon, Ms. Aronovitz. No additional questions. We'll be 
calling on your expertise and your organization in the near 
future.
    Last panel for today: Stuart Butler, who's obviously been 
before us in the past--we look forward to his testimony--the 
Heritage Foundation. Dr. Paul Ginsburg. And it's pleasant to 
find out that other folk who've been studying the concerns that 
we have as well, if not in direct context, at least in a 
general context, that Dr. Michael Gluck, National Academy of 
Social Insurance, and Marion Lewin, who was the study director 
of a Committee on Choice and Managed Care, Institute of 
Medicine.
    I want to thank all of you for coming. Your written 
testimony will be made a part of the record, and you can 
address us in your timeframe as you see fit. And we'll start 
with Dr. Butler. Thank you.

   STATEMENT OF STUART BUTLER, VICE PRESIDENT, DOMESTIC AND 
        ECONOMIC POLICY STUDIES, THE HERITAGE FOUNDATION

    Mr. Butler. Thank you, Mr. Chairman.
    Congress last year enacted a series of reforms that 
modernized Medicare, as you mentioned in your opening 
statement. If HCFA is to carry out its new role under these 
reforms, it must respond to two challenges. It must be able to 
organize a market of competing health plans and provide the 
information necessary for beneficiaries to make wise choices 
within that market; and it must make the traditional fee-for-
service system a more effective competitor to managed care and 
other private plans that are available now to beneficiaries.
    Broad economic and managerial principles would suggest two 
key strategies are needed to respond to these challenges. 
First, the management of the market of competing plans and the 
provisions of information to consumers must be completely 
separate from the operation of any particular plan. That is a 
very basic principle of economic organization in a market. 
Those responsible for setting the rules of competition, and for 
providing consumers with dispassionate information on rival 
products, should have neither an interest in promoting any 
particular product, nor even the close relationship with one of 
the competitors. That is why umpires in baseball do not own 
baseball teams. But HCFA today carries out both of these 
conflicting functions.
    Second, the managers of an in-house government plan in a 
competitive market should be given wide latitude to introduce 
innovations in organization and marketing. But today, as I note 
in my testimony, there are several obstacles that frustrate 
efforts by HCFA managers and staff to make the traditional fee-
for-service plan more competitive and better attuned to the 
customer needs and desires.
    With this in mind, I believe Congress should make two major 
organizational changes in Medicare. One, Congress should create 
a Medicare Board responsible directly to the secretary of HHS. 
In effect, Congress should create within HHS a body that is the 
functional equivalent of the Office of Personnel Management 
within the FEHBP. The function of this body and the focus of 
the staff within it should be to organize and operate the 
market of competing plans, including the traditional fee-for-
service plan; and to provide Medicare beneficiaries with the 
information they need to make the wisest choice possible. The 
board and its personnel should be separated completely from the 
personnel running the fee-for-service plan.
    This step would effectively split HCFA into two separate 
agencies within HHS. One agency would set the rules of 
competition in Medicare, act as an umpire, and help 
beneficiaries make choices. The other, among other tasks, would 
run the fee-for-service plan, competing in that market. I 
suggest in my testimony how such a board should be structured.
    The second step: Congress should give managers of the fee-
for-service program greater discretion to be innovative and to 
modify benefits. It will continue to be difficult for HCFA to 
modify the fee-for-service benefits gradually in order to make 
them more competitive and modern, as long as Congress 
micromanages virtually all organizational and benefits 
decisions. On the other hand, as long as the fee-for-service 
plan is to be a benchmark standard plan available everywhere, 
Congress must have the ultimate control over the benefits 
package.
    I would suggest that Congress resolve this dilemma by 
requiring HCFA to propose annual modifications in the fee-for-
service benefits package, and that Congress restricts itself to 
an up-or-down date vote on the proposed benefit changes as a 
whole.
    To improve this process further, Congress could designate a 
standard benefits commission within HCFA, with commission 
members selected for fixed terms by Congress. This commission 
would make the detailed benefit proposals to be considered by 
Congress.
    Structural changes of the kind I've suggested should of 
course be considered very carefully and enacted slowly. In the 
meantime, I believe Congress should make some changes now to 
improve the organization of Medicare that will also help 
evaluate the probable effects of larger changes. And I 
mentioned those in my testimony, Mr. Chairman.
    [The prepared statement follows:]
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    Chairman Thomas. Thank you very much, Stuart.
    Dr. Ginsburg.

 STATEMENT OF PAUL GINSBURG, PH.D., CHAIR, STUDY PANEL ON FEE-
FOR-SERVICE MEDICARE, NATIONAL ACADEMY OF SOCIAL INSURANCE AND 
      PRESIDENT, CENTER FOR STUDYING HEALTH SYSTEM CHANGE.

    Mr. Ginsburg. Thank you, Mr. Chairman.
    I am appearing as chair of an expert panel convened by the 
National Academy of Social Insurance, and am accompanied by 
Academy staff director, Michael Gluck. This panel's outstanding 
member have depth of experience in Medicare, private health 
plans, and health care delivery. And many have extensive 
experience in both government and the private sector.
    The panel's report, ``From a Generation Behind to a 
Generation Ahead: Transforming Traditional Medicare,'' is being 
released today, and my testimony is drawn from that report.
    Even if Medicare+Choice develops rapidly, large numbers of 
beneficiaries will continue in the fee-for-service Medicare 
program for the foreseeable future. The structure of this 
program has changed little since 1965; its essence is to pay 
bills. While the Congress has accomplished a great deal in the 
1980s in mechanisms for setting payment rates, little has 
happened to encourage more effective delivery of services to 
beneficiaries.
    There are opportunities to improve quality and reduce 
program costs, especially for those beneficiaries with chronic 
illness. Leading private insurance plans have increased their 
activities to manage care over the past ten years, but Medicare 
has not followed.
    A number of management tools used in the private sector 
hold promise for Medicare; these include disease and case 
management, incentives to use selected providers and 
competitive procurements.
    We cannot say at this point precisely which tools will be 
most effective in fee-for-service Medicare. HCFA needs to test 
the potential of such tools and to encourage broader use of 
those that are successful. The limited progress in this area is 
not because of lack of interest by the leadership of HCFA, but 
rather, the substantial barriers to HCFA performing this role; 
the Congress tends to allow little latitude to innovate; and 
HCFA does not have the authority to integrate successful 
demonstrations into the regular Medicare program.
    The Congress has begun to reduce barriers. Provisions in 
the Balanced Budget Act and in the Health Insurance Portability 
and Accountability Act move in this direction, but I would 
characterize these steps as reflecting innovation by exception. 
A more comprehensive approach is needed. HCFA needs a broad 
mandate to pursue ongoing improvement in fee-for-service 
Medicare by incorporating effective care management tools.
    The Panel made specific recommendations. First, the 
Congress should mandate fee-for-service Medicare to move beyond 
its traditional role as a billpayer and take responsibility for 
quality and cost of care. Second, the Congress should direct 
HCFA to promote innovations in Medicare fee-for-service by 
adapting the best practices of private health plans to this 
program environment. These innovations should be targeted 
toward those geographic areas and populations where they could 
be most effective. Third, to carry out these innovations, HCFA 
should have the authority to waive some statutory requirements 
and should be able to contract with a variety of qualified 
private organizations that specialize in particular services, 
such as patient education, case management, or utilization 
review.
    Along with this additional authority, accountability should 
be demanded. The Secretary of HHS should report annually to 
Congress on how HCFA has used its authority to innovate, and 
what the results are. Congress should designate an advisory 
body, such as the Medicare Payment Advisory Commission, to 
review this report.
    In conclusion, to advance the quality of care for 
Medicare's fee-for-service beneficiaries and to ensure that 
taxpayers' money is well spent, HCFA must have modern 
management tools at its disposal. In managing fee-for-service 
Medicare, HCFA should have the capacity to apply new knowledge 
from research and the private sector about how best to manage 
health benefits for older Americans and those with 
disabilities, especially as the number of beneficiaries living 
with chronic conditions continues to grow.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]
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    Chairman Thomas. Thank you, Dr. Ginsburg.
    Ms. Lewin.

 STATEMENT OF MARION E. LEWIN, M.A., STUDY DIRECTOR, COMMITTEE 
       ON CHOICE AND MANAGED CARE, INSTITUTE OF MEDICINE

    Ms. Lewin. Mr. Chairman, Mr. Stark, and members of the 
committee, I'm very pleased to be here today, on behalf of the 
IOM Committee on Choice and Managed Care, and my remarks are 
based on their report. The list of the members of that 
committee and their recommendations are attached to the 
testimony.
    Before I provide my few comments on this very important 
topic of today's discussion, I want to provide some important 
clarifying information. One is that the report that we did came 
out in August 1996, before the passage of the Balanced Budget 
Act of 1997. Second, the committee was mandated to look 
primarily at how to make the Medicare Choice system more 
accountable, and to improve informed purchasing by and on 
behalf of beneficiaries. It was not given a specific mandate to 
look at the organization of HCFA, but clearly as we went 
through our work, the organization of HCFA and the role of HCFA 
did become an important topic. But only one of the study's 
seven recommendations pertains to HCFA, and regarding that 
recommendation the committee made the following points.
    It said that, if we want to make the Medicare market more 
accountable, trustworthy, and assuring for Medicare 
beneficiaries, there were some concerns about HCFA; that 
administration of a market-oriented multiple choice program and 
the management of the traditional Medicare program involved 
very different corporate culture and missions; that the two 
functions require different types of management, staff 
expertise, orientation, and knowledge. And the committee spoke 
to the benefit of HCFA recruiting staff and senior managers 
with extensive experience in managing the various aspects of 
multiple choice in the private sector. Then also that a 
flexible response mode to changing conditions and opportunities 
is required for the effective management of a multiple choice 
market in order to provide the best options for beneficiaries. 
Such responsiveness may be hard to achieve with the regulatory 
constraints of HCFA.
    As part of its recommendation, the committee suggested an 
entity for study, which we call the Medicare Market Board, 
which has taken on a life of its own. As the committee was 
envisioning this Medicare Market Board, they looked at a model 
at something like the Federal Reserve Board. The committee 
didn't investigate it further. We didn't have specific experts 
on the committee on public administration and organizational 
management. But they felt that a Medicare Market Board should 
have the stature, leadership and resources to hold plans 
accountable, and to be a dispassionate developer of the rules 
of the game.
    Since the publication of our report, I think the committee 
believes and the committee is now doing some continuing 
activities, that HCFA has made some impressive strides to more 
capably and effectively administer this complex and challenging 
world of choice. The committee is especially heartened by 
HCFA's new center for beneficiary services because they are 
undertaking or implementing many of the other recommendations 
we made in the report, and is also applauding the establishment 
of the Center for Health Plans and Providers, which does 
include many, if not all of the elements and responsibilities 
that we have envisioned under the Medicare Market Board.
    I think that the major difference is that as some of the 
other witnesses have said, that the committee felt that there 
really needs to be a fire wall between the choice plans and the 
fee-for-service. Even on our committee, we had representatives 
from the fee-for-service world and representatives from the new 
managed care world. There was a tension. The people from the 
managed care world really didn't want fee-for-service to 
succeed. They didn't really want it to be improved because it 
would compete with them.
    So I think there is a feeling that if in a large self 
insurance plan, which you could really think of as Medicare, 
you do need a fire wall between people who are managing and 
administering the competitive choice plan and the ones that are 
managing the fee-for-service.
    As part of our committee's work, we heard a lot of 
testimony from model purchasers, the people that we feel are 
doing it right, that are the leaders in this arena. I do want 
to share with you that certain themes and cautions from these 
purchasers, from these plans, from these States, from these 
organizations, were heard again and again, both in the 
commission papers and in our hearings. That is, that doing it 
right requires a real commitment of staff, talent, time, 
technology, and resources in order for these kind of strategies 
to have a real payoff. It can not be done on the cheap. I think 
the lack of resources is a real detriment and a problem for 
HCFA as it has been given these major, major new 
responsibilities.
    Why don't I end here so that we can allow time for 
discussion. Thank you.
    [The prepared statement follows:]
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    Chairman Thomas. Thank you very much, Ms. Lewin. I 
understand that your study and book came out prior to the BBA 
being passed, but HCFA reorganized itself prior to the BBA 
passing as well. I read with note on page 107 of your book, and 
you indicated in your testimony, that the ``administration of 
multiple choice programs and the management of the traditional 
Medicare programs evolved very different missions and 
orientations.'' But in your testimony, you indicated that you 
believe HCFA has made impressive strides to deal with this.
    Was the reorganization of HCFA, notwithstanding it occurred 
prior to the BBA, the direction that you think they should be 
going? Or should it be more in the direction of I think 
probably to use Butler's position as a kind of a guidepost, 
that in fact bringing the two together, the fee-for-service and 
managed care, may not be the right direction. You indicated 
they clearly deal with things differently. Where are you on the 
fire wall? I don't think you contradict yourself, but I am a 
little concerned about your praise of HCFA and the point you 
made in the book.
    Ms. Lewin. Okay. Let me try to clarify that. First of all, 
in terms of HCFA's reorganization, we do feel that the Center 
for Beneficiary Services is certainly a step in the right 
direction. Our other recommendations about how to develop an 
infrastructure for information for Medicare beneficiaries and 
what is needed, many of these are now the priorities for the 
Center for Beneficiary Services, whether they can truly 
implement that ambitious agenda with limited resources of 
course----
    Chairman Thomas. But we were very concerned about that. We 
are going to monitor the resources. But that is more of an 
informational, relational. I am concerned about the structural 
change of in essence taking the whole managed care program that 
was outside the house or maybe in the garage, and bringing it, 
integrating it into the overall structure. Not the end work 
product of some areas that are beginning to understand 
belatedly the beneficiary is a customer and they need 
information.
    Ms. Lewin. Well, let me just say that the Medicare Market 
Board, we were clear that we felt that there should be a 
dispassionate group that would set the rules for the game for 
both managed care and fee-for-service. Then the second level is 
how you actually contract with plans. We felt that it even 
could be under the Medicare Market Board, but at some level, 
there had to be a fire wall between the people who administer 
the one part of Medicare and the other. The committee stopped 
short in terms of making a final recommendation, because we 
really didn't feel that we had the expertise and the time, this 
was a very short-term report, to actually develop the details 
of how that should be done.
    There is a potential of a Medicare Market Board building 
some kind of a fire wall even in one organization. I mean it 
certainly has been done. But we are not able to supply the 
details.
    Chairman Thomas. Stuart, obviously your approach is that 
with your number of analogies, that you really shouldn't be 
doing two in the same shop. What is your assessment of the 
reorganization that HCFA carried out, a help or hindrance to 
moving in the direction that----
    Mr. Butler. Well, as Marion Lewin pointed out, some of the 
functions that would have to be under some kind of marketing 
board have been developed. There is an intent at HCFA to try to 
do this. However, no reorganization within the current 
structure can achieve what you really want to achieve because 
it's an issue of a culture. It's an issue of the skills that 
are involved. It is also an issue of keeping people apart from 
each other. Keep the umpires away from the players. This is 
absolutely crucial for Medicare to be successful. As Ms. Lewin 
pointed out, within her committee, the whole world can be 
divided into fee-for-service people and managed care people, as 
far as I can see. There is this dichotomy. So I think that 
ultimately there must be a revision of the HCFA reorganization 
to separate these functions out, if we are going to see 
Medicare work effectively for everybody.
    Chairman Thomas. One of my concerns is that I think in fact 
failure to innovate was reinforced by the fact that the fee-
for-service was structured as the way to operate. One of the 
reasons we are lagging behind now is that it's the Government's 
structure and not a flexible one that can change with the 
marketplace. I think maybe skilled nursing facilities were 
invented by Government payment structures. My very real concern 
is that what we are talking about a fire wall between fee-for-
service and managed care, and we are beginning to think that 
there's this bifurcated world or that this is the way things 
are, I am worried that we are going to stifle innovation in 
that regard and that we have got to create the maximum 
opportunity for innovation. Those were the various programs we 
had. To the degree that bureaucracy locks itself into a certain 
pattern now, it inhibits the change that I think needs to take 
place. So I am very much concerned about anybody saying that 
there is this bipolar world in terms of an approach. I am 
trying to figure out a way to deal with it in multiple ways.
    The other concern I have, both in terms of Dr. Ginsburg and 
I'm sorry to say, Dr. Butler, you as well, if we are going to 
run a defined benefits world, I can assure you, we ain't going 
to let those folk make the decisions in the general sense or 
for Congress to judge on a pass/fail basis an overall program.
    Now, if you want to talk about shifting to a defined 
contribution, where Congress' obligation is to pony-up ``X'' 
number of dollars, then I am more willing to talk about letting 
the professionals manage the packaging and delivery of those 
dollars to maximize the benefit both to the beneficiaries, and 
get the maximum distance out of your dollars. Now that is a 
different approach to the way that you have offered it.
    So what is your reaction to moving to a defined 
contribution which would maximize HCFA's ability to package and 
reorganize and create a comfort level on the part of Congress, 
because that is what they are supposed to be doing? We are 
doing what we're doing. But in a defined benefits world, there 
is no way you are going to.
    Mr. Butler. I agree, as you know, about moving towards a 
defined contributions system. I think that is ultimately the 
way to go. But even if you don't complete that task, I would 
just make two observations about the point you made.
    First, I would totally agree that we need to have increased 
flexibility in the way in which the fee-for-service in the 
system operates. But second, I think you would also accept that 
there is clearly a dilemma in the process we have of trying to 
set benefits within a defined benefits system. Because in 
reality, all kinds of political pressures come to bear on 
Congress regarding what services are provided. Provider 
organizations are highly influential and pressing their cases. 
One of the problems we have with the Medicare system is that 
effect.
    Somehow we have got to find a midway position between 
allowing orderly evolution and yet also having effective 
Congressional control over the benefit structure. That's really 
what I was getting at. I don't have a simple answer to it. I 
just think that somehow we have got to get away from either 
complete control by a bureaucracy over benefits or by a 
political process constantly trying to determine how long 
people should be in hospital and what services they should be 
provided in their every circumstance.
    Chairman Thomas. My concern is that to the degree you would 
move to your halfway house of an all-or-nothing approach still 
dealing with defined benefits, the way in which Congress would 
express itself unfortunately, Ms. Lewin, would be back to 
cutting funding for the support of, the administration of, and 
then you kind of create a built-in guaranteed failure of the 
halfway house, because the only way you can get at it is to 
control the mechanism of delivery or of review or the rest.
    So at some point we have to engage in a fairly fundamental 
debate about more fundamental changes, not just in the 
management, but in the program itself. We have to be aware of 
one clearly affects the other, and not think that we can just 
play with the management structure inside HCFA and solve a lot 
of problems. I guess what I am saying is this is an ongoing 
changing process. We have only begun. Some people think we have 
finished. I know you do not. But we will be looking to people 
like you to give us some models. I especially have difficulty 
with a quality group of folk coming together who could provide 
answers and then say well, we have decided we can't come up 
with something. Somebody has got to walk the plank. I don't 
think it's Congress that should walk the plank on coming up 
with specific changed suggestions. We need you folk as well. 
But I appreciate what you have done.
    The gentleman from California?
    Mr. Stark. Thank you, Mr. Chairman.
    Dr. Butler, on page 3, you talk about the separation of the 
management of the market from the management of any plan. I 
mentioned that in my opening statement. You can't have somebody 
promoting a product and regulating it. It's like the problems 
with the FAA who promote airline travel and at the same time 
tell airlines how to operate. It's an inherent conflict of 
interest.
    I would like to bring up another issue. I think you make a 
strong case for a problem that I have complained about for some 
time. That problem is the National Committee for Quality 
Assurance and the Joint Accreditation Committee for Hospitals. 
Both of those groups have their boards stacked with people who 
either operate or own the very entities that these people are 
supposed to investigate on behalf of the Federal Government. My 
sense has been that we have got to separate that. We cannot 
have the fox in the hen house. Does that comport with your 
concerns? If we are going to contract with outside groups, 
basically private groups, to do quality investigations for us, 
there should just be an absolute prohibition between any 
contact with that company and the people that are 
investigating.
    Mr. Butler. I'm not an authority on the structure NCQA, so 
I would hesitate to talk in detail about that. I would say that 
your general principle is one I would agree with as a general 
matter, namely that for those who set the rules of the game 
that will affect any particular player should, at the very 
least, any involvement should be very explicit and clear and 
taken into account. Ideally, the people involved should not 
have a direct interest in the outcome of any of those 
decisions, I think as a general principle.
    Now there is also of course the issue of an advisory role. 
It makes a lot of sense to have people who are practical 
players in a field to give advice and to make recommendations 
and so on. But that can be separated from the ultimate 
authority of who makes the decision.
    Mr. Stark. Thank you. I, by the way, just as a sidebar, 
like your idea of a board to manage the Medicare managed care 
plan. I would love to discuss that with you further at some 
other time. I think we have to do something in that area.
    Either Dr. Gluck, or Paul Ginsburg, could respond to this. 
We now reimburse virtually any hospital that wants to conduct a 
transplant operation, even though common wisdom would suggest 
that those centers which do many more procedures have far 
better outcomes.
    Would you all support giving HCFA the authority to narrow 
the number of facilities for certain complex procedures so that 
we concentrate experience? I hate to use the words ``centers of 
excellence'', because I'm not sure how you define that. But, 
these centers that have more experience, would we not be doing 
a service by giving HCFA the authority to direct patients to 
them?
    Mr. Gluck. The study panel spent a fair amount of time 
looking at the examples from private health insurance, in which 
patients are steered toward those providers that do better in 
cost and quality outcomes. The panel was struck by that, and it 
certainly informs their recommendations. They didn't get into a 
lot of the specifics about exactly how that would be done.
    Mr. Ginsburg. Clearly, one of the innovations that we can 
imagine would be HCFA identifying for beneficiaries the best 
transplant providers and we're contracting with them. We did 
not discuss whether the ones that do not make that cut should 
not be in the program or they shall just hold non-preferred 
status. But it clearly is in the program's interest to steer 
beneficiaries toward more effective providers.
    Mr. Stark. You also talk about the practice patterns that 
are identified in the Dartmouth Atlas. Somebody recently 
indicated--I think it was Uwe Reinhardt in his Christmas card--
that a procedure that costs $8,000 fees in Miami is only $3,000 
in Minneapolis. Now I have a plan to contract with Northwest 
Airlines. We could do a lot of flying people back and forth 
from Miami to Minneapolis and save a lot of money, it seems to 
me, in between. But all I have been able to find is that these 
huge differences in the cost of care--where the outcomes don't 
reflect--the cost, is tradition. These differences are habit. 
They are a whole host of things which I'm not sure Congress can 
control.
    But I would hope that you could help us in finding some way 
that we could begin to move toward some national standards. 
With two and a half and three times a difference for the same 
procedures with equally highly qualified and well-trained 
providers, we are going to have a problem that is just going to 
intensify if we can't figure out a way to--level that out.
    Mr. Ginsburg. Yes, these variations demonstrate the 
potential for saving money and improving quality by moving 
beneficiaries towards where the best care is delivered. A 
number of implications for the Pand's ideas come up. One is 
that if a certain procedure costs $8,000 in Miami and $3,000 in 
Minneapolis, we should concentrate our efforts improving its 
delivery in Miami, but not in Minneapolis, because I wouldn't 
rule out a Medicare program to provide an option for 
beneficiaries to travel to a facility that has a contract with 
HCFA to provide these services on the basis of its quality and 
cost.
    Mr. Stark. The airlines will be after us. Thank you, Mr. 
Chairman.
    Chairman Thomas. Just briefly along that line, I think it's 
fairly easy to talk about the best move to quality and the 
rest. The difficulty I have is coming up with a really 
objective way to measure some of that. The best way I know is 
to collect the data statistically, create outcomes, compare 
outcomes for dollar spent, and begin to structure it in a way 
that allows you to at least define quality in a relative sense. 
Especially to determine what you get for your dollar. And then 
create some positive guidelines.
    I have a very real concern, this is slightly off the mark, 
but clearly an issue we have to deal with is the ability to 
gather that information, the question of confidentiality, the 
ability to produce with clear protections for folk where it's 
appropriate, the material necessary to produce the outcomes 
research to provide the positive guidelines given the potential 
of some legislation which will limit us. Minnesota has been 
mentioned several times. Over the break, I spent some time at 
the Mayo Clinic talking with them. Their real concern, for 
example, the new Minnesota State law in the ability to collect 
information. The whole question of information collection as a 
matrix for making decisions, both of cost effective and of 
``quality'' will be absolutely critical to us to be able to do 
the kinds of things you have been discussing. It's an area that 
all of us have to deal with because a very simple bill passing 
will eliminate our ability to move in a number of directions 
that would produce quality medical care at a reasonable cost to 
taxpayers.
    The gentleman from Louisiana?
    Mr. McCrery. Thank you, Mr. Chairman. Actually, you asked 
most of the questions that I was going to ask.
    Dr. Butler, if the title of this hearing had been preparing 
Medicare for the 21st century rather than preparing HCFA for 
the 21st century, would you have submitted different testimony?
    Mr. Butler. Well, I would have commented probably on the 
defined contribution issue, as I have done before. But I think 
the structural changes I suggested, whether or not one goes 
further in terms of Medicare reform as a whole, are still sound 
organizational principles for where we are in the structure of 
Medicare, which has been to move from a kind of a one type of 
benefit structure and operation to a much wider choice. When 
you have a range of choices and people have to evaluate them, 
and plans are in competition with each other, it forces I think 
you to look at a structure that makes sure that people have 
information; and it's honest and dispassionate information, 
which is not possible under the present arrangement.
    Mr. McCrery. I thought Mr. Thomas' criticism of your 
proposal was a little unfair, given the constraints of the 
topic of the hearing. I wanted to make sure you had the 
opportunity to say that if you prepared testimony on the future 
of Medicare, it might be different from the 21st century for 
HCFA.
    I happen to agree with the criticisms that Mr. Thomas 
leveled at your proposals, as well as some of the others. Even 
though we could have a dispassionate board, if that's possible, 
I don't think by any stretch of the imagination that Congress, 
as long as we have a defined benefit program, is going to hand 
over to some dispassionate board the power to describe and 
define the benefits. Even if it's on an up or down vote, any 
time you start taking away benefits from people, we are going 
to vote down. That's just the nature of this beast. Now if you 
want to add benefits, we'll vote up.
    So I just don't think your proposal is practical from a 
political standpoint. I understand where you are trying to go. 
You are trying to form some kind of midway stop along the way 
from where we are now to a defined contribution. I hope that's 
what you have in mind. But I don't think we can do that. I 
think we have finally faced the question of whether we have a 
defined benefit program or a defined contribution program. We 
can't go halfway. We have tried. I mean we have done these 
little piddling things with choice and Medicare Plus and all 
this stuff. It's going to fail, in my view. We are going to 
continue to have costs go through the roof and we're going to 
continue to be the arbiters of what benefits those managed care 
plans must provide. So I just don't think that your proposal is 
going to get us to where we need to go.
    We really ought to just face the question and debate it 
honestly and have it out. Then maybe we'll win and get a 
defined contribution system and let the market work. Maybe we 
should just fold Medicare into the private healthcare 
marketplace all together, do away with Medicare as it exists 
today and have some sort of Government assistance to everybody 
for healthcare, from children all the way up to the most 
elderly, but let the market be the manager of the system and 
not the Government.
    Mr. Butler. I don't fundamentally disagree with that 
characterization of where we need to go.
    Mr. McCrery. I would hope not.
    Mr. Butler. I am doing my best today to look at the current 
situation of how to improve it. I think you would agree, I 
suspect, that a large group of legislators trying to figure out 
a comprehensive package of benefits and to make sure that it's 
improved every year on the basis of best knowledge is not a 
very good way of doing it.
    Mr. McCrery. It's nuts.
    Mr. Butler. It may be the only way right now. However, I 
would suggest that you look at one of the short-term proposals 
I made, which was simply to say let us set up at least an 
advisory body of some kind to suggest to Congress.
    Mr. McCrery. I think that's a swell idea. I hope we do it, 
but I don't have high hopes for solving the problems with it.
    Does anybody else want to comment?
    Ms. Lewin. I guess I did want to comment in this discussion 
between a defined contribution or a defined benefit. I mean 
that is a whole different debate. But when this committee did 
its work, I think one of the underlying issues, and I know it's 
been overplayed, is trust in the system. There is now a lack of 
trust on behalf of beneficiaries because they feel that the 
information they get is inadequate, it's not trustworthy, it's 
not understandable. When we looked at best practices, like 
CalPERS, or Pacific Business Group on Health, and some of the 
large corporations, when consumers or patients trust the 
information and feel that their employer is on their side but 
also is interested in providing more cost effective appropriate 
healthcare, then you can move to a more value-based system. But 
I think when you tell the elderly we're going to go to a 
defined-contribution without that inherent trust, I think that 
is a problem.
    Mr. McCrery [presiding]. That's a good point. Obviously if 
we went to a defined contribution system, we would have to have 
some Government-imposed information availability program so 
that seniors and everybody else in the healthcare system could 
make good choices. Thank you.
    I guess I'll assume the chair and call on Mr. Houghton.
    Mr. Houghton. I guess I'm next. Thank you very much, Mr. 
Chairman.
    Thank you very much for being our last panel. You have been 
very patient. I really would like to ask sort of a broader 
question about responsibility here. One of the problems which 
exists here in Congress is that we have responsibility and 
we're clearly interested. There is an enormous amount of money 
involved. Yet we sort of dabble in the organizational bit 
rather than being sort of the board of directors. One of the 
questions I would like to ask you, do you think that the 
management of HCFA really understands what we are asking them 
to do?
    Mr. Ginsburg. I can comment on the board of directors' role 
versus getting into details. I saw this firsthand in my 
experience with Medicare physician payment reform, which was 
very detailed and technical--for example, setting relative 
values and geographic factors. Congress, as far as I am aware, 
never engaged in that level of detail. They set up the overall 
principle, and HCFA implemented it and reported how they did 
it. I believe that Congress didn't get into the details because 
the leaders knew if one relative value wa changed, the members 
would hear from lobbyists forever to change the relative value 
that affects their group. The down side of getting involved in 
the details was very clear to them. I think it's not as clear 
with things like the benefit structure of Medicare.
    I can envision Congress learning from the experienceof 
dealing with detailsconcluding that there are certain areas 
that it just should not get into because of the consequences. 
The Congress should act more like a board of directors and 
delegate more to HCFA. Over the years that I have watched HCFA, 
it has been very responsive to the Congress. Some of the 
biggest problems have come with interest groups that are narrow 
focused. They tend to do do better in Congress than they do in 
approaching the Executive Branch. This has caused a lot of the 
turmoil.
    Mr. Houghton. Does anybody else have any comments on that? 
Because I think the thrust of my question is really this is an 
organizational issue. Obviously, you want to look over the next 
hill and see whether HCFA is prepared for some of the dynamics 
of the next century. However, the question is, will they really 
understand what Congress wants. If they don't, we should tell 
them. If they do, I don't know why we have a board of 
directors, advisory commissions, and things like that. That is 
up to them. They ought to decide that. I don't know how you 
feel about this. Maybe Dr. Butler or Ms. Lewin?
    Ms. Lewin. I think part of it is this whole new world is 
challenging for all organizations. When I even think of being 
employed at the Institute of Medicine, how many things have 
changed for us. I mean the whole world is more market oriented 
and competitive, et cetera, et cetera. I think that HCFA is 
trying very valiantly to respond, and very responsibly. I mean 
when you go there, you really do have a sense that people are 
working very very hard. I mean clearly this is a whole 
different orientation. I think it is a challenge. I think that 
is why hearings like this are very good because you put people 
on notice that you are watching.
    Just to divert a little bit, but I think it's relevant, and 
actually I'm now kind of going in a different direction to what 
we were discussing earlier between fee-for-service and managed 
care. But we had a lecture at the Institute of Medicine last 
night which I thought was very telling, by someone by the name 
of Arnie Millstein, on purchasing quality on behalf of 
purchasers. He cautioned the audience in saying you know, we 
have gotten too much in this polarization of fee-for-service 
versus managed care. What we really should be looking at is the 
average American healthcare and the best healthcare that 
America has to offer. Whether it's fee-for-service or managed 
care, that should be our goal.
    My feeling is that sometimes we're looking at this as fee-
for-service versus managed care. Whereas both sides, that 
really should be their goal, to purchase the best care that 
America has available.
    Mr. Butler. Congressman, I think it's not only a question 
of giving clear direction to an agency and making sure that its 
senior management understand that. I think as many of us have 
said in different circumstances, that there is a culture of an 
agency to consider too. It is very difficult to take an agency 
or a group of people in the private sector, let alone the 
public sector, who are very used to seeing their role in one 
way and being trained in that way, to then try to get them to 
do something else. Divorce lawyers don't tend to make very good 
marriage counselors. There are reasons for that.
    Mr. Houghton. I understand that. I'll just interrupt a 
minute, and then I'll cut off, Mr. Chairman. But I mean I think 
sure, conditions change, market changes, demands change, the 
money changes. That's to keep a monitoring eye on it, not to 
direct whether to establish this board or that board or have 
advisory committees. I mean that's the operations that have got 
to do that. Thank you.
    Chairman Thomas. [presiding] Just let me say, very briefly, 
because I know we want to move on, this business about best I 
just think has to always be qualified. That is, we are dealing 
with a program that at least in the Part B portion is 75 cents 
subsidized by the taxpayers. Given the advances of medical 
science, you have got to somehow reconcile the public treasury 
with the medicine available. People will consume--and this is 
my friend from Louisiana's statement that I've stolen a long 
time ago, I figure another six months and I'll just quit giving 
you attribution unless you are here--People will consume as 
much healthcare as the people are willing to pay for. The 
reason I like moving more toward a defined contribution, and 
frankly, discussing as a matter of public policy, not just for 
Medicare but a number of other areas, how much we should be 
putting in there is that that is what Congress should be doing, 
setting the policy and the overall structure. The professionals 
ought to be determining how we maximize the return on that 
dollar in healthcare we should provide them with the tools to 
be able to measure between them far better than we do now. It 
is a legitimate and appropriate role for Government, including 
the education of the consumer, woefully ignorant now, about 
their options and what they have available.
    But the innovation, the specifics and the way in which that 
product is delivered should only remain in the private sector 
because that is where you get the rapid innovation and the 
turnaround and the change. That kind of a blend I think 
ultimately will bring some folk who now apparently are on 
opposite sides but don't realize that there is an area of 
common ground.
    Obviously, there are a lot of vested interests and sacred 
cows that were just shot or slaughtered by that statement that 
we have to overcome to go forward, but it's something I think 
we have to do.
    The gentleman from Louisiana for a final question?
    Mr. Cooksey. I am looking here at an earlier edition of 
National Journal. There are four Presidents with big ideas and 
four Presidents with small ideas. I just happened to be in 
Washington the summer when I was in medical school, the summer 
that Medicare was signed into the law. Lyndon Johnson is not on 
either side.
    My question is, can we step back and look at the big 
picture? Can we come up with a plan that is a defined 
contribution and consider three categories, the people that get 
their payment from the Government, the indigent, the Medicare 
or the Medicaid, the old veterans like me when I get a little 
older. Then the people that get their insurance or their health 
insurance from their employers. The third group are individuals 
who are not in either category, but are out there maybe as 
small business women, men, individuals that don't have any real 
tie, but have to pay for their insurance. Can we step back and 
look at a plan that would be defined contribution, let the 
Government pay where they are going to pay, and then let all 
the others have full deductibility for their health insurance, 
and the employer get out of the health insurance business, and 
the employer have no deductibility? Would that be feasible? Do 
you think that can be done? Then this would put us back in the 
marketplace. I deal with these veterans on my Veterans Affairs 
Health Subcommittee. He would have a card and he would go in 
and pay for it, but he has got a defined contribution.
    Mr. Butler. I strongly feel it can be done. I am more than 
happy to share with you some of the material that we prepared 
in the past suggesting exactly that. You are talking about a 
combination of things. First looking at Medicare, at defined 
contributions to people. And second, you are looking at 
changing the way the tax system operates to do two things, to 
enable people to obtain the means they need through some kind 
of refundable credit, and ending this bias in the current 
system towards one type of organization for healthcare for the 
working population, which is through the place of employment. 
This also means looking at the role of other intermediaries to 
help to pool people together so that you don't have to go 
through the employment system. I think that a number of ideas 
along these lines should be looked at. It is a continuum.
    I think it's very important that we have a healthcare 
system in this country which is a continuum, whether one is 
elderly, working population, or unemployed.
    Mr. Cooksey. Dr. Ginsburg, do you have an opinion?
    Mr. Ginsburg. Yes. The major contribution that employers 
have made in their provision of health insurance is forming a 
group in which everyone or almost everyone is going to be 
buying insurance. Of course our tax system has distorted things 
because there's an additional incentive to get insurance 
through employers.
    I could see a lot of advantages over the long-term to 
phasing employers out of the health insurance area. But what we 
need to replace them with is a strong mechanism to create and 
govern the health insurance market. I wouldn't want to have a 
situation where everyone bought their health insurance in the 
individual market with tax credits because that market has long 
failed. It has not well served people who can't get insurance 
through employers.
    So I think that there is an important need, whether you 
call it a purchasing coalition or a purchasing cooperative, to 
have another entity that people go with their tax credits to 
find out what qualified plans are available, what the choices 
are, and what it costs. I think that would work, but if we 
don't set that up, then we could lose a great deal.
    Mr. Cooksey. Ms. Lewin, I liked your term ``fire wall.'' I 
understand that analogy. Do you think it can be done?
    Ms. Lewin. I agree with Paul. First of all, I think 
everything is possible. I think a key thing with the defined 
contribution is of course where do you set the contribution. If 
people feel that they can seek valuable and essential 
healthcare services, it's going to be more politically 
acceptable. But I think the problem with the voucher idea is 
first of all, at what rate do you set the voucher. But then 
also, what is the purchasing capability of people with that 
chit. I mean there are some people that will be much more 
disadvantaged.
    So I do agree with Paul. I think if you set in and develop 
also at the same time an infrastructure, where people can be 
well-informed about their options and also that they can join 
various groups that will help them purchase more effectively, I 
mean I think clearly we're moving in that direction, even if we 
don't say it. Many of the employers now basically give a 
defined contribution. They say this is the rate to buy our 
standard managed care package. If you want to buy something 
else, it's out of pocket. So that I think that defined 
contribution is a trend that we're seeing more and more. 
Whether we can make it the major way that we pay for healthcare 
services, I think remains an open question.
    Mr. Ginsburg. We very much are going toward the defined 
contribution. In the employer market it's getting to that point 
where a lot of employees have confidence in their employer that 
their defined contribution will be enough to enroll in a plan 
that is adequate. The challenge for making a Medicare-defined 
contribution acceptable is to convince the beneficiaries that 
the contribution will be set high enough so that a plan that is 
called acceptable, whatever that means, will be available, as 
opposed to allowing it to shrivel over time so that more and 
more personal resources are going to have to be used to getting 
a ``adequate'' plan.
    Mr. Butler. If I could just add too, however, that that 
issue with the defined contribution is real, but it's not 
unique to the defined contribution approach. It's also true of 
a defined benefit. If you say we're going to give you all these 
benefits, but then you say we're not actually going to pay 
physicians and hospitals adequately to provide them, you are in 
fact reducing the value of the benefit.
    So while I agree with that point about the defined 
contribution, it's not unique to the defined contribution.
    Chairman Thomas. The fundamental problem has been that we 
started out with a program rooted in the historical structure 
of the cost plus defined benefits. It never ever had the built-
in flexibility to make the kinds of adjustments because your 
argument is that people are going to worry about whether or not 
the plan can adequately cover the benefits that were presented. 
Had it had enough flexibility for changing management delivery 
structures, you could have maintained a number of benefits at a 
savings. So it's just a big chicken and egg problem that we 
have begun to address.
    I think, Stuart, you are absolutely right. We can ratchet 
down payments to doctors and hospitals and say we have 
maintained a defined benefit program. It's just that we have a 
hollow shell for benefits and the rest of it.
    The concern to me goes back to the basics, how can the 
taxpayer get maximum value for the dollar? To me it is in 
setting a structure which gets us more out of it, more into a 
policy, and create a degree of flexibility that whatever it is 
that we are able to deliver, it's the best that we can deliver 
for the dollar amounts, rather than talking about everybody in 
the U.S. gets the best medicine available. Frankly, there are 
not enough bucks in the system to deliver that in terms of what 
the private sector can do for people who have open-ended dollar 
amounts. That may be the subject of another hearing.
    I appreciate all of you coming. Without any further 
questions, the Subcommittee stands adjourned.
    [Whereupon, at 1:13 p.m., the hearing was adjourned subject 
to the call of the Chair.]
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