[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
                        MEDICARE+CHOICE PROGRAM

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 18, 1999

                               __________

                              Serial 106-7

                               __________

         Printed for the use of the Committee on Ways and Means


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 56-758 CC                   WASHINGTON : 1999



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        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
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Illinois            JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  KAREN L. THURMAN, Florida
JIM RAMSTAD, Minnesota
PHILIP S. ENGLISH, Pennsylvania


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 March 11, 1999, announcing the hearing...............     2

                               WITNESSES

Health Care Financing Administration, Robert Berenson, M.D., 
  Director, Center for Health Plans & Providers; Carol Cronin, 
  Ph.D., Director, Center for Beneficiary Services; and Jeff 
  Kang, M.D., Director, Office of Clinical Standards & Quality...    13

                                 ______

Aetna U.S. Healthcare, Sandra Harmon-Weiss, M.D..................    74
American Academy of Actuaries, William F. Bluhm..................    61
American Association of Health Plans, and PacifiCare Health 
  Systems, Janet G. Newport......................................    67
Francis, Walton, Fairfax, VA.....................................    52
Health Insurance Association of America, Sandra Harmon-Weiss, M.D    74
PacifiCare Health Systems, Janet G. Newport......................    67

                       SUBMISSION FOR THE RECORD

American Medical Association, statement..........................    89



                        MEDICARE+CHOICE PROGRAM

                              ----------                              


                        THURSDAY, MARCH 18, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 11:08 a.m. in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE                         CONTACT: (202) 225-3943
March 11, 1999
No. HL-3

                      Thomas Announces Hearing on
                      the Medicare+Choice Program

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on the Medicare+Choice program. The hearing will 
take place on Thursday, March 18, 1999, in the main Committee hearing 
room, 1100 Longworth House Office Building, beginning at 11:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include representatives of the Administration and a 
panel of experts. However, any individual or organization not scheduled 
for an oral appearance may submit a written statement for consideration 
by the Committee and for inclusion in the printed record of the 
hearing.
      

BACKGROUND:

      
    The Balanced Budget Act of 1997 (P.L. 105-33) created the 
Medicare+Choice program to provide seniors with a greater variety of 
health plan choices. Today, six million seniors, or 16 percent of 
Medicare beneficiaries, are enjoying the benefits of Medicare+Choice. 
However, the transition from Medicare's risk contracting program to the 
new program has not been without difficulties. Several issues need 
examination, including the proposed new risk adjustment method, 
dissemination of health plan information to seniors, and new plan 
requirements for quality measurement.
      
    In announcing the hearing, Chairman Thomas stated: 
``Medicare+Choice, with its many options, is the foundation on which we 
can build a stronger, better Medicare program for our seniors. 
Continual and careful fine-tuning may be required to ensure that the 
Medicare+Choice program operates smoothly and efficiently. This hearing 
will offer the Committee an opportunity to examine several important 
Medicare+Choice issues.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on three key aspects of the Medicare+Choice 
program: making appropriate payments to health plans, providing 
information for seniors' health plan choices, and measuring health plan 
performance and quality.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Thursday, 
April 1, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

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

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Thomas. This hearing is convened today to examine 
the state of the Medicare+Choice Program. The Medicare+Choice 
Program was created as part of the Balanced Budget Act of 1997 
and to many is thought to mean managed care within the Medicare 
Program.
    To some extent this is true, but congressional intent was 
for Medicare+Choice to encompass much more than just managed 
care and Medicare. To many, Medicare+Choice was meant in its 
simplest terms to be the last best chance to see if a Federal 
bureaucracy could duplicate many of the innovations that are 
occurring in the private market and to bring more choices to 
our elderly and disabled Americans.
    This summer will mark the 2-year anniversary of the passage 
of the Balanced Budget Act of 1997 that created the 
Medicare+Choice Program. Today, we will examine three major 
components of the program: payment, information, and quality.
    As you know, prior to 1997, Medicare's county level rates 
varied from $221 per month in Banner County, Nebraska, to $767 
per month in Richmond County, New York, an annual difference of 
over $6,500. The rates also varied from year to year, making it 
difficult for companies to make long-term plans.
    The Medicare+Choice payment system, although still 
artificial, was designed to create the disparities between 
counties, while providing some certainty that counties at the 
lowest end would receive an adequate rate and that counties at 
the high end would receive something, a 2-percent increase.
    The Medicare+Choice payment annual updates were tied to the 
growth in Medicare fee-for-service spending, something that 
both this administration wanted and the health plans felt was 
important during drafting of the bill. Because of that tie to 
the fee-for-service spending, in 1998, the first year, and 
again last year, the growth in Medicare fee-for-service 
spending was lower than expected, and, therefore, there were no 
so-called blend counties, a merging of the national and the 
local rate.
    For the year 2000, the picture is beginning to change. 
Sixty-three percent of the counties, based upon the data that 
has been presented to us, will receive a blended rate, and many 
counties will see significant increases in their rate. Six 
percent of the counties will see increases of 10 percent or 
more.
    In addition to the county level payments, the Balanced 
Budget Act instructed the Secretary of Health and Human 
Services to develop a risk adjustor that reflects variations in 
health status. A good risk adjustor would reward the plans that 
take on the toughest cases, those seniors and disabled 
Americans with multiple medical conditions. Today, we will take 
a closer look at the Administration's proposed risk adjustor.
    Knowledge is key to choice, so the Medicare+Choice Program 
includes a beneficiary information campaign, including 
booklets, an Internet site, a toll-free telephone number, 1-
800-MEDICARE, and that 1-800-MEDICARE number just became 
available nationwide. Last year, seniors in five States 
received comprehensive booklets. In other States, they have 
received pamphlets.
    While Administration officials predicted that our seniors 
would be incapable of comprehending the information and that 
Members' offices would be inundated with calls, this did not 
happen.
    What I find amazing is that in the data that is being used 
to get a feel for whether or not the seniors understand, use, 
and believe this information is valuable to them, 67 percent of 
the seniors did not know basic information, for example, that 
they would be able to disenroll from an HMO if they enrolled in 
it in a given year.
    Now, HMO risk models have been available since 1985, so I 
think that is clear evidence that HCFA, the Health Care 
Financing Administration, has done an absolutely abysmal job of 
informing seniors of their choices long before we reached the 
Medicare+Choice period, and so I am very concerned about the 
way in which seniors are being provided information so that 
they can make a choice. The track record is not bright.
    Finally, we will examine the Administration's approach to 
measuring the quality of care delivered to our seniors. It is 
important that we maintain high-quality care in the program 
while creating a system that does not produce a centralized, 
one-size-fits-all regulatory burden, which makes dealing with 
Federal health programs less and less attractive and, 
therefore, producing a self-fulfilling structure.
    I look forward to the testimony of our witnesses. First, we 
will hear from three individuals at the Health Care Financing 
Administration who have been given direct responsibility for 
overseeing key Medicare+Choice issue areas, payment information 
and quality, and then we will hear from two outside experts and 
two health plans.
    [The opening statement follows:]

Opening Statement of Hon. Bill Thomas, a Representative in Congress 
from the State of California

    This hearing is convened today to examine the state of the 
``Medicare+Choice'' program. The Medicare+Choice program was 
created as part of the Balanced Budget Act of 1997 and, to 
many, is thought to mean managed care within the Medicare 
program. To some extent, this is true. But Congressional intent 
was for ``Medicare+Choice'' to encompass much more than just 
managed care in Medicare. Medicare+Choice was meant--in its 
simplest terms--to be the last best chance to see if a Federal 
bureaucracy could duplicate many of the innovations that are 
occurring in the private market and bring more choices to our 
elderly and disabled Americans.
    This summer will mark the two year anniversary of the 
passage of the Balanced Budget Act of 1997 that created the 
Medicare+Choice program. Today we will examine three major 
components of the program--payment, information, and quality.
    As you know, in 1997, Medicare's county level rates varied 
from $221 per month in Banner County, Nebraska to $767 per 
month in Richmond County, New York-an annual difference of 
$6,552. The rates also varied from year to year, making it 
difficult for companies to make long-term plans. The 
Medicare+Choice payment system was designed to decrease the 
disparity between counties, while providing some certainty that 
counties at the lowest end would receive an adequate rate and 
that counties at the highest end would receive a 2 percent 
increase in their rate. The Medicare+Choice payment annual 
updates were tied to the growth in Medicare fee-for-service 
spending-something that both the Administration and health 
plans felt was important during drafting of the bill.
    In 1998, and again in 1999, the growth in Medicare fee-for-
service spending was lower than expected. This resulted in no 
``blend counties'' for the first two years. For the year 2000, 
the picture is much different. Sixty-three percent of the 
counties will receive a blended rate and many counties will see 
significant increases in their rate. Six percent of counties 
will see increases of 10 percent or more.
    In addition to the county level payments, the Balanced 
Budget Act instructed the Secretary to develop a risk adjuster 
that reflects variations in health status. A good risk adjuster 
would reward the plans that take on the toughest cases-those 
seniors and disabled Americans with multiple medical 
conditions. Today, we will take a closer look at the 
Administration's proposed risk adjuster.
    Knowledge is the key to choice, so the Medicare +Choice 
program includes a beneficiary information campaign including 
booklets, an internet site and a toll-free phone number, 1-800-
M-E-D-I-C-A-R-E. Just this week, 1-800-M-E-D-I-C-A-R-E became 
available nationwide. Last year, seniors in 5 states received 
comprehensive booklets. In the other states they received 
pamphlets. While Administration officials predicted that our 
seniors would be incapable of comprehending the information and 
that members' offices would be inundated with calls, this did 
not happen. HMOs have been available to Medicare participants 
since 1985, but HCFA's efforts to educate seniors about basic 
information have largely failed. Seventy-six percent of seniors 
did not know basic information about their ability to enroll 
and disenroll in private plans.
    Finally, we will examine the Administration's approach to 
measuring the quality of care delivered to our seniors. It is 
important that we maintain high quality care in the program 
without creating a centralized, one-size-fits-all regulatory 
burden which makes dealing with federal health programs less 
and less attractive.
    I look forward to hearing the testimony of our witnesses. 
First, we will hear from three individuals at the Health Care 
Financing Administration (HCFA) with direct responsibility for 
overseeing key Medicare+choice issue areas--payment, 
information, and quality. We will then hear from outside 
experts and two health plans.
      

                                

    Chairman Thomas. With that, I would ask the gentleman from 
California, my friend Mr. Stark, the Ranking Member, if he has 
any comments.
    Mr. Stark. I would like to thank you for having this 
hearing, Mr. Chairman.
    I share your concern that the Medicare+Choice Program 
should work effectively for the beneficiaries. I will soon 
introduce legislation to suggest ways in which we could 
increase beneficiary protections and perhaps do some of the 
things the industry wants.
    I hope we can agree that the filing date for plans should 
be moved from May to July to give the plans the necessary time 
to plan their following year's rates more accurately.
    In the future, I also hope we can hear from the plan 
enrollees. Their satisfaction seems to me to be the key 
component as to whether or not this program will survive or 
expand. We are going to hear plenty today about the financial 
concerns of the HMOs and why they are not making any money, so 
I think we should hear from enrollees.
    Also, I understand we are going to focus on risk adjustment 
and quality improvement initiatives. I think it is important 
that the HCFA continue on their quality initiatives for managed 
care plans. I would urge HCFA to resist any calls from the 
industry for more delay in that regard.
    On the education front, I share with you the concern that 
was raised here in a bipartisan sense, but I do not think we 
can have HCFA improve that effort if we do not help them get 
their full $115 million appropriation.
    Congress keeps pushing HCFA. I just came from a discussion 
of why HCFA is not adequately surveying nursing homes. The 
programs are good. I am concerned we have heaped a lot on their 
plate, but we are not giving them a chance to digest it. I 
think they need help.
    I am going to urge my colleagues against delaying the 
phase-in of the risk adjustor. It seems to me that such delay 
only rewards those plans that are doing the wrong thing. 
Delaying the risk adjustor rewards the plans who avoid the sick 
or cherry pick to get healthy risks, and it punishes those 
plans that have the sicker than average patients. That is 
exactly the opposite of what I think good health policy should 
be.
    We called for the risk adjustor in the Balanced Budget Act 
amendment. We required HCFA to develop a risk adjustment 
system. HCFA did not dream this up. It was at our direction in 
the Balanced Budget Act that they begin with a collection of 
hospital-based data. We also asked them to have a risk 
adjustment system implemented no later than the end of this 
year.
    Now, we should not be surprised if they have to start that 
with a system that uses the data that we first ordered them to 
collect and analyze. While it may not be the best system, it is 
one that we created, not HCFA.
    The other point I would like to suggest as an argument for 
not phasing in risk adjustment is that we are already 
overpaying the managed care industry. We have $31 billion in 
overpayments due to a mistake, $31 billion over 10 years, $8.7 
billion over the next 5 years, because we removed HCFA's 
ability to recover overpayments when health care inflation is 
lower than anticipated.
    If we do not change that, we are just throwing away 
somewhere from 8 to 30 billion dollars' worth of the taxpayers' 
money. There are other areas in which we overpay: fraud and 
abuse. We should not pay for that. Overpayment due to 
Medicare's administrative costs, overpayment due to lack of 
risk adjustment. These are funds we are tossing at the managed 
care industry, and yet we are going to hear that they cannot 
survive.
    I think we ought to look more closely at the ability of the 
managed care industry to do a job that we anticipate, and I 
look forward to their pleadings today.
    Thank you.
    [The opening statement and attachments follow:]

Opening Statement of Hon. Fortney Pete Stark, a Representative in 
Congress from the State of California

    I want to commend Chairman Thomas for holding this hearing. 
I share his concern that the Medicare+Choice program work 
effectively for beneficiaries. In fact, I have introduced 
legislation, HR 491, The Medicare+Choice Improvement Act, to 
make a number of changes to the program that would increase 
beneficiary protections as well as address some of the 
industry's concerns. I think many of the provisions of this 
bill are also incorporated in the Administration's 
recommendations for improvements to the Medicare+Choice 
program. One issue upon which I hope we can all agree is that 
the filing date for plans to submit their benefit and price 
information should be moved from May 1 to July 1 in order to 
give plans the time necessary to plan the following year's 
rates more accurately.
    In a future hearing, I hope we will hear from plan 
enrollees. Medicare beneficiaries' satisfaction with the 
Medicare+Choice program is a key component of whether the 
program will expand. We will hear plenty regarding the health 
plans' financial concerns today; we need to also hear from 
enrollees.
    It is my understanding that today's hearing will focus on 
risk adjustment, HCFA's quality improvement initiatives for 
Medicare+Choice plans, and the beneficiary education campaign.
    Let me emphasize that I think it is very important that 
HCFA move forward with quality initiatives for managed care 
plans. We are turning over a growing portion of the Medicare 
program to these private companies and it is incumbent upon us 
to ensure that we are getting a quality product for our dollar. 
To that end, I urge HCFA to continue moving ahead and to resist 
calls from the industry for more delay.
    I would also like to submit for the Record a fact sheet 
that describes the development of HCFA's Quality Information 
System for Managed Care (QISMC). As this fact sheet shows, the 
industry has been fully involved in the development of QISMC 
from day one and HCFA has been very responsive to their 
concerns throughout the process.
    On the beneficiary education front, I cannot over-emphasize 
the importance of making sure that Medicare beneficiaries 
understand their options and the consequences of those options 
when they consider signing up for a Medicare+Choice plan. Last 
year, I sent a newsletter to seniors in my district that 
explained the new Medicare+Choice program. This year, I've 
included a notice in my most recent newsletter that California 
now has access to the 1-800-MEDICARE number where beneficiaries 
can get answers to their questions about Medicare+Choice. I 
urge my colleagues to do the same. We must also work to ensure 
that HCFA receives their full appropriations request of $150 
million for running an effective beneficiary education 
campaign.
    One of the pleas we will hear from the health plans later 
today is that we delay the implementation of risk adjustment. 
On behalf of the HMOs that have done the right thing and 
enrolled a fair and representative proportion of the Medicare 
population--both the sick and the well--I urge that Congress 
not consider legislation delaying the phase-in of the risk 
adjuster. Any delay will reward those plans who have avoided 
the sick and chronically ill, and punish those who have sicker 
than average patients--and that is exactly the opposite of good 
health policy.
    HCFA has already announced that they will phase-in the risk 
adjustment over five years--a compromise that is supported by 
the Medicare Payment Advisory Commission (which includes Ms. 
Newport, one of today's witnesses) whom we appointed to provide 
us with expert advice on Medicare. Let's heed their advice. 
Even this compromise hurts the best HMOs and gives the industry 
a $4.7 billion bonus over the next five years. Further delay is 
simply not warranted.
    There is another fact surrounding risk adjustment that 
seems to continually get lost in the debate. HCFA did not dream 
up this idea as a way to reduce Medicare HMO payments. In fact, 
the Balanced Budget Act required HCFA to develop such a risk 
adjustment system. When you read the BBA language, it is no 
surprise at all that HCFA started out with a hospital-based 
risk adjuster. Let me quote: ``The Secretary shall require 
Medicare+Choice organizations...to submit data regarding in-
patient hospital services for periods beginning on or before 
July 1, 1997 and data regarding other services and other 
information as the Secretary deems necessary for periods 
beginning on or after July 1, 1998. The Secretary may not 
require an organization to submit such data before January 1, 
1998.'' It was precisely at the direction of the BBA that HCFA 
began with the collection of hospital-based data. Since BBA 
also required a risk adjustment system to be implemented ``no 
later than January 1, 2000,'' none of us should be surprised 
that they had to start with a system that uses the data they 
have first been able to collect and analyze.
    I also take issue with the arguments from the managed care 
industry that Medicare is not paying them enough today to 
remain in the program. I would like to enter into the Record a 
summary of the ways we have been overpaying Medicare HMOs. I 
would also like to enter a letter from the HCFA Administrator 
that describes a little known ``glitch'' in the Balanced Budget 
Act that overpays HMOs $8 billion over five years, and $31 
billion over ten years. This overpayment occurs because we took 
away the authority of HCFA to adjust for overpayments in 1997. 
We paid plans a higher amount than was justified in light of 
the lower medical inflation which actually occurred. By 
allowing these overpayments, we build into the budget base 
billions of dollars in extra payments. As the Administrator's 
letter makes clear, the other budget savings in the BBA do not 
even correct for this mistake--let alone reduce the earlier, 
underlying overpayment to the Plans.
    I couldn't let this opportunity pass by to also highlight 
that what we will hear from the health plans on the last panel 
of this hearing proves why the Premium Support plan being 
pushed by a majority of the Bipartisan Commission on the Future 
of Medicare will not work.
    AETNA is testifying today that:

          ``If the current reimbursement structure is not adjusted, 
        more Medicare+Choice organizations are likely to withdraw from 
        areas served and beneficiaries enrolled in the remaining plans 
        will likely experience premium increases or reduced benefits.''

    Similarly, PacifiCare's testimony states:

          ``These problems [relating to risk adjustment] will make it 
        difficult for Medicare+Choice plans to operate in certain 
        markets and to maintain a level of benefits and services to 
        which beneficiaries have become accustomed.''

    In other words, pay us more or we can't offer extra 
benefits--in fact, we may not even stay in the program.
    As I've already described, we currently pay Medicare HMOs 
more than we should. We pay the plans more for the people they 
enroll than we would have paid if those people had stayed in 
Medicare fee-for-service. To rephrase that, the taxpayers would 
actually save money if we abolished the Medicare+Choice program 
today.
    Unfortunately, the beneficiaries in these plans who have 
been getting extra benefits at little or no cost are the first 
ones who will lose under the Premium Support model. That is why 
we need to improve the core Medicare program so that everyone 
has a drug benefit and catastrophic protection--and so that 
people do not need to join an HMO to get extra benefits.
    But, if plans say they cannot offer extra benefits at a 
time when we are overpaying them, they certainly won't be able 
to do so if Medicare were to actually start saving money by 
paying them more accurately for the people they enroll.
    And, if the plans cannot offer extra premiums, who in the 
world would want to join a system that rationed their choices 
and services?
    Premium support won't work to save Medicare--it is just a 
way to raise premiums on seniors and the disabled to force them 
into bare-bones, no-frills HMOs that will offer no extra 
benefits.
    I hope all of the members will consider the testimony of 
these witnesses before they endorse the Premium Support scheme.
      

                                

[GRAPHIC] [TIFF OMITTED] T6758.001

[GRAPHIC] [TIFF OMITTED] T6758.002

      

                                


Quality Standards for Medicare+Choice Fact Sheet

1. Pre-BBA 97 quality assurance (QA) requirements for managed 
care organizations in Section 1876 of the Social Security Act

     Two requirements indirectly related to quality:
    --50/50rule (no more than 50 percent of enrollees could be 
Medicare/Medicaid) assumed plans would ensure quality in order 
to attract non Medicare/Medicaid enrollees.
    --30-day disenrollment option allowed Medicare enrollees to 
``vote with their feet'' on the plan's quality.
     Formal internal QA system required in regulations 
which HCFA monitored. In recent years HCFA has required plans 
to report objective standardized measurements on quality of 
care using the Health Plan Employer Data and Information Set 
(HEDIS) and the Consumer Assessment of Health Plans Study 
(CAHPS).

2. Development of Quality Standards for Managed Care

     Purpose--Recognizing an opportunity to improve 
existing QA policy with its emphasis on structure and process 
and the need to move managed care plans toward actively 
improving the quality of care, HCFA in 1996 contracted with the 
National Academy for State Health Policy to develop, in 
consultation with consumer groups, the managed care industry, 
state Medicaid agencies and HCFA, new standards which 
emphasized measurable outcomes of the quality of care. The 
purpose was to encourage managed care plans to protect and 
improve the health and satisfaction of Medicare and Medicaid 
enrollees.
     Collaboration/consultation--The contract process 
included extensive consultation, review and opportunity for 
input by all the parties cited above. Periodic formal meetings 
of a technical expert panel composed of plans, purchasers, 
consumers, and regulators were held and opportunity given for 
representatives to poll their constituencies. After an initial 
draft was developed it was released for comment in December, 
1997. During 1998 HCFA sponsored public meetings and training 
programs around the country, during which participants had the 
opportunity to voice their comments and concerns. The current 
document outlining HCFA's quality standards is the result of 
collaboration among Federal, State, insurance industry, and 
private organization representatives.
     BBA 97--The BBA added section 1852 (e) to the Act 
which greatly expanded upon the previous Section 1876 QA 
requirement and espoused the same philosophy of performance 
improvement as in the quality standards HCFA had been 
developing. Therefore, it was logical and required few changes 
to use what had been developed as a model for the regulations 
necessary to implement the BBA Medicare provisions. In 
Medicaid, states can also use these standards as a tool to 
ensure that Medicaid plans meet comparable QA obligations.
     Modifications--HCFA has demonstrated continuous 
flexibility, consistent with that permitted by the law, from 
the initiation of the project with the NASHP contract. For 
example, revisions from early drafts include: a reduction in 
the number of annual clinical performance improvement projects 
from as many as nine in an early draft to two in the current 
version; waiver of participation in a national mandatory 
project; a more generous phase-in period for implementation; 
and giving plans discretion as to the circumstances under which 
they will conduct site visits for provider credentialing.
     Preferred Provider Organizations (PPOs)--HCFA 
recognizes that these quality standards may be somewhat more 
challenging for PPOs because of the difficulty influencing 
individual provider practice. However, HCFA also believes it is 
important that beneficiaries have access to outcome information 
from these quality standards in order to make informed 
decisions regarding their choice of plans. Through the American 
Association of Health Plans' participation in the drafting 
process, PPOs had the opportunity to participate in the 
development of the quality standards. HCFA expects to be 
flexible in working with all plans in helping them become 
compliant with the quality standards. For example, in the 
February 17, 1999 regulation (see below) HCFA expanded the 
structural requirements dealing with coordination of care to be 
more accommodating to a broader range of types of plans, 
especially those which do not require enrollees to be assigned 
to primary care providers.
     Consistency with NCQA and Other Accrediting Body 
Standards--NCQA and other accrediting body standards were 
reviewed and incorporated by the technical expert panel in 
developing the quality standards. In addition, HCFA evaluated 
the interim standards against the current NCQA standards and 
generally found them and their burden of improvement 
comparable.

3. HCFA Quality Standards; Four Domains

     Domain One: Quality Assessment and Performance 
Improvement (QAPI)--Plans are required to conduct performance 
improvement projects, report on standard measures and achieve 
minimum performance levels. The standard measures include HEDIS 
and CAHPS, indicators well known to industry.
     Domain Two: Enrollee Rights--Standards for 
enrollee privacy, dignity, access to services and information, 
participation, and grievances/resolution of issues.
     Domain Three: Health Services Management--
Standards for availability and accessibility of services, 
continuity and coordination of care, service authorization, 
practice guidelines, new technology, provider qualifications, 
medical records, transfer of clinical information.
     Domain Four: Delegation [of functions/
responsibilities]--Plans still responsible for oversight of 
delegated activities, and are not permitted to delegate their 
responsibilities to providers.

4. Medicare+Choice Regulations

     The interim final with comments regulations 
implementing the BBA's Medicare+Choice provisions, including 
QA, were published in the Federal Register on June 26, 1998.
     On February 17, 1999 HCFA published a final rule 
dealing with selected issues in the June 1998 rule. Among these 
were the coordination of care requirements, which impact on the 
quality standards and which were modified.

5. Interim Quality Standards/Guidelines

    HCFA published the interim quality standards in an 
operational policy letter (OPL No., 72) which furnished 
operational advice on complying with the standards.

6. Implementation

    Recognizing it takes time for plans to adapt to the quality 
improvement requirement, HCFA made several changes to help 
plans comply. These include the following:
     First year: Continue reporting on HEDIS and CAHPS 
but no minimum performance levels required. Plans must initiate 
two performance improvement projects, one national (diabetes) 
and one of the plan's choice. (This is comparable to the 
standards of private sector accrediting organizations.)
     The plans have three years to achieve demonstrable 
improvement.

7. Enforcement

    Since this is a transition year for HCFA and Medicare+ 
Choice organizations (M+COs) as well, the agency feels the best 
strategy is one which ``phases-in'' not only implementation of 
the QAPI projects but enforcement as well. Therefore, in its 
desire to provide on-going consultation and technical 
assistance to M+COs, HCFA will move first to corrective action 
plans rather than nonrenewals or contract terminations. HCFA 
will look to the Quality Assurance Action Plans submitted this 
February by over 300 M+C organizations to provide a snap-shot 
of the organizations' educational needs and projected 
compliance activities for 1999.

8. Deeming

    The Act now permits the Secretary to allow a 
Medicare+Choice organization to be deemed to meet certain HCFA 
requirements if it is fully accredited by a private, national 
accreditation organization approved by HCFA. These requirements 
are the quality assessment and performance improvement 
requirements (see 42 CFR 422.152), and the confidentiality and 
accuracy of enrollee records requirements (see 42 CFR 422.118). 
HCFA will approve an accreditation organization if it applies 
and enforces standards that are at least as stringent as HCFA's 
own and it complies with HCFA's application procedures.
    The procedures HCFA will use to oversee deeming of 
Medicare+Choice organizations are being modeled on those used 
in fee-for-service. HCFA is actively working with national 
accreditation organizations (AOs) in developing the deeming 
application process.
      

                                

    Chairman Thomas. I thank the gentleman.
    If any Members have written statements, they will be made a 
part of the record.
    [The opening statement of Mr. Ramstad follows:]

Opening Statement of Hon. Jim Ramstad, a Representative in Congress 
from the State of Minnesota

    Mr. Chairman, thank you for calling this important hearing 
on the Medicare+Choice Program.
    I have always strongly supported increased health care 
options for all Americans, including seniors enrolled in 
Medicare. For this reason, I have closely followed the progress 
of the Medicare+Choice program.
    Like many of my constituents, I understand the 
possibilities of the Medicare+Choice option in comparison to 
the traditional fee-for-service Medicare. Some of my 
constituents have expressed preference for the Medicare+Choice 
option because of its comprehensive, integrated approach to 
providing health services. They like that Medicare+Choice 
includes more preventive health benefits and, for many seniors 
across the nation, has also included such things as 
prescription drug and dental coverage.
    I am also learning that Medicare+Choice, with its increased 
ability to evolve more quickly, reviews new, innovative 
technologies in a more timely fashion to ensure seniors have 
access to the most up-to-date and best health care devices and 
procedures available. And, unlike the traditional fee-for-
service, the quality of care provided under Medicare+Choice, as 
well as the general administration of program services by the 
plan, is closely monitored.
    My constituents continue to be concerned about payment 
levels within the program and I will be closely monitoring the 
introduction of the new risk adjustment method. While I agree 
with the concept of the risk adjuster, there may be some 
sensitive issues that need serious attention as we transition 
into the payment adjustment system.
    Thank you again, Mr. Chairman, for calling this important 
hearing. I look forward to hearing from today's witnesses on 
how we can further improve the Medicare+Choice option for 
current and potential enrollees.
      

                                

    Chairman Thomas. I want to welcome the HCFA team, Dr. 
Berenson, Dr. Cronin and Dr. Kang. Any written testimony you 
have will be made a part of the record, and you can address us 
as you see fit in the time that you have.
    Let us start with Dr. Berenson in the middle. We will move 
to Dr. Cronin and then----
    Dr. Berenson. I am actually going to give a statement for 
the three of us, and then we will be available for questions at 
that point.
    Chairman Thomas. Fine.

STATEMENT OF ROBERT BERENSON, M.D., DIRECTOR, CENTER FOR HEALTH 
PLANS & PROVIDERS, HEALTH CARE FINANCING ADMINISTRATION; CAROL 
 CRONIN, PH.D., DIRECTOR, CENTER FOR BENEFICIARY SERVICES; AND 
   JEFF KANG, M.D., DIRECTOR, OFFICE OF CLINICAL STANDARDS & 
                            QUALITY

    Dr. Berenson. Thank you, Mr. Chairman. Chairman Thomas, 
Congressman Stark, and distinguished Subcommittee Members, 
thank you for inviting me and my colleagues today to discuss 
progress in implementing the Medicare+Choice Program.
    Successful implementation of Medicare+Choice is a high 
priority for us. We believe very strongly that managed care and 
other private plans are important voluntary options next to 
original Medicare, and we believe that Medicare beneficiaries 
need to be equipped with information to make more informed 
decisions about their health care.
    We are meeting regularly with beneficiary advocates, 
industry representatives and others to discuss ways to improve 
the Medicare+Choice Program, and we are already making 
adjustments based on that consultation.
    Last month we published initial refinements to the 
Medicare+Choice regulations which improve beneficiary 
protections and access to information while reducing the 
administrative workload of the plan. We tested a national 
education campaign and are using what we have learned to refine 
it for the full-scale open enrollment period this fall.
    We have participated in more than 1,000 events around the 
country to help beneficiaries understand health plan changes, 
and we are also establishing a Federal advisory committee to 
help us better inform our beneficiaries.
    We have converted the vast majority of former Medicare HMOs 
to the Medicare+Choice Program. We published all BBA mandated 
Medicare+Choice regulations, we have worked diligently to 
improve communication with plans, and have recently designated 
a senior official at HCFA to assure that the various HCFA 
components coordinate their activities that affect plan 
operations.
    We are on track to begin risk adjustment payment to plans 
on schedule, and we are proceeding carefully to meet the 
statutory mandate while minimizing the impact on beneficiaries 
and plans in the early years. We are also proceeding with 
quality improvement requirements in a prudent manner that will 
meet the statutory mandate while giving plans reasonable time 
and flexibility to comply.
    One of the most important things we are doing now is a test 
of competitive pricing for managed care, which will begin soon 
in Phoenix and in Kansas City. This test will provide central, 
objective data that is needed to evaluate Medicare reform 
proposals that assume savings from price-based competition 
among plans.
    We look forward to working with you as we proceed to make 
adjustments that may be necessary to ensure success of the 
Medicare+Choice Program.
    We thank you again for holding this hearing, and we would 
be happy to answer your questions.
    I think we have decided, to avoid confusion, that the 
questioning can be posed to me, and then I will figure out with 
my colleagues who is the best qualified to respond.
    [The prepared statement follows:]

Statement of Robert Berenson, M.D., Director, Center for Health Plans & 
Providers, Health Care Financing Administration; Carol Cronin, PH.D., 
Director, Center for Beneficiary Services; and Jeff Kang, M.D., 
Director, Office of Clinical Standards & Quality

    Chairman Thomas, Congressman Stark, distinguished committee 
members, thank you for inviting us to discuss progress in 
implementing the Medicare+Choice program. Medicare+Choice 
allows private plans to offer beneficiaries a wide range of 
options, similar to what is available in the private sector 
today. It requires a massive new beneficiary education campaign 
to inform beneficiaries about these options. It includes 
important new protections for patients and providers, as well 
as statutory requirements for quality assessment and 
improvement. And it initiates a 5-year transition to a fairer 
and more accurate payment system.
    Successful implementation of Medicare+Choice is a high 
priority for us, and we have accomplished a great deal. We 
believe very strongly that managed care and other private 
insurance plans are important voluntary options, next to 
original Medicare, and that Medicare beneficiaries need to be 
equipped with information to make more informed decisions about 
their health care. Medicare managed care enrollment has nearly 
tripled under the Clinton Administration, from 2.3 million when 
the President took office to now 6.8 million. We are meeting 
regularly with beneficiary advocates and industry 
representatives, and others to discuss ways to improve the 
Medicare+Choice program. We are already making refinements 
based on these comments and discussions.
    We have converted the vast majority of former Medicare HMOs 
to the Medicare+Choice program and published all Balanced 
Budget Act-mandated Medicare+Choice regulations. Last month, we 
published initial refinements to these regulations which 
improve beneficiary protections and access to information while 
reducing plans' administrative workload to make it easier for 
plans to offer more options to beneficiaries. And we have met 
statutory deadlines for reporting to Congress and to plans on 
how we will risk adjust payment to plans.
    We launched a national education campaign and participated 
in more than 1,000 events around the country to help 
beneficiaries understand health plan changes. And we are 
establishing a federal advisory committee to help us better 
inform beneficiaries.

                         Beneficiary Education

    Helping beneficiaries understand the Medicare+Choice 
program is perhaps our most important challenge. As mentioned 
above, we launched the National Medicare Education Program to 
make sure beneficiaries receive accurate and unbiased 
information about their benefits, rights, and options. The 
campaign includes:
     mailing a Medicare & You handbook to explain new 
benefits and health plan options;
     a toll-free ``1-800-MEDICAR(E)'' call center with 
live operators to answer questions and provide additional print 
information on request;
     a consumer-friendly Internet site, 
www.medicare.gov,  which includes comparisons of benefits, 
costs, quality, and satisfaction ratings for plans available in 
each zip code;
     work with more than 120 national aging, consumer, 
provider, employer, union, and other organizations who help 
disseminate Medicare+Choice information to their 
constituencies;
     enhanced beneficiary counseling from State Health 
Insurance Assistance Programs;
     a national publicity campaign;
     more than a thousand individual state and local 
outreach events around the country in senior centers and town 
halls, on radio call-in shows and other venues, and in 
alternative languages, including sign language, Spanish, and 
Chinese; and,
     a comprehensive assessment of these efforts.
    We tested the whole system in five states--Arizona, 
Florida, Ohio, Oregon and Washington in 1998. Unfortunately, 
the decisions by some plans to withdraw from the program or 
reduce their service area significantly complicated our task. 
We learned a great deal in this ``dry run.'' We are also 
conducting case studies to evaluate the education campaign in 
five communities in the five pilot States and one community 
outside the pilot States. And we have conducted focus groups.
    We have learned a great deal from our assessment efforts 
already. For example, we learned that a majority of 
beneficiaries found the information in the Medicare & You 
handbook to be informative and useful. Fully 93 percent want to 
be mailed Medicare & You. However, even with the handbook, they 
are often confused about differences in plan options and do not 
always understand the basic Medicare program. We also have 
learned that, even though there are many places to receive 
Medicare+Choice information, beneficiaries often do not know 
where to go for specific types of information, and they tend to 
seek it only as they need it.
    These preliminary results are already suggesting ways to 
improve our education efforts. We have identified ways to make 
``Medicare & You'' easier to use. We learned that the number of 
calls to our toll-free number was lower than we expected, and 
that the amount of time for each call was about the 7 minutes 
we had predicted. And we identified additional links we can add 
to our Web site to help users find key information faster. Last 
month, almost 300,000 viewers used the Web site to review 
Medicare+Choice plan comparisons, Nursing Home Compare, and 
view or download HCFA publications. These and other findings 
will help us to refine efforts for a full-scale, national 
campaign before the November 1999 open enrollment period.
    Also, as mentioned above, we are establishing the Citizens 
Advisory Panel on Medicare Education, in accordance with the 
Federal Advisory Committee Act, as a formal mechanism to obtain 
public input for our education efforts on an ongoing basis. The 
panel will meet quarterly to help:
     enhance our effectiveness in informing 
beneficiaries, including the appropriate use of public-private 
partnerships;
     expand outreach to vulnerable and underserved 
communities, including racial and ethnic minorities; and
     assemble an information base of ``best practices'' 
for helping beneficiaries evaluate plan options and 
strengthening a community infrastructure for information, 
counseling, and assistance.
    Panel members will include representatives from the general 
public, older Americans, specific disease and disability group 
advocates, minority communities, health communicators, health 
economics researchers, health plans and insurers, providers, 
and other groups. We are already receiving nominations for the 
Panel, and expect to announce members and meeting schedules 
soon.
    We are also working with beneficiary advocates and health 
plans to standardize plan marketing materials that summarize 
benefits so beneficiaries can make apples-to-apples 
comparisons. Our goal is to complete this work before the first 
annual coordinated open enrollment period in November 1999.

                         Reaching Out to Plans

    We have taken several steps to reach out to health plans to 
encourage participation in the Medicare+Choice program. We have 
converted the vast majority of Medicare HMOs--more than 300--to 
the new Medicare+Choice program, and added 12 new plans and 
expanded service areas for another 11 plans since last 
November.
    We are currently reviewing another 24 new plan applications 
and 18 service area expansion applications. The newly approved 
plans include provider sponsored organizations, which are HMOs 
run by hospitals and physicians rather than insurers. One of 
these plans is the first to enter Medicare with a federal 
waiver from State licensure, which is allowed for the first 
time ever under the Medicare+Choice program.
    Last summer, we held outreach sessions attended by more 
than 1,500 plan representatives, and we continue to strengthen 
lines of communication with plans. HCFA Administrator Nancy-Ann 
DeParle has named a senior HCFA official, Tom Gustafson, whom 
plans can call directly if they have trouble resolving issues 
through normal HCFA channels.
    Last month, we published initial refinements to the 
Medicare+Choice regulation that improve beneficiary protections 
and access to information, while making it easier for health 
plans to offer more options to beneficiaries. The new rule:
     clarifies that beneficiaries enrolled in an M+C 
plan that withdraws or is terminated from Medicare are entitled 
to enroll in other remaining locally available M+C plans;
     specifies that any changes in plan rules must be 
made by October 15 to ensure beneficiaries have all the 
information they need to make an informed choice during the 
November annual open enrollment period;
     waives the requirement for an initial health 
assessment within 90 days of enrollment for commercial health 
plan enrollees who remain in the same managed care 
organization's Medicare+Choice plan when they become eligible 
for Medicare at age 65, and for enrollees who switch plans but 
remain under the care of the same primary care provider;
     allows plans to choose the form of the initial 
health assessment;
     stipulates that the coordination of care function 
can be performed by a range of qualified health care 
professionals, and is not limited to primary care providers;
     limits the applicability of provider participation 
requirements to physicians rather than all health care 
professionals; and,
     aligns requirements for terminating specialists 
with the process for other providers.
    We intend to publish a comprehensive final rule with 
further refinements this fall.
    To further facilitate plans' ability to offer choices to 
Medicare beneficiaries, the President's budget includes a 
proposal to give plans 2 more months to file the information 
used to approve benefit and premium structures. This ``Adjusted 
Community Rate'' data would not be due until July 1, rather 
than May 1. The move from May 1 to July 1 should help plans 
base their cost and premium packages on more current trends and 
costs in the marketplace. July 1 is the latest we can accept, 
process, and approve premium and benefit package data, have the 
data validated by plans, and still mail beneficiaries 
information about available plans in time for the November 1999 
Medicare+Choice open enrollment period. Given legislative 
schedules and the need to act immediately, we have informed 
plans that the required filing date this year will be July 1. 
We look forward to working with you to enact the legislation 
necessary to support this change that is so important to the 
success of the Medicare+Choice program.
    We have also informed plans that they can continue to 
segment their service areas, according to the transition rules 
that were applicable for the 1999 adjusted community rate 
filings. We are considering whether to make this policy 
permanent in our final Medicare+Choice regulation.

                             Payment Reform

    The Balanced Budget Act of 1997 requires Medicare to ``risk 
adjust'' Medicare+Choice payments starting January 1, 2000. 
That means we must base payment to plans on the health status 
of individual plan enrollees. Data on individual beneficiary 
use of health care services in a given year will be used to 
adjust payment for each beneficiary enrolled in a 
Medicare+Choice plan the following year. Health status 
adjustments are based on the average total cost of care for 
individuals who had the same diagnoses in the previous year. 
Risk adjustment represents a vast improvement over the current 
payment methodology. It helps assure that payments are more 
appropriate, and curtails the disincentive to enroll sicker 
beneficiaries.
    Risk adjustment will help beneficiaries feel more confident 
in their Medicare+Choice options. It assures beneficiaries that 
Medicare pays plans the right amount to provide all necessary 
care because payments take each enrollee's health status into 
account. That will help people with serious illnesses, such as 
cancer or cardiovascular disease, who can benefit most from the 
coordination of care health plans can provide.
    Risk adjustment will help taxpayers by addressing the main 
reason Medicare has lost rather than saved money on managed 
care. Many studies show health plans enroll beneficiaries who, 
on average, are much healthier and less costly than those who 
remain in original Medicare. That discrepancy has cost 
taxpayers $2 billion a year.
    Risk adjustment will also help level the playing field 
among Medicare+Choice plans. It tempers the risk of significant 
financial loss when plans enroll beneficiaries who have 
expensive care needs. And it focuses competition more on 
managing care than on avoiding risk. It also will help plans by 
alleviating concerns among beneficiaries that plans have 
financial incentives to deny care.
    The law requires us to proceed with risk adjustment 
starting January 1, 2000, and does not specifically call for a 
transition. However, we believe we must implement these changes 
in an incremental and prudent fashion, as was done with other 
new major payment systems. We are, therefore, using flexibility 
afforded to us in the law to phase in risk adjustment over five 
years to prevent disruptions to beneficiaries or the 
Medicare+Choice program.
    Initially, we will use data on inpatient hospital stays and 
move in an orderly fashion, as envisioned in the Balanced 
Budget Act, to use of data from other health care settings. In 
the first year, only 10 percent of payment to plans for each 
beneficiary will be calculated based on the new risk adjustment 
method. By 2004, we and health plans will be ready to use data 
from all sites of care, not just inpatient hospital 
information, for risk adjustment. Then, and only then, will 
payment to plans be 100 percent based on risk adjustment.
    It is essential to stress that risk adjustment will not and 
cannot be budget neutral if we intend to protect the Medicare 
Trust Fund and be fair to taxpayers. The whole reason for 
proceeding with risk adjustment is that Medicare has not been 
paying plans properly. There is considerable evidence that we 
overpay plans because payments are not adjusted for health 
status, and managed care enrollees tend to be healthier than 
beneficiaries who remain in fee-for-service Medicare.
    Congress also recognized that plans have been paid too 
little for enrollees with costly conditions, and too much for 
those with minimal care needs. The simple demographic 
adjustments made now for age, gender, county of residence, 
Medicaid and institutional status, do not begin to accurately 
account for the wide variation in patient care costs. Risk 
adjustment will.
    If risk adjustment was budget neutral, Medicare and the 
taxpayers who fund it would continue to lose billions of 
dollars each year on Medicare+Choice. Budget neutral risk 
adjustment would cost taxpayers an estimated $200 million in 
the first year of the phase-in, and $11.2 billion over five 
years if health plans maintained their current, more healthy 
mix of beneficiaries.
    The impact on plan revenues during the transition will 
depend on the extent that less healthy beneficiaries enroll in 
Medicare+Choice plans, resulting in higher payments than health 
plans receive today. Total payment may be higher for some plans 
than it would be under the current system if they enroll a mix 
of beneficiaries that is more representative of the entire 
Medicare population.
    Overall, we project plan payment to change on average by 
less than 1 percent the first year. Phasing in risk adjustment 
substantially buffers the impact. The federal government is 
foregoing an estimated $1.4 billion in savings in the first 
year, and as much as $4.5 billion over the full five years 
because of the phase in. Impact will be further buffered by an 
annual payment update for 2000 of 5 percent. And, importantly, 
we estimate that payment rates in 63 percent of counties in 
2000 will be based on the higher, blended rates called for in 
the BBA, thereby further helping plans adjust to risk 
adjustment.

                   Competitive Pricing Demonstration

    We will soon begin a test of competitive pricing for 
managed care, as called for in the BBA. This test is an 
important step in our efforts to learn how to improve and 
protect Medicare. It will provide objective data that is needed 
to evaluate Medicare reform proposals that assume savings from 
rate-based competition among plans.
    In this demonstration project, managed care plans will 
compete to offer benefits at the most reasonable cost. A 
bidding process, similar to what most employers and unions use 
to decide how much to pay plans, will be used to set 
Medicare+Choice rates.
    To ensure broad community involvement in this project, a 
Medicare Competitive Pricing Advisory Commission, chaired by 
General Motors Health Care Initiative Executive Director James 
Cubbin, has made recommendations regarding key design features. 
It also has selected the markets of Phoenix, Arizona and Kansas 
City, Kansas and Missouri, as initial demonstration sites. We 
are establishing local advisory committees in these 
communities, and they will hold public meetings to ensure that 
local beneficiaries and other stakeholders have a voice in how 
the test program will operate. In particular, the local 
committees will set the local minimum benefit package on which 
plans will bid. We will also explore ways to reward plans that 
provide higher quality care.

                            Ensuring Quality

    The BBA includes important quality provisions for 
Medicare+Choice. It raises the bar by requiring most plans to 
not only monitor quality but also to improve quality. The new 
requirements will be phased in over the next several years. 
This way beneficiaries can compare plans based on quality, and 
we can utilize Medicare's substantial market leverage to be a 
prudent purchaser and promote competition based on quality. We 
are working to incorporate quality assessment and improvement 
into original fee-for-service Medicare, as well, so 
beneficiaries will be able to make truly informed choices about 
all their options. And we have committed to making measurable 
quality improvements throughout the Medicare program as part of 
our Government Performance and Review Act objectives for fiscal 
2000.
    All Medicare+Choice plans must report objective, 
standardized measurements of how well they provide care and 
services. They have been using HEDIS, the Health Plan Employer 
Data and Information Set, for reporting purposes since 1997. 
HEDIS is the industry standard for measuring health plan 
performance, and it has been tailored specifically for the 
Medicare program. As a result of our audit of data from the 
initial round of HEDIS reporting, we learned that some plans 
needed to improve data systems, and we are seeing improvement. 
We will continue to require HEDIS data to be audited before 
submission to ensure accuracy.
    We also are using CAHPS, the Consumer Assessment of Health 
Plans Study, to objectively measure beneficiary satisfaction 
with plan care and service. We are in the second year of 
requiring Medicare HMOs to conduct CAHPS surveys, and got a 
strong 74 percent beneficiary response rate. Reported results 
include overall ratings of each health plan's service, overall 
ratings of each health plan's care, ratings of how well doctors 
communicate with patients, and ratings of experience in getting 
referrals to specialists.
    This fall, we will conduct a CAHPS survey specifically of 
beneficiaries who disenroll from plans, asking about the 
beneficiary's experience and why they left their plan. This 
will give beneficiaries the perspectives of both those who left 
and those who stayed. Also, importantly, next year we will 
conduct a Medicare fee-for-service survey with results 
available in 2001. This will enable us to provide beneficiaries 
with comparable data on all options.
    The results of both HEDIS and CAHPS are being formatted so 
beneficiaries can make direct, apples-to-apples comparisons 
among their plan options, and are posted on our Website at 
Medicare.gov. Beneficiaries may also request HEDIS and CAHPS 
information through our 1-800-MEDICAR(E) call center. To the 
extent possible, we intend to also include this information in 
the 2000 edition of Medicare & You.
    Plans must conduct performance improvement projects and 
achieve demonstrable and sustained improvement. Eventually, 
plans will have to meet minimum performance standards. The date 
for meeting these standards may be delayed until 2001 in order 
to make sure plans have adequate time to comply. These 
standards are important because there is wide variation in how 
well plans provide care. For example, our HEDIS data show that 
90 percent of women in some Medicare+Choice plans get yearly 
mammograms, while less than 50 percent get this essential 
service in other plans. Also, the National Committee on Quality 
Assurance State of Managed Care Quality reports that, despite 
the promise and capacity of managed care to improve quality, 
the industry's overall performance on HEDIS measures was 
``essentially unchanged'' from 1996 to 1997.
    We recognize that it takes time for plans to adapt to the 
quality improvement requirements, and that a learning curve is 
involved. Therefore, we made several changes from our draft 
proposal to help plans comply.
    We are requiring plans to conduct two performance 
improvement projects per year. This workload is comparable to 
standards imposed by private sector accrediting organizations. 
Plans can choose projects they believe will target their 
enrollees' specific concerns.
    We are permitting waivers of mandatory participation in a 
national project each year, and allowing plans to substitute 
any related ongoing projects of their own. For 1999, the 
national HCFA-sponsored project focuses on diabetes, but plans 
with existing diabetes projects can instead continue these 
projects without obtaining preapproval from HCFA.
    We are phasing in quality improvement requirements by 
giving plans three years before they must achieve demonstrable 
improvement. In the first contract year, plans need only select 
a topic, establish performance indicators, and collect baseline 
data.
    We are clarifying the schedule for compliance with minimum 
performance level requirements. We intend to establish these 
levels in 1999, first measure compliance in 2000, and require 
plans to have achieved demonstrable improvement in 2001.
    We are giving plans discretion as to where they conduct 
site visits for provider credentialing, rather than mandating 
site visits to each provider location. Plans also have 
discretion in developing criteria for site visits, and they may 
delegate these functions.
    Phasing in enforcement is normal and prudent when 
implementing new programs or rules. The Medicare+Choice quality 
improvement requirements remain similar to those in the private 
sector. We are simply making sure plans have sufficient time to 
come into compliance.
    Appropriate flexibility will be provided so plans with 
networks that are less structured than traditional HMOs, such 
as PPOs, can meet these requirements. Our quality improvement 
systems will be sensitive to different plan structures and 
their different abilities to affect provider behavior.
    We are extremely impressed with the quality improvement 
project outlines submitted by plans. Most are very thorough and 
thoughtful. Many include detailed benchmarks and timetables. 
They make abundantly clear that plans are very capable of 
achieving what Congress envisioned in the BBA. We will continue 
to work closely and extensively with plans to help them 
understand and meet all Medicare+Choice quality requirements. 
But, if plans do what they have indicated in these outlines, we 
are confident that they will succeed and, as a result, provide 
beneficiaries with better care and taxpayers with better value 
for their money.
    Once we have published the final Medicare+Choice rule, we 
will begin to allow private accrediting organizations to 
``deem'' that plans meet requirements for quality, 
confidentiality, and records accuracy, as allowed under the 
BBA. We will continue to review compliance with other 
requirements.

                           Market Volatility

    As you know, some Medicare HMOs did not convert to the 
Medicare+Choice program, and others reduced their service areas 
last year. While we are concerned about the business decision 
that some Medicare HMOs made to reduce participation in the 
program, and especially the impact on beneficiaries who were 
left with no other managed care options, it is important to put 
those business decisions in context. Some of the plans that 
withdrew had market positions or internal management issues 
that made it hard for them to compete. And they faced rising 
prescription drug prices and other commercial pressures. Many 
of the disrupted beneficiaries had several other plans to 
choose from, and all but 50,000 had at least one other plan 
option.
    It is our understanding that the Federal Employees Health 
Benefits Program experienced a similar rate of plan pullouts. 
We have observed instances where plans that withdrew Medicare 
service from specific counties also withdrew from FEHBP in many 
of those same counties. As mentioned above, the vast majority 
of Medicare HMOs converted to the Medicare+Choice program. We 
have approved 23 new plan and service area expansions since 
November, and are now reviewing applications from another 42 
plans that want to get into or expand their role in 
Medicare+Choice. This suggests that plan withdrawal decisions 
have more to do with internal plan and larger marketplace 
issues than with Medicare rates or regulations. In fact, a 
certain amount of market volatility must be expected when 
relying on the private sector to serve beneficiaries.
    To buffer against such market volatility, the President's 
budget includes proposals to protect beneficiaries from 
disruption by plan withdrawals. We have provided for earlier 
notification of plan withdrawals in our recent refinement to 
Medicare+Choice regulations. We look forward to working with 
you on legislation the President has proposed to broaden access 
to supplemental Medigap polices if beneficiaries lose their 
plan option, and to allow enrollees with end stage renal 
disease to move to another plan.

                               Conclusion

    We are making substantial progress in implementing the 
Medicare+Choice program. We are incorporating lessons learned 
from our initial beneficiary education campaign to refine 
future efforts. And we are establishing an advisory committee 
to further help improve these essential efforts. We are working 
with plans to encourage participation. And we are refining 
regulations so plans will be able to offer beneficiaries more 
choices. We are proceeding with payment system improvements in 
a prudent manner that will meet the statutory mandate while 
minimizing any impact on beneficiaries and plans. We are also 
proceeding with quality improvement requirements in a prudent 
manner that will meet the statutory mandate while giving plans 
reasonable time and flexibility to comply.
    We look forward to working with you to enact necessary 
beneficiary protections and make other adjustments that may be 
necessary to ensure success of the Medicare+Choice program. We 
thank you again for holding this hearing, and we are happy to 
answer your questions.
      

                                

    Chairman Thomas. Thank you, Dr. Berenson. I guess that is a 
familiar way of doing things in the hierarchical bureaucratic 
structure. Normally, when we have folks in front of us, they 
get to have their say and then respond, but you run your shop 
the way you want to.
    Talking about running your shop, you used to do something 
in your former life, did you not, that was actually out in the 
private sector?
    Dr. Berenson. Yes. I have done a couple of things. I 
practiced medicine, internal medicine, actually about eight 
blocks from here on Capitol Hill in a private internal medicine 
practice, and for 10 years I was the medical director and 
member of the board of a local PPO from about 1988 until about 
2 years ago that currently serves about 140,000 members in the 
Washington area, so I have experience, as do my colleagues.
    Chairman Thomas. When you ran that plan, did you receive 
risk-adjusted payments?
    Dr. Berenson. No. We were a PPO. We did not take risk 
ourselves. We were a PPO network, and so the various insurance 
companies contracted for our services. They negotiated the 
deals with the purchasers.
    Chairman Thomas. One of the concerns I have is the way in 
which information is collected and disseminated. Obviously, I 
was concerned about that in my opening remarks in terms of the 
knowledge to allow people to make a choice and that we have 
committed ourselves to as complete an analysis as we are able 
in terms of a comparative knowledge structure for our seniors.
    I understand you folks have a Web site. Is that correct?
    Dr. Berenson. I am going to let Carol answer these 
questions.
    Ms. Cronin. Yes. Yes, we have a Web site, Medicare.gov.
    Chairman Thomas. You mean www.Medicare.gov----
    Ms. Cronin. Correct.
    Chairman Thomas [continuing]. Is how I get there.
    You provide information by zip code of the plans that are 
available to seniors. You also provide information regarding 
four measures that are intended to measure quality, right? They 
are mammography rates, beta blockers after a heart attack, eye 
exams for plan members with diabetes, and the percentage of 
members seen by a provider in the last year.
    What percent of women enrolled in fee-for-service in 1998 
had a mammogram?
    Ms. Cronin. Jeff knows the answer to that question.
    Dr. Kang. Nationally, in 1997, it was about 55 percent.
    Chairman Thomas. In the fee-for-service?
    Dr. Kang. In the fee-for-service.
    Chairman Thomas. Is that on the Web site?
    Dr. Kang. No, but we are working toward putting that on the 
Web site.
    Chairman Thomas. What is on the Web site----
    Dr. Kang. Right now----
    Chairman Thomas [continuing]. In regard to women having 
mammograms? Anything?
    Ms. Cronin. It is comparative information by health plan 
compared to a State average.
    Chairman Thomas. Can they compare the fee-for-service plan 
with the other plans?
    Ms. Cronin. No, it does not at this time.
    Chairman Thomas. What percentage of fee-for-service 
enrollees in 1998 who had a heart attack were prescribed beta 
blockers?
    Dr. Kang. In 1997 it was about 60 percent nationwide.
    Chairman Thomas. And what is it in the fee-for-service 
program?
    Dr. Kang. I am sorry. That is 60 percent fee-for-service.
    Chairman Thomas. Fee-for-service. Is that on the Web site?
    Dr. Kang. It is not.
    Chairman Thomas. What percent of fee-for-service enrollees 
with diabetes in 1998 had an eye exam?
    Dr. Kang. I know I have that number back in my office. I 
did not bring that.
    Chairman Thomas. Well, the followup question would be is it 
on the Web site?
    Dr. Kang. No, it is not.
    Chairman Thomas. See, you are talking about setting up an 
informational structure so seniors can make a choice, and 76 
percent of the seniors today in a program that was available 
since 1985 do not know they can disenroll from an HMO.
    We are taking this money and saying that we are going to 
provide information on a comparative basis so people can make a 
choice, and when 85 percent or more of the people are in the 
fee-for-service program, you do not set up a structure which 
allows them to make a choice which includes the fee-for-service 
program.
    How useful is that Web site to the average beneficiary who 
happens to be in the fee-for-service program to compare what 
they are doing versus what the plans are offering?
    Dr. Kang. If I may? From a measurement perspective, we 
agree wholeheartedly that we need to compare fee-for-service 
and managed care. That is part of their choice.
    The issue is comparison. It turns out that the measurement 
collection we are doing in fee-for-service is not strictly an 
apples-to-apples comparison to Medicare managed care. The 
dilemma here is that HEDIS was developed for Medicare managed 
care. It was not developed for Medicare fee-for-service.
    There are technical issues and accuracy issues we have to 
solve here, and the dilemma we are in is a balancing act of 
putting up inaccurate information, or not 100 percent 
comparable information, versus the issue that the beneficiaries 
need to know. This is a process----
    Chairman Thomas. Let me get this straight. You are not 
saying, and I do not think you are saying, that you do not care 
about the quality of service that 85 percent of the seniors get 
in the fee-for-service program. It is just that you do not have 
any ability to measure it?
    Dr. Kang. I just gave you the numbers. We have the ability 
to measure it.
    Chairman Thomas. Then why do we not put them in a place 
where they can be conveniently referenced vis-a-vis the other 
kinds of programs?
    Dr. Kang. It is not an apples-to-apples comparison, so the 
question is: Are they making a true comparison between managed 
care and fee-for-service.
    Chairman Thomas. What is the true comparison that we are 
concerned about?
    Dr. Kang. I will give you an example. In fee-for-service, 
the beta blocker measure is the number of beneficiaries who 
received beta blockers following a hospital discharge.
    In managed care, it is the number of beneficiaries who 
received beta blockers following a hospital discharge plus what 
they are getting in the outpatient setting, so there is a 
different methodology for----
    Chairman Thomas. As a doctor, which is the preferred 
procedure using beta blockers?
    Dr. Kang. The latter measure is the preferred. We would 
like to see beta blockers in both settings, in the hospital and 
the physician's office. The problem here, though, is that we do 
not have the statutory authority in fee-for-service to get this 
information from group practices or physicians' offices. We 
have----
    Chairman Thomas. So the problem is not being able to get 
the information in a useable form, but since managed care and 
the way in which it deals with medicine wanting to understand 
how these things work collects the data?
    Dr. Kang. The fee-for-service program has certain statutory 
and regulatory barriers, as well as operational barriers that 
prevent us from getting the information in the same way that 
Medicare managed care can.
    Chairman Thomas. I am not going to continue this line of 
questioning, but, frankly, I think this is one of the 
fundamental problems we have.
    We are talking about creating, for example, risk adjustors 
and others in the managed care area in which we will remove 
money from this area if certain criteria are not met, but we do 
nothing over on the fee-for-service side. In fact, it is an 
entitlement program open to whatever money is available.
    If the pot shrinks, there is a greater chance it will fail, 
which is a self-fulfilling structure, yet we provide 
information to seniors only on an internal comparative basis 
between managed care plans because the answer is statutorily we 
are not able to get this information from the fee-for-service.
    I have to tell you that I never heard anyone from the 
administration during the entire time we talked about, worked 
on, and negotiated the Balanced Budget Act amendments in 
Medicare who came to me and said that seniors are not getting 
the kind of information they need. Would you please make these 
statutory changes so that we can collect the data and allow 
seniors to make a realistic choice between all of the offerings 
in Medicare? I never heard that once.
    Dr. Kang. This was actually an Administration proposal 
several----
    Chairman Thomas. I never, ever had it laid in front of me 
in a way that you folks wanted it as compared to all the other 
things you wanted, including a 15-percent reduction on home 
health care costs and a number of items that you made very 
clear you wanted.
    Now, our goal is to try to create a system to provide as 
much information as possible to seniors to make comparisons, 
but it does not make a lot of sense to me, and we will be 
talking about this in other contexts, to run a system which 
removes money from one side and which makes a comparative 
structure available on one side and requires one side to fund 
it.
    That does not sound to me like a system that is intended to 
be integrated, to providing knowledge so the choice is an 
across-the-board choice available in Medicare. We have to work 
on that together.
    Ms. Cronin. Congressman Thomas, I want to point out before 
we leave this topic that the other piece of the information 
that we provide to beneficiaries on medicare.gov is 
satisfaction information.
    At this point, you would be correct in noting that there is 
also no satisfaction information on the original Medicare 
Program. Our intent, however, is to field test a consumer 
satisfaction survey of Medicare beneficiaries in the original 
Medicare Program and report that information on the original 
plan, so that is going to occur on the satisfaction side.
    Chairman Thomas. I have said this several times and no one 
has reacted, so I will invite reaction.
    In your own documents, you indicated that 76 percent of 
Medicare beneficiaries do not know they can disenroll from an 
HMO once they enroll, even though it has been available as a 
choice to them since 1985. Does that disturb you----
    Ms. Cronin. Absolutely.
    Chairman Thomas [continuing]. In terms of that knowledge?
    Ms. Cronin. Absolutely.
    Chairman Thomas. Since 1985 prior to Medicare+Choice, did 
HCFA ever include in any of the materials that it mailed out to 
the beneficiaries information about risk programs, their 
ability to enroll and not enroll?
    Ms. Cronin. It was probably there, but it was not mailed to 
every individual. It was probably in small print in the back of 
a book. We are starting from a low baseline, there is no 
question, in terms of our educational efforts.
    Chairman Thomas. But you were mailing stuff to 
beneficiaries for more than a decade.
    Ms. Cronin. Well, that actually is not true. We were not 
mailing. We were not mailing out anything to beneficiaries. 
Beneficiaries had to take the initiative to get anything from 
us.
    I think now we are providing information to them so that 
they can have it as a reference document when they need it. We 
did not do this before.
    Chairman Thomas. The argument has been that you are having 
trouble because we are not giving you as much money as you 
asked for.
    Interestingly enough, the signup for the Medicare+Choice 
Program has not been as high as we anticipated, so if in fact 
they are the ones that are going to pay the bill, you may not 
have as much money as necessary.
    The point I have repeated over and over again was there 
prior to Medicare+Choice, so I am hopeful you folks are looking 
at finding the resources to inform and to educate seniors, 
especially the 85 percent who are not in the Medicare+Choice 
Program, because it obviously is not the case, is it, that you 
want to educate all beneficiaries about all of Medicare using 
those people who pay under the Medicare+Choice?
    Are you in fact providing information to seniors beyond the 
Medicare+Choice Program with the Medicare+Choice providers' 
money?
    Ms. Cronin. We are providing information to all 
beneficiaries. That includes information about the 
Medicare+Choice Program.
    Some of the funding, the overall funding we are using to do 
that, is from other HCFA budget categories because we 
understand there is a maintenance of effort required in terms 
of our education efforts.
    Chairman Thomas. If the maintenance of effort is that 76 
percent of the people do not know they can disenroll from an 
HMO, the hurdle for the maintenance of effort is pretty low.
    The gentleman from California.
    Mr. Stark. We are going to hear later that we receive great 
information as Federal employees, which I presume you all get, 
as I do.
    Why do you not tell me, and somebody is going to ask it, 
why do we not just do what we do with FEHBP, the Federal 
Employee Health Benefit Program, and send out a book that is in 
simple English and is easy to understand?
    That is not my assessment of what you get from the Federal 
Employee Health Benefit Plan. I think you have to look at it 
carefully, and I think there is quite a bit of small print. 
But, could you assess for me, any of you, the major differences 
between what FEHBP does and Medicare does? If all it takes is 
to copy FEHBP and it will quiet the critics, why do we not do 
that?
    Ms. Cronin. We are. You know, we have been. In the context 
of developing our overall national Medicare education program 
and the different components, we looked at a wide range of 
approaches, including OPM, the Office of Personnel Management.
    I would say we are incorporating many aspects of their 
approach. In fact, we anticipate that if in fact the ACR is 
moved back in the year, that will make our document possibly 
look even more like what OPM does now, which is to provide a 
rather limited amount of information in the document that you 
receive and with satisfaction information.
    What we would do is also provide performance measurement 
information as well and then----
    Mr. Stark. Now, the Federal Employee Health Benefit Plan 
provides no satisfaction information, if I am not mistaken.
    Ms. Cronin. The FEHBP does.
    Mr. Stark. No, none. I do not think so.
    Ms. Cronin. I believe it does.
    Mr. Stark. Where? It does? What kind of satisfaction 
information?
    Ms. Cronin. Yes. I think it is an overall rating of 
satisfaction of the health----
    Mr. Stark. By whom?
    Ms. Cronin [continuing]. Of the health plans. The overall 
rating of health plan satisfaction is in FEHBP in that book 
that you get.
    Mr. Stark. Where does that information come from?
    Ms. Cronin. They do a survey. FEHBP does an annual survey 
of all the enrollees in managed care plans, and that is----
    Mr. Stark. And then they----
    Ms. Cronin. Report on it.
    Mr. Stark [continuing]. Put that in their list?
    Ms. Cronin. Correct.
    Mr. Stark. I am surprised to learn that. I was unaware of 
that. Is it a number? Do you get 90 or 30 or 60?
    Ms. Cronin. No. I think they have a broken bar, so you get 
the number of beneficiaries that are--I am sorry. The number of 
FEHBP enrollees that are very satisfied, and then it is broken 
down in a bar.
    We in fact are working closely on a Federal interagency 
workgroup. The HCFA and the Office of Personnel Management are 
the lead on the consumer health information group. What we are 
trying to do is to develop a common government lexicon around 
the whole concept of how you give information to the public, or 
to our public.
    Mr. Stark. Now, that same FEHBP bulletin would go out to 
Medicare beneficiaries who are retired Federal employees, 
right?
    Ms. Cronin. Our information would, yes.
    Mr. Stark. Yes. Now, is there any difference there? Do you 
notice any difference in the information they receive or 
questions they ask?
    Is there any thought on the bulletin for the average 
Federal employee beneficiaries who are for employees in their 
forties, while the average Medicare beneficiaries are really in 
their seventies? It is conceivable that there might be more 
confusion among the older beneficiaries. But, FEHBP makes no 
differentiation for them in this as far as you know?
    Ms. Cronin. I do not know that. We are very conscious that 
anything we do with our beneficiaries, and you were very quick 
to alert us in case we forgot, has to be in plain English.
    I think that is the biggest thing we are going to work on 
in terms of our handbook this year. We tried to take out as 
much jargon as possible. We are going to do an even better job 
this year.
    Mr. Stark. Go ahead, Dr. Kang.
    Dr. Kang. I was going to say that FEHBP does not make a 
distinction between the age groups.
    The only other thing I should mention is they are moving to 
our survey that we are using rather than the other way around. 
They like the survey that we are using, the CAHPS, Consumer 
Assessment of Health Plans Study, satisfaction survey.
    Mr. Stark. Federal Employee Benefits is using your survey?
    Dr. Kang. They are moving toward using our survey.
    Mr. Stark. Would the job not be a whole lot easier if we 
had standard benefits? The Medigap comparisons are much easier, 
are they not, than the Medicare+Choice plans? If we require 
uniform benefits, would it not be easier to compare?
    Dr. Berenson.
    Dr. Berenson. It is a tradeoff. Certainly, it would be 
easier to compare. At the same time, plans are able, with our 
capitation payments, to offer additional benefits to 
beneficiaries, and we do not want to limit that ability. A lot 
of beneficiaries take advantage of those additional benefits as 
well.
    Ms. Cronin. I might also note that one of the things we are 
also doing that does not move completely in your direction, but 
we are standardizing the way in which the marketing materials 
will be portrayed to beneficiaries so that when they get a 
summary of benefits from one managed care plan, the information 
they see will be in the same order using the same types of 
words as they would receive from another plan.
    Mr. Stark. I think that is what I was referring to. There 
are differences in the plans under Medigap. In a sense, you can 
offer additional frosting on the cake if you choose to do so, 
but there must be certain underlying benefits that are common 
to all plans.
    Thank you very much.
    Chairman Thomas. I am sure Dr. Cronin did not intend when 
she said in plain English, because that was a generic 
statement, that there would also be one necessary in plain 
Spanish or in plain whatever other language is necessary. She 
did not mean just plain English.
    Does the gentleman from Minnesota wish to inquire?
    Mr. Ramstad. Thank you, Mr. Chairman. Thank you for being 
here today, all three of you.
    I am concerned that HCFA's proposed risk adjustment 
methodology will impose very problematic financial penalties on 
health plans that appropriately provide quality health care in 
outpatient settings.
    For example, it seems to me from what I am hearing and 
reading that including congestive heart failure in the payment 
model penalizes plans with cardiac disease management programs. 
That does not make any sense. Is my concern real?
    Dr. Berenson. Well, that is in fact the one diagnosis where 
I personally had a long talk with the staff to figure out the 
right solution to that. We very much do not wish to penalize 
plans that do creative things in disease management.
    Because of that, we eliminated about 30 percent of 
inpatient diagnoses that are not typically hospital diagnoses 
where plans can adequately manage and correctly manage the 
condition on an outpatient basis. We have modeled it in a 
number of ways to try to minimize that incentive.
    For congestive heart failure, there may be some decrease in 
payment to the plans that do a terrific job, but it is 
basically the example that we keep hearing about. There is just 
so much congestive heart failure that we could not eliminate it 
from the model.
    The other point I would make, we now have the opportunity 
for a plan to start marketing to fee-for-service 
beneficiaries--that the plan has a state-of-the-art disease 
management programs in congestive heart failure. They should be 
attracting beneficiaries because of that.
    We have not heard that kind of marketing in the past 
because plans had no rewards for, in fact, recruiting 
beneficiaries who had health needs. It is not a perfect system. 
It is a system we could start with. We do not think there are 
serious flaws in it.
    Mr. Ramstad. I am also concerned about how the proposed 
risk adjustment would impact a program that I have heard about 
from a lot of my constituents that is very important to them. 
This program is called Ever Care.
    Are you familiar with it? I think Dr. Kang is familiar with 
it.
    Dr. Berenson. Yes. Jeff knows it quite well, he has worked 
with them.
    Basically, for some of the demonstrations like Ever Care 
and the social HMOs, the PACE Program, which focus specifically 
on nursing home beneficiaries and others in long-term care 
facilities, we are not imposing the risk adjustor that we are 
putting on Medicare+Choice plans as we work out alternatives 
for those specific kinds of demonstrations. We are working with 
Ever Care to try to figure out an appropriate risk adjustor.
    Mr. Ramstad. I appreciate that collaborative effort on your 
part. I know you are aware that all the empirical data suggests 
that hospital admissions under Ever Care within that program 
have decreased 40 percent, a very, very impressive program.
    I also appreciated that 1-year exemption from the risk 
adjustment payment methodology. I understand you are 
considering the development of a hybrid payment methodology for 
programs like Ever Care. Is that accurate?
    Dr. Berenson. Yes. We are looking to see whether we can use 
approaches that do not rely solely on encounter data, like 
functional status of nursing home residents, that might be 
appropriate.
    We can advance the comprehensive risk adjustor which 
involves encounters from sites of service other than inpatient 
hospitals, so we are looking at the range of alternatives that 
we have.
    Mr. Ramstad. One final question, and it is broader in 
scope. Could you just briefly explain the systems that HCFA has 
in place to monitor and analyze the effects of the new risk 
adjustment system?
    In other words, will HCFA be able to detect whether plans 
that are providing good care and preventing avoidable 
admissions are getting underpaid under the new system?
    Dr. Berenson. Yes. Clearly our goal is to move as quickly 
as we can from an inpatient-only model to an all sites of 
service model. As we do that, and we anticipate it will take us 
about 4 years to get there, we will make corrections.
    Again, you have pointed to congestive heart failure. That 
may be something we need to make a correction on, if necessary. 
We are looking at the inevitable concern about the incentives 
for upcoding or miscoding that could take place to take 
advantage of the system and will have an oversight program to 
make sure that that does not happen.
    This is one of the most important initiatives we have at 
HCFA, and we are devoting the resources we need to do it right 
and to respond to the concerns that plans have about it.
    Mr. Ramstad. Thank you, Doctor.
    Mr. Chairman.
    Chairman Thomas. Thank you.
    Does the gentlewoman from Connecticut wish to inquire?
    Mrs. Johnson of Connecticut. Thank you.
    Dr. Berenson, in a recent study supported by the Physician 
Payment Review Commission they concluded that the data you were 
requiring the PPOs to collect was not operationally feasible. I 
am quoting. ``Not operationally feasible for product structure 
to promote unrestricted choice of providers.'' Would you agree 
with that?
    Dr. Berenson. Could you repeat the quote again?
    Mrs. Johnson of Connecticut. The Physician Payment Review 
Commission believes the information you are requiring PPOs to 
develop under the new regulations is ``not operationally 
feasible for product structure to promote unrestricted choice 
of providers.''
    Dr. Berenson. I see. I think that is referring to the fact 
that as a coordinated care plan, PPOs, along with HMOs and 
PSOs, under our regulations would be required to submit data to 
us so we can do the same kinds of comparisons that we are doing 
with the other plans and also that they would conduct quality 
improvement projects.
    I will take the first part of it. I come from a PPO 
environment. That is where I spent 10 years. What characterizes 
PPOs is that they collect encounter data, both from their 
contracted network as well as noncontracted providers, and they 
in fact have the ability, in our opinion, to generate what most 
of the HEDIS, Health Plan Employer Data and Information Set, 
data and other measures are based on, which is encounter data.
    There are some unique problems that PPOs have in conducting 
quality improvement projects, and I am going to let Jeff 
respond to that because we have tried to accommodate that 
concern.
    Dr. Kang. We have, on the quality improvement side, created 
more flexibility around the quality improvement projects they 
can do. Also, through our peer review program or our quality 
improvement----
    Mrs. Johnson of Connecticut. Excuse me just for a moment. 
You have----
    Dr. Kang [continuing]. Created greater flexibility.
    Mrs. Johnson of Connecticut. In other words, you stepped 
back from your original regulatory requirements?
    Dr. Kang. That is correct, especially in some of the 
structural quality requirements, to recognize looser networks.
    The other is that with regard to the quality improvement 
projects, we are offering the assistance of the peer review 
organizations to actually help them in their quality 
improvement projects.
    We are actually paying for that. I do need to say that, in 
fee-for-service, we are measuring performance, and we are 
actually holding ourselves, through the GPRA measures, 
accountable for quality improvement in fee-for-service.
    Mrs. Johnson of Connecticut. Are you collecting the same 
information in your fee-for-service section that you want your 
PPOs to collect?
    Dr. Kang. The answer, again because of the legal, 
operational, and technical reasons, is no.
    Mrs. Johnson of Connecticut. Right. You are not collecting 
the same information from fee-for-service physicians that you 
want PPOs to collect from fee-for-service physicians in their 
network. Bottom line, you will make it impossible to be a PPO 
Medicare plan.
    I really am disappointed, Dr. Berenson, with all your 
experience and that what Congress was trying to do is to say 
give seniors the same options that the Federal employees have, 
and now you are imposing requirements on PPO networks whose 
sole goal it is to give seniors much more choice of physician--
--
    Dr. Berenson. No.
    Ms. Johnson [continuing]. Requirements you do not impose on 
your own fee-for-service physicians. That is what comes 
through.
    Dr. Berenson. But let me repeat that PPOs, under the 
Balanced Budget Act, are defined as a coordinated care plan, 
and we do hold all coordinated care plans to certain reporting 
requirements. The data that they report is essentially based on 
the encounters they receive from physicians and other providers 
that they are able to turn around into the information we need.
    We have met with representatives of the industry to try to 
get into this in more detail, and I really do not think that on 
the data requirements side that they are in fact, if anything, 
an HMO that has a capitated contract with a group of providers 
has more difficulty providing some of the information we need 
because they capitate 90 percent of the payment, and that 
physician group has not been obligated to provide it, so in 
fact we have unique situations.
    Mrs. Johnson of Connecticut. Dr. Berenson, I have a few 
more questions, so we really have to move on.
    Dr. Berenson. OK.
    Mrs. Johnson of Connecticut. I do not believe the Federal 
Employee Health Benefits Program is derelict in being concerned 
about quality. They use NCQA, National Committee on Quality 
Assurance, standards. They require their plans to be NCQA 
approved.
    Why did you not use that mechanism for this kind of a 
structure rather than impose regulatory requirements that will 
mean these kinds of plans cannot participate in Medicare 
managed care? Why are you not turning to the private sector 
entities that assure quality for the majority of Americans 
across the country?
    Dr. Berenson. I have two responses. One is that under the 
BBA authority, we do get to deem private accrediting agencies 
such as NCQA.
    Mrs. Johnson of Connecticut. Are you prohibited from using 
NCQA?
    Dr. Berenson. No, and we plan to. We have a deeming 
authority that we will be using, and we will be deeming NCQA, 
presumably----
    Mrs. Johnson of Connecticut. Excuse me one moment. Why did 
you----
    Dr. Berenson. Let me make another point that most PPOs are 
not accredited by the private accrediting agencies.
    Mrs. Johnson of Connecticut. But it would have been so 
simple to require accreditation. Why did you not do that at the 
beginning instead of setting up a bureaucratic system that is 
heavy, costly, burdensome?
    Why do you think some of those plans pulled out after they 
had submitted their data and set rate in May, but in July you 
came out with a step?
    One of the things I was pleased about was that you had 
experience in the industry. Frankly, it does not take a rocket 
scientist to know that if now instead of using NCQA data you 
have to start collecting all of this stuff yourself, this is 
big money. Furthermore, it changes your relationship with your 
network docs.
    Basically, what you did not only made it impossible for 
plans to stay in and so they pulled out, disrupting the lives 
of our seniors, but you also are moving in a way that means we 
will never get to a Medicare set of alternatives that are 
similar to the alternatives our employees have throughout the 
country with the exception that they offer by law the Medicare 
bundle of services.
    Unfortunately, my time has run out, but I know we will have 
a second chance to get back at this, and I wanted to get clear 
that I am profoundly concerned.
    Your answer to Mr. Ramstad that maybe you were not able to 
completely recognize the benefits of disease management, that 
there may still be some deficit there, that is the future of 
medicine. If we are going to underreimburse for management, we 
are going to destroy quality for seniors, so I am concerned 
about what you are telling us.
    Thank you.
    Chairman Thomas. On the gentlewoman's remaining time, I 
only want to underscore, Dr. Kang, I am very pleased you are 
collecting the information that you are collecting in the fee-
for-service area.
    My assumption is that that is a means to an end and not an 
end in itself, and that it will be available to seniors to make 
choices. That was the point I made. The fact you are collecting 
it is only halfway there.
    Does the gentleman from Washington wish to inquire?
    Mr. McDermott. Thank you, Mr. Chairman.
    You are being put through a stress test today as we bounce 
from subject to subject. I am going to bounce back to another 
one.
    CBO recently revised its Medicare baseline estimates and 
now says that in 1999, the increase will only be 1.1 percent, 
yet the plans got a 2-percent increase in 1999, and 5 percent 
is anticipated for 2000, but the managed care industry is 
telling us they cannot make it on that amount of money.
    Now, are they saying that they cannot compete with the FFS, 
fee-for-service, system even with increases above inflation? Is 
that what we are to draw from their statements?
    I would like to have your comments about that because the 
GAO study says that managed care is actually dealing with fewer 
sick people than fee-for-service. I have a difficult time 
figuring how HMOs get bigger increases than inflation and are 
dealing with the least sick of the population, and yet they 
continue to say they cannot make it.
    Dr. Berenson. Again, the point you make about favorable 
selection HMOs is the rationale for why we have proceeded 
cautiously with a risk adjustment system that is based on 
inpatient diagnoses, which are predictors of the health needs 
of beneficiaries for subsequent health care costs.
    We have done an impact analysis that suggests that if we 
had fully implemented the risk adjustment system, there would 
be a reduction in payment to the plans in aggregate of about 7 
percent. That would be if their case mix had stayed the same.
    Again, we hope the incentives of risk adjustment will 
result in plans attempting to attract patients who have the 
kinds of problems that Congresswoman Johnson is endorsing, 
disease management programs that they can then promote to fee-
for-service beneficiaries and get rewarded under that payment 
system.
    To go back to the basic thrust of your question, because of 
favorable selection we felt we wanted to and needed to proceed 
as the BBA called us to do with risk adjustment phased in over 
5 years.
    The final point I would make is that the 1.1-percent 
increase was based on projections for this year. The actuary 
assumes that next year's spending will be significantly higher, 
and that is how the blend in fact is going to get funded.
    Many counties, including in your own State in Washington, 
will be getting increases on the order of 10 or 12 percent. The 
goal of the BBA is to begin to have a differential between what 
we are paying in the fee-for-service side, in higher payment 
areas, and begin to provide some support for more efficient 
areas that have been underpaid under fee-for-service, so I 
think now some of the promise of the BBA redistribution will 
begin to take place.
    Mr. McDermott. Some of the problems?
    Dr. Berenson. Some of the promise.
    Mr. McDermott. I am sorry.
    Dr. Berenson. Some of the promise of the BBA formula.
    Mr. McDermott. OK. I have a second question.
    One of the major insurers last year offered a $300 fee to 
licensed brokers for every managed care senior citizen that 
could be brought into their HMO. Does that suggest there is 
more than enough money out there for operating a managed care 
system if HMOs have $300 to give to licensed brokers?
    Dr. Berenson. I am not sure. Clearly, many insurance 
companies use brokers in their normal marketing activities. We 
are actually looking right now at the issue of plans using 
brokers to recruit.
    I think it is fair to say that for a number of reasons, 
until the very recent past plans had been overpaid, but after 2 
years of only getting 2 percent increases and many plans still 
only get 2 percent, I think the situation is changing at this 
time.
    There is no question that in some parts of the country 
plans are doing quite well. However, in other parts, they felt 
the need to pull out of the Medicare Program, and that was a 
problem for all of us.
    Mr. McDermott. Which really brings me to my last question, 
and that is the question of what do you anticipate is going to 
happen here come July 1, if we move the date back down to July 
1 before people have to put their nickel on the bar and decide 
whether they are going to go with the program next year?
    Are we going to get more managed care operations pulling 
out of Medicare, or do you expect them to all stay the same?
    Dr. Berenson. It is hard to predict. Clearly, there will be 
some. Some of it will be better this year for the simple fact 
that for this coming year, the plans will have to tell us if 
they are in for the following year, or whether they are 
withdrawing at the same time. It will not happen just before 
like on November 2 of last year when the beneficiaries had no 
notice.
    We think that last year was a difficult transition year. 
The plans had to provide their ACR, adjusted community rate, 
proposals to us even before they had a chance to see what our 
regulations were. They now have an opportunity to know what the 
program requirements are. They can perhaps make somewhat more 
conservative assumptions on their ACR proposals.
    We are hopeful that most of the plans will stay in. We are 
still getting a number of new applications. Since November, we 
have approved 10 new Medicare+Choice HMOs, and we have improved 
service area expansions for another dozen, so there is still a 
lot of interest.
    Right now the enrollment in HMOs has gone back up to where 
it was before the pullouts occurred back in December. There is 
still interest in this program, and we are hopeful there will 
not be the kind of pullouts that there were last year.
    Mr. McDermott. Primarily in urban areas you have had the 
increase in enrollment, or is it across the country?
    Dr. Berenson. I do not know that we have done that 
breakdown. Most of the HMOs are in urban areas and metropolitan 
areas. That is where they are, so I assume the increases are in 
those areas.
    Mr. McDermott. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. Certainly.
    Does the gentlewoman from Florida wish to inquire?
    Ms. Thurman. Thank you, Mr. Chairman.
    I want to read, first of all, a statement that I guess Ms. 
DeParle made in front of the Senate Finance Committee where she 
said we should not call the Medicare+Choice Program a failure 
simply because managed care plans are pulling out, but then she 
went on to say that, ``Some plans withdraw not because of low 
payment, but because they had problems pulling together 
networks or faced rising prescription drug prices or other 
commercial pressures.''
    I do not understand that. Those are money issues. 
Prescription drugs is a money issue. Networking to try to pull 
people into a network is probably because of money issues.
    Then I go, and I am thinking OK, we are estimating an 
average per person fee-for-service spending when you do the 
formula, but yet fee-for-service is not paying for prescription 
drugs and some of these other areas. How do we then make the 
determination if you are trying to compare these folks? How do 
you make that determination as to what that cost would be?
    Then I look at what the cost is, or we have something from 
CRS that gives us what the percentage of change was. Dade 
County, who got $748 in 1997 and $794 in 2000; Citrus County, 
which is one of the counties that I represent, got what was 
$446 and went to $489. Our managed care just pulled out. Dade 
County is thriving. Somewhere along the line something is not 
jiving here for me.
    Dr. Berenson. Well, you have raised a number of points. I 
will just take two of them.
    One is that the Balanced Budget Act attempted to partly 
deal with those discrepancies between Dade County and Citrus 
County. Unfortunately, because the fee-for-service increases 
were so low for 2 years in a row and the projections of those 
were so low, there was no ability to, what we are calling in 
shorthand, fund the blend, the combination of taking the 
national rate and the local county rate and over a period of 5 
years getting to a 50-50 blend between the two. Now that will 
happen and so those discrepancies will start decreasing as that 
happens.
    Ms. Thurman. But how do you just take it from a fee-for-
service when fee-for-service is not giving the same benefits to 
a beneficiary? I do not----
    Dr. Berenson. Yes. Well, I guess all I would say is that is 
how it is statutorily defined at this point. It used to be that 
the payment to the HMOs was based on every year's update in 
fee-for-service payment, causing some swings in payments, 
though it was directly tied to each year's fee-for-service 
payment.
    The BBA went part of the way to a new system by 
establishing a baseline in 1997, but then having the increase 
be based not on the continuing fee-for-service expenses within 
the county, but based on the BBA formula. So, the BBA did break 
the link to fee-for-service partly.
    Ms. Thurman. Am I missing something? Help me here. We have 
still not taken into account the additional services. I am not 
saying that----
    Dr. Berenson. Yes.
    Ms. Thurman [continuing]. We are not wrong. I am not 
blaming anybody.
    Dr. Berenson. No. We are not taking in----
    Ms. Thurman. I am saying is there a better way than in a 
way of a monetary issue here back to these counties based on 
the other----
    Dr. Berenson. Yes.
    Ms. Thurman [continuing]. Benefits that an HMO gives? If 
there is, I would really like to hear that.
    Dr. Berenson. I think the only way would be to learn from 
the competitive pricing demonstrations that we are authorized 
now to conduct, and the Subcommittee selected Phoenix and 
Kansas City. In those communities, the HMOs, instead of being 
paid based on the administrative pricing formula, will actually 
bid on a benefit package that will be the community standard 
benefit package, including prescription drugs.
    They will actually bid to provide those services, and the 
beneficiaries will then have incentives to pick the low bidders 
essentially, so in essence we are testing a new approach which 
is closer to how the private markets work, but except for that, 
we have no ability to factor in the cost of prescription drugs, 
as the major example, in the updates that go to the plans, and 
the plans do have difficulty controlling cost on prescription 
drugs.
    Ms. Thurman. Quite frankly, I think that is a part of the 
problem for some of the pullout, which is what really has me a 
little concerned because, as I said, in Dade County they get 
$700 and some based on the fee-for-service, but not necessarily 
the drug issue, which is creating some of the problems for 
these HMOs and pulling out.
    Dr. Berenson. I think this year the HMOs are in a better 
position to more accurately do their actuarial projections of 
how much it will cost them, and there may be some increase in 
cost to the beneficiaries, but it should still be far lower 
than what they face in Medigap insurance, or the alternatives 
with the fee-for-service and supplemental insurance.
    Ms. Thurman. However, in some places they are paying no 
premium at all.
    Dr. Berenson. I understand that.
    Ms. Thurman. In others they are paying high.
    Dr. Berenson. Right. You are right.
    Ms. Thurman. I am sorry, Mr. Chairman.
    Chairman Thomas. Thank you, gentlewoman.
    I want to thank the gentleman from Louisiana, Mr. McCrery, 
for yielding to me.
    I wanted to ask a couple of process questions in terms of 
your ability to collect data under this risk assessment model. 
Obviously, the question of the collection of data is a critical 
one in a number of different regards.
    How did you go about establishing the relative risk weights 
when you have the 15 diagnostic groups that you are creating in 
the proposed risk adjustment? Did you basically go back and 
look at what the average cost of different inpatient episodes 
were and kind of lump them together around structures and you 
came up with the 15, or did you come up with the structure and 
take the data and fit it into the category? How did you come up 
with it?
    Dr. Berenson. No, the other way. The initial group was to 
take all the ICD-9 diagnoses and come up with groups that were 
clinically coherent, similar kinds of diagnoses. The key part 
of this was to identify in a subsequent year the total 
spending--not just hospital spending--associated with an 
individual with a particular hospitalization and to determine 
what those costs were.
    Basically, there was clustering, expense clustering, so it 
was a combination of diagnoses and then expenses for 
statistical techniques that I do not understand.
    They ended up with 15 groups. In the first version of this 
there were 10 groups, and it got expanded to 15. So, now we 
have, in the 15 groups, diagnoses that are somewhat different, 
but what they have in common is the anticipated subsequent year 
spending for all points of service cluster around the same 
number.
    Chairman Thomas. OK. Take that data then and feed it back 
down to the individual level. How do you propose to assign that 
group to an individual? Do you go back and just take a look at 
what their history was in the previous year, their inpatient 
stays, and then----
    Dr. Berenson. Yes, basically.
    Chairman Thomas [continuing]. Assign them to whichever 
category fits?
    Dr. Berenson. Every Medicare beneficiary, whether in fee-
for-service or in managed care, is assigned to the highest 
hospitalization that that person had during the year, the 
highest ranked hospitalization. That becomes the diagnostic 
roof that they are assigned to.
    If somebody was hospitalized for congestive heart failure 
and metastatic cancer, metastatic cancer of the prostate, let 
us say, that is a higher ranked diagnosis and so the additional 
payment would be associated with that diagnosis.
    Chairman Thomas. How successful would you be in creating 
this risk adjustment model, if each individual Medicare 
beneficiary had the right to withhold that information and you 
would have to go to them and get them to sign a document that 
said you had the ability to use that information?
    Dr. Berenson. We would be severely disabled in being able 
to do the risk adjustor if we----
    Chairman Thomas. Is severely disabled a sufficient 
description?
    Dr. Berenson. We would not be able to do this model. We 
would be dead.
    Chairman Thomas. You would be dead. You could not do the 
essential work that we need to do.
    Dr. Kang, in terms of your trying to verify the QISMC 
quality data that has to be reported, how are you going to 
validate that in terms of whether the plan actually achieves 
the performance standards? How are you going to crosswalk that 
information?
    Dr. Kang. I am not sure I understand the question. How when 
we go to look at----
    Chairman Thomas. Well, they are going to report the quality 
data to you.
    Dr. Kang. Right.
    Chairman Thomas. How do you verify it? How do you know 
whether or not the plan to actually achieve the performance 
standards----
    Dr. Kang. OK. We do have monitors and enforcers who 
actually look at and go onsite.
    Chairman Thomas. What percentage?
    Dr. Kang. I think we are onsite at all plans every 2 years.
    Chairman Thomas. A 100-percent examination?
    Dr. Kang. We are looking at not only just the 
Medicare+Choice quality standards, but also compliance, in 
general, with other standards and data validity, and so forth.
    Dr. Berenson. I think we need to say that the self-reported 
HEDIS data was not valid, and we have now taken as a policy 
that we only want beneficiaries to have access to data that is 
in fact valid. We have now as one of the pros, I believe, of 
the contract to actually validate the HEDIS data.
    Chairman Thomas. I think that was the genesis of my 
question.
    Does the gentleman from Wisconsin wish to inquire?
    Mr. Kleczka. Thank you, Mr. Chairman.
    Dr. Berenson, I am trying to ascertain the success to date 
of the Medicare+Choice Program. We are told that 16 percent of 
the Medicare population is currently enrolled in HMOs. I 
frankly was surprised it is that high.
    I do not know what type of gauge you can give me, but let 
us try. From January 1 to date, what type of growth are we 
seeing in the Medicare+Choice Program? Are you seeing a 
sufficient number of plans out in the various States offering 
managed care plans to seniors? Where are we going with this 
whole program?
    Dr. Berenson. I guess I would answer in two parts. One, the 
number of enrollees that are signing up. Because last year over 
400,000 beneficiaries lost their plan, certainly some went back 
to original Medicare. Our current estimate is that 
approximately 60 percent as of February signed up with a new 
plan and 40 percent went back into original Medicare, so----
    Mr. Kleczka. Of those who lost their coverage?
    Dr. Berenson. Of those who lost their coverage. Now, 50,000 
of that 400,000 plus had no choice and had to go back into 
original Medicare, so even a higher percentage of those that 
had a choice actually went back into a managed care plan.
    We actually had a drop off of enrollment in December 
because of the withdrawals, but with the new enrollments in 
February and March, we are now at the same level we were before 
the withdrawals. The increase is on the order of about 50,000 
or 60,000 new enrollees a month again.
    When I first came into HCFA 1 year ago, the increase was 
even higher with about 80,000 to 100,000 beneficiaries a month 
moving into HMOs, so I anticipate continued movement into what 
were the traditional kinds of HMOs that we have been 
contracting with.
    The other part of Medicare+Choice is to try to bring in new 
kinds of plans like PPOs, PSOs, MSAs. In those areas, we have 
been less successful, and I think this year will be the year 
that we see whether or not there will be some of those kinds of 
organizations coming in.
    I think for a PPO, which traditionally has not managed 
risk, when they looked and saw that many HMOs had pulled out 
because of their cost pressures, I think they were somewhat 
reluctant to come in quickly until they really had a medical 
management program in place to know that they could manage 
this. So, I do not know how quickly we will be successful in 
getting some of those new kinds of entities, but we are trying 
very hard to work with them.
    Mr. Kleczka. Are you signing up those plans now? Do you see 
many coming forward to offer health care benefits?
    Dr. Berenson. Again, most of the new applicants, and, as I 
said, when we had all those withdrawals back in the fall, we 
actually had 46 plans seeking applications from us. The large 
majority of those were traditional HMOs.
    We have approved one PSO waiver and approved an 
application, and that is St. Joseph's in Albuquerque, New 
Mexico, that is now in the program. We have approved another 
PSO waiver, and they are now applying. There were four other 
PSO applicants who we sent back to the State because they had 
not gone through the required approach to get State licensure.
    We have approved one PPO. We have one private fee-for-
service insurance company that has talked to us extensively and 
we are anticipating an application, but we have not seen it 
yet.
    Mr. Kleczka. Are there any MSA plans signed up at this 
point?
    Dr. Berenson. None.
    Mr. Kleczka. OK.
    Chairman Thomas. Would the gentleman yield briefly?
    Mr. Kleczka. I surely would.
    Chairman Thomas. One of the concerns would be, and it is a 
concern, that when you create something as different as this, 
that you in fact have it structured correctly so that it is 
competitive with the other products in the marketplace. I 
believe the Chairman of this Subcommittee has a bill in because 
we believe it is not properly structured.
    When there is a demonstration plan, the chance of a 
demonstration plan getting up and running when there is a clear 
termination also makes it fairly difficult, but I think the 
gentleman's question is a good one, and I was interested in it.
    Mr. Kleczka. One of the biggest problems with 
Medicare+Choice that I see in my district is a reluctance on 
the part of Medicare beneficiaries to change from their current 
plan over to a managed care operator because of what they read 
in the paper about the problems of managed care.
    We have a patient's bill of rights pending. There are 
stories where doctors cannot refer to specialists or they are 
prohibited by their plan from telling the patients all the 
medical options. Seniors read these stories and they say well, 
I will be darned if I am going to change and go into a system 
that is having some serious problems today.
    Again, I am surprised you have 16 percent. Until some of 
those problems are rectified with the managed care system on 
the whole, I do not think you are going to have a migration of 
seniors running to managed care plans for their health care 
needs.
    If you would like to respond, go ahead.
    Ms. Cronin. I just want to indicate that everything you 
have said is true. It is also interesting that the first round 
of beneficiary satisfaction surveys that we did of 
beneficiaries that are in Medicare managed care plans shows 
very high satisfaction. That is what is on our Web site that 
was referred to earlier. Very high satisfaction.
    That is not to say that there is not some dissatisfaction. 
We are going to be looking this year specifically at enrollees 
who disenrolled to see what their views on the plans are, but 
beneficiaries who are in managed care plans now, according to 
our data, with very high response rates indicate that they are 
very satisfied with that option.
    Mr. Kleczka. Do most of those plans offer some type of drug 
coverage?
    Ms. Cronin. We do not link the survey to that, but my guess 
would be yes.
    Dr. Berenson. Most of the Medicare+Choice HMOs offer 
prescription drugs. That is one of the major benefits that 
beneficiaries are looking for.
    Mr. Kleczka. OK. Thanks.
    Chairman Thomas. Just a quick followup on that in terms of 
the fear and the concern that folks have about changing.
    I still find relatively interesting the statement that you 
made in response to the 400,000 who because of market decisions 
by their plan had to go somewhere else. If 50,000 of those 
400,000 had no other plan, that was the only plan available, 
they obviously had to go back to fee-for-service, so you had 
350,000 who had a choice. I am trying to do the math on that. I 
need a calculator.
    Somewhere around 75 percent chose what would have been 
their second choice since the one that was their first choice, 
the one they were in, was no longer available. They still 
preferred to choose their second choice in a managed care 
option rather than go back into fee-for-service. There is a way 
of looking at that data that indicates something.
    Dr. Berenson. Some satisfaction with that option and having 
it.
    The other thing to say is that the majority of the pullouts 
were in counties where there were four or more other plans.
    Chairman Thomas. Right.
    Dr. Berenson. Some beneficiaries moved across plans without 
having, in some cases, to take advantage of a drug benefit that 
may be up against the cap or something like that.
    Chairman Thomas. One additional question, and I do want to 
go to the gentleman from Georgia, but I think the gentlewoman 
from Florida wants to ask questions.
    Did you do any analysis of those plans where there were 
other competing plans, and to what extent were the plans that 
had zero premium plans versus those plans who charge a small 
copay?
    I just think psychologically that if you put yourself in 
the marketplace with a zero dollar premium and you are up 
against somebody who already had bitten the bullet and put $5 
in, if they change the plan and add another $5 it is not nearly 
as cataclysmic as going from nothing to something when you 
thought you were going to get nothing.
    I think it is the marketing position that may have caused 
some of those concerns. Is that a reasonable statement?
    Dr. Berenson. I think that is right. I guess I cannot 
answer your question directly. We do know that 14 percent of 
beneficiaries who were in the floor counties were affected by 
withdrawals and only 3 percent of the beneficiaries in the 
higher payment areas. Those were probably the zero premium 
plans and so not too many zero premium plans actually did pull 
out, but I do not have the specific numbers for you.
    Chairman Thomas. If the gentleman from Georgia would allow 
me to let the gentlewoman from Florida follow up on that same 
line?
    Ms. Thurman. You said, and I need to have this clarified, 
that where the plans withdrew were from counties that had 
competition?
    Dr. Berenson. Yes.
    Ms. Thurman. Is that----
    Chairman Thomas. What that tells us is that, and, again, 
out of the 400,000 only 50,000 were from counties that had no 
other option on a managed plan.
    To me, it was more the market placement or the competitive 
capability of one plan versus another where they simply could 
not make their nut in the way they designed their plan and 
entered that market, and they decided to make a decision using 
the confusion of what was going on rather than owning up to the 
fact that they failed in their market analysis and did not do a 
good job of marketing their product.
    The plans found another excuse, and that is, ``These people 
are making it more difficult for me.'' That is probably one of 
the factors, and, therefore, they pulled out. It is key to me 
that the plans that pulled out were primarily in areas where 
there were other plans available.
    Dr. Berenson. Eighty percent of the plans either had 1,000 
or fewer enrollees or had lower than 25 percent market share, 
meaning there are some fixed costs of doing business with 
Medicare, and they had not had major market impact.
    In fact, some of the companies that did pull out have never 
viewed Medicare as a core business, as some other ones for whom 
Medicare really is, so they saw fit to pull out. That is why it 
is hard to know what is going to happen this year.
    Ms. Thurman. But I think there is an important statement in 
what you just said. For those that had 1,000 or less, wherein 
some of the rural areas that were affected really was done with 
no competition in those areas, but because they had a low 
enrollment, because there were fewer people to be enrolled, I 
do not know that we can blanketly say it was just those people 
in areas where there was competition. I think we also have to 
look at the amount of people that were eligible.
    Chairman Thomas. Clearly, those 50,000 are the ones that to 
me are more interested in analyzing in terms of those that were 
pulled out. Where are the counties? Are they in proximity?
    Are they rural counties in proximity to an urban area where 
a plan took a flyer trying to stretch out to see if they could 
in fact work it, and there was such a differential in the AAPCC 
between that county and the county that they had been operating 
in there was a threat that the service plan had to be the same? 
That was the confusion?
    If I were outstretched there in a very cheap county coming 
from a higher paying county and I was going to have to deal 
with that whole structure that had not been clarified at that 
time, I think if you go through and look at them it is possible 
to come up with a very plausible reason for each of them 
pulling out, either never getting off the ground, not worth the 
hassle, took a flyer, did not work, ready to back out.
    That is why I think Dr. Berenson's statement might be 
accurate that the first time around really is not as meaningful 
as we might like to think it is. It is the second and third 
time around that is going to give us a better picture.
    Dr. Berenson. This was a new program. The previous 2 years 
there were a total of five withdrawals in the 2 years put 
together, so there was something special that happened last 
year with the new program.
    We actually expected only a 2-percent increase for the next 
few years as well. I think it came as a positive surprise to 
many of the plans in areas. In fact, there will be a 5- or 10- 
or even 15-percent increase for many of those counties. If that 
had been known last year, the behavior might have been 
different.
    There was, again, a technical reason, I think. Last year 
there was no penalty for pulling out. This year there will be a 
5-year penalty and a plan is out of the program, so I think 
some pulled out and know that they can come back in, although I 
think they have created some ill will for the beneficiaries 
when they do come back in.
    Chairman Thomas. The gentleman from Georgia.
    Mr. Lewis. Thank you very much, Mr. Chairman.
    Last year, the Inspector General of HHS reported that 
Medicare+Choice paid some $1 billion annually in inappropriate 
payments based on their own inflated reporting to Medicare of 
their administrative costs.
    The Inspector General recommended that you take 
administrative action to stop these losses, and MedPAC 
recommended that you require separate reporting of 
administrative costs and profit projection by Medicare+Choice 
plans.
    Do you agree that you need to take action, and what action 
do you plan to take to stop these losses?
    Dr. Berenson. In fact, we were underway with a new approach 
to the requirements, the accounting requirements that the 
health plans provide to us when the Inspector General was doing 
the analysis.
    In fact, in the old methodology, you did not have to 
account specifically for the administrative costs attributable 
to the Medicare Program, and you could project your profit 
margin from commercial business simply on a straight 
proportionate basis.
    We are changing that now. I think we did make overpayments 
to plans at least how they allocated their payments, and we 
will be changing that. Instructions have gone out, are going 
out to the plans. We have held training sessions with the plans 
about the new accounting approaches, and this overpayment will 
not be going on in the future, so that report did identify a 
significant issue that we are in the process of addressing.
    Mr. Lewis. Thank you. I believe there is a proper place for 
a trade association in America in so many different ways. Is it 
proper for the Federal Government to turn over enforcement of 
the standards to them?
    Should any private organization to receive financial 
support from industry like a trade organization be a credit for 
deeming purposes? Is that not a conflict of interest?
    Dr. Kang. This actually speaks to the issue of 
accreditation and certification. This is the dilemma of 
deeming, that there is a potential conflict of interest.
    The history, if you look across the entire Medicare 
Program, with accreditation and certification, has been a 
checkered history. There have been places where it works. There 
have been other places where perhaps because of this conflict 
of interest, we have substandard providers still being 
accredited who would not otherwise be notified.
    We are very interested in achieving the efficiencies that 
we can get through deeming. The difficulty here is we still 
need to have our own----
    Mr. Lewis. Are there substandard providers still being 
certified today as we speak?
    Dr. Kang. Well, see, this explains exactly why the Federal 
Government needs to have its own standards and actually monitor 
and enforce against those standards for proper stewardship of 
the program. The notion that we could just deem away and then 
just ignore it is very problematic.
    The answer to your question is, we do not know. It 
explains, though, why we need to have our own standards and to 
do ``look behind surveys'' to make sure that there is 
appropriate application of the Federal standards.
    Dr. Berenson. But let me just say, we have made it clear in 
our regulations, in the interim final regulations, that we 
would not deem an organization that is not independent of the 
kinds of entities that they are being asked to accredit.
    We will apply that and make sure that only organizations 
that are truly independent will be approved by HCFA to be able 
to provide that kind of deeming certification for us.
    Mr. Lewis. Thank you. Would you like to respond? Thank you 
very much.
    Madam Chair.
    Ms. Johnson [presiding]. Thank you.
    Mr. Lewis. I yield back my time.
    Mrs. Johnson of Connecticut. Mr. Thomas has asked me to 
proceed in his absence. I am sorry I missed the answers to the 
questions in the last few minutes, but I just want to ask you a 
couple other things.
    Through HEDIS, can you collect outpatient payment data 
separate from inpatient payment data?
    Dr. Kang. The answer is no.
    Mrs. Johnson of Connecticut. In designing the system, why 
did you do that?
    Dr. Kang. Actually, the system was designed by the National 
Committee for Quality Assurance, not by us, so I think----
    Mrs. Johnson of Connecticut. But you were quite involved?
    Dr. Kang. We were.
    Mrs. Johnson of Connecticut. Did people not foresee the 
need for that?
    Dr. Kang. Actually, the way HEDIS collects its data is on a 
sample, so it is not all the encounters. That was largely to 
try to decrease the burden on plans. At that point, there was 
no thought of risk adjustment and the need to collect 100 
percent encounter data. HEDIS really is designed as a sample, 
not a 100-percent data collection.
    Dr. Berenson. If I could insert, actually in one of my 
other hats I participate in the CPT coding area that the AMA 
manages, and they actually are planning for the new update in 
coding to have in their coding a series of HEDIS relevant 
information where a physician can, in fact, code that they have 
conducted a certain kind of examination, say a preventive 
screening for rectal cancer. That would become something that 
would be routinely reported so that special record reviews, 
which is what has to happen now, would not have to happen, 
would become routinely reported, so people are aware of that 
deficiency.
    Mrs. Johnson of Connecticut. I do think it is a very 
serious matter to go on the Internet with information about 
mammogram participation and fee-for-service and be silent on 
managed care plans, performance in that area.
    Even if it is not apples for apples, I think constituents 
have a right to know that while it is more inclusive, for 
instance, the beta blocker information, nonetheless this is the 
degree to which the plans provided beta blockers both in and 
out.
    We are only telling you in fee-for-service the inpatient 
setting, and we do not know about the others, but I do think it 
would be a terribly misleading project to go out there on the 
Internet and begin reporting fee-for-service information 
without reporting managed care information.
    I think it is going to be clear that they will never be 
exactly comparable. Managed care, if it succeeds, is going to 
be much more disease management preventive oriented, and you 
are not going to be able necessarily to identify dollars. It is 
not going to show up on your screens in the same way, so you 
are going to have to report their kind of data for them and not 
be so hung up on apples and apples and those issues.
    I would hope that from the very beginning, like this week, 
when you put that other data out there, you put out what you 
know about those kinds of incidents in the managed care plans.
    I also wanted to move on to make a second comment. You did 
not talk much, at least while I was here, about the risk 
adjustor issue. I have really grave concerns with moving ahead 
and implementing a risk adjustor based on inpatient care when 
the whole purpose, the whole purpose of managed care, is to 
keep people out of the hospital, so the costs associated with 
that operation are not recorded and are not part of, and the 
whole management of disease is not recognized in that risk 
adjustor.
    Dr. Berenson. Yes. Let me try again. First of all, the only 
data available now is inpatient data, and the BBA anticipated 
that that is what we would be using. What we have worked very 
hard to do was eliminate many diagnoses which are typically 
handled on an outpatient basis where good managed care, good 
regular medical care, does not generally require a 
hospitalization.
    What we are left with are about 70 percent of the 
diagnoses, which the overwhelming majority of them, most every 
physician would agree, need to be treated on an inpatient 
basis.
    We are talking about myocardial infarctions. We are talking 
about strokes, metastatic cancers and just a whole series of 
diagnoses that are in fact inpatient diagnoses that predict 
where those individuals have higher health care costs in 
subsequent years.
    We are left with one or two diagnoses where managed care, 
by doing disease management, can keep people out of the 
hospital some of the time, but even there patients with 
congestive heart failure will be hospitalized despite the best 
efforts of the managed care organization, so we really do not 
have a system with perverse incentives. We have one or two 
diagnoses where the plans are not adequately rewarded, but the 
system works pretty well.
    The second point I want to make is we have something of a 
catch-22 problem. I think you are going to hear in subsequent 
testimony that the plans, at least some of them, feel that they 
cannot move quickly to provide us outpatient data from 
physicians' offices, outpatient departments, because of 
administrative burdens, so they are basically saying they want 
to move as quickly as possible to an outpatient, to an all 
sites of service system, but they cannot provide the data 
because of the administrative burden.
    Mrs. Johnson of Connecticut. But do you----
    Dr. Berenson. So we want to move as quickly as the plans, 
and we can do that to----
    Mrs. Johnson of Connecticut. [continuing]. Do you have the 
simpler data as to what percentage of the outpatient cases fall 
in these diagnostic categories that you are looking at 
inpatient? Do you know that general information?
    Dr. Berenson. We do not have at this moment any routinely 
reported data on, for example, the treatment of congestive 
heart failure in the doctor's office. We do not have that at 
this moment.
    Mrs. Johnson of Connecticut. What about in outpatient and 
outpatient facilities like the outpatient portion of the 
hospital? Do you not have that information?
    Dr. Berenson. We do not get that from the managed care 
organizations, and that is exactly what we want to work with 
them to be able to get. Where we----
    Mrs. Johnson of Connecticut. But do the hospitals not have 
this? Do they not know what percentage of their outpatient care 
is devoted to these 10 diagnoses?
    If they could provide you with that information, then you 
could make sort of a statistical adjustment knowing that a 
certain percentage of those heart patients treated in 
outpatient who did not quite need to go into the hospital would 
have long-term higher cost. It would be a rough measure, but it 
is important to have some measure.
    Dr. Berenson. We need to assign that information to the 
individual to be able to assign the risk adjusted score for the 
individual, and that is the information we do not have. It does 
not help us to just have the hospital's information. It has to 
be attributable to an individual, and that is what we want to 
work on getting as quickly as we can.
    Mrs. Johnson of Connecticut. Yes. I can see that, but if 
you find out the first generic information, you will have a 
sense of whether 50 percent of their cases are in this category 
or 80 percent or 10 percent. If it is 10 percent, it is 
probably not consequential. If it is 50 or 60 or 70 percent, 
then you probably are going to have an unintended consequence 
of your risk adjustor.
    Just having that generic information I think would be 
valuable and important for us to be able to evaluate----
    Dr. Berenson. Yes.
    Mrs. Johnson of Connecticut [continuing]. Whether the risk 
adjustors were having unintended consequences.
    Dr. Berenson. Again, we used a contractor which had a 
clinical panel that went diagnosis by diagnosis and made 
clinical judgments supported by data as to which diagnoses 
should be pulled out because they typically are performed on an 
outpatient basis and which diagnoses should be left in because 
they are typically provided on an inpatient basis, and that is 
the system we have left.
    Again, the one specific diagnosis that creates a problem is 
congestive heart failure where the ICD-9 coding includes very 
sick patients in intensive care units on ventilators and fairly 
mild congestive heart failure that can be adequately treated 
with a good disease management program.
    We will be happy and have already started talking with 
representatives of plans to figure out if we can deal with that 
specific diagnosis in a different way, but we did go through 
the whole process of eliminating many diagnoses that are 
typically not inpatient diagnoses. We eliminated diagnoses like 
appendectomies that are not predictive of subsequent costs.
    This has been a many year project, and it actually holds 
up. I think you are going to hear later from the actuaries 
association, who I think have some suggestions about phasing in 
some of the fine points, but basically think that our approach 
was pretty responsible and pretty well done.
    Mrs. Johnson of Connecticut. Well, I am extremely concerned 
in an environment in which we have made arbitrary cuts in 
reimbursements rates for purposes unrelated to cost of health 
care, for us to then do something, no matter how rational, that 
will further reduce reimbursement, so there is a generic 
concern here that has to be overlaid against the concern with 
what will be the consequence of the risk adjustor.
    Let me just conclude by saying that I am also very 
concerned about the impact of the nursing home reimbursement 
rates on particularly small, rural facilities. I think when 
Congress passed the initiative to bundle payments, we intended 
to bundle ancillary payments, and it really came out ending up 
including ambulance payments in that reimbursement.
    For small nursing homes out in the country, this is a 
catastrophic problem. I have facilities with a $200 a day 
reimbursement rate and a $700 or $800 ambulance drive because 
they are so far from the hospitals. This is unfair, completely 
unfair, and I want to be working with your shop if you are 
interested to eliminate that.
    The inclusion of the cost of prosthetic devices is just 
simply grossly unfair. They have no control over that, and some 
of those devices are extremely expensive. I think that we did 
not intend to include those when we included ancillary 
services, and I think we clearly have a responsibility to 
better delineate the bundle of services on which we are going 
to pace that reimbursement.
    I would ask if there is someone in your shop that I could 
work with on that, Dr. Berenson?
    Dr. Berenson. The administrator has asked me to work on it 
and in fact has suggested, and I have agreed, that I should 
come to your district and meet with some of the nursing home 
administrators to understand firsthand what the concerns are.
    The whole issue around nontherapy ancillaries under skilled 
nursing has arisen. We are looking at it, and I am personally 
going to be looking at that issue.
    Mrs. Johnson of Connecticut. Thank you. All right. Thank 
you very much.
    Mr. McDermott, would you like a second round?
    Mr. McDermott. Thank you, Madam Chair.
    I have a question about this whole business that Ms. 
Johnson was asking you about, maybe an extension of that 
really. Some of the managed care people have said that you 
should not move ahead with risk adjustment because who do not 
have the outpatient data, and inpatient data will skew it. Then 
they go on. The continuum of that logic is that this will cause 
managed care to gain the system and somehow wind up with more 
costs inside.
    Now, my question really is do you believe that the 
incentives for added hospitalization are greater than the 
financial disincentives? It seems to me the Medicare risk-
adjusted payments would not be greater than the added costs of 
greater hospitalization for the managed care operation.
    Dr. Berenson. Right. I think you are basically right. For a 
managed care organization to decide to hospitalize rather than 
the alternative, they would have to take into account the 
following factors. Number one is the direct costs of the 
hospitalization.
    Number two is that the period of time is a different period 
of time, and that beneficiary might not be with the plan 18 or 
24 months later when they would receive the additional payment. 
I think the most important part is to have a coherent medical 
management program that works consistently where you 
communicate a set of standards to the physicians you are 
contracting with. You cannot suddenly start picking off this 
diagnosis, or ``Let us hospitalize this patient this time, but 
only once a year, not twice a year, and only for 2 days, not 3 
or 4 days.''
    It brings a sophistication and a sort of overt, explicit 
attitude of trying to take advantage of the system that I do 
not think most plans would engage in, and I do not think that 
most of the providers who the plans work with would support it.
    In fact, it will still be in the interest of a managed care 
organization to run the same kind of medical management program 
to find alternatives to hospitalization that they do today, in 
our opinion.
    Mr. McDermott. You are essentially saying that it is a 
bogus argument for why we should not begin risk adjustment?
    Dr. Berenson. I basically think it would be better if we 
could start with a comprehensive risk adjustor from all sites, 
but I am not persuaded that an inpatient model for 4 years, 
until we are able to move, creates such perverse incentives 
that we should not go forward.
    At the margin, for a disease or two, it creates something 
of a perverse incentive, but the basic incentives under this 
system are very consistent with how managed care functions. I 
would emphasize the point I said earlier. This provides an 
incentive for health plans who have a disease management 
program to make that known to fee-for-service beneficiaries.
    If they have a good disease management program for 
congestive heart failure, they should let people know that, and 
then they might attract some beneficiaries that they can take 
care of quite well and get the additional payment because those 
beneficiaries were most likely hospitalized in fee-for-service.
    Mr. McDermott. The Association of Actuaries is going to 
come in and testify that as you obtain this encounter data from 
the plans, there is a need for what they call substantial 
testing, including cost benefit analysis, to determine the 
impact on plans.
    Do you have plans, and one of the problems in sequencing 
witnesses is I would like them to have said this so then I 
could ask you, but I will have to say it for them. Do you have 
plans to do that kind of testing? Is there anything in the 
works by which you are going to try and do the kind of things 
they are talking about?
    Dr. Berenson. We have been working with the plans for a 
couple years. There are some glitches that need to be worked 
out in terms of making sure the data flow gets to the fiscal 
intermediaries and ultimately gets to our system, but our view 
is that we have adjusted the rare glitches by having the first 
year transition be a 90-10 blend. Only 10 percent of the 
payment to the plans will be based on the new risk adjustment 
system.
    The only way to really make this work is to make it live. 
When it really affects payment is when the plans will take it 
seriously, when we will take it seriously, when the 
intermediaries will do what they are supposed to do. We very 
much want the incentives of this plan to start working now.
    We want the plans to no longer find that it is not in their 
interest to have sicker Medicare beneficiaries, so by making it 
live, but at the same time only having a small portion of the 
payment be based on it, we think that is the right way to go.
    As I said earlier, we will make some corrections. There is 
a controversy we have about 1-day stays as to whether to 
include them or not include them. We have taken the position 
that it is too easy for a plan to redesignate what was 
outpatient surgery or observation care as a 1-day stay in the 
hospital for the additional payment, so we have eliminated 
that. The plans feel that that is not right.
    We will learn from that, and we will make some adjustments 
if that is necessary.
    Mr. McDermott. I want to say I support the idea. It is like 
skiing. You finally have to lean forward and start down the 
hill. You can talk about it and make all the adjustments in 
your bindings and all the rest, but until you actually put 
yourself at risk, I think that is really what has to happen to 
make this work.
    Thank you.
    Mrs. Johnson of Connecticut. Mr. McCrery.
    Mr. McCrery. No questions.
    Mrs. Johnson of Connecticut. Mr. Stark, do you have further 
questions?
    Mr. Stark. Thank you, Madam Chair.
    The plans, the managed care plans, are due to get a 5-
percent inflation increase based on projected Medicare 
spending, as I understand it. CBO has just released its 
Medicare baseline, and it is projecting Medicare inflation of 
only a little over 1.1 percent.
    The plans, many of them, are reporting to the stockholders 
that their costs for the government plans have been flat. Does 
that indicate to you that based on what they are spending and 
what has happened to inflation, there is any great urgency to 
increase the rates that we are paying to the plans?
    Dr. Berenson. Well, I guess I would disagree a little bit 
with what the plans' experience seems to be. At least what they 
are telling us is that their own medical trend of inflation is 
more like a 6- to 8-percent increase.
    Mr. Stark. Hey, read their stockholder reports. That is not 
what they are telling the stockholders.
    Dr. Berenson. In fact, there is actually an important point 
to make here.
    Mr. Stark. Well, look.
    Dr. Berenson. Let me just----
    Mr. Stark. Whoa, whoa, whoa.
    Dr. Berenson. OK.
    Mr. Stark. We are going to hear from these dudes later, but 
you might as well hear now. This is their consolidated medical 
care ratio. That is it, is it not?
    The consolidated medical care ratio increased 1.2 percent 
as a result of higher commercial costs. The government medical 
care ratio for the year 1997 numbers remained flat, and 
somewhere in this report that say it is going to remain flat in 
2000. That is PacifiCare. We are going to hear from them later.
    Do you guys know what a 10-K is? Read them. That is where 
they tell you the truth.
    Dr. Berenson. Again, I guess the basic response I would 
make is that that is the reason we want to conduct these 
demonstrations in Phoenix and Kansas City, so that we can have 
more of a market test and not just be locked into this formula.
    Mr. Stark. Let me try this for 1 minute.
    Dr. Berenson. OK.
    Mr. Stark. Do you have information on what the plans spend 
per patient?
    Dr. Berenson. Yes, we do.
    Mr. Stark. You know what we spend fee-for-service per 
patient, right, in----
    Dr. Berenson. Yes.
    Mr. Stark [continuing]. Medicare? Do you know what they 
spend per patient in managed care plans? Yes or no? Do you 
know? Do you have that data?
    Dr. Berenson. I do not have that data handy.
    Mr. Stark. No. You do not collect it, do you?
    Dr. Berenson. I do not think we know that.
    Mr. Stark. All right. So you are shooting in the dark 
there.
    Let me ask you this. What would you say to the nearest 
percent or so is your medical care ratio? What is your loss 
ratio? I always assume it is up in the nineties. Is that----
    Dr. Berenson. Well, it is about 99 percent. We spend about 
1 percent on administration.
    Mr. Stark. All right. That includes the money you pay out 
to the Blues and the others who are the intermediaries. It does 
not include my salary and Mrs. Johnson's salary, your board of 
directors, but it includes virtually your entire cost, right?
    Dr. Berenson. That is right.
    Mr. Stark. OK. So what you are telling me then is if a plan 
that we are contracting out with--like these Medicare+Choice 
plans--have medical care ratios in the neighborhood of 85 or 90 
percent.
    By definition, they are that many points less efficient 
than what we call original or fee-for-service Medicare. Is that 
not correct?
    Dr. Berenson. Well, they do more things, but in terms of 
medical loss ratio they keep more of the administrative----
    Mr. Stark. Yes, but they are supposed to do those 
additional things out of the spread, not out of what they spend 
in the medical care. I am just making a suggestion that the 
data would certainly not indicate, or at least maybe you could 
tell me why it would indicate, that it takes more money then. 
What does that do?
    Dr. Berenson. They are providing additional benefits. That 
is what they are doing with the extra money.
    Mr. Stark. But they are telling us they cannot do that 
anymore.
    Dr. Berenson. That is what they are telling us, and that is 
the question.
    Mr. Stark. And yet they have a broader spread and their 
costs are not going up, but their income is going up.
    Do you ever question the things these guys tell you, 
Doctor? You do not take that as the straight skinny, do you?
    Dr. Berenson. There are times I do, and there are times I 
do not. I think there is in fact----
    Mr. Stark. That is the wrong time, Doc. That is when you 
cost us money.
    I wanted Dr. Kang to answer just one quick question. The 
managed care industry is also saying that we are being much 
tougher on Medicare+Choice plans than on fee-for-service plans 
in regard to quality standards.
    The General Electric director of health care, Dr. Galvin, 
was quoted last week as saying that managed care has been a 
terrible failure at managing care with patients or providers. 
As the managed care revolution took hold, it got worse, said 
Dr. Galvin, and he believes we have to have data that are 
important to patients if they are going to make a choice.
    Do you want to comment about how nasty you are being to the 
managed care plans, as opposed to fee-for-service plans, in 
regard to their quality standards?
    Dr. Kang. I think we are being equally demanding of both 
programs. We do require quality improvement projects for both 
programs, and on the fee-for-service side we are measuring our 
performance. That is why I could give Chairman Thomas our 
measures. There is an issue of comparison, but certainly within 
fee-for-service we are measuring and demanding improved 
performance.
    These are in our GPRA measures. Just to give you an 
example, Medicare heart attacks for Medicare fee-for-service, 
we are looking for a 4-percent reduction in the annual 
mortality rate over the next 3 years. That would meet the same 
quality improvement standards in Medicare fee-for-service that 
we are asking for in Medicare managed care.
    For mammography rates, we are looking for an 11-percent 
improvement in the mammography rates in Medicare fee-for-
service over the same 3-year period; for flu shots, a 5-percent 
improvement over the same, so we believe that we need to have 
performance measurement and accountability in both systems, 
Medicare managed care and fee-for-service, and we are measuring 
it in our GPRA measures. We are holding ourselves accountable, 
or you are, Congress, in Medicare fee-for-service.
    The issue we were wrestling with earlier is the technical 
issue of comparison between the two, and we need to solve that 
problem. As a matter of principle, we do think we should get to 
a comparison between the two, but certainly that does not 
preclude us within the program from measuring and asking for 
measurable improvement. That is exactly what we are doing in 
Medicare fee-for-service.
    Dr. Berenson. I would like to just add to that. There is 
one difference between fee-for-service and managed care, which 
is in managed care you get a capitated payment, and there is a 
potential of underservice in a capitated payment. The public 
wants protection.
    Mr. Stark. You are kidding?
    Dr. Berenson. Well, you got it. Therefore, we have an 
affirmative obligation to really oversee, as purchasers do, as 
other large purchasers do, that in fact the beneficiaries are 
getting the services that we are obligated to provide and that 
they deserve to get.
    Mr. Stark. But you just told me you do not know.
    Dr. Berenson. I do not know.
    Mr. Stark. Should we not get that data, Doc? Should we not 
know what they are spending? How the heck can we compare?
    My guess is you talk about managed care plans having better 
benefits, but not ones people use. So they could give my 3-
year-old son birth control benefits. Big deal.
    Dr. Berenson. Well, let me just say in terms of not 
knowing, we are doing two things, and this was a BBA provision.
    We are going to start auditing each plan every third year, 
a third of the plans, to see that their ACR submissions in fact 
comport with reality. We also are validating their own data, 
and we go onsite to see what is going on, so in fact----
    Mr. Stark. Just get the numbers.
    Mrs. Johnson of Connecticut. Mr. Stark, I think this line 
of questioning certainly reveals the dramatic difference in 
philosophy between the two sides.
    I do not want you to develop a separate bureaucracy that 
collects data that the private sector for Federal employees and 
people of all ages do not collect because they rely on our 
quality oversight organizations that we have developed.
    I think you are perfectly right to say we are not going to 
validate someone to do quality oversight if they have an 
economic connection with the plan, but I do not want to see the 
kind of bureaucracy develop that Pete would like to see because 
I do not believe we can from Washington guarantee action by 
action quality.
    I do want to put on the record a couple of questions, if I 
may, before we move on because this is important to our 
technical understanding of what is going on.
    Dr. Berenson, how did HCFA go about establishing the 
relative risk weights assigned to the 15 diagnosis groups used 
in the proposed risk adjustor? Did you essentially look back at 
the average costs of different inpatient episodes and combine 
those episodes with similar costs into the groups you proposed?
    Dr. Berenson. We combined costs from all sites of service 
that an individual who was hospitalized in 1 year experienced 
in a subsequent year, so we combined costs from all sites, so 
the inpatient model predicts not just inpatient cost, but total 
cost that somebody who was hospitalized in 1 year will 
experience in a subsequent year.
    Mrs. Johnson of Connecticut. When you go to actually assign 
the relative weights to each enrollee that signs up for a given 
plan, you would essentially go back and look at that person's 
inpatient stays in the previous year?
    Dr. Berenson. Yes. We define a period of time, and we take 
the highest ranked inpatient stay for that year to determine 
what additional scores are associated with that beneficiary for 
the subsequent year.
    Mrs. Johnson of Connecticut. For that beneficiary? It is 
beneficiary specific?
    Dr. Berenson. It is beneficiary specific.
    Mrs. Johnson of Connecticut. Dr. Kang, how will HCFA verify 
the QISMC quality data that has to be reported, and how will 
you validate whether or not the plans actually achieve the 
performance standards that will be required?
    Dr. Kang. The HEDIS measures are audited by an independent 
auditor, and on the quality improvement projects we are 
developing monitoring protocols to go out and review those.
    Now again, to the extent that NCQA is doing the same on 
those same projects or any other accrediting organization, we 
are very interested in developing the deeming relationship to 
allow an NCQA accreditation. If they are equal or higher than 
our standards, we would allow that.
    We are working along those lines to get those efficiencies. 
I do not have any problems with that.
    Mrs. Johnson of Connecticut. How has HCFA implemented 
quality improvement projects in the fee-for-service Medicare 
population in the past? For example, how about the cooperative 
cardiovascular project that set out to improve the use of beta 
blockers? How did HCFA implement that project?
    Dr. Kang. That actually was through the peer review 
organization program or the quality improvement organizations.
    For the projects and the improvement that we are trying to 
achieve, get in Medicare fee-for-services, I just referred to, 
with Congressman Stark, the vehicle for that in Medicare fee-
for-service in all 50 States will be the PRO Program in the 
next 3 years.
    We are funding them to do that and to achieve the 
measurement and quality improvement that we are looking for in 
Medicare fee-for-service.
    Mrs. Johnson of Connecticut. If, for instance, the 4-
percent reduction in cardiac problems is not achieved, who will 
be penalized?
    Dr. Kang. Well, actually this is in the Government 
Performance Review Act. Congress actually then looks at our 
performance in managing the agency.
    Mrs. Johnson of Connecticut. You will implement this 
through the PRO Program, but you will take responsibility.
    Dr. Kang. And I assume----
    Mrs. Johnson of Connecticut. It is a very different 
mechanism than a managed care plan trying to implement quality 
improvements.
    Ms. Thurman.
    Ms. Thurman. Thank you, Madam Chairman.
    Just reading in your booklet, Medicare payment, or I guess 
it is actually from MedPAC, it says under this scheme the 
Health Care Financing or HCFA updated payments for each county 
based on the estimated growth in Medicare fee-for-service 
spending per beneficiary in that county, so it updated payments 
on an estimated growth.
    Do you ever go back and look at the information that these 
payments were first based on? Are we in some way back to the 
problem with what we are spending out there. Are we building in 
over utilization issues? Are we building it into this base 
because we really do not go back and look at the initial 
criteria in that area; we just keep adding on?
    Dr. Berenson. We have not known very well what explains the 
difference between Dade County and a county in Nebraska where 
the difference in payment is three times.
    We actually, now, for the first time, with the risk 
adjustor, can take into account that portion of the difference 
that actually has to do with individuals' health needs and at 
least isolate that from the rest of it, which has to do with 
practice styles that occur.
    Some of the difference is explained by health needs, but 
that is a relatively small part of it. A lot of the other 
difference is not well explained. Dr. Wennberg has a whole 
atlas documenting variations across the country that we do not 
have good explanations for, so we do not know how to account 
for those differences very easily in spending.
    Again, I think one of the positive things about the BBA was 
to try to narrow those differences, but it was done in an 
arbitrary kind of a way.
    Ms. Thurman. Have we gotten there yet?
    Dr. Berenson. We certainly have not gotten there yet.
    Ms. Thurman. OK.
    Dr. Berenson. In the first 2 years we were going in the 
wrong direction. Now, at least, we are making some progress in 
going in the right direction, and I think we do need to look at 
that.
    Now that we actually have information about relative 
morbidity of the populations in the various counties, we might 
be able to think more creatively about how those payments 
should in fact take place.
    Ms. Thurman. OK. I thank you.
    Chairman Thomas [presiding]. Thank you very much. We 
appreciate your testimony.
    Dr. Berenson. Thank you.
    Chairman Thomas. We look forward to your work product.
    We would now ask the second panel. Sorry for the delay.
    Walton Francis, who is a consultant, an expert on consumer 
information and the FEHBP, Federal Employees Health Benefit 
Program, which had been mentioned previously; William F. Bluhm, 
who is chair of the Risk Adjustor Work Group, American Academy 
of Actuaries; Janet G. Newport, vice president, Regulatory 
Affairs, PacifiCare Health Systems; Dr. Sandra Harmon-Weiss, 
vice president and head of government programs, Aetna.
    I would indicate to each of you that any written testimony 
you may have will be made a part of the record, and you can 
inform the Subcommittee in any way you see fit beginning, we 
might as well, on my left, your right, with Mr. Francis and 
move across the board.

  STATEMENT OF WALTON FRANCIS, CONSULTANT, EXPERT ON CONSUMER 
INFORMATION AND THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM,  
                       FAIRFAX,  VIRGINIA

    Mr. Francis. Thank you very much, Mr. Chairman, members of 
the panel. I am honored to be here today. I would like to 
summarize, with your permission, my testimony very briefly, 
hitting a few high points.
    I have been disappointed over the years at HCFA's utter 
lack of willingness to undertake any beneficiary education 
measures as they relate to participation of HMOs. One of the 
things I try to do when I evaluate something is do a little 
hands on experimentation. One year I found a HCFA pamphlet that 
said if you want information, call the regional office. I 
called several regional offices pretending to be a beneficiary 
asking for lists of participating HMOs and their telephone 
numbers. I was unable to obtain such a list anywhere, and I was 
shocked.
    I will fast forward past all this ancient history, but I 
think it is important to the present situation in which we find 
ourselves. Having said that, I want to emphasize I think the 
people who were here today before you are excellent, I know 
them all by reputation. Tom Gustafson was mentioned. He is an 
extraordinarily dedicated and able civil servant, and he is 
working on the Medicare+Choice Program directly for Nancy-Ann 
Min DeParle. HCFA's problem is not that it does not have good 
people who are well intentioned. I do not know what the problem 
is, but let me come back on that.
    In any event, up until very recently, HCFA provided zero in 
the way of helping people make these choices, and this despite 
the fact that there was this history of chicanery and marketing 
abuses and so on, particularly in the Miami area.
    These things matter. People, beneficiaries, did not get the 
information they needed and were entitled to despite the fact 
that as many as 1 million people were enrolled in HMOs a decade 
ago. The participation of HMOs in this program on a major scale 
goes back 15 years.
    Starting in the midnineties, about 4 or 5 years ago, HCFA 
began to get a lot more serious about this. I was in the 
department at the time, and I participated in a very marginal 
way in some of its early work developing a Web site and 
reviewed its plans to do the CAHP survey, and so on.
    HCFA clearly was getting the message that something needed 
to be done. Then, in preparing for this hearing, I decided to 
look at what was really happening today, and for the first time 
in a year or so actually looked at what HCFA was providing. 
Frankly, I was appalled, and I feel terrible to come here 
before you today and tell you that I think they are nowhere 
near a minimally acceptable level of performance.
    As I detail in my written testimony, I spent a fair amount 
of time on the HCFA Web site, and could not find certain things 
that exist, and that they should by law be posting on that Web 
site.
    This morning, still not believing the situation and knowing 
that someone from PacifiCare was going to be here today, I 
decided to go research the PacifiCare health plan on the HCFA 
Web site. I downloaded everything on the Web site that it has 
on the PacifiCare plan. It is 62 written pages long. It took me 
10 minutes and 72 mouse clicks just to find the pages to tell 
the computer to download and print; I mean, 10 minutes of 
clicking my mouse and watching pages load.
    It took another 20 minutes to print it all out. It was 
actually 24 separate print jobs. About two-thirds of the way 
through my computer died because it could not handle that many 
print jobs at once.
    I got this stuff, and I found in all these pages--and you 
have heard testimony today that HCFA has on its Web site this 
information--nothing on plan quality and consumer satisfaction. 
I do not understand that. I have looked at a dozen or so plans. 
I have found zero information on those subjects. I get a page 
that says we do not have that information for every plan, and 
then the page is blank. It does not list it for any plan.
    It is possible the problem is that I am using a minority 
web browser, OK, but part of good Web site design is to make 
sure your Web site works on all the web browsers that are used, 
not just the latest version of Microsoft Internet Explorer.
    I honestly do not understand why I cannot find all the Web 
site information HCFA officials have told you that is there. I 
will not go through the rest of it, but I would call this a Web 
site from hell. It is unusable.
    Let me then talk about what I found when I actually looked 
at the information. I thought--what might a person who was 
thinking about enrolling in a specific HMO want to know? I 
picked a few examples. They might want to know how many 
outpatient mental health visits they could get. They might want 
to know whether they could get smoking cessation drugs. They 
might want to know whether they could get Viagra. I think those 
are the sort of reasonable questions you might ask. None of 
that information, nor information on a whole lot more, is in 
those 62 pages.
    Now, I do not want to hold up OPM as the paragon of 
virtues. Believe me, it is, in my view, only about a B in 
providing information on the web, but it is not bad. That is a 
pretty solid grade.
    I have in my hand the PacifiCare brochure that OPM 
publishes on paper, OK, and it is 24 pages long. I did not 
bother, but I could have downloaded this exact, identical 
brochure formatted identically in something called the PDF 
format from OPM's Web site in about three mouse clicks.
    If I turn to the page on prescription drugs, I would find 
out if PacifiCare covered smoking cessation or Viagra. They do, 
by the way. They only pay 50 percent for Viagra, but at least 
they cover something. HCFA has serious, serious problems in 
comparison to OPM.
    I had also got a friend to give me, because I was so 
concerned about this, the written document that went out from 
HCFA in five States. I have it in my hand, ``Medicare and 
You.'' I got the one for Oregon.
    Now, let us leave aside the problem that all the plans in 
this document may not still be in the program. That is a tough 
problem to deal with in an environment when you have to print 
stuff early, but let me comment. If this document as such were 
on their Web site, they could have corrected it the day after 
those plans withdrew. They could have notified counselors and 
beneficiaries that if you want the latest version, go to our 
Web site and download it.
    Leave that aside. This document is 39 pages long. It 
includes on Medicare+Choice plans about 4 pages of information, 
which I think properly presented would have taken up less than 
a page. It has an immense amount of verbiage. People could 
differ on how helpful it is. I do not think it is all that 
helpful.
    If you want to look up information on health plans, that is 
what you want to do. You do not necessarily need a lot of 
advice about how to fill out a worksheet, which you may or may 
not want to have.
    Let me conclude with a couple of points about all this. 
First, I think despite my ``is the cup half empty or half full 
and I think it is less than half full'' conclusion, the 
problems I am describing are not as serious as they may sound. 
They are fixable, correctable problems with hard work and 
dedication and paying serious attention to what people are 
doing.
    It is not rocket science to fix up a Web site, and there 
are just any number of things HCFA could get on with. I do not 
know why they have not put up disenrollment data, for example. 
The law requires it. GAO told them to do it in the strongest 
possible terms 3 years ago in a wonderful GAO report. They have 
the data. I have seen printouts of it. I do not understand why 
it is not there.
    There was some mention earlier of consumer satisfaction 
information. I do not know precisely where HCFA is in 
processing the CAHPS data, but OPM has been publishing data on 
these very same plans for years. Here is a copy of it. By the 
way, there was a question earlier. They do publish in their 
comparison guide for the whole country detailed satisfaction 
data that is pertinent to the same HMOs. PacifiCare, for 
example, is in there.
    There are things HCFA could do right now or in the very 
near future to fix it up, and I do not think it takes rocket 
science, and I do not think it takes encounter groups and all 
this complicated stuff, advisory panels.
    Part of the problem HCFA has that I alluded to earlier is 
as a bureaucracy it often is in a paroxysm of review and 
recreation and rereviews, and it changes and it fiddles. They 
find it very hard to get certain things done. You must ``do 
it'' sometimes when it needs to be done.
    The other general point I would make is I think the 
Congress shares some complicity in the problem here. The 
Congress had an oversight role all those same years that HCFA 
was not producing information.
    The Congress, in the Balanced Budget Act, understanding 
there were some problems, was very specific in what it was 
requiring HCFA to do, but I think some of those requirements in 
their details actually interfere with getting this job done 
effectively.
    I would hope and urge that you, in talking with HCFA and 
seeing what you can work out in legislation this year, would 
seek to adjust a few deadlines and other things that might make 
it a little easier for them to do the kind of job that I know 
they are in fact capable of doing.
    Thank you, sir.
    [The prepared statement and attachments follow:]

Statement of Walton Francis, Consultant, Expert on Consumer Information 
and the Federal Employees Health Benefits Program, Fairfax, Virginia

    Mr. Chairman and Members of the Committee:
    I am honored to be invited to testify on progress in 
implementing the Medicare+Choice program. My experience in 
providing health insurance information to consumers, in Federal 
program evaluation, in regulatory reform, and in disseminating 
consumer information on the World Wide Web, have led me to 
monitor the progress in providing plan information in the 
Medicare program with keen interest.
    Twenty years ago I conceived the idea of providing Federal 
employees and annuitants with information on the costs, 
benefits, and customer service of 50 or so health insurance 
plans then participating in the Federal Employees Health 
Benefits Program (FEHBP). As a private author, I worked with 
the Washington Center for the Study of Services (sometimes 
called CHECKBOOK, after its main publications), a non-profit 
organization dedicated to providing objective consumer 
information, on developing the most useful possible publication 
for participants in the FEHBP. To date, we have sold more than 
one half million copies of CHECKBOOK's Guide to Health 
Insurance for Federal Employees and have saved both the Federal 
government and program participants billions of dollars by 
encouraging the choice of more cost-effective plans. We now 
cover some 300 plans across the entire nation, with comparative 
information on cost, coverage, and quality. I not only write on 
this topic, but also directly advise thousand of employees and 
annuitants on choosing health plans, over radio call-in shows, 
seminars, and one-on-one counseling.
    Quite apart from our own publication, we stimulated the 
Office of Personnel Management (OPM) to improve its own program 
of consumer information in substantial ways. CHECKBOOK 
designed, and persuaded OPM to adopt, the survey of customer 
service that was added in the mid-1990s. While others 
pontificated about the need for quality measures, CHECKBOOK and 
OPM delivered the first real world example of multi-plan 
comparative quality measures, presented to consumers in plain 
English and easy formats. (See both CHECKBOOK's Guide and OPM's 
own Guide.)
    For many years I served as the chief regulatory review 
official in the Department of Health and Human Services. In 
that capacity, I sought to enforce the several laws and 
executive orders requiring that proposed regulations minimize 
unnecessary burden on the public. On many occasions I persuaded 
the Department to require consumer information in lieu of ``one 
size fits all'' regulation when dealing with issues of service 
quality.
    Most recently, I served as co-chair of the Department of 
Health and Human Services' internet ``reinvention laboratory'' 
during the formative years of the World Wide Web. Our job was 
to stimulate the provision of customer friendly information on 
the Internet. My colleagues and I created major information 
services, including the award-winning HealthFinder Web site for 
consumer information on health care. We also placed abstracts 
or full text of most HHS evaluations, testimony, press 
releases, and other policy information on the Web. To date, 
despite the passage of the so-called ``Electronic Freedom of 
Information Act'' amendments, no other Federal agency provides 
nearly as much public information on its policies as HHS.
    It is from these perspectives that I provide my views on 
recent progress of the Health Care Financing Administration 
(HCFA) in implementing the Medicare+Choice program. I focus 
particularly on dissemination of health plan information to 
seniors. Obviously, however, that there are much larger issues 
at stake. If, as Senator Breaux and others have proposed, 
Medicare can be transformed to a system looking much more like 
the FEHBP, then the financial viability of the program can be 
extended and its inadequate benefits can be improved. In this 
regard, it is notable that in the last decade Medicare costs 
per capita have risen at a rate of 7.2 percent annually, 
compared to 5.8 percent in the FEHBP. Over time, a difference 
like this leads to immense savings. During this same period, 
the FEHBP financed rapidly rising medical needs of increasingly 
aged enrollees, and provided substantial benefit increases, or 
its savings would have been even larger.
    In what follows, I describe Medicare+Choice in terms of 
HMOs. I appreciate that the statute allows for other types of 
plans, but so far as I know no other plans have yet been able 
or willing to participate. This is obviously a function in some 
combination of (a) unwieldy and in some respects impossible 
regulations (partially corrected in a recent update), (b) the 
government's checkered history as a business partner, and (c) 
the economics of current payment rates. Regardless, it seems 
unlikely under plausible reforms that many plans that are not 
heavily managed care--HMOs or PPOs or a close variant--will 
make major inroads in the Medicare market.
    Before I appraise progress to date, I think it important to 
put this subject in some context. There are all too many 
``experts'' who look at the problem of choosing health plans 
and conclude that seniors will be hopelessly confused, at best. 
After all, decision research tells us that even the smartest of 
us cannot mentally process more than a half-dozen variables at 
a time. About one-fourth of seniors do not even have a high 
school diploma, and a tenth or more are functionally 
illiterate. Ten percent have Alzheimer's disease. How then, can 
these elderly cope with the problems of shopping for food, 
clothing, automobiles, or any other complicated activity of a 
modern life? For that matter, how can any of us cope, with 
functional illiteracy and confusion common in every age group?
    One way to think about this problem is to consider the 
automobile. There are literally hundreds of different models 
available and, with options, many thousands of possible 
purchases. Few of us are automotive engineers or race car 
drivers, yet who else is qualified to evaluate those complex 
engines or evaluate brakes and emergency handling? The market 
creates lemons, such as the infamous Edsel and Jugo. Seductive 
advertisements permeate the airways. Not one government agency 
provides objective and unbiased advice on which cars function 
best (with the minor exception of mileage statistics on 
purchase stickers). A wrong decision can cost $20 or $30 
thousand, or even one's life. Yet, somehow, things go well. 
Better cars get more market share. Losing manufacturers 
reinvent themselves. Companies that make lemons go out of 
business. Over time, valuable improvements are added and the 
hours of work needed to purchase an auto decrease.
    Health insurance is a simple product compared to an 
automobile. What can we learn from the auto purchasing 
experience when we consider Medicare+Choice? First, only a 
small fraction of consumers have to be highly informed to 
``drive the market.'' We all benefit from the people who do 
their homework and advise the rest of us. Second, there are 
innumerable sources of information, starting with friends and 
neighbors who have real life experience with different 
products, and including private sector publications such as Car 
and Driver and Consumer Reports. Third, there are many 
intermediaries who help us digest that information, including 
TV shows, newspapers, and counselors of one kind or another. 
Fourth, most of us learn to tune out the irrelevancies and 
focus on the essentials, particularly those of most concern to 
us.
    In the real world in which we live, even such an 
intractable seeming problem as deciding which car will serve us 
best seems to solve itself almost invisibly. How, then, will we 
choose health insurance plans?
    Clearly, the government has a role. The Balanced Budget Act 
of 1997 laid out important fiduciary responsibilities for 
providing information to seniors. The startling thing is that 
the statute had to be so specific. Yet, the historical record 
demonstrates that in the Medicare context--in sharp contrast to 
the FEHBP--the government has been worse than negligent. In 
fact, for a decade or more the government actively resisted 
every effort to improve information available to seniors on 
Medicare HMO choices.
    Perhaps the best evidence on this matter can be found in a 
superb 1996 GAO report entitled HCFA Should Release Data to Aid 
Consumers, Prompt Better HMO Performance. In that report, the 
GAO not only identified vital information that HCFA was not 
making available to seniors at all--notably disenrollment data 
that show how seniors ``vote with their feet'' against inferior 
plans--but also demonstrated that it was almost impossible for 
a senior to get simple information on local HMO options. In 
1996, more than a decade after HMO choices became available 
under Medicare, it was as a practical matter impossible for a 
senior to obtain a copy of a set of brochures describing the 
benefits of each plan available locally.
    In contrast, consider that OPM has long made available to 3 
million employees and 1\1/2\ million seniors participating in 
the FEHBP:
     an annual comparison guide providing summary 
premium and benefit information on each plan available in the 
area, including in recent years information on quality;
     a brochure for each plan written in plain English 
and in a standard format facilitating comparison of key benefit 
features;
     an 800 number for confused elderly to use during 
Open Season;
     a simple postcard system so that a senior can get 
any brochure mailed to him from a central facility; and
     in recent years, a World Wide Web site that takes 
customers both to simple plan comparisons and to brochures that 
they can download on the spot, in multiple formats.
    OPM has developed methods of creating and disseminating 
information that do not cost it scarce Salaries and Expenses 
appropriations or require hiring a lot of staff. For example, 
to publish brochures it simply makes the plans responsible, as 
a condition of getting contracts. And to minimize paper and 
mailing costs, it relies heavily on its Web site.
    The main fault of OPM is that even today it collects but 
does not publish disenrollment information. In measuring health 
plan quality, ``quit'' rates are a gold standard. The number of 
plan participants getting immunizations or mammograms is all 
very well, but the real nitty gritty is information on how many 
people are served so poorly--for any reason--that they quit a 
plan compared to other plans with similar premiums and 
benefits. If one plan loses 5 percent of its customers in a 
year and another plan loses 20 percent, a prudent consumer 
knows which to choose.
    It is unclear why HCFA did not copy the economical and 
effective OPM system, lock, stock and barrel, 10 years or more 
ago. I was once told by a HCFA official that the reason why no 
usable information was provided was because the plans didn't 
want to make comparisons easy, and HCFA felt obliged to defer 
to the plans' wishes. This theory is so scandalous that it is 
hard to believe. I am more inclined to believe in tight budgets 
and weak imagination. Another theory is that a well-run Choice 
program would drive traditional Medicare (a grossly inferior 
insurance product) into the ground and that agency staff are 
unwilling to foster fair competition. Regardless, the record on 
Medicare HMO information is atrocious.
    Even today, after an explicit Congressional mandate and a 
major infusion of funds, HCFA's information products are 
notably inferior to those of OPM or of other Web sites 
providing comparative information. Before this hearing I spent 
some time testing the www.medicare.gov Web site to get 
information on participating plans in Virginia. I found the 
site intolerably slow and confusing. Even an expert would have 
a hard time using it to compare plans. In fact, as a practical 
matter it is almost impossible to get the most obvious 
comparisons. Literally hundreds of mouse clicks, and tens of 
pages of printout, would be needed to compare the five Medicare 
participating HMOs in Virginia on cost, coverage, and quality.
    It does not focus on key information by deleting 
unnecessary verbiage. For example, the standard table entry 
says ``You pay nothing for your hospital stay'' or ``You pay 
$250 per admission to a plan hospital'' next to a hospital cost 
heading, instead of simply saying ``Nothing'' or ``$250'' (with 
a redesigned heading couched in terms of cost per admission). 
Crafting tables so that the entries are single words or numbers 
is one of the first principles of user friendly and user 
comprehensible design. In CHECKBOOK's Guide, we try to make 
every single table entry--and there are thousands--a number or 
simple word such as ``Yes'' or ``No.''
    The Medicare+Choice Web site does not facilitate 
comparisons and correctly warns that its design will not let 
users compare more than two plans at once. It suggests that 
users who want more information change fonts in their browsers 
to prevent results from becoming unreadable. When comparing 
plans, it first presents traditional Medicare compared to 
Medicare with Medigap rather than taking users to a Choice 
option or giving them control. It doesn't have the most 
obviously needed features, such as simple tables listing all 
plans in an area and showing, for each, premium, copayments, 
and drug coverage. It doesn't let seniors get around its clumsy 
presentation by downloading information in PDF or text formats 
or comma delimited text files. Instead, files must be 
``unzipped'' and can be used only by consumers with data base 
software in the Windows format--so much for Macintosh users, 
America Online users, and millions of others without 
sophisticated knowledge going far beyond the operation of a 
browser through mouse clicks. In seeming violation of two civil 
rights statutes, section 504 of the Rehabilitation Act and the 
Americans with Disabilities Act, it fails to provide health 
plan information in formats and presentation modes accessible 
to the blind.
    Interestingly, Congressional agencies such as GAO and GPO 
have made presentation choices--such as presenting most 
documents in both text and PDF formats--that avoid many of 
these problems. And many of the documents presented on the 
Internet for easy access by citizens, such as copies of HCFA 
regulations, are far longer and more complex than anything 
needed to compare health plans.
    When I was at HHS, mid-level HCFA staff made the bizarre 
decision to ban all ``links'' from the HCFA Web site to 
commercial, for-profit Web sites. No other Federal agency has 
made such a limiting decision. Presumably for this reason, 
users at the Medicare site are unable to click directly to the 
home pages of participating health plans. Again, this sharply 
contrasts with OPM's encouragement of visits to the Web sites 
of health plans. Medicare seniors get the URL address but must 
type it in or copy it rather than connect directly. This kind 
of inconvenience is totally unnecessary and discourages access 
to some of the most important plan information, such as the 
location of facilities and names of providers.
    Despite a voluminous presentation of information--one which 
drowns vital details amid unnecessary text--HCFA leaves out 
important information completely. For example, many plans 
provide out of area services to snowbirds and others who 
travel. HCFA does not indicate which plans have reciprocity and 
similar arrangements, but simply says ``call plan for 
details.'' Nowhere does the material clearly point out how much 
money can be saved by joining an HMO rather than purchasing a 
Medigap plan. (Most seniors are smart enough to figure out the 
big dollar savings, but some could use a little help.)
    As another example, HCFA stopped publishing several years 
ago its annual data on hospital mortality, by procedure, for 
almost every hospital in the country. For a senior citizen 
looking for a good hospital to perform a coronary bypass, or 
looking for a health plan that signs up several good hospitals, 
this information should be on the Web, linked plan by plan. 
(However, CHECKBOOK continues to publish this important 
information on paper and may come out with an electronic 
version). Compare the value of outcome information on life and 
death to the process-oriented HEDIS measures.
    Incidentally, www.medicare.gov promises to provide 
information on ``helping you stay healthy'' (HEDIS measures 
like percent getting eye exams and mammography), ``about your 
providers'' (how many are board certified), and ``beneficiary 
satisfaction'' (survey information). So far as I could 
determine, none of this information is available on the Web 
site for any plans--certainly none that I checked in several 
states. With all due respect, most of this information is 
available today and has been available for several years. To be 
sure, the new Consumer Assessment of Health Plans survey 
results will take some time to process, but in the meantime OPM 
has excellent survey data on most of the same plans that 
contract with HCFA. Why not use the OPM data until the newer 
data are available? Similarly, HEDIS information is available 
for many plans, though not all. In this regard, why not at 
least tell users which plans are NCQA certified (another OPM 
practice eschewed by HCFA)?
    In a reflection of either my expert inability to find the 
obvious, or of HCFA's inability to do the obvious, I tried but 
failed to find a copy of the published Medicare+Choice handbook 
on the HCFA Web site while preparing for this hearing. I had 
reviewed the handbook in draft but wanted to refresh my memory 
of its contents. Apparently, not living in Arizona or one of 
the other demonstration states, I cannot be trusted with the 
published version. And even if I lived in Arizona, I would 
apparently be forced to find a paper copy rather than view or 
download the information from the Web.
    Users are even warned that the information on the Web site 
may be obsolete and told to ask the plans for accurate 
information. As OPM long ago discovered, plan functionaries are 
almost incapable of providing reliable, up-to-date information 
in response to a telephone call. Instead, the plain-English 
brochure is made a binding element of the contract that the 
plan may not abrogate or change in any way. Brochure 
information (whether on paper or on the OPM Web site) is MORE 
accurate than anything a plan employee might tell an enrollee. 
And it is standardized to facilitate comparisons. To the best 
of my knowledge, Medicare participating plans have never been 
required to provide standardized written information.
    Any one or even a few of these gaps and gaffs could be 
excused and may well be justified. But taken as a whole, the 
entire panoply of overload and omission suggests that radical 
improvement is needed.
    Having said all these depressing things about the quality 
of available information on Medicare+Choice, let me add that 
the agency has come a long way in the last two years. It would 
take only modest reforms--not much more than common sense 
contracting, data assembling, editing, editorial, and 
presentation decisions--to transform its Choice-related 
information products from scanty and barely usable to models of 
ease and clarity. In fact, many other HCFA information 
products, such as advice on choosing a nursing home, are 
exemplary in their usefulness and clarity. As one of many fine 
practices, HCFA publishes most of its key material in Spanish 
as well as English.
    I also have no doubt that significant improvements are 
planned for this year. After all, the Balanced Budget Act 
requires certain information that is now missing, such as 
quality, disenrollment, and satisfaction survey results. HCFA 
undoubtedly plans to provide this information in the reasonably 
near future. The agency can do better and it will do better.
    However, more is needed. My suggestion, both directly to 
HCFA and to the Committee, is that independent evaluations of 
current and planned information for plan comparison be 
performed right away, with corrective actions completed this 
year. These evaluations should not be theoretical or researchy. 
Instead, they should be aimed at practical improvements that 
would facilitate use of the most important information both by 
seniors and by those who advise them. For example, could 
extraneous details be excised so that comparative tables could 
be presented covering all available plans in an area? Can the 
number of levels ``clicked down'' and back-clicked be reduced 
from hundreds to a handful so that the information on all plans 
in an area can be found quickly and easily? Can all plans be 
required to produce plain English brochures in a standard 
format, with copies made available in several file formats on 
the Medicare Web site? Can HCFA get the plan comparison 
handbook up and available, in several formats, and can the 
handbook be redesigned to improve readability and reduce 
verbiage (to say nothing of mailing costs)? Can outcome 
information, such as disenrollment data and hospital mortality, 
be added quickly and easily to the Web site, at least on a 
``look up'' basis?
    I don't share the view that radically different 
informational efforts are needed for seniors because of their 
cognitive deficits. Seniors can do ``just fine, thank you'' 
with carefully presented and summarized information. 
Unfortunately, the existing information would confuse anyone. 
With readily achievable improvements, I have no doubt that 
seniors can be greatly aided in making sensible plan choices. 
And, as can reasonably be expected from the experience of the 
FEHBP, those choices will save both seniors and taxpayers a lot 
of money.
    To illustrate a few of these concerns, I have attached two 
tables, one replicating the www.medicare.gov presentation of 
information (which takes two printed pages and covers only two 
plans), and one illustrating how the same information can be 
provided in a far simpler format covering four plans. The 
www.medicare.gov version is accurate in every respect, 
including blank spaces and wording of answers.
      

                                

Web search result at www.medicare.gov


------------------------------------------------------------------------
                                    Company Name A,     Company Name B,
  What's Most Important to You?        Segment 1           Segment 1
------------------------------------------------------------------------
Plan type.......................  HMO--M+C Plan       HMO--M+C Plan
                                   (Definition).       Definition
Basic Plan Information:
    Product Name................  Senior Advantage..  Bonus Plus
    Federal Approval Status.....  ..................  ..................
Phone number....................  1-800xxx-xxxx.....  1-800xxx-xxxx
    Websit Address..............  www.nameA.org.....  www.nameb.com
    Tax Status..................  Nonprofit.........  For Profit
    Additional Packages.........  ..................  ..................
    Important Note..............  ..................  ..................
Cost:
Premium.........................  You pay nothing if  You pay nothing if
                                   you have Medicare   you have Medicare
                                   Parts A and B.      Parts A and B
Physician Visits................  You pay $5 per      You pay $5 per
                                   visit with your     visit with your
                                   personal            personal
                                   physician.          physician
Inpatient Hospital..............  You pay nothing     You pay nothing
                                   for your hospital   for your hospital
                                   stay.               stay
Doctor and Hospital Choice:
    Doctor Choice...............  You must go to      You must go to
                                   plan specialists,   plan doctors,
                                   and hospitals.      specialists and
                                   You need a          hospitals. You
                                   referral to see     need a referral
                                   specialists.        to see
                                                       specialists
Prescription Drugs..............  Prescription drugs  Prescription drugs
                                   are covered with    are covered with
                                   limits.             limits
                                  You pay $5 per      You pay $7 per
                                   generic             generic
                                   prescription.       prescription
                                  You pay $20 per     You pay $15 per
                                   brand name          brand name
                                   prescription.       prescription
                                  Your generic and    Your generic and
                                   brand name          brand name
                                   prescriptions are   prescriptions are
                                   covered up to       covered up to
                                   $1,000 per year.    $600 per year
                                  You must use plan-  You must use plan-
                                   approved            approved
                                   prescription        prescription
                                   drugs.              drugs
Extra Benefits:
    Physical Exams..............  You are covered     You are covered
                                   for an unlimited    for 1 number of
                                   number of           physical exam(s)
                                   physical exams      per year
                                   per year.
    Vision Services.............  You have some       You have some
                                   coverage for        coverage for
                                   glasses, contacts   routine eye
                                   and routine eye     exams--contact
                                   exams--contact      plan for details
                                   plan for details.
    Dental......................  You are covered     In general, you
                                   for 2 preventive    are not covered
                                   dental exam(s)      for dental
                                   every 1 year(s).    services
                                  You pay $30 per
                                   preventive dental
                                   exam.
                                  You are covered
                                   for some other
                                   dental care
                                   beyond the basic
                                   Medicare benefit
                                   --contact plan
                                   for details.
------------------------------------------------------------------------

      

                                

Illustrative revision to display double the information more 
clearly and concisely


----------------------------------------------------------------------------------------------------------------
            Plan Name             Original  Medicare   Senior  Advantage      Bonus Plus          Grey Bonus
----------------------------------------------------------------------------------------------------------------
Company/Product Line............  HCFA..............  Company A.........  Company B.........  Company C
Plan Type.......................  fee for service...  HMO...............  HMO...............  HMO
Phone Number....................  800-xxx-xxxx......  800-xxx-xxxx......  800-xxx-xxxx......  800-xxx-xxxx
Website?........................  [symbol click]....  [symbol click]....  [symbol click]....  [symbol click]
Additional packages?............  No................  No................  No................  No
Important note?.................  No................  No................  No................  No
Extra premium cost?.............  None..............  None..............  None..............  None
Deductible for doctor visits?...  $100..............  None..............  None..............  None
Cost per doctor visit?..........  20 percent........  $5................  $5................  $10
Cost per hospital stay..........  $768..............  None..............  None..............  None
Limited to plan doctors and       No................  Yes...............  Yes...............  Yes
 hospitals?.
Referral needed to see            No................  Yes...............  Yes...............  Yes
 specialist?.
Prescription drugs covered?.....  No................  Yes...............  Yes...............  Yes
    --cost of generic drug......  NA................  $5................  $7................  $10
    --cost of brand name drug...  NA................  $20...............  $15...............  $20
    --maximum plan will cover     None..............  $1,000............  $600..............  $1,500
     per year.
Pays for physical exam?.........  No................  Yes--unlimited....  Yes--1 per year...  Yes--1 per year
Pays for routine eye exam?......  No................  Yes...............  Some..............  Yes
Pays for glasses & contacts?....  No................  Some..............  No................  No
Covers dental exams?............  No................  2 at $30 each.....  No................  No
Any other dental coverage?......  No................  Some..............  No................  No
----------------------------------------------------------------------------------------------------------------

      

                                

    Chairman Thomas. Thank you very much, Mr. Francis, and we 
are in fact engaged in discussing how we can work out either 
administratively or legislatively some of that stuff. We 
appreciate your testimony.
    Mr. Bluhm.

  STATEMENT OF WILLIAM F. BLUHM, MAAA, FSA, FCA, CHAIR, RISK 
       ADJUSTOR WORK GROUP, AMERICAN ACADEMY OF ACTUARIES

    Mr. Bluhm. Good afternoon, Chairman Thomas, other 
distinguished Members. My name is Bill Bluhm. I am a principal 
with Milliman & Robertson in Minneapolis. I am here today in my 
capacity as the chair of the American Academy of Actuaries Risk 
Adjustors Work Group.
    That volunteer work group was formed in response to a 
request from HCFA to do a review of the new risk adjustment 
methodology from an actuarial point of view. We did that 
review. Our analysis was presented to them in a report which 
became an appendix of their report to Congress.
    The new system is obviously a significant change for health 
plans, contracting providers, and Medicare beneficiaries. We 
think there is a substantial risk to the system, it is fairly 
obvious, if this does not work as it is intended, including 
withdrawals from the market, financial problems, and potential 
for reductions in benefits.
    Our conclusion at the end of analysis was that new 
methodology does meet the actuarial requirements of the 
Balanced Budget Act, provided it is implemented carefully. The 
work group also believes the methodology is actuarially sound 
as we defined it in the report.
    On balance and with the phase-in approach, and I underline 
that, that HCFA has recommended, the new method appears to be a 
reasonable first step in what should be a long-term 
evolutionary process.
    Based on our review, we did note in our report some 
concerns about the implementation of the new system and its 
impact on the market. There were five significant ones.
    The first was lack of adequate testing by HCFA, at least at 
the time we did the review, of the potential impact of the 
methodology on health plans and beneficiaries. A lot of this 
concern was alleviated by the adoption of the phase-in 
approach.
    Second, the administrative feasibility of implementing the 
new system because of timing problems and data collection 
issues.
    Third, the processing by HCFA and health plans of new, huge 
amounts of data, and a lot of seriously complex calculations 
makes things a little bit uncertain as we are moving forward.
    Fourth, HCFA used only fee-for-service data, which was 
apparently the only data available at the time, but which has 
some potential problems with it that we hope will be fixed over 
time.
    Fifth, decisions made by HCFA to exclude or limit certain 
diagnostic categories such as 1-day hospital stays, which might 
penalize some health plans that effectively manage care.
    We see that HCFA has done a lot of work in a short time 
period in developing this methodology, but additional work does 
need to be done. Our group recommends that HCFA further modify 
this model on an ongoing basis with knowledge that they gain in 
the first year. Our report also includes a number of 
recommended changes to the methodology that we urge be 
considered following implementation.
    I also need to note that we did not analyze fully the final 
version of this, because the data was not all available at the 
time we did our analysis, and the methodology was still being 
fine tuned at the time. We did not perform any audit or 
analysis of the data or the calculations by HCFA. We relied on 
those, and because of all this, our report is a qualified 
opinion of the soundness.
    I would be glad to answer any questions you have.
    [The prepared statement and attachment follow:]

Statement of William F. Bluhm, MAAA, FSA, FCA, Chair, Risk Adjustor 
Work Group, American Academy of Actuaries

    Good morning Chairman Thomas and members of the committee. 
My name is Bill Bluhm and I am a principal with the actuarial 
consulting firm of Milliman & Robertson in Minneapolis. I am 
appearing today in my capacity as the Chair of the Risk 
Adjustors Work Group of the American Academy of Actuaries. Our 
work group was formed at the request of the Health Care 
Financing Administration (HCFA) to complete an actuarial review 
of the health status risk adjustment methodology the agency 
will use starting on January 1, 2000 to pay Medicare+Choice 
health plans.
    As you are aware, the use of a health status risk 
adjustment formula is required by the Balanced Budget Act of 
1997 (BBA). That law directed HCFA to report to Congress on the 
proposed risk adjustment method and, further, provides for, 
``an evaluation of such method by an outside, independent 
actuary of the actuarial soundness of the proposal.'' (BBA, 
Section 1853). Last fall, the Health Care Financing 
Administration asked the American Academy of Actuaries to 
perform this evaluation. As the Academy's Vice President of 
Health at that time, I appointed a volunteer work group 
consisting of health actuaries who are either consultants to or 
staff members with health plans and health insurers to review 
HCFA's proposal. A list of the members of the work group is 
attached to my testimony. Our analysis was included as part of 
the agency's report to Congress which was issued earlier this 
month. The Academy's work was provided pro bono, although HCFA 
did reimburse the members for travel expenses associated with 
the meetings of the work group.

                            HCFA's Proposal

    Currently, HCFA's payment rates for Medicare+Choice plans 
are adjusted to reflect the risk characteristics of the plans' 
participants as defined by the demographic factors of age, 
gender and the beneficiary's status (institutionalized or 
noninstitutionalized; Medicaid recipient or non-Medicaid; 
employed or not; disabled or not). Beginning in the year 2000, 
HCFA is required by the BBA to supplement these demographic 
adjustments with a health status risk adjustor.
    HCFA plans to assign a risk score to each Medicare 
beneficiary based on diagnosis information for that individual, 
taken from previous hospital inpatient stays. The risk scores 
were developed using a list of ``principal inpatient diagnostic 
cost groups'' (PIP-DCGs), which were developed for this 
purpose. The previous medical costs for inpatient hospital 
stays incurred by the individual are used to determine their 
expected future medical risk and, therefore, how much the 
Medicare+Choice health plan in which they are enrolled should 
be paid. New enrollees in Medicare will be assigned an 
estimated risk score based on HCFA's analysis of existing 
Medicare fee-for-service (FFS) data.

                              Conclusions

    The new risk adjustment system represents a significant 
change for health plans, contracting providers, and health plan 
members. While the Academy work group believes the conceptual 
basis of the risk adjustment method proposed by HCFA is 
``actuarially sound,'' as we have defined it for this purpose, 
we have serious concerns about the method's implementation, 
operation, and impact. These issues include:
     Exclusions of certain risk categories from the 
risk adjustment methodology, such as one-day hospital stays, 
which may penalize health plans that effectively manage the 
delivery of health care.
     Lack of adequate testing of the potential impact 
of the new methodology on health plans and Medicare+Choice 
beneficiaries, although the phase-in will significantly soften 
the impact of changes in reimbursement levels from what it 
might otherwise be.
     Administrative feasibility of the implementation 
of the new system because of timing and data collection issues.
     The processing of extraordinary amounts of newly 
collected data and completing a series of complex calculations 
introduces an element of uncertainty that cannot be anticipated 
until health plans and HCFA have full opportunity to understand 
the implications.
     Use of only fee-for-service data as the basis for 
the development of risk adjustment weights.
    There is a substantial risk for the Medicare system if the 
risk adjustment methodology does not work as intended. The 
negative consequences could include withdrawal of 
Medicare+Choice health plans from the market, financial 
problems or insolvency for health plans and the potential for a 
reduction in benefits provided to beneficiaries. Because of 
these concerns, the work group believes HCFA's decision to 
implement the new methodology under a phased-in approach is a 
sound one and will limit changes from the current payment 
system while HCFA and the health plans assess the impact of the 
new methodology.
    While HCFA has done much work in a short time period to 
develop the new methodology and design implementation 
strategies, additional work remains to fully define HCFA's risk 
adjustment method and test application of the method to make 
sure it achieves the intended results. The work group 
recommends that HCFA further modify the risk adjustment model 
with the knowledge gained during the first year of operation.

                   Definition of Actuarial Soundness

    The Academy was asked by HCFA to evaluate the actuarial 
soundness of its proposal. For this purpose, there is no widely 
recognized definition of ``actuarial soundness.'' The work 
group therefore analyzed HCFA's proposal in terms of: (1) 
established actuarial criteria for risk adjustment, (2) 
Actuarial Standards of Practice, and (3) the general principles 
and practices of actuarial science. Actuarial Standards of 
Practice are guidelines developed by the Actuarial Standards 
Board to help actuaries in their work. Specific actuarial goals 
and criteria for risk adjustment are described in the Academy's 
May 1993 monograph titled, ``Health Risk Assessment and Health 
Risk Adjustment: Crucial Elements in Effective Health Care 
Reform.'' The criteria used to evaluate risk adjustment systems 
are:
    Accuracy: Because payments to health plans will be 
determined based on the risk adjustment mechanism, accuracy and 
avoidance of statistical bias is critical.
    Practicality and Reasonable Cost: The risk adjustment 
mechanism should not be so complex that implementation is 
extremely cumbersome, thereby adding significant cost to the 
system.
    Timeliness and Predictability: Carriers setting premium 
rates should be able to predict the impact of risk adjustment 
on their premiums with a fair degree of accuracy and in a 
timely manner, in order to avoid solvency concerns and 
disruption to members.
    Resistance to Manipulation: The risk adjustment mechanism 
should aim to make it impossible for specific carriers to 
benefit financially by ``gaming'' the mechanism.
    The Academy's review took into account all aspects of the 
proposed methodologies that impact on its ``actuarial 
soundness,'' including, but not limited to the proposed 
formulas, the availability, quality, and relevance of the data 
required, and the ability to be implemented as intended.
    In addition, the Academy has evaluated the appropriateness 
of the proposed methods in relation to available alternatives 
(including non-administrative data models such as surveys, 
enhanced age/gender/status, and the status quo) and in light of 
the modifications being made to the underlying base rates by 
county over the same time period.

                Limitations of the Work Group's Analysis

    It is important to note that the work group's analysis and 
conclusions relied on the information supplied by HCFA. During 
the review process, HCFA provided the work group with 
preliminary results of the potential payment impact of the risk 
adjustment methodology on Medicare+Choice plans. However, the 
work group was not able to verify the accuracy of the data 
collected by HCFA or the calculations used by HCFA to determine 
the impact on health plans.
    In addition, HCFA did not provide the work group with an 
assessment of the impact of the risk adjustment methodology on 
beneficiaries, and the scope of our opinion is similarly 
limited.
    HCFA's risk adjusted payment system is still a ``work in 
progress,'' and it should be understood that our opinion on the 
actuarial soundness of HCFA's proposals are based on the system 
as they were described to us at the time we performed our 
review.
    The work group was not able to undertake a detailed 
analysis of the mathematical formulas used to develop the risk 
adjustment methodology, but rather focused its review on the 
conceptual and theoretical basis of the system. Because HCFA is 
still working on the proposed methodology and there are a 
number of unresolved implementation issues, our report is a 
qualified review of the actuarial soundness of the proposal.

                      Analysis and Recommendations

    The new methodology for making health status risk 
adjustments to Medicare payments appears to meet the 
requirements of the Balanced Budget Act of 1997, provided the 
system is implemented carefully. On balance, and with a phase-
in, the proposed risk adjustment method appears to be a 
reasonable first step in what should be a long-term 
evolutionary process. HCFA is to be commended for the progress 
to date and for recognizing the limitations of the proposal 
arising from the available data, timing requirements and areas 
for future improvements.
    In general, the work group believes the PIP-DCG risk 
assessment methodology developed by HCFA meets the goals of 
risk assessment I outlined earlier in my testimony. However, 
there are a number of concerns about the health risk assessment 
formula that the work group raised in its report:
    Using Only Inpatient Data: A significant component of the 
PIP-DCG model is the restriction of the risk adjustment method 
to conditions identified by inpatient hospital claims. This 
feature has both advantages and disadvantages. As one positive 
factor, this requirement matches well with the information 
currently available to the Medicare program. Currently, 
hospital claim information is more accessible and easier to 
audit than ambulatory care data, and requires less additional 
work by health plans to report to HCFA.
    However, there are several drawbacks to a system that uses 
only inpatient data. A major feature of managed care has been 
the measurable shifting of inpatient care to outpatient sites 
and the substitution of less invasive therapies to treat a 
given condition. When the risk assessment system is restricted 
to inpatient claims, the members subject to effective managed 
care can appear healthier than average, because of limits on 
what is measured.
    If outpatient (ambulatory) data is added to the inpatient 
claims information, a better picture of the potential ``risk'' 
of each individual Medicare beneficiary is obtained. We have 
therefore recommended that outpatient data be included in 
HCFA's methodology as soon as it is feasible to do so.
    Exclusion of One-Day Hospital Stays: The risk adjustment 
methodology does not ``give credit'' for one-day 
hospitalizations, under the assumption that including them may 
result in ``gaming'' of the system by health plans. If 
included, plans could ``game'' the system by ordering 
unnecessary one-day stays for minor medical conditions, in 
order to include beneficiaries in the health status risk 
adjustment process, and thereby increase payments the next 
year.
    The underlying concept of excluding one-day admissions does 
have merit. It can reduce gaming of the system by requiring 
each hospitalization to be of a certain severity (measured by a 
length of two days or more) and plans would not have an 
incentive to hospitalize a patient overnight just to receive 
``credit.''
    However, the exclusion of one-day stays may unduly penalize 
plans which efficiently manage the delivery of health care. 
This is because effective care management tend to reduce stays 
to one day which might otherwise be two or more day stays. 
Since those stays would then be excluded from the risk 
adjustment process, this would penalizing plans for their 
efficiency.
    According to the report from Health Economics Research 
(HER), which assisted HCFA in designing the PIP-DCGs, excluding 
one-day stays reduces the predictive power of the health status 
risk adjustment methodology. Also, it might be noted that 
excluding one-day hospitalizations shifts the issue of 
``gaming'' from whether to hospitalize someone at all to a 
question of whether to keep the patient for a second hospital 
day.
    The work group suspects that the disadvantages of excluding 
one-day hospitalizations may outweigh any possible gain. It 
would be appropriate to analyze the risk adjustment methodology 
based on whether it is easier to ``game'' admissions or to 
``game'' length of stay and any resulting adverse incentives 
for health plans.
    HCFA may want to consider either using one-day stays as 
part of the risk adjustment formula or giving a partial credit 
or other adjustments for those hospitalizations in structuring 
payments to health plans.
    Principal Diagnosis: The PIP-DCG model measures conditions 
by capturing the principal diagnosis recorded on each inpatient 
claim. The use of the principal diagnosis for the PIP-DCG model 
is based on existing coding practices for inpatient claims used 
by hospitals. Since only the principal diagnosis is generally 
used, it is possible that not all appropriate information is 
collected or used. A qualifying condition could be listed as 
the secondary (or other) diagnosis, which could be a 
contributing factor leading to the need for hospitalization.
    Alternately, there is a common belief that many secondary 
conditions currently reported are not as reliable and should 
not be included in the measurement system. Since the initial 
stages of the risk assessment system will be using data that 
was recorded without the presence of direct coding incentives, 
it may be reasonable to use only principal diagnosis 
information. However, as the PIP-DCG system is implemented, the 
restriction to using only principal diagnostic groups should be 
re-evaluated.
    Number and Development of the PIP-DCG Groups: Health 
Economics Research developed the diagnostic groups using a HCFA 
survey of Medicare FFS data which sampled 5% of Medicare 
beneficiaries. The claims information for this sample fell in 
the two-year interval from January 1, 1995 through December 31, 
1996. Beneficiaries who were not alive and enrolled in Medicare 
for the entire time period were excluded, as were individuals 
who would not have been eligible for the Medicare+Choice 
program for various reasons. Because of these limits, the 
actual sample represents roughly a 3.5% sample. We have 
included some technical recommendations in our report, which 
can be included as HCFA revises the methodology.
    Excluding Discretionary Conditions: The base cost group 
(those individuals who are not assigned health status risk 
scores) also includes Medicare beneficiaries with diagnoses 
that were determined by HER to be discretionary, vague, or only 
occasionally resulted in inpatient admissions. The exclusion of 
those ``discretionary'' conditions has the beneficial effect of 
reducing potential bias in the formula against Medicare+Choice 
health plans with well managed care delivery systems by not 
giving credit for discretionary admissions and by removing the 
incentives to hospitalize a patient for minor illness.
    However, we suggest that the diagnoses included in the base 
cost group should be reviewed in the future as coding practices 
change under the PIP-DCG system. If hospitals become more 
aggressive in their coding in the future, the percentage of 
claims falling into a PIP-DCG may change and weights would need 
to be recalibrated, particularly if the PIP-DCG method is used 
beyond the currently planned three-year period.
    Chemotherapy: HCFA has indicated that beneficiaries who are 
undergoing chemotherapy will be placed in a diagnosis category 
based on the patient's secondary diagnosis (most likely 
cancer). Since the medical conditions underlying the need for 
chemotherapy represent high-cost, ongoing conditions that are 
predictive of future medical expenses, it is appropriate that 
they be included in the risk assessment model. The work group 
believes including chemotherapy as part of the diagnosis groups 
will increase the ability of the methodology to predict future 
health care costs.
    Exclusion of Indirect Medical Education Costs: The model 
developed by HER excludes indirect medical education (IME) 
costs from the Medicare FFS data used to calculate the relative 
weights used in this system. The IME costs are approximately 
two-thirds of the total graduate medical education costs 
currently paid through Medicare (the FFS data does include 
direct medical education expenses). While it is technically 
incorrect to include any graduate medical education costs 
(since medical education costs will be paid outside of the 
capitation rate in the future), any distortion is likely to be 
small. However, it is possible there will be some internal 
inconsistencies in the model since high-cost conditions 
captured in the PIP-DCGs may more likely be treated in a 
tertiary care or teaching hospital.
    Factors for Newly Enrolled Medicare Members: HCFA decided 
to develop a special set of risk scores for those individuals 
who are eligible for Medicare for the first time and do not 
have any previous encounter data in the Medicare system. HCFA 
used FFS data to construct average expenditures for categories 
of newly eligible members (beneficiaries who become eligible 
for Medicare because of age or disability, or members who were 
previously eligible for coverage but deferred entry into the 
Medicare system). Newly eligible members will be assigned an 
estimated risk score based on HCFA's estimate of their 
predicted medical expenditures. The validity of these risk 
scores is unclear. The work group suggested that HCFA review 
its risk scores for the newly eligible once current data is 
available.
    Additional Testing: Health Economics Research performed a 
number of tests on the PIP-DCG risk adjuster methodology to 
determine how accurately it predicts total expected medical 
costs. The recommendations made by HER regarding several key 
components of the model such as the use of inpatient data only, 
exclusion of one-day stays and the number of PIP-DCG groups to 
be used, appear to be reasonable based on the FFS data which 
was reviewed. While the HER report discusses potential bias 
against managed care organizations that deliver care more 
efficiently than fee for service providers, HER did not have 
managed care data to determine what, if any, bias exists.
    HCFA has completed some preliminary testing of the 
potential impact of the new risk adjustment methodology on 
Medicare+Choice plans, including managed care organizations. In 
order to understand the impact of the new system on the 
marketplace, the work group suggests that HCFA update these 
tests as additional data is available, and as health plans gain 
more experience with the operation of the risk adjustment 
mechanism.
    Cost-Benefit Analysis: The proposed system is relatively 
new and it is likely that there will be difficulties in 
implementation. It would be very helpful to establish more 
accurate estimates of the cost of implementing the PIP-DCG 
methodology and any modifications (such as using ambulatory 
data) and to determine the benefits to be derived from these 
systems before final decisions as to implementation are made. 
We suggest that consideration be given to producing a cost-
benefit analysis of the PIP-DCG methodology and any subsequent 
modifications. The analysis should specifically include the 
costs incurred by health plans due to changes to the system.
    Actuarial Oversight: HCFA apparently plans to conduct 
additional analysis of the impact of the PIP-DCG methodology on 
managed care plans. It is unclear what form that impact 
analysis will take. In addition, there is a need for continuing 
monitoring and testing of the system and future modifications. 
The work group suggests that additional actuarial review be 
included as the system and subsequent changes are implemented.
      

                                


American Academy of Actuaries Risk Adjustors Work Group

William F. Bluhm, Chair
Milliman & Robertson, Inc.
8500 Normandale Lake Boulevard
Suite 1850
Minneapolis, MN 55437

Robert C. Benedict
156 North Sierra Street
Porterville, CA 93257

John M. Bertko
PM-Squared
444 Market Street Suite 1000
San Francisco, Ca 94111

Robert B. Cumming
Milliman & Robertson, Inc.
8500 Normandale Lake Boulevard
Suite 1850
Minneapolis, MN 55437

Patrick J. Dunks
Milliman & Robertson, Inc.
15800 Bluemound Road
Brookfield, WI 53005

Kathy Ely
Milliman & Robertson, Inc.
80 Lamberton Road
Windsor, CT 06095

Alan D. Ford
54 Country Acres Drive
Hampton, NJ 08827

P. Anthony Hammond
Greenwood Consultants
22501 Robin Court
Laytonsville, MD 20882

William R. Lane
Heartland Actuarial Consulting, LLC
2615 South 159th Plaza
Omaha, NE 68130

Lucinda M. Lewis
Blue Cross/Blue of Massachusetts
100 Summer Street, 01-04
Boston, MA 02110

Dave Nelson Humana, Inc.
500 West Main Street, 5th Floor
Louisville, KY 40201

Donna C. Novak
Deloitte & Touche, LLP
980 East Shore Drive
Fox Lake, IL 60020

Leslie F. Peters
Price Waterhouse Coopers, LLP
333 Market Street
San Francisco, CA 94105

Kevin Rease
Consulting Actuary
Nine Piedmont Center
3495 Piedmont Road N.E.
Atlanta, GA 30305-1736

Martin E. Staehlin
Price Waterhouse Coopers, LLP
203 North LaSalle Street
Chicago, IL 60601

Jill Ann Stockard
Pricewaterhouse Coopers, LLP
203 North LaSalle Street
Chicago, IL 60601

Leigh M. Wachenheim
Milliman & Robertson, Inc.
8500 Normandale Lake Boulevard
Suite 1850
Minneapolis, MN 55437
  
  
      

                                

    Chairman Thomas. Thank you very much, Mr. Bluhm.
    Ms. Newport.

   STATEMENT OF JANET G. NEWPORT, VICE PRESIDENT, REGULATORY 
 AFFAIRS, PACIFICARE HEALTH SYSTEMS, SANTA ANA, CALIFORNIA; ON 
       BEHALF OF AMERICAN ASSOCIATION  OF  HEALTH  PLANS

    Ms. Newport. Good afternoon. Mr. Chairman, Members of the 
Subcommittee, I wish to thank you for the opportunity to 
testify on behalf of the American Association of Health Plans. 
I am Janet Newport, vice president of Regulatory Affairs for 
PacifiCare Health Systems, which is the Nation's largest 
Medicare managed care program with almost 1 million members.
    Millions of Medicare beneficiaries are counting on 
Congress, HCFA, and the plans to guarantee the future success 
of the Medicare+Choice Program. Medicare beneficiaries may not 
know much about risk adjustment or other complex policy issues. 
However, they know they like the Medicare+Choice plans, and 
they like the high quality of services, additional benefits, 
and low out-of-pocket costs offered by these plans.
    The BBA intended to create more private health plan choices 
for Medicare beneficiaries. AAHP strongly supported this 
objective. Regrettably, the approach to implementing 
Medicare+Choice threatens to eliminate or reduce choices to the 
Medicare population.
    Because the Medicare+Choice Program will serve as the 
foundation for future Medicare reform, we believe the success 
of this program is essential. Many Medicare beneficiaries are 
seriously concerned as they learn about the unfairness of the 
approach to paying for their care. Two points illustrate this 
unfairness.
    First, over the next 5 years, Medicare+Choice payments, 
when measured against fee-for-service payments, will decline 
with each passing year. Many Medicare+Choice members live in 
counties where by 2004 the annual Medicare+Choice payment per 
person will be $1,000 less than payment for Medicare fee-for-
service beneficiaries. In many instances, the gap will be much 
wider.
    Second, as our chart shows, HCFA's risk adjustor, combined 
with the indirect effect of the administration's proposed 
Medicare fee-for-service cuts, will cut $1,676 from government 
payments for each Medicare+Choice member over the next 5 years. 
In contrast, Medicare fee-for-service cuts proposed in the 
administration's budget would equal about $248 per person.
    If the disparity between Medicare+Choice and Medicare fee-
for-service payments is allowed to continue, beneficiaries will 
pay a price. Enrollees will lose critical benefits like 
pharmaceutical and end up paying higher out-of-pocket costs. 
Higher premiums will be particularly hard on low-income 
beneficiaries who rely on our plans.
    Physicians and hospitals are also affected by inadequate 
payments to Medicare+Choice plans. Our Medicare provider 
networks have become fragile in some areas as payment dollars 
have been stretched to the limit. The risk adjustment 
methodology HCFA has chosen will make this problem worse. Every 
dollar HCFA has chosen to cut is actually a dollar that cannot 
be used to attract and retain the high-quality providers 
members expect and deserve.
    We have serious concerns relating to HCFA's risk adjustor. 
This methodology would impose significant cuts at the expense 
of Medicare+Choice enrollees, an additional $11.2 billion over 
the next 5 years. These administratively imposed cuts reflect a 
50-percent increase over the $22 billion in cuts enacted by the 
BBA.
    Had HCFA followed through with full and immediate 
implementation of this methodology, the cuts shouldered by 
Medicare+Choice enrollees would have accounted for one-third of 
the total Medicare cuts achieved by the BBA, even though these 
enrollees accounted for only 14 percent of all the 
beneficiaries. Clearly, it was not Congress' intent to cut that 
much out of Medicare+Choice.
    HCFA's risk adjustor reflects a strong bias against managed 
care. It penalizes the basic principle of managed care; keeping 
people healthy and avoiding unnecessary hospital admissions.
    For example, consider diabetes, a highly manageable 
disease. We actively manage our diabetes patients to keep them 
out of the hospital. The same patient in fee-for-service may 
experience multiple hospitalizations. Our beneficiary with the 
same chronic condition is considered healthy.
    The American Academy of Actuaries has cautioned that 
reliance on inpatient or hospitalization data and the exclusion 
of 1-day hospital stays will result in a distorted picture of 
beneficiaries' health, causing certain Medicare+Choice 
enrollees to appear healthier than they actually are. We have 
serious concerns about the administrative feasibility of 
implementing a new risk adjustment system by January 1, 2000.
    With respect to QISMC, Quality Improvement System for 
Managed Care, we are concerned that the program as currently 
structured does not recognize the importance of coordinating 
HCFA's quality oversight standards with existing private and 
public accrediting programs. The process should be established 
for using private sector standards to deem Medicare+Choice 
plans to be in compliance with HCFA's requirements.
    Finally, we believe it is unfair to require Medicare+Choice 
enrollees, who account for about 15 percent of Medicare, to 
shoulder 100 percent of the cost of the Medicare beneficiary 
information campaign. Mismanagement of this campaign has been a 
significant problem. Last year, in every PacifiCare market, 
there were errors in HCFA's brochure.
    Thank you.
    [The prepared statement follows:]

Statement of Janet G. Newport, Vice President, Regulatory Affairs, 
PacifiCare Health Systems, Santa Ana, California; on Behalf of American 
Association  of  Health  Plans

                            I. Introduction

    Mr. Chairman and members of the Subcommittee, thank you 
very much for the opportunity to comment on issues related to 
implementation of the Medicare+Choice program. I am Janet 
Newport, Vice President of Regulatory Affairs \1\ for 
PacifiCare Health Systems, based in Santa Ana, California. 
PacifiCare provides health care coverage for more than 3.7 
million enrollees in ten states--Arizona, California, Colorado, 
Kentucky, Nevada, Ohio, Oklahoma, Oregon, Texas and 
Washington--and the territory of Guam. Through Secure Horizons, 
our Medicare plan, we enroll nearly one million Medicare 
beneficiaries, the largest enrollment nationwide.
---------------------------------------------------------------------------
    \1\ Ms. Newport also serves as a commissioner on the Medicare 
Payment Advisory Commission.
---------------------------------------------------------------------------
    I am testifying today on behalf of the American Association 
of Health Plans (AAHP), which represents more than 1,000 HMOs, 
PPOs, and similar network health plans. Together, AAHP member 
plans provide care for more than 140 million Americans 
nationwide. AAHP appreciates this opportunity to comment on the 
Health Care Financing Administration's (HCFA) implementation of 
the Medicare+Choice provisions of the Balanced Budget Act of 
1997 (BBA).
    When passed by Congress, the goal of the BBA was to expand 
on the successful Medicare HMO program and to provide for 
additional private sector options for beneficiaries while 
allowing the program to expand into other parts of the country. 
AAHP and its member plans have long supported these efforts to 
modernize Medicare and give beneficiaries more choice. Today, 
more than 16 percent--or 6 million beneficiaries are enrolled 
in health plans, up from 6.2 percent five years ago.\2\
---------------------------------------------------------------------------
    \2\ Includes enrollees in risk, cost, and HCPP contractors.
---------------------------------------------------------------------------
    The transition from Medicare's risk contracting program to 
the Medicare+Choice program has not been without difficulties. 
As the Medicare+Choice program has been implemented, the result 
has been unintended negative consequences for beneficiaries and 
the health plans that serve them. Last year, health plans 
holding nearly 100 Medicare contracts reluctantly reduced their 
service areas or withdrew from the Medicare program largely 
because of the combination of reduced payments and the 
significant administrative burden of the many new regulatory 
requirements under the Medicare+Choice program. These decisions 
resulted in disruptions in care and a loss of benefits and 
increased out-of-pocket costs for more than 440,000 Medicare 
beneficiaries. Of these beneficiaries, 50,000 were left with no 
choice but to return to the traditional fee-for-service 
program. HCFA's decision to proceed with phased-in deep cuts 
under its new risk adjustment methodology will further 
contribute to the program's instability and penalize 
beneficiaries who have chosen to join Medicare+Choice plans.
    AAHP has consistently supported the goal of ensuring that 
Medicare payments to health plans are accurate and that they 
fairly reflect the health care service needs of the Medicare 
beneficiaries who enroll. However, it is critical to place the 
program on a stable and predictable footing so that 
beneficiaries enrolled in the Medicare+Choice program can 
continue to receive the high quality services, benefits, and 
lower cost sharing that they have come to rely on. This 
statement examines three areas of Medicare+Choice 
implementation: 1) the proposed new risk adjustment method; 2) 
dissemination of health plan information to seniors; and 3) new 
plan requirements for quality measurement.

                          II. Risk Adjustment

    The risk adjuster proposed by HCFA threatens the stability 
of the Medicare+Choice program in two ways: 1) by exacerbating 
the cumulative impact of payment reductions to Medicare+Choice 
plans; and 2) by creating unworkable and burdensome 
administrative processes that increase plan costs and raise the 
likelihood of inaccurate payment. Taken together, these 
problems will widen the growing disparity between payment to 
Medicare+Choice plans and reimbursement under fee-for-service. 
In addition, these problems will make it difficult for 
Medicare+Choice plans to operate in certain markets and to 
maintain the level of benefits and services to which 
beneficiaries have become accustomed. It is unrealistic for 
HCFA or Congress to assume that a disparity of this magnitude 
will have no adverse impact on providers, delivery of services, 
or health care options for seniors.
    On January 15th, HCFA announced its new methodology for 
adjusting Medicare+Choice payment rates to reflect the health 
status of individual Medicare beneficiaries. AAHP has serious 
concerns about the impact of HCFA's new risk adjustment 
methodology on Medicare beneficiaries, as well as on 
Medicare+Choice participating organizations and their 
providers. Under HCFA's new methodology, between 2000 and 2003, 
Medicare+Choice payments will be based on a blend of rates 
adjusted for demographic characteristics only and rates 
adjusted for health status as well as demographic factors. 
During this period, the portion of the payment rate that 
reflects health status adjustment will be calculated under a 
model that uses only inpatient hospital data. The phase-in will 
be completed in 2004 when Medicare+Choice payments will be 
risk-adjusted using full encounter data--not just inpatient 
hospital data.
    According to HCFA, fully implementing the PIP-DCG risk 
adjustment methodology in 2000--without using any transition 
period--would have resulted in $15.7 billion in cuts over a 
five-year period. These reductions would have accounted for 71 
percent of the $22 billion savings that Congress anticipated 
from the Medicare+Choice program enacted in 1997. With the 
transition period proposed by HCFA, aggregate payments to 
Medicare+Choice organizations will be cut $11.2 billion over a 
five-year period. This is an administratively imposed 50 
percent increase in the $22 billion savings Congress 
anticipated from the BBA payment methodology. Congress did not 
anticipate this level of savings from the risk adjuster when 
the BBA was enacted. In fact, the Congressional Budget Office 
did not score the risk adjustment provision in the BBA. As 
discussed in our recommendations below, AAHP strongly believes 
the new risk adjustment methodology should be budget neutral to 
ensure that it does not reduce aggregate funding of the 
Medicare+Choice program. HCFA projects that, when fully 
implemented, its proposed risk adjuster will cut payments, on 
average, by a further 7.0 percent. HCFA's own data show that 
only 5 to 6 plans \3\ will receive increased payments as a 
result of the new risk adjustment methodology.
---------------------------------------------------------------------------
    \3\ Out of 195 plans that submitted substantially complete data for 
the base period July 1, 1997 to June 30, 1998.
---------------------------------------------------------------------------
    The BBA required that HCFA have its risk adjustment method 
evaluated by an outside, independent actuary. In response to 
this mandate, the American Academy of Actuaries Risk Adjustor 
Work Group conducted an analysis of HCFA's new health status 
risk adjustment methodology.\4\ The Academy issued only a 
``qualified review'' of HCFA's methodology, which is 
significant because it means that the Academy was unable to 
analyze HCFA's methodology fully due to incomplete available 
data and information (p.4). In other words, the Academy was 
unable to replicate HCFA's approach and expressed ``serious 
concerns'' about the method's ``implementation, operation and 
impact'' (p.3). AAHP believes, and the Academy's report 
confirms, that the design of HCFA's risk adjustment methodology 
results in a bias against managed care due to the system's 
exclusion of one-day hospital stays and its reliance on 
inpatient-only hospital utilization data. Additionally, 
according to the Academy report, health plans could be 
underpaid if claims are ``denied due to edits, or get caught in 
a data processing bottleneck'' (p.27).
---------------------------------------------------------------------------
    \4\ American Academy of Actuaries Risk Adjustor Work Group, 
Actuarial Review of the Health Status Risk Adjustor Methodology, 
January 14, 1999.
---------------------------------------------------------------------------
    At PacifiCare, we have experienced problems with HCFA's 
ability to process our claims in an accurate and timely manner. 
While PacifiCare, like all plans, has faced challenges, 
particularly since the system relies on the reporting of 
retroactive data, HCFA's internal systems issues have been a 
more significant factor in slowing the establishment of the 
database necessary for risk adjustment. In addition, HCFA has 
admitted to errors in their estimates of our plans' average 
risk adjustment factors and has urged us to rely on our own 
estimates to determine next year's benefits. In order to 
prepare our adjusted community rate proposals, through which we 
determine the benefits we will offer and the premiums we will 
charge to beneficiaries, we must have accurate estimates of our 
plans' average risk adjustment factors from HCFA. Without such 
information, our own estimates may not be accurate and have the 
potential to translate into decreased benefits for the many 
beneficiaries that PacifiCare serves. Furthermore, as a 
requirement of the BBA, we must attest to the accuracy of our 
adjusted community rate proposal. This will be difficult to do 
without the assurance from HCFA that the data provided to us 
and which serves as the foundation for the ACR are accurate.
    The initial use of a risk adjuster based solely on hospital 
inpatient data penalizes health plans that use disease 
management or other care management programs designed to reduce 
hospitalizations for chronically ill and other patients who 
would have otherwise been treated in inpatient settings. These 
programs are designed to provide superior quality care while 
preventing costly hospitalizations by treating patients in 
alternative settings. The Academy of Actuaries identifies 
``several drawbacks'' to a risk adjustment system that uses 
only inpatient data, noting that ``health plans which use 
outpatient alternatives to hospitalization would be financially 
penalized'' (p.10, p.19). The Academy also notes ``many 
observers recognize that using only inpatient data in the PIP-
DCG risk adjustment model may result in a bias toward the FFS 
system'' (p.30). Since the PIP-DCG method is restricted to 
inpatient claims, beneficiaries enrolled in health plans may 
appear healthier than they actually are because of the limits 
of what HCFA's new risk adjustment method can measure.
    HCFA's decision not to count diagnoses related to one-day 
hospital stays in the risk adjustment formula reduces payment 
for health plan members. We believe that Medicare+Choice 
organizations have a higher proportion of one-day hospital 
stays than occurs in the fee-for-service Medicare program and 
that more of these stays involve diagnoses for which 
hospitalization is the common course of treatment. In its 
report, the Academy of Actuaries warns ``this limitation could 
penalize efficient plans enough to make them leave the Medicare 
market'' (p.19). The Academy also notes that excluding one-day 
stays reduces the predictive power of risk adjustment. The 
Academy concludes, ``the disadvantages of excluding one-day 
hospitalizations may outweigh any possible gains'' (p.13).
    The Academy's report questions the administrative 
feasibility of implementing the new risk adjustment system 
given the timing and data collection challenges involved, some 
of which we have identified above. The Academy notes that other 
programs have had difficulty implementing the PIP-DCG method 
due to data collection problems and administrative challenges. 
Many of these programs conducted extensive simulations prior to 
implementation of risk adjustment including the Health 
Insurance Plan of California (HIPC), which conducted a one year 
test prior to the start of the program.
    AAHP recommends the following with regard to implementation 
of the new risk adjustment methodology:
     The new risk adjustment methodology should be 
budget neutral to ensure that it does not reduce aggregate 
funding of the Medicare+Choice program.
     Payments to Medicare+Choice organizations should 
not be based on a new risk adjustment mechanism until, at the 
earliest, January 1, 2001.
     In the meantime, HCFA should redesign the new risk 
adjustment method to eliminate serious inaccuracies with the 
data and the methodology itself.
     HCFA should also move forward with the 
calculations and data collection initiatives that are necessary 
to support implementation of the model and allow simulations of 
its impact.
    This additional time will provide an opportunity for 
Medicare+Choice organizations and HCFA to gauge more reliably 
the potential impact of the PIP-DCG model on health plan 
payments and the benefits and premiums offered to Medicare 
beneficiaries. Postponing implementation of the PIP-DCG model 
will also provide an opportunity to resolve numerous 
significant outstanding issues with the model and complete the 
data submission and processing that are necessary to support 
it.

               III. Beneficiary Information and Education

    The BBA instructs the Secretary to educate Medicare 
beneficiaries about their choices using a variety of 
approaches, including a handbook, toll-free number, an internet 
Web site, and community outreach. To finance these activities, 
the BBA authorizes HCFA to charge each Medicare+Choice 
organization and Medicare risk contractor a fee equal to the 
organization's pro rata share of HCFA's estimated costs of 
enrollment and information dissemination activities. While AAHP 
supports efforts to enhance informed beneficiary choice, we 
have significant concerns about the funding, costs and design 
of the program developed by HCFA.
    We urge HCFA to revisit its plans for the 1999 beneficiary 
education campaign and ensure that it provides beneficiaries 
with information that will educate, not confuse. HCFA's 1998 
beneficiary information and education campaign experienced 
numerous problems that confused beneficiaries and hindered 
access to the new Medicare+Choice program.
     In Omaha, Nebraska, Baltimore, Maryland and West 
Virginia, the Spanish language brochures were sent to areas 
with no Spanish-speaking population.
     In Eastern Washington and parts of Florida, the 
brochures were mailed with a statement that the information 
presented is incorrect and that the beneficiaries should call a 
toll-free number if they have any questions.
     The toll-free call centers were expected to 
receive 15,000 calls per week per center. However, during the 
month of November 1998, the total number of calls received by 
all centers was only 9,400. Most of the calls regarded HCFA's 
mistake in sending Spanish language brochures, and requests for 
additional brochures.
    While it is reasonable for health plans and their enrollees 
to contribute to funding HCFA's enrollment and information 
dissemination initiatives, their contribution should be in 
proportion to their participation in the Medicare program. Last 
year, Medicare risk HMOs and their enrollees represented 14.3 
percent of the program but shouldered 100 percent of the cost 
of the information campaign.\5\ Requiring health plans and 
their members to bear 100 percent of the burden of this fee 
directly affects the premiums and benefits that plans can offer 
to their members. While AAHP supports disseminating information 
to all beneficiaries to enhance informed choice, we believe 
that an equitable funding mechanism is critical to the success 
of this effort. The goal of expanded choice is not served if 
the costs of underwriting the information campaign reduce the 
level of benefits that Congress sought to make available to 
more beneficiaries.
---------------------------------------------------------------------------
    \5\ Includes enrollees in risk contracts only.
---------------------------------------------------------------------------
    We also are concerned about the costs of the education 
campaign that HCFA intends to implement. Congress appropriated 
$95 million for these activities in FY 1998, less than one half 
of the $200 million allowed by the BBA. In FY 1999, HCFA 
requested the full $150 million allowed by the BBA, and 
Congress again approved only $95 million. The President's 
proposed FY2000 budget requests that Congress appropriate $150 
million, $50 million more than the amount allowed by the BBA. 
In addition, the President's budget calls for a series of new 
user fees to generate an additional $194.5 million. Of these 
proposed new user fees, which also would apply to fee-for-
service providers, $36.7 million would be levied on 
Medicare+Choice plans to support HCFA's application and renewal 
processing activities. At a time of growing instability in the 
Medicare+Choice program, we are concerned that these user fees 
set a dangerous precedent and translate into reduced choices 
for beneficiaries.
    AAHP and its member plans will continue to work with HCFA, 
beneficiary groups and others to develop an education campaign 
that provides accurate, timely and meaningful information to 
beneficiaries without compromising the services to which they 
have become accustomed. The central goal of this initiative, to 
provide more and better information to beneficiaries about all 
of the options available to them, is critical to permitting 
beneficiaries to take advantage of the expanded range of 
choices envisioned under the new Medicare+Choice program.

            IV. Quality Improvement System for Managed Care

    One area of significant concern to our member plans is 
HCFA's Quality Improvement System for Managed Care (QISMC). 
QISMC is designed to establish a consistent set of quality 
oversight standards for health plans for use by HCFA and state 
Medicaid agencies under the Medicare and Medicaid programs, 
respectively. AAHP has long advocated coordination of quality 
standards for health plans in order to maximize the value of 
plan resources dedicated to quality improvement. While we 
believe that QISMC holds the promise of contributing to this 
important goal, we have a number of serious concerns regarding 
implementation. We urge HCFA to engage in intensive dialogue 
with health plans contracting under the Medicare and Medicaid 
programs to permit full consideration of their outstanding 
concerns about the QISMC standards and guidelines. Furthermore, 
we are also concerned that the Medicare program is not 
providing equal attention to the overall quality of care 
furnished under the fee-for-service program.
    One of our primary concerns is that QISMC lacks clear 
coordination with existing public and private sector 
accreditation and reporting standards. Health plans currently 
meet voluntary private accreditation standards, such as those 
developed by the National Committee for Quality Assurance, in 
order to satisfy requirements of private sector purchasers and 
some states. Rather than coordinate with these existing 
standards, QISMC appears to establish an entirely new system of 
requirements. This adds to administrative cost while actually 
detracting from health care quality improvement. Additional 
concerns expressed by AAHP members include:
     QISMC fails to establish realistic goals for 
health plan activities and performance that take into 
consideration available resources and health plan 
responsibilities for the delivery of quality care to 
beneficiaries. The significant additional resources that would 
be required to meet the new QISMC standards and the 
prescriptive nature of the QISMC standards would seriously 
hinder health plan pursuit of quality improvement projects 
focused on the needs of their enrolled Medicare and Medicaid 
beneficiaries.
     Far more consideration should be given to 
standards that would be applicable to all types of 
Medicare+Choice plans. While QISMC requirements are modeled 
after a health plan using the primary care gatekeeper model, 
organizations participating in the Medicare+Choice program will 
have many different structures.
     In establishing goals for health plan performance, 
QISMC lacks recognition of differing characteristics of 
Medicare and Medicaid beneficiaries and the programs and 
policies under which they receive health care.
     We have urged HCFA to engage in an intensive 
dialogue with health plans contracting under the Medicare and 
Medicaid programs to permit full consideration of their serious 
outstanding concerns about the draft QISMC standards and 
guidelines. We are eager to work collaboratively with HCFA to 
develop an approach to future health plan quality oversight 
activities under Medicare and Medicaid that is responsive to 
the interests of beneficiaries, health plans, and federal and 
state responsibilities under the Medicare and Medicaid 
programs.
    As the Committee considers reforms to the Medicare+Choice 
program, we encourage you to examine the experience of our 
member plans in implementing quality initiatives such as QISMC. 
As numerous studies demonstrate, health plans provide high 
quality care. In recent years, private sector quality 
initiatives have provided the leadership in this area. We are 
concerned that government programs are not adequately 
recognizing these initiatives and coordinating better with 
them.

                             V. Conclusion

    Health plans have valuable experience to share with 
Congress and HCFA on implementation of many of the provisions 
of the Balanced Budget Act of 1997. AAHP appreciates this 
opportunity to comment on the Medicare+Choice program and its 
implementation to date. We urge you to undertake mid-course 
corrections to implementation of the Medicare+Choice program to 
ensure the program's future stability. We look forward to 
continuing to work with members of the Subcommittee, other 
members of Congress, and HCFA to ensure the successful 
implementation of the Medicare+Choice program.
      

                                

    Chairman Thomas. Thank you very much, Ms. Newport.
    Dr. Harmon-Weiss.

  STATEMENT OF SANDRA HARMON-WEISS, M.D., VICE PRESIDENT AND 
 HEAD, GOVERNMENT PROGRAMS, AETNA U.S. HEALTHCARE, BLUE BELL, 
 PENNSYLVANIA; ON BEHALF OF HEALTH INSURANCE ASSOCIATION  OF  
                            AMERICA

    Dr. Harmon-Weiss. Mr. Chairman, Members of the 
Subcommittee, I am Dr. Sandra Harmon-Weiss, vice president and 
head of government programs for Aetna U.S. Healthcare.
    My company is one of the Nation's leading health benefits 
companies and has 5,000,000 members covered in their managed 
care plans nationwide. Aetna U.S. Healthcare has 18 
Medicare+Choice plans, which provide coverage for quality 
comprehensive care for more than 530,000 Medicare beneficiaries 
in 16 States.
    I am testifying today on behalf of the Health Insurance 
Association of America, HIAA, a prominent trade association of 
265 member health care companies and insurers, including 
companies that currently serve Medicare+Choice beneficiaries, 
companies who are considering offering new Medicare+Choice 
options, and companies that offer Medicare supplemental 
insurance.
    I am pleased to have the opportunity to discuss the 
implementation of the Medicare+Choice Program with you and to 
share a few of our principal concerns. HIAA believes the 
central purpose of the Medicare+Choice is to restructure the 
Medicare managed care program in order to deliver high quality, 
cost-effective health care services to Medicare beneficiaries 
through a broad array of private health plans. We support this 
goal.
    In the next few minutes, I would like to focus on several 
fundamental concerns, namely the adequacy of payment rates to 
health plans and the proposed risk adjustment methodology.
    The limits on the annual increases in capitation rates to 
plans pose a threat for the continued success of the 
Medicare+Choice Program. The program rules must allow payment 
rates that recognize and adjust for the actual cost of 
providing health care and complying with the increased 
administrative burdens stemming from BBA.
    The payment methodology option of a blended capitation 
rate, a minimum county rate or a 2-percent increase in the 
AAPCC rates do not meet the current threshold of medical 
expenses in 1999, which are expected to increase in the range 
of 7 to 10 percent for a comprehensive benefit package.
    The practical result, based upon the Medicare+Choice 
enrollment, is that organizations serving a majority of 
Medicare beneficiaries receive rate increases at a minimum of 2 
percent or only slightly more. The impact is illustrated on 
these charts.
    HIAA suggests that the annual increase in Medicare+Choice 
payment rates be sufficient to cover medical inflation 
experienced in local markets for basic Medicare benefits.
    The new risk adjustment methodology will substantially 
reduce payments to Medicare+Choice organizations. HCFA recently 
released data on the estimated impact of the risk adjustor on 
health plans as proposed for year 2000 that is with only a 10-
percent risk-adjusted rate and a 90-percent demographic rate. 
The net impact is an estimated reduction in payment of 
approximately 1 percent for health plans in the year 2000.
    The risk adjustor is based upon inpatient hospital 
encounter data projected on a model based on fee-for-service 
experience in 1995. The model is not reflective of the current 
managed care experience in providing access to the most 
appropriate care in the most appropriate setting.
    HIAA urges Congress to delay the risk adjustor beyond 
January 1, 2000, to allow additional study, to allow collection 
of a broader data set, including outpatient encounters, to more 
fully adjust for health status of beneficiaries. At a minimum, 
HIAA encourages Congress to direct HCFA to conduct a 
demonstration project to validate the proposed methodology.
    HIAA believes that quality standards are important for any 
market-based approach to Medicare. It is necessary to measure 
the quality of services provided to Medicare beneficiaries in 
both managed care and fee-for-service.
    QISMC introduces an ambitious and comprehensive approach to 
quality improvement for Medicare and Medicaid. HCFA has worked 
collaboratively with the health care industry to initiate 
quality improvement studies in a well-defined manner, linked 
with the efforts of the peer peview organizations. The quality 
improvement efforts are focused on chronic disease and, with 
additional guidance which is needed from HCFA, should yield 
useful information on the management of conditions common to 
Medicare beneficiaries, thus improving health status overall.
    QISMC includes a provision that Medicare+Choice 
organizations may be deemed to meet quality assessment and 
performance improvement requirements if judged to do so by an 
independent external review organization approved by HCFA. This 
approach has much merit for consistency in quality improvement 
standards.
    HIAA encourages HCFA to move forward promptly with the 
implementation of this deemed status process. Many 
Medicare+Choice organizations like Aetna U.S. Healthcare meet 
the rigorous quality improvement requirements set forth by NCQA 
for full accreditation and welcome consistency of standards and 
encourage the deeming effort that the QISMC offers.
    A consumer-oriented infrastructure for Medicare 
beneficiaries is imperative to the success of the 
Medicare+Choice Program. Funding of the information campaign 
solely by Medicare+Choice organizations needs further 
consideration.
    In closing, let me stress that we believe the Congress, 
HCFA, and HIAA member companies share a common goal, the 
successful implementation of Medicare+Choice. Aetna U.S. 
Healthcare's goal is to provide access to comprehensive quality 
care for Medicare beneficiaries at an affordable premium. We 
feel the prospect for success will be greatly improved if there 
are adjustments to the payment structure----
    Chairman Thomas. Doctor, we have a vote going on, and we 
are losing time.
    Dr. Harmon-Weiss. OK.
    Chairman Thomas. You have a chart up there.
    Dr. Harmon-Weiss. Yes.
    Chairman Thomas. Can you wrap it up, please?
    Dr. Harmon-Weiss. Yes, I can.
    I appreciate being able to appear before you with these 
remarks, and certainly now that the Medicare Commission has 
defined for all of us the challenges that lie ahead for 
Medicare and failed to recommend to Congress a plan to 
restructure and privatize Medicare, I want to take this 
opportunity to offer our assistance in seeking long-term 
solutions.
    I will be happy to answer any questions the panel might 
have.
    [The prepared statement follows:]

Statement of Sandra Harmon-Weiss, M.D., Vice President and Head, 
Government Programs, Aetna U.S. Healthcare, Blue Bell, Pennsylvania; on 
Behalf of Health Insurance Association of America

    Mr. Chairman and members of the Committee, I am Dr. Sandra 
Harmon-Weiss, Vice President and Head of Government Programs of 
Aetna U.S. Healthcare. I am testifying today on behalf of the 
Health Insurance Association of America (``HIAA''). As the 
preeminent health insurance trade association, HIAA is the 
principal voice of the broadest spectrum of the health 
insurance industry. HIAA represents over 265 members that 
include commercial insurers, health maintenance, preferred 
provider and managed care organizations and businesses that 
provide products and services to the health insurance industry. 
Together, HIAA members provide health, long-term care, 
supplemental, and disability income insurance coverage to more 
than 110 million Americans. Association members include 
companies currently serving as Medicare+Choice managed care 
contractors, companies who are considering offering new 
Medicare+Choice options, and companies that have recently 
withdrawn from the Medicare+Choice program, giving us a unique 
perspective on the issues under review by this Committee. Aetna 
U.S. Healthcare offers 18 Medicare+Choice plans (under 15 
Medicare+Choice contracts) which serve 530,000 Medicare 
beneficiaries in 16 states.
    I am pleased to have this opportunity to discuss the 
implementation of the Medicare+Choice program with you and to 
share a few of our principle concerns. HIAA and Aetna U.S. 
Healthcare believe that the Medicare+Choice program represents 
an essential component in the government's effort to ensure the 
financial survival of the Medicare program and to meet the 
health care needs of the baby boom generation as we move into 
the 21st Century. HIAA applauds the Health Subcommittee of the 
Ways and Means Committee for its role in shaping these bold 
Medicare reforms through the Balanced Budget Act of 1997. 
Recent developments, however, suggest that the Committee's work 
is not yet done. To ensure the promise of the reform, and to 
facilitate beneficiary choice under the Medicare program, 
additional legislative and policy modifications must be made.

  Concerns About Low Anticipated Medicare+Choice Organization Payment 
                            Rate Increases.

Limits on Annual Increases in Capitation Rates and Concerns Regarding 
the New Proposed Risk Adjustment Methodology Threaten the Continued 
Attractiveness of the Medicare+Choice Program to Beneficiaries and 
Providers.

    a. Most Plans Will Experience Cost Increases From Medical Inflation 
That Exceed Payment Increases During the Coming Year. Perhaps the 
greatest threat to the success of the Medicare+Choice program is the 
collective impact of changes in Medicare's payment methodology enacted 
by the BBA. In order to achieve a successful partnership between the 
federal government and Medicare+Choice organizations, program rules 
must: (1) allow payment rates that recognize and adjust for the actual 
costs of covering quality health care services and complying with the 
increased administrative burdens imposed by the BBA, and permit 
necessary investment in clinical and operational improvements, and (2) 
incorporate financial incentives to reward those Medicare+Choice 
organizations that achieve the government's economic, quality and 
operational objectives.
    As set forth in Section 1853(c) of the BBA, Medicare+Choice 
organizations will be paid the greater of:
    (a) a blended capitation rate, which is the sum of a percentage of 
the area-specific capitation rate and a percentage of the national 
Medicare+Choice capitation rate (the percentage balance will change 
over time until it reaches a 50/50 blend in 2002); or
    (b) a minimum amount, which is $401.61 per enrollee per month in 
2000; or
    (c) a minimum percentage increase equal to an increase of 2 percent 
of the 1997 Adjusted Average Per Capita Cost rate for the particular 
county for 1998, with increases of 2 percent in each subsequent year.
    Due to a budget neutrality requirement, the blended capitation rate 
was not available in 1998 or 1999. The Health Care Financing 
Administration (HCFA) has announced, however, that the blend will apply 
to 63 percent of counties in the year 2000. While the majority of 
counties will receive blended payments, it is HIAA's understanding that 
approximately 27 percent of counties will continue to receive the floor 
amount and 10 percent of counties will receive the minimum two percent 
increase.
    The practical result, based on actual Medicare+Choice enrollment, 
is that Medicare+Choice organizations serving a majority of Medicare 
beneficiaries enrolled in such organizations will receive rate 
increases of the minimum 2 percent or only slightly more. For most--if 
not all--of these organizations, this increase would not be sufficient 
to cover the increased cost of covering mandated services, given 
projected medical inflation.\1\ This, combined with the fact that many 
Medicare+Choice organizations experienced significant losses in 1998 
(and anticipate additional losses in 1999), forecasts trouble for the 
program.
---------------------------------------------------------------------------
    \1\ The budget for fiscal year 2000 includes funding for original 
fee-for-service Medicare that reflects anticipated increases in medical 
costs over a five year period of 27% and an increase in the Federal 
Employee Health Benefit Program of about 50%. Estimates of the likely 
growth for Medicare+Choice plan payments in high paying counties for 
the same period is less than 10%.
---------------------------------------------------------------------------
    Indeed, inadequate reimbursement rates for 1999 largely were 
responsible for the retrenchment of Medicare+Choice plans last fall. At 
that time, some of the most respected Medicare+Choice organizations in 
the country withdrew from states and counties with low capitation 
rates. Other withdrawals occurred in low enrollment areas even though 
capitation rates were above average. As reported, 45 health plans 
decided to withdraw from the Medicare+Choice program and 55 plans 
decided to cut back their coverage area. In all, about 400,000 Medicare 
beneficiaries were effected. To put this in perspective, HCFA averaged 
two Medicare risk contract cancellations per year from 1993 through 
1997.
    The use of the blended rate for some Medicare+Choice plans for the 
first time in 2000 is clearly a step in the right direction in terms of 
ensuring fair and adequate reimbursement. However, HIAA strongly 
believes that additional adjustments are necessary to attract and 
maintain the number and diversity of Medicare+Choice organizations 
necessary to establish a sound and attractive market-based alternative 
to the traditional fee-for-service program.
    Accordingly, HIAA urges Congress to reconsider the artificial and 
arbitrary limits on capitation rate increases set forth in the BBA.\2\ 
Specifically, HIAA suggests that annual increases in Medicare+Choice 
payment rates be sufficient to fully cover medical inflation 
experienced in the local markets. Because local employer health plans 
and other commercial customers have a tremendous incentive to keep 
costs down, they will positively affect the inflation rate in each 
market. If the current reimbursement structure is not adjusted, more 
Medicare+Choice organizations are likely to withdraw from areas served 
and beneficiaries enrolled in the remaining plans will likely 
experience premium increases or reduced benefits. Finally, as 
Medicare+Choice plans leave the market, the original Medicare program 
(with its higher per capita costs) will have more beneficiaries and put 
additional strain on both the Part A Trust Fund and the budget.
---------------------------------------------------------------------------
    \2\ In addition to the 5-percent reduction in payment from fee-for-
service costs which existed prior to the BBA, the increase in payment 
to Medicare+Choice organizations under both the blended rate and the 
floor will not fully reflect anticipated medical inflation. A reduction 
of 0.8 percent was made in 1998 and reductions of 0.5 percent are to be 
included in 1999 through 2002. The cumulative effect of these 
reductions will be that even the blended rate adjustment will be 
inadequate. This, coupled with the insufficient increases in the 
minimum rate, will undermine Congressional intent to encourage growth 
of Medicare+Choice options for seniors in low cost areas.
---------------------------------------------------------------------------
    b. The New Risk Adjustment Methodology Will Substantially Reduce 
Payments to Medicare+Choice Organizations. Change in the 
Medicare+Choice payment calculations is all the more necessary because 
the risk adjustment process which HCFA is implementing will 
substantially reduce aggregate payments to Medicare+Choice plans while 
adding additional administrative requirements and expenses. According 
to preliminary HCFA estimates, total Medicare+Choice plan revenues for 
the year 2000 are projected to be $200 million less than they would 
have been under the Adjusted Average Per Capita Cost (``AAPCC'') 
payment method and $6.3 billion less in 2004. As a result, some plans 
will see even their minimum two percent increase eroded in 2000 as the 
risk adjustment methodology is phased in. Thus, what began as a well-
intended effort to compensate plans for the health care costs of their 
particular members will, in reality, result in an overall reduction in 
funds to Medicare+Choice organizations.
    This development runs counter to HIAA's understanding of 
Congressional intent, i.e., that the savings resulting from the 
percentage reduction in plan payments for years 1998 through 2002 was 
intended to be in lieu of any net program savings from risk adjustment. 
(Indeed, the Congressional Budget Office did not score any projected 
savings in connection with the risk adjustment program under BBA 97). 
The new methodology, and huge projected revenue reductions, underscores 
HIAA's concerns regarding the inadequacy of plan payments under 
Medicare+Choice. To the extent that the proposed HCFA risk adjustment 
methodology translates into a significant overall decrease in payments 
for the Medicare+Choice program, it will undoubtedly be an additional 
deterrent to program participation. Accordingly, HIAA urges Congress to 
require HCFA to modify the risk adjustment methodology so that 
aggregate payments to Medicare+Choice plans for 2000 and beyond are 
based on aggregate BBA adjustments, making the risk adjustment process 
budget neutral.
    c. The User-Fee ``Tax'' on Medicare+Choice Organizations for 
Beneficiary Education is Inequitable and Reduces Even Further Payments 
to Medicare+Choice Organizations. HIAA strongly supports educating and 
informing Medicare beneficiaries about all coverage options, including 
the Medicare+Choice program, and supplying beneficiaries with 
straightforward, unbiased information to help them choose appropriate 
coverage. That said, we are concerned that the BBA, to support 
beneficiary education activities for all 37 million beneficiaries, 
places a ``user fee tax'' on Medicare+Choice organizations only.\3\ The 
educational campaign is a benefit to all Medicare beneficiaries. 
Indeed, initial information suggests that the toll-free number HCFA 
established last year with funds from the $95 million dollar ``tax'' 
assessed upon Medicare+Choice organizations primarily fielded calls 
from beneficiaries seeking information about the fee-for-service 
program. Considerations of equity dictate that the educational 
program--which informs beneficiaries about basic program benefits and 
requirements--be funded from the Medicare trust fund, or another broad-
based source of revenue, as are other such essential program functions.
---------------------------------------------------------------------------
    \3\ Medicare+Choice organizations essentially pay a ``head tax'' 
(i.e., an amount based on the number of Medicare+Choice enrollees in 
their plan) to support the public information program.
---------------------------------------------------------------------------
    This user fee tax equals .355% of the total monthly payments to 
each Medicare+Choice plan in 1999. The detrimental impact of the user 
fee tax would be magnified under the Administration's recent Budget 
proposal, which would boost the authorization by 50% (to $150 million 
in Fiscal Year 2000), and which would add another type of user fee 
(estimated at $37 million in Fiscal Year 2000) to cover the cost of 
reviewing initial M+C organization applications and renewing annual 
contracts.
    We note that this tax further exacerbates the problems outlined 
above concerning inadequate reimbursement. Indeed, when the user fee 
tax is combined with the large revenue reductions due to adjustment, 
some existing Medicare+Choice plans will see little or no increase in 
their payment rates from 1999 to 2000 even though HCFA is using a 
phase-in of an interim risk-adjustment methodology.
    In your district, Chairman Thomas, there were 33,527 beneficiaries 
enrolled in Medicare risk plans in 1997 (or 29.1% percent of Medicare 
beneficiaries). We project \4\ that by 2003, Medicare+Choice plans will 
receive only 53.3% percent of the projected per capita increase in 
Medicare fee-for-service costs. We also project an increase in the 65+ 
population from 103,296 in 1998 to 117,030 in 2003. If Medicare+Choice 
options are withdrawn or have less perceived value by then, a reduction 
of Medicare+Choice enrollment to 75 percent of existing numbers would 
reduce the savings from BBA for 2003 by $14.6 million  \5\ from your 
district alone.
---------------------------------------------------------------------------
    \4\ Our projections of the change from 1997 to 2003 utilize 
September 1998 enrollment figures, a 1998 Price Waterhouse report on 
Medicare Capitated Payments, and reflect HCFA's assumption for the 
average cost to Medicare+Choice organizations of risk adjustment.
    \5\ Lost savings, based on the difference in projected per capita 
payments to HCFA vs. Medicare+Choice, multiplied by the potential 
Medicare+Choice enrollment less 75 percent of current enrollment.
---------------------------------------------------------------------------
    In your district, Representative Stark, there were 137,276 
beneficiaries enrolled in Medicare risk plans in 1997 (or 41.9% percent 
of Medicare beneficiaries). We project that by 2003 Medicare+Choice 
plans will receive only 46.2% percent of the projected per capita 
increase in Medicare fee-for-service costs. We also project an increase 
in the 65+ population from 312,704 in 1998 to 351,438 in 2003. If 
Medicare+Choice options are withdrawn or have less perceived value by 
then, a reduction of Medicare+Choice enrollment to 75 percent of 
existing numbers would reduce the savings from BBA for 2003 by $72.8 
million from your district alone.
    Overall, over the period 1997 to 2003, the per capita increase in 
payments to Medicare+Choice plans will average only 49.5% of the 
expected per capita increase in costs for the fee-for-service portion 
of Medicare. In some areas of the country, Medicare+Choice plans may 
get less than $50 more per month over this entire period to deal with 
medical inflation.
    2. The May 1 Deadline for Filing ACRs Has Created Serious Problems 
in the Administration of the Medicare+Choice Program and Should Be 
Changed to November 1. The BBA moved up the deadline by which 
Medicare+Choice plans must submit their adjusted community rate (ACR) 
proposals from November 1 to May 1. The problem with this early date is 
two-fold. First, by submitting proposals seven months in advance of the 
actual effective date (i.e., January 1), plans place themselves at 
substantial risk that health care costs will rise in unexpected ways in 
the latter half of the year and thus not be captured in the proposals. 
This is what occurred last year, contributing to the decision by many 
Medicare+Choice organizations to not renew their Medicare+Choice 
contracts for 1999, or to reduce their service areas. Also, proposals 
submitted by May 1st are based on relatively limited claims experience 
with the Medicare beneficiary population enrolled in the more rapidly 
growing plans and are thus less likely to be accurate predictors of 
costs than proposals based on a longer period of time.
    In regulations published earlier this month, HCFA ``recognize[d] 
the difficulties inherent to estimating the cost of a benefit package 
for 2000 based on at most 4 months of experience under the 1999 benefit 
package,'' but indicated that it had no discretion in this matter due 
to the statutory mandate. The President's fiscal year 2000 budget 
includes a proposal that would extend the deadline for ACR submissions 
until July 1. HCFA strongly supports this proposal. In fact, in several 
recent public statements, HCFA has indicated that M+C plans should 
proceed assuming a July 1 due date. However, HCFA has NOT provided 
official notice to M+C organizations. Consequently, even today my 
company (Aetna U.S. Healthcare) and others are struggling to compile 
ACRs for the official May 1 due date. Given the importance of this 
issue to Medicare+Choice organizations, and the concerns involved, HIAA 
urges the Committee to take steps to put in place a permanent workable 
deadline for ACR submissions and suggests an ACR date of November 1, or 
as close to that date as operationally possible.
    3. Congress Should Return to the Previous Policy Allowing Flexible 
Benefits and Premiums Within a Service Area. Historically, Medicare 
risk contractors were able to offer different benefit or charge 
structures within a given contracted service area. For example, 
modified benefit packages were often developed and offered in a subset 
of the contracted service area. While Medicare beneficiaries residing 
in the segmented service area were offered a uniform array of benefits 
at a uniform price, uniformity was not required across the entire 
service area. This flexibility was important because it allowed 
contractors to adjust their benefit package and premium structure to 
take into account differences in capitated payment rates received, 
which varied by county.
    In the BBA, Congress mandated a new policy requiring that 
organizations offer uniform benefits and premiums throughout a service 
area, despite varying payment levels. Under the Medicare+Choice 
regulations, an organization may offer multiple plans and propose 
different service areas for each plan. (Were this not the case, 
organizations would be discouraged from expanding to outlying rural 
counties that typically offer lower reimbursement rates.) This 
regulatory policy allows Medicare+Choice organizations to achieve 
results similar to the original flexible benefit policy, but only at 
significant additional expense. Instead of one ACR being filed for a 
broad service area with benefits modified to reflect anticipated 
revenues, as used to be the case, multiple ACRs must be generated for 
separate Medicare+Choice plans by each organization, and reviewed and 
approved by HCFA. The Congressional mandate thus imposes significant 
administrative costs on the organizations and the agency, with 
absolutely no benefit to beneficiaries. Therefore, HIAA urges Congress 
to repeal the uniform benefits and premium provisions of the BBA.

 In Many Places the Regulations Are Overly Rigid and Demanding So They 
    Become an Impediment to All Medicare+Choice Organizations, and 
        Especially for Small and/or Rural Medicare+Choice Plans

1. The Quality Assurance Approach is Misguided.

    HIAA believes that some form of quality standards are important to 
any market-based approach to Medicare. Without quality standards, or 
some other performance measurement, the added costs of maintaining 
quality will be difficult to present fairly although over time, it will 
be obvious. That being said, HIAA has serious concerns about the 
breadth and depth of the onerous quality assessment, performance 
improvement and performance measurement standards developed by HCFA.
    More Guidance from HCFA is Needed To Implement the Quality 
Improvement Program. QISMC establishes ambitious new quality 
improvement standards for Medicare+Choice organizations. While HCFA has 
scaled back their initial, overly ambitious implementation plan in 
response to M+C organization concerns, more guidance is needed from 
HCFA in several areas. For example, local Peer Review Organizations 
(PROs) are intended to collaborate with M+C organizations on quality 
improvement projects, yet the specific role of the PRO is not clear. In 
many cases, PRO staff will need additional training to fulfill their 
role.
    The Extensive Data Collection Proposed Is Not Necessary. The 
extensive data collection and reporting efforts required under the 
regulations will add significant administrative costs to 
Medicare+Choice organization operations. We question whether these 
costs are justified or desirable, and whether the quality assurance 
goals might not be met just as well through alternative approaches. 
HIAA strongly believes that consumers, not government officials, should 
dictate through their plan choices the extent and nature of quality 
improvement, balanced against costs. Under this approach, organizations 
that are responsive to consumer preferences would be rewarded with 
greater market share. Fewer government resources would be required for 
oversight.
    HCFA could, however, play a central role in ensuring that minimum 
standards are met and encouraging quality initiatives through flexible, 
incentive-based standards established by contracts. HCFA is to be 
congratulated for posting beneficiary satisfaction survey results and 
other such information on the Medicare internet site 
(www.medicare.gov). In HIAA's view, this would be far superior to the 
current practice of setting detailed regulatory mandates which run the 
risk of leading to micromanaging and encouraging uniformity at the 
price of creative experimentation.
    In trying to determine the cost of the extensive data collection 
effort proposed, HIAA notes that many health care organizations, 
particularly those with loosely managed network-style delivery 
arrangements (such as PPOs) do not currently have the capability to 
capture or report performance data at the level being proposed. The 
BBA's limitations on increases in capitation rates means that outside 
sources will be required to fund system upgrades. Even if financially 
possible, the time required for procurement, installation, training, 
and validation are not consistent with HCFA's scheduled implementation 
and reporting requirements for Medicare+Choice plans. As a result, 
these quality assessment requirements will be a significant deterrent 
to expanding senior's choices as potential new plans decide not to 
participate in the Medicare+Choice program. At the very least, HIAA 
believes that organizations making a good faith effort to meet the 
regulatory requirements should be provided a transition period where 
penalties would not be imposed. This is particularly important given 
plan efforts to address Year 2000 computer issues.
    The ``Deemed Status'' Program Should Be Implemented Immediately. 
Most Medicare+Choice organizations already adhere to rigorous quality 
assurance review by nationally accredited health care organizations 
such as the National Committee on Quality Assurance (NCQA), the 
Utilization Review Accreditation Committee (URAC), and the Joint 
Commission on Accreditation of Health Organizations (JCAHO). HCFA has 
provided by regulation that Medicare+Choice organizations may be 
``deemed'' to meet quality assessment and performance improvement 
requirements if judged to do so by a national accreditation 
organization approved by HCFA and applying HCFA's standards for 
assessing compliance. This approach has much merit. It would allow 
plans to work with reviewers who already are familiar with their 
operations, creating obvious efficiencies and potential cost-savings. 
HCFA has failed, however, to establish procedures to implement the 
``deemed status'' process. To date, HCFA has not designated any 
national accreditation organization for this purpose, nor has it issued 
policy guidance on how this process will work. HIAA urges Congress to 
direct HCFA to promptly institute a procedure for awarding deemed 
status since this process has the potential to reduce some of the 
substantial costs associated with HCFA's extensive quality assurance 
measures.

2. The Proposed Risk Adjustment Policy is Ill-Conceived.

    On March 1, 1999, HCFA reported to Congress on its methodology for 
implementing the risk adjustment mandate set forth in the BBA. While 
HIAA believes that improved risk adjustment is an appropriate and 
essential long-term goal for the program, we have serious concerns 
regarding the current HCFA proposal, which calls for the initial use of 
only inpatient hospital data. During the Administration's proposed 5-
year phase-in period, plans would receive capitated payments based on a 
blend of payment amounts under the current demographic system and the 
interim (PIP-DCG) risk adjustment methodology. For the year 2000, for 
instance, the HCFA plan calls for a separate capitated payment rate for 
each enrollee based 90 percent on the demographic method and 10 percent 
on the risk adjustment methodology.
    By 2004, payment rates would be based on comprehensive risk 
adjustment using full (i.e., inpatient and other) encounter data and 
the demographic method would not be used. HCFA estimates a much greater 
negative impact on M+C plan revenues, on average, with the switch to 
full encounder data risk adjusters. HIAA's concerns with this proposal 
are both practical and programmatic.
    First, the practical. The time frame for implementation outlined by 
HCFA is simply far too short. Given the significant technological 
considerations involved, it is unreasonable for the agency to require 
that all Medicare+Choice organizations be able to provide physician, 
outpatient hospital, skilled nursing facility and home health data 
beginning as early as October 1, 1999. (HCFA has not yet identified a 
specific date by which this information must be provided, creating 
additional uncertainty.) The collection, verification, transmission and 
analysis of ``representative'' encounter data is a complicated 
endeavor. Capturing these data in a valid, accurate and transferable 
manner will be a major challenge for most plans. Indeed, some HIAA 
member companies that currently contract with HCFA do not have the 
technical capability to capture and transmit encounter data other than 
inpatient encounters. Nor do our members with PPO and similar network-
style delivery systems have the capability to do so. They are simply 
not organized in a manner that will allow them to collect this level of 
data.
    Even if the capital needed for technological up-grading can be 
arranged, HCFA's proposed time frame is insufficient to allow 
Medicare+Choice organizations to procure and install the required 
systems. Procuring systems that can accomplish these tasks requires 
very careful planning and assessment, review of the capabilities of 
competing technologies and vendors. Time is needed to install the 
systems, modify provider contracts if necessary to ensure adequate 
reporting to the Medicare+Choice plan, train the staff (both at the 
Medicare+Choice organization and provider locations) and verify and 
validate the data. All of these steps must be carefully executed or the 
system will fail. These obstacles to compliance cannot simply be wished 
away. Moreover, the imposition of these costs on all Medicare+Choice 
plans will make the development of rural plans even more difficult 
because they will continue to have fewer beneficiaries enrolled 
compared to plans in other areas.
    The process by which information is communicated to, and received 
by, HCFA is likely to present significant technological problems as 
well, if past experience is any guide. HIAA members have experienced, 
and continue to experience, problems in ensuring that accurate 
inpatient hospital data is transmitted via Medicare fiscal 
intermediaries to HCFA.
    Difficulties can also be expected as HCFA attempts to manipulate 
significant amounts of data for the first time using the proposed PIP-
DCG risk adjustment model. The methodology developed by HCFA is 
complicated and requires numerous steps. The process is yet untested. 
HCFA faces a monumental task in getting the PIP-DCG system to work. 
Moreover, as HCFA acknowledges, ``the PIP-DCG model is [simply] an 
interim step towards implementation of a comprehensive risk adjustment 
model (i.e., one which uses diagnoses from all sites of service.)'' 
HIAA strongly believes that the ambitious time frame proposed by the 
agency rests on a flawed premise: namely, that all of the anticipated 
technological and methodological problems can be resolved in the five-
year window.
    HIAA's doubts in this regard are heightened by the fact that 
planned implementation coincides, at least initially, with agency 
efforts to ensure Year 2000 readiness, both internally and in 
connection with Medicare+Choice organizations and other contractors. If 
HCFA transitions to risk adjustment before the necessary fixes are made 
and before reliable data are gathered and properly analyzed, the 
consequences could be catastrophic for individuals enrolled in 
Medicare+Choice plans, as well as the Medicare managed care program 
generally.
    As if all this were not reason enough to delay implementation, HIAA 
has significant programmatic concerns regarding the proposed risk 
adjustment model. First, HIAA is concerned that variations resulting 
from excessive payments under the original Medicare fee-for-service 
program have been incorporated into the risk adjustment calculation. 
Additional, unnecessary hospitalizations that have occurred within the 
original Medicare Part A fee-for-service program, despite HCFA's 
attempt to fight this, are still significant. As a result, 
Medicare+Choice organizations will receive lower payments through the 
proposed risk adjustment methodology. HCFA should not penalize the 
managed care portion of Medicare for the program's failure to limit 
false or fraudulent claims and medically unnecessary hospitalizations. 
One approach to avoid this, would be to limit the use of risk 
adjustment so that the total amount paid to all Medicare+Choice plans 
is not reduced but instead redistributed among Medicare+Choice plans 
only.
    Second, recognizing the fact that most federal agencies rely on 
sampling, HCFA's expectation of reported data on all individuals seems 
excessive. Given that even the more comprehensive risk adjuster will 
not be able to fully reflect all differences, HIAA believes that 
Congress should require HCFA to reexamine the use of plan-based 
sampling to reduce the administrative burden on the plans, reduce the 
potential for errors in the start-up phases, and increase the privacy 
of each individual's sensitive medical information.
    Third, HIAA strongly believes that it is poor public policy to base 
risk adjustment--even temporarily--on inpatient hospital data only. 
Such an approach, even with the adjustments that HCFA has made to its 
initial risk adjustment proposal, would reward Medicare+Choice plans 
that, through inferior utilization management or poorer quality, 
experience excessive hospital use, and penalize plans that have 
effectively reduced inpatient hospitalizations and focused on providing 
more care on an outpatient basis and improving quality through 
preventive care. The incentives created by a risk adjustment 
methodology based exclusively on inpatient hospital data would 
inevitably result in increased inappropriate hospital use, increased 
avoidable costs, and a setback in the effort to realize greater 
efficiency and quality in the health care system. Beneficiaries 
enrolled in plans with a relatively high proportion of members who 
receive care for expensive chronic illnesses outside the hospital 
setting would be particularly harmed.
    For all these reasons, HIAA urges HCFA to delay the implementation 
date of risk adjustment beyond January 1, 2000. Since HCFA believes it 
does not have the authority to do this, Congress should revise the 
implementation date. While the effort to collect encounter data should 
proceed in a careful and deliberate manner, changes in payment 
methodology based on risk adjustment should not be implemented until 
complete and reliable encounter data are available. To ensure the 
validity of the data and a viable risk adjustment process, Congress 
should direct HCFA to (1) conduct a demonstration project aimed at 
validating the proposed methodology and (2) identify less costly and 
less data intensive ways of performing risk adjustment. Alternatively, 
the impact of the risk adjuster should be capped at a level, perhaps 
1%, that would reduce the potential for perverse effects, and 
Medicare+Choice plan withdrawals or benefit reductions.

                         Summary and Conclusion

    If the Medicare program is to be sustained for the next 
generation of beneficiaries and beyond, it is crucial that the 
federal government employ every strategy appropriate to enhance 
quality health care options for beneficiaries and encourage the 
development of lower cost options rather than relying on 
punitive regulations which will reduce choice and funnel more 
people into the highest cost option--fee-for-service Medicare. 
The Medicare+Choice program already is at an early crossroad 
where improvements can allow it to flourish but neglect of 
necessary change will doom it to failure. It would be more 
wise, in the long run, for the government to employ market-
oriented strategies to ensure that there are Medicare+Choice 
options available to beneficiaries and to create incentives for 
private health insurers and providers to deliver value in the 
context of the Medicare program. Because it is a critical 
building block in this market-based strategy, Medicare+Choice 
must be successful.
    In summary, HIAA believes that the prospects for success 
will be greatly improved if the following steps are taken with 
respect to the Medicare+Choice program:
     Adjust the payment structure so that increases 
cover medical inflation;
     Issue revised regulations to reduce costly 
administrative burdens on all M+C plans;
     Change the due date of ACRs to November 1 to 
eliminate unnecessary risk;
     Delay and revise the proposed risk adjustment 
model to reduce the cost of reporting and system development; 
and
     Modify the role of risk adjustment so that overall 
revenues to the Medicare+Choice program are not reduced, but 
simply reallocated among M+C plans based on the health status 
of enrollees.
    A final word of caution: Congress must act quickly to 
direct HCFA to change course in the manner outlined and to find 
ways to reduce the regulatory burden of participating in the 
Medicare+Choice program if it wants the program to succeed. The 
time frames for critical decisions relating, for instance, to 
system investments are very short, particularly given HCFA's 
anticipated risk adjustment schedule. Thus, if Congress is to 
make adjustments to the program, it should act now.
    Thank you, Mr. Chairman. I would be happy to answer any 
questions you may have at this time.
      

                                

    Chairman Thomas. Thank you very much, because we are going 
to need a lot of help to see if this particular structure 
works. In fact, a number of us believe we need to look at a 
different structure.
    I would like to ask a series of questions. Not very many; 
three, I think. Anybody can respond if they want to to several 
others, but this is directed to Mr. Francis.
    I have looked at your book. I have heard it advertised, and 
I am glad I got it without paying for it because--although it 
is some money, I do not think it is a gift; I think I took it--
it is very useful, and I have heard it talked about.
    How many people did you have to employ to put this book 
together?
    Mr. Francis. Well, sir, I am about 90 percent of the effort 
personally, and I spent about 1 month of the year full time on 
it, some time elsewhere in the year. Checkbook puts a few 
people on it just, you know, things like page grouping and so 
on, but it is about half an FTE in Federal jargon.
    Chairman Thomas. About half an FTE and about 1 month's 
worth of work?
    Mr. Francis. Right.
    Chairman Thomas. What could you do with $95 million? You do 
not need to answer that, but, boy, I would like to see you 
turned loose on that.
    Mr. Bluhm, in your testimony regarding the proposed risk 
adjustor you mentioned that you have serious concerns about the 
method of implementation, operation, and impact.
    When we tried to move the information structure to all 50 
States, HCFA threw up its hands and said we just really cannot 
do it. Maybe we ought to do it in five and talk about a phased 
rollout.
    What is your reaction? Should we go nationwide with this, 
or should we talk about maybe a phased rollin?
    Mr. Bluhm. I guess there is too much of a practical nature 
in that question that I do not have enough data to answer it.
    Chairman Thomas. Would you get back to me in writing, 
because I would very much like to have that, as soon as you 
can?
    Obviously, we are trying to risk adjust here. What is the 
difference between where we are and what we get with the 
information that we are collecting? Is it a 1-percent 
difference; a 5-percent difference; a 10-percent difference?
    Mr. Bluhm. Between the new method and the old method?
    Chairman Thomas. Yes, in terms of the variation of 
individual health costs. How much can we measure? What is this 
bringing us in correcting the problem?
    Mr. Bluhm. My understanding, we saw a list from HCFA that 
they had done of calculations. That was one of the things we 
were not able to verify, but it appeared to have some variance 
that on average the impact, if it were fully implemented, would 
be about a 7-percent reduction in payments in aggregate.
    The variation, that being an average, went to 10, sometimes 
even 15 percent, but the larger the variation might have been 
happening on smaller plans, so the dollar impact might not have 
been that big.
    Chairman Thomas. Last question from me, and then I will 
turn it over to the gentleman from Washington.
    You can do this in writing, Dr. Harmon-Weiss, if you want 
to. I am in possession of a letter from the Health Insurance 
Association of America in terms of its positions on the BBA, 
and one of them is that the annual increases in Medicare+Choice 
payments fully cover medical inflation experienced in local 
markets.
    If you use as a multiplier 100 percent of the cost against 
the managed care cost, which is an adjusted cost, does it make 
sense to use the multiplier of 100 percent of the medical 
inflation?
    Dr. Harmon-Weiss. There is medical inflation for the basic 
benefit package, and then there is medical inflation for the 
enriched benefit package that----
    Chairman Thomas. The point here is that HIAA is calling for 
payments that fully cover medical inflation. Where do we get 
the savings if you are managing the cost, if we give you the 
full update?
    Dr. Harmon-Weiss. There are savings built into the system 
currently, and what we would request is that we be able to 
increase our rates to meet that target of medical inflation on 
a regular basis.
    [The following was subsequently received:]

            Health Insurance Association of America        
                   555 13th Street, NW., Suite 600 East    
                                  Washington, DC 20004-1109
                                                     April 13, 1999
The Honorable Bill Thomas, Chairman
Subcommittee on Health, Committee on Ways and Means
1136 Longworth House Office Building
United States House of Representatives
Washington, D.C. 20515

    Dear Chairman Thomas:

    On behalf of the Health Insurance Association of America (HIAA), I 
wanted to follow up to your inquiry presented at the Subcommittee's 
March 18, 1999 hearing on the Medicare+Choice Program. You requested a 
written response to a question involving a statement issued by HIAA in 
a letter to Members of the Committee. At the hearing, you described the 
statement as seeking larger increases than what BBA assumes, and asked 
if such increases would mean that the savings assumed in BBA would not 
be realized.
    To reiterate a central point of our testimony, HIAA is very 
concerned about the significant disparity in payments between 
Medicare+Choice and fee-for-service Medicare which will occur under the 
BBA Medicare+Choice payment formula. HIAA actuaries estimate that by 
2003, per capita payments for beneficiaries in Medicare+Choice plans, 
on average, will be down to 83% of the original Medicare payment ($616 
vs. $742). The payment disparity will be much greater in high cost 
counties, where Medicare+Choice payments, on average, will be only 74% 
of original Medicare payments ($768 vs. $1,032). Charts illustrating 
these HIAA estimates are attached.
    The budget savings in the Balanced Budget Act of 1997 (BBA) assumed 
that a significant increase in Medicare+Choice enrollment would occur. 
While the per capita cost of the Medicare fee-for-service program would 
not be affected by such growth in private plan enrollment, savings 
would be achieved as Medicare+Choice enrollment rose because per capita 
payments to Medicare+Choice plans are expected to be lower than per 
capita payments in the original fee-for-service program.
    BBA made certain assumptions about the level of growth in private 
plan enrollment. Future budget projections will need to reflect 
differences from the BBA assumptions for the following:
     the actual rise in medical costs per capita vs. those 
projected in 1997;
     actual numbers in Medicare+Choice and fee-for-service vs. 
those projected in 1997;
     tax and budget effects of new benefits, or loss of 
benefits, in either Medicare+Choice or fee-for-service portions of 
Medicare.
    HIAA's concern is that without sufficient growth in revenue, the 
projected levels of Medicare+Choice enrollment are unlikely to be met. 
This could result from some combination of beneficiary decisions not to 
enroll and Medicare+Choice organization decisions not to offer 
Medicare+Choice plans.
    Without sufficient growth in revenue, Medicare+Choice plans will be 
forced to reduce benefits and/or increase premiums, and will eventually 
leave the market. In the near term, revenue constraints may squeeze out 
the additional benefits that most Medicare+Choice plans have been able 
to offer. Without the attraction of additional benefits, enrollment in 
Medicare+Choice plans could slow.
    If federal revenues do not grow sufficiently to cover the increases 
in the costs of the basic Medicare benefits in some local markets, the 
Medicare+Choice organizations, having eliminated added benefits, could 
be forced to discontinue offering benefits entirely. Some 
Medicare+Choice organizations, as a number did in 1998, may not wait 
until revenues are actually insufficient. With fewer Medicare+Choice 
plan options available in the market, it is even more likely that the 
BBA projected levels of Medicare+Choice enrollment will not be met.
    When Medicare+Choice plan options are reduced (or even eliminated) 
in particular markets, fewer beneficiaries will be in private plans and 
more beneficiaries will return to or stay in fee-for-service. For 
those, the per capita cost will not be the per capita amount that was 
projected to be paid under a Medicare+Choice plan. Instead, the cost 
will very quickly rise to the level of the average per capita in fee-
for-service, where there is an incentive for over-utilization of 
services. This will add to federal expenditures and make meeting the 
BBA projections impossible without cuts in other areas.
    Thus, while increasing Medicare+Choice payments will not 
necessarily increase savings to the Medicare program, the savings 
assumed under the BBA will not be achieved without sufficient 
Medicare+Choice options, and the availability of those options depends 
on Medicare+Choice organizations' expectation of adequate payment 
levels.
    I hope this clearly outlines our concerns and the rationale for our 
position that the revenues to Medicare+Choice organizations must 
increase to cover increases in medical trend of required benefits. If 
you have any questions, please do not hesitate to contact me.

            Sincerely,
                                        Charles N. Kahn III
                                                          President
      

                                

[GRAPHIC] [TIFF OMITTED] T6758.003

[GRAPHIC] [TIFF OMITTED] T6758.004

[GRAPHIC] [TIFF OMITTED] T6758.005

      

                                

    Chairman Thomas. OK. The gentleman from Washington.
    Mr. McDermott. Thank you, Mr. Chairman.
    A couple of quick questions. Does the managed care industry 
support the managed----
    Chairman Thomas. I will tell the gentleman we have 7 
minutes, so he has 3 or 4. If we can walk fast, he can have 5.
    Mr. McDermott. Yes, thank you. Do you support the managed 
competition demonstrations going on in Phoenix and Kansas City?
    Ms. Newport. We would support the fundamental concept of 
testing competition. Our problem with the demonstration as we 
currently understand it is that it will not include fee-for-
service, which we do not think is a true test of the 
competitive market.
    Mr. McDermott. So you do not like the way they are doing 
it?
    Ms. Newport. I think you have very profound concerns, and 
they are doing it essentially giving us 3 months--we are in 
Phoenix--to put together a very significant proposal, which 
takes major reworking.
    Mr. McDermott. Let me ask a second question. Some people 
think that the so-called premium support program that was 
talked about in the Commission would save $65 billion by the 
year 2009.
    Do you agree that plans would accept less under a premium 
support model than they already get under the Medicare+Choice 
Program, and do you support the premium support plan that was 
put out here?
    Ms. Newport. I would prefer, if you do not mind, I am a 
Medicare expert, and I followed in the press the deliberations 
on this bipartisan commission. If we could submit for the 
record something from AAHP in terms of that specific question, 
I would be happy to do that.
    I think there were so many moving parts it is very 
difficult to decide what the impact would be or not.
    Mr. McDermott. You do not think that you would accept less 
than you are already getting in Medicare+Choice though, do you?
    Ms. Newport. Well, I think if there were propounded 
decreases and the efficiencies were eroded or the protection of 
fee-for-service was such that we could not compete, that would 
obviously be a problem, but the details of the program I would 
not profess to make a position statement here today.
    Mr. McDermott. I think we would all like a letter from you 
telling us where you stand on the premium support program, the 
organization.
    Ms. Newport. And I think the AAHP would be happy to provide 
you with the statements they have made to date to your specific 
question.
    [The following was subsequently received:]

               American Association of Health Plans        
                   1129 Twentieth Street, NW, Suite 600    
                                       Washington, DC 20036
                                                      April 9, 1999

The Honorable Jim McDermott
1035 Longworth Building
United States House of Representatives
Washington, DC 20515

    Dear Representative McDermott:

    Thanks for taking the time on a particularly busy day to meet with 
us to discuss Medicare. I hope as discussions begin in your committee 
that we might have the opportunity to share the results of our research 
with you and offer any appropriate technical assistance.
    At the March 18 hearing by the House Ways and Means Subcommittee on 
Health regarding implementation of the Medicare+Choice program, you 
invited AAHP to share its views on the premium support model proposed 
by Senator Breaux during the Bipartisan Commission's deliberations. In 
our view, the premium contribution approach to restructuring Medicare 
could fundamentally change the way Medicare finances coverage to 
beneficiaries, offering seniors a wide variety of choices with the 
anticipation also of curbing long-term spending growth. While the broad 
outlines of an approach were laid out by the Commission, many details 
of the premium support model remain unresolved. Changing the Medicare 
program along these lines raises a number of important design issues 
that should be explored thoroughly before moving forward.
    To that end, our members view the following principles as a 
starting point for discussions within Congress of a premium support 
approach for the Medicare program.
     Establish a Core Set of Benefits and Allow for Competition 
Around Additional Services. The program should require a core set of 
benefits, while allowing plans flexibility in offering other benefits. 
To help beneficiaries compare different plan offerings, benefit 
descriptions could be standardized.
     Government Contribution Must Be Actuarially Sound. 
Determining the amount of the government contribution will be a 
critical decision in the design of a premium support program. The level 
of the government's contribution should be a fixed proportion of an 
amount necessary to adequately meet the needs and costs of the benefits 
package for Medicare beneficiaries.
     Include the Fee-For-Service Program. All Medicare options, 
including the Medicare fee-for-service program (FFS), should be 
included in any premium support program.
     Let the Beneficiary Choose. The federal government's 
premium contribution should not vary according to the type of program 
or delivery system selected.
     Ensure Parity between the Fee-For-Service Program and 
other Models. A premium support program should ensure parity between 
health plan options and the fee-for-service option. There are a number 
of ways to ensure such parity, including a requirement that the FFS 
program meet the same standards, where applicable, as health plans.
     Pilot Testing and Phase-In. A premium support approach--
including the traditional program--should be pilot tested on a limited 
basis. Subsequently, the program should be phased-in to allow time to 
make necessary adjustments.
    AAHP and its member plans have long supported efforts to modernize 
Medicare and give beneficiaries more choice. Today, more than 16 
percent--or 6 million beneficiaries--are enrolled in health plans, up 
from 6.2 percent five years ago. As we testified on March 18, it is 
critical that Congress and the Administration act this year to address 
the growing disparity between Medicare fee-for-service and 
Medicare+Choice payments, HCFA's controversial new risk adjustment 
proposal, the user fee, and other issues that will have significant 
effects on beneficiaries who have chosen Medicare+Choice. Many of these 
beneficiaries cannot afford to return to the traditional program where 
they will pay more out of pocket and receive fewer benefits.
    We look forward to continuing to work with you and other Members of 
Congress in addressing the challenges in the Medicare program and 
ensuring its viability for future generations.

            Sincerely,
                                              Karen Ignagni
                              President and Chief Executive Officer
      

                                

    Mr. McDermott. Mr. Chairman, I think that is probably all. 
We have to go vote.
    Chairman Thomas. I want to thank the panel very much. We 
will be back to you as we look at some of the particulars. We 
appreciate your willingness to help and your offer to help.
    The Subcommittee stands adjourned.
    [Whereupon, at 1:26 p.m., the hearing was adjourned.]
    [A submission for the record follows:]

Statement of American Medical Association

    The American Medical Association (AMA) appreciates the 
opportunity to submit this written testimony for consideration 
by the Ways and Means Subcommittee on Health and requests that 
it be included in the printed record. Our statement will focus 
on the Medicare+Choice program that was created under the 
Balanced Budget Act of 1997 (BBA) (P.L. 105-33).
    The AMA represents 300,000 physicians, many of whom provide 
patient care under the Medicare+Choice program. The primary 
mission and responsibility of the AMA and the medical 
profession is to promote the art and science of medicine and 
the betterment of public health. When Congress began to 
seriously debate expanding Medicare choices in 1995, the AMA 
vigorously supported legislation that would provide Medicare 
patients with a wider range of health plan choices as 
alternatives to Medicare fee-for-service and Section 1876 
plans. When the President ultimately signed the BBA into law, 
the AMA was pleased with the significant number of choices that 
could become available to Medicare patients, including 
Medicare+Choice coordinated care plans with a point of service 
(POS) option, provider sponsored organizations (PSOs), 
preferred provider organizations (PPOs), medical savings 
accounts (MSAs), and private fee-for-service (PFFS) plans.
    The AMA was deeply dismayed, however, that so few PSOs, 
PPOs, and no MSAs or PFFSs, submitted applications to HCFA for 
participation in the Medicare+Choice program in 1999. We 
expressed this sentiment to the Health Care Financing 
Administration (HCFA) last September in our comments regarding 
HCFA's interim final rule on the Medicare+Choice program. Since 
our comments were submitted, matters have deteriorated for 
Medicare patients. At the end of last year, about 50 managed 
care plans that either were already participating in Medicare 
or had applied to become Medicare+Choice plans withdrew from 
the program. Another 50 plans reduced their service area. This 
forced nearly 450,000 Medicare patients to find new coverage, 
of which about 50,000 Medicare patients did not have the option 
of joining another Medicare+Choice plan.
    While we believe that it is HCFA's duty to assure that the 
regulatory structure properly facilitates the development of 
Medicare+Choice organizations that offer quality plans to 
Medicare patients, we believe that Congress must provide the 
appropriate legislative framework to ensure that the objectives 
of the Medicare+Choice program are achieved. As HCFA stated in 
the interim final rule's preamble, the Medicare+Choice program 
is one of the most significant changes in the Medicare program 
since its inception. We agree. And Medicare patients should not 
be the victims of this change. Thus, we strongly encourage 
Congress and HCFA to consult continually with physicians, other 
health care professionals, and providers for input on modifying 
the statutory and regulatory structure of Medicare+Choice to 
improve the quality of care, access, and patient protections 
within the Medicare+Choice program.

                             Medigap Reform

    The AMA believes that permitting newly-eligible Medicare 
patients to elect and subsequently discontinue enrollment in a 
Medicare+Choice plan and move back into Medicare fee-for-
service is a useful temporary device to protect those 
unfamiliar with all the features of the managed care option. In 
our view, however, this protection should be afforded to 
beneficiaries who become eligible due to a disability as well 
as those who gain eligibility by turning 65. We recognize that 
the statute specifically extended this option only to those 
entering the program at age 65, but we believe that Congress 
should now extend this patient protection to all Medicare 
patients.

                      Medicare+Choice Regulations

    On February 17, 1999, HCFA issued a final rule that made 
some changes to the Medicare+Choice regulations published in 
the June 26, 1998, interim final rule. In the AMA's view, this 
final rule significantly reduces a number of essential patient 
and physician protections to placate the managed care industry. 
For example, the final rule makes several concessions on 
treatment plans for Medicare patients with complex conditions 
so that patients' rights to see needed specialists is no longer 
guaranteed. Also, under the guise of protecting proprietary 
information, HCFA appears to be condoning a practice by 
Medicare+Choice plans of withholding basic information on how 
payments for their services are determined.
    In an ideal world, physicians and patients could simply not 
participate in plans that refuse to provide adequate care and 
information. However, in reality this simply is not an option, 
especially as markets are increasingly dominated by a few very 
large plans. Also, under the current antitrust laws, physicians 
do not have equal bargaining power. Consequently, neither 
physicians nor patients can walk away from poorly-performing 
plans.
    The AMA does not believe that vital issues such as whether 
patients have adequate access to specialists and whether plans 
have to tell physicians how they will determine payment should 
be decided in contract negotiations where physicians have no 
ability under current law to collectively bargain. For this 
reason, we are opposed to legislative or regulatory initiatives 
that further compromise patient and physician protections under 
Medicare+Choice. At the same time, legislative and regulatory 
modifications intended to discourage managed care plans from 
leaving Medicare should not come at the expense of patients and 
physicians protections.

                             Payment Rates

    The AMA concurs with much of the Medicare Payment Advisory 
Commission's (MedPAC) recent report to Congress. We have 
previously argued that Congress should modify the Sustainable 
Growth Rate expenditure target established in the BBA, and we 
are pleased that MedPAC echoed many of our suggestions in this 
area.
    The Medicare+Choice plans that withdrew from Medicare last 
year had been guaranteed a 2% a year increase in payments while 
physicians are subject to an SGR formula that is expected to 
lead to negative updates in their fees. In fact, under recent 
simulations by MedPAC, the conversion factor that determines 
physician payment rates would drop from $34.73 this year to 
$34.50 in 2009--or by about 20% after adjusting for inflation. 
These new payment cuts would come on top of years of meager 
increases in Medicare payments. From 1992 to 1998, for example, 
increases in the physician conversion factor averaged just 0.8% 
a year or 1.6% less than inflation in physicians' costs.
    Many physicians have had to adjust their practice style to 
cope with these constraints. However, most physicians are 
maintaining their commitment to their patients and continue to 
treat the elderly and disabled whom they see as individual 
patients, not just faceless enrollees tied to a particular 
payment amount. For Congress to now address the managed care 
industry's financial concerns while leaving physicians headed 
toward a downward payment slope would reward the plans for 
abandoning Medicare patients while ignoring physicians who have 
stood by their elderly and disabled patients even when times 
got tough. The AMA believes this sends the wrong message to 
Medicare patients and the physicians who provide their care. 
Thus, we urge Congress to follow the advice of the MedPAC which 
is recommending no change in Medicare+Choice rates and an 
increase in the SGR for physician services.

                  Medicare+Choice Plan Accountability

    Contrary to claims made by some in the managed care 
industry, Medicare+Choice plans are not being held to a higher 
accountability standard than applies in the fee-for-service 
program. In fact, the AMA believes that in areas such as 
payment policy and time-frames, Medicare+Choice standards are 
not as high as those for fee-for-service. Here are a few 
examples:
     While the carriers that process Medicare fee-for-
service claims are required to pay 95% of claims within 30 
days, there are no deadlines at all for payments to physicians 
who contract with Medicare+Choice plans that use fee-for-
service reimbursement.
     Claims edits in Medicare fee-for-service are 
subject to review by HCFA and the physician community, but 
Medicare+Choice plans are allowed to use ``black box'' edits 
that disregard standard coding convention, effectively denying 
payment for certain services.
     Medicare fee-for-service payment rates are 
distributed to physicians and locked in for a year, but 
Medicare+Choice plans are allowed to deny physicians a list of 
their reimbursement rates and can alter the rates in mid-year.
     HCFA pays Medicare+Choice plans as soon as a 
Medicare+Choice patient enrolls in a plan, but Medicare+Choice 
plans are allowed to withhold payments to sub-contracting 
physicians until the patient actually receives care.
    There is no reasonable justification for holding 
Medicare+Choice plans to a lower standard of accountability 
than applies in the fee-for-service program. Thus, the AMA 
believes that Medicare+Choice plans using fee-for-service 
reimbursement should be subject to Medicare's fee-for-service 
payment deadlines and policies. In addition, Medicare+Choice 
plans that make capitation payments to subcontracting 
physicians should be required to begin payment as soon as a 
beneficiary enrolls, and not delay payment until the 
beneficiary actually receives care from the subcontracting 
physician.

                           Quality Assurance

    As the nation's oldest and largest professional association 
of physicians, the AMA has a firm commitment to quality 
standards, quality measurement, and quality improvement. That 
commitment is grounded in our belief in professionalism and 
professional responsibility. Our commitment to quality 
improvement has been well demonstrated in the formation of the 
American Medical Accreditation Program (AMAP), which will 
provide health plans with a single source for credible 
information about physician quality. Along with AMAP, the AMA 
is working to:
     Set standards for the education, training, 
behavior, and delivery of care by our profession;
     Measure and evaluate the qualifications and 
performance of physicians using those standards; and
     Educate and assist physicians to meet those 
professional standards.
    We agree that the government should demand assurances of 
quality in Medicare+Choice and we are pleased that HCFA intends 
to automatically deem as qualified any plans that are 
accredited by national bodies such as the Joint Commission on 
Accreditation of Healthcare Organizations and the National 
Committee for Quality Assurance. However, physicians share in 
the Medicare+Choice plans' skepticism about the overly-
ambitious quality improvement system HCFA has designed for 
Medicare+Choice plans.
    Under the Medicare program, these private accreditation 
bodies would have to follow unrealistic standards dictated by 
HCFA in order for their accreditation to be deemed sufficient. 
The AMA is concerned that HCFA's proposed standards go beyond 
the state-of-the-art and would impose a significant new 
paperwork burden on Medicare+Choice plans and physicians 
without a corresponding improvement in the quality of care.
    In fact, the burden of this system may fall even more 
heavily on physicians than the Medicare+Choice plans. For 
example, although plans will initially be limited to two 
projects (one of which addresses diabetes), physicians will be 
required to collect data for a variety of different projects 
run by all the plans in which they participate. In addition, 
HCFA officials intend to extend quality improvement measures 
developed for Medicare+Choice into fee-for-service. Thus, 
physicians will be required to provide data on fee-for-service 
as well as Medicare+Choice patients.
    Although Medicare officials have already scaled back their 
Quality Improvement System for Managed Care (QISMC), the AMA is 
not convinced that QISMC is ready for full implementation and 
we favor legislation that would require additional 
modifications or move back the implementation date.

                               Conclusion

    Like Congress, the AMA is worried about the impact of 
managed care plan withdrawals on Medicare patients. We would 
not like to see a repeat of the massive exodus that occurred 
last fall. We note, however, that managed care plans are 
guaranteed a 2% increase in payments every year while fee-for-
service physicians face potential cuts in their payments. We 
also agree with MedPAC that Congress should adopt a wait-and-
see approach before taking any drastic steps to encourage the 
managed care industry to continue to serve Medicare patients.
    While we endorse the expansion of private options to the 
traditional Medicare program, we believe that success will 
depend upon the development of a fair and equitable payment 
method that does not encourage biased selection. The AMA 
supports MedPAC's recommendation that a new risk-adjuster begin 
on schedule in January of 2000. We also concur with HCFA's and 
MedPAC's call for a five-year phase-in of the new adjuster.
    The AMA believes that the best value in medical care can be 
achieved by ensuring that the medical profession has a central 
role in the design and implementation of the Medicare+Choice 
program. Also, patients must receive timely and accurate 
information on the both the Medicare fee-for-service and 
Medicare+Choice programs. We stand ready to work with Congress 
and HCFA to ensure that Medicare patients continue to have 
access to the highest quality medical services.

                                  
