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




                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION


                           SEPTEMBER 22, 1999


                             Serial 106-48


         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT PRINTING OFFICE
65-698 CC                    WASHINGTON : 2000
            For sale by the U.S. Government Printing Office,
Superintendent of Documents, Congressional Sales Office, Washington, DC 

                      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
RON LEWIS, Kentucky

                     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



Advisories announcing the hearing................................     2


Congressional Budget Office, Dan L. Crappen, Director............     9
U.S. General Accounting Office, Hon. David M. Walker, Comptroller 
  General........................................................    32


Dowd, Bryan, School of Public Health, University of Minnesota....    60
Moon, Marilyn, Urban Institute...................................    47
Wilensky, Hon. Gail R., Project Hope.............................    55

                       SUBMISSIONS FOR THE RECORD

Accent Insurance Recovery Solutions, Omaha, NE, and Omnium 
  Worldwide, Omaha, NE, Douglas R. Wilwerding, joint statement...    72
American College of Nurse-Midwives, Karen S. Fennell, statement..    73
American Counseling Association, Alexandria, VA, statement.......    75
American Medical Association, statement..........................    77
National Center for Policy Analysis, John C. Goodman, statement..    88



                     WEDNESDAY, SEPTEMBER 22, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:07 p.m., in 
room 1100, Longworth House Office Building, Hon. William M. 
Thomas (Chairman of the Subcommittee) presiding.
    [The advisories announcing the hearing follow:]



                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943

September 9, 1999

No. HL-9

                    Thomas Announces Hearing on the

             Strengthening Medicare for Future Generations

    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 strengthening the Medicare program for future 
generations. The hearing will take place on Thursday, September 16, 
1999, in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 10:00 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 experts in the structure, financing and history 
of the Medicare program. 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.


    In the years ahead, the Medicare program will face serious 
challenges brought on by rapid changes in the aging of the population 
and increasing medical costs. Today, Medicare comprises 11 percent of 
Federal outlays, but by 2030, it is projected to consume between 28 and 
38 percent of Federal spending, requiring more than doubling the 
payroll tax to cover increased expenditures. Even sooner, without 
structural changes in the program, Medicare will be bankrupt by 2015.
    Additionally, Medicare has not kept pace with the transformation of 
the health care delivery system. While the program represented first-
class coverage in 1965, private insurance plans have surpassed Medicare 
in offering their enrollees better benefits, including prescription 
drug coverage, and greater choice of providers at reduced cost. The 
National Bipartisan Commission on the Future of Medicare considered 
these facts in indicating its support for a plan to strengthen and 
improve the Medicare program in time for the retirement of the 77 
million ``Baby Boomers'' beginning in 2010.
    In announcing the hearing, Chairman Thomas stated: ``The Medicare 
Commission's proposal received bipartisan support from 60 percent of 
its members. I believe that the Commission's approach, based on 
expanded choice for all beneficiaries in all areas, improved benefits, 
and increased efficiencies, offers the best plan for sustaining the 
Medicare program for future generations. As Congress deliberates the 
best methods to strengthen Medicare and expand benefits to include 
prescription drugs for needy seniors, we must act in a comprehensive 
way that will not bankrupt Medicare and deny seniors their current 
benefits. Medicare's current statutory and regulatory structure simply 
cannot keep pace with innovations in the health care delivery system.''


    The hearing will focus on the need to reform the administration, 
structure, and financing of the Medicare program to maintain its long 
term solvency, ensure enrollees' access to benefits, and improve choice 
of health plans.


    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, 
September 30, 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.


    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 

    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 

    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.


                         NOTICE--CHANGE IN TIME



                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943

September 13, 1999

No. HL-9-Revised

               Change in Time for Subcommittee Hearing on

             Strengthening Medicare for Future Generations

                      Thursday, September 16, 1999

    Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on strengthening Medicare for future generations, 
previously scheduled for Thursday, September 16, 1999, at 10:00 a.m., 
in the main Committee hearing room, 1100 Longworth House Office 
Building, will now begin at 1:30 p.m.
    All other details for the hearing remain the same. (See 
Subcommittee press release No. HL-9, dated September 9, 1999.)


                      NOTICE--HEARING POSTPONEMENT



                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943

September 15, 1999

No. HL-9-Revised

                Postponement for Subcommittee Hearing on

             Strengthening Medicare for Future Generations

                      Thursday, September 16, 1999

    Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on strengthening Medicare for future generations, 
previously scheduled for Thursday, September 16, 1999, at 1:30 p.m., in 
the main Committee hearing room, 1100 Longworth House Office Building, 
has been postponed until Wednesday, September 22, 1999, beginning at 
2:00 p.m.
    All other details for the hearing remain the same. (See 
Subcommittee press release No. HL-9 , dated September 9, 1999.)


    Chairman Thomas. The Subcommittee will please come to 
order. I want to thank everyone for allowing the week to lapse, 
and especially those witnesses who were inconvenienced in terms 
of I know very busy schedules.
    Today hopefully we will do a little bit of discussing about 
Medicare and the way it should be. There is no question that 
the Medicare Program has improved the health and has provided 
security to millions of seniors since its inception in 1965.
    Thirty-five years ago Medicare was modeled on what was then 
state-of-the-art health care insurance. The program was based 
on acute hospital care, offered no real preventive benefits, 
and provided the then going model of cost reimbursement. 
However, it is obvious that the evolving health care delivery, 
shifting demographics, advanced technology, all structured into 
rising health care costs, are threatening the Medicare Program, 
without change.
    Medicare's current statutory and regulatory structure has 
not been able to keep pace with the changes in the health care 
marketplace. Seniors are often not afforded the choices of 
health care that Members of Congress and most Americans enjoy. 
It wasn't until 1997 that a really meaningful preventive and 
wellness package was even included, and there it fell far short 
in many areas.
    Seniors do not benefit from the availability of the most 
innovative and advanced treatments. In addition, income tax 
payers have been called upon to shoulder an increasing share of 
the program's financing. Providers are almost literally crushed 
under the 130,000 pages of minutely detailed rules and 
regulations. Increasingly, policymakers are calling for a 
structure that offers solutions.
    As all of us now know, 10 of the 17 members of the National 
Bipartisan Commission on the Future of Medicare--which was 
about a 60 percent majority, but given the rules under the 
statute, it had to be a super, super, supermajority--thought a 
market-based structure would provide the solution for reforming 
a significant portion of the seniors' health program.
    The term that was utilized was ``premium support,'' and it 
modernized Medicare by integrating innovations of the 
marketplace into the program and harnessing competition to 
control costs, while preserving the entitlement, the specific 
defined benefits, and the safety net. Structural reform of 
Medicare, many of us believe, is the best way to ensure that 
seniors get the added health benefits they need, such as 
prescription drug coverage, while also guaranteeing Medicare 
will meet the health care needs of the Nation's retiring 77 
million baby boomers.
    There are a lot of myths about premium support, and I hope 
that some of them will not be perpetuated today. We do want to 
look at other options and focus on proposals that are 
constructive for fundamental reform.
    I am particularly heartened that the President has 
delivered on his promise of those many months ago, that he 
would provide a proposal. And interestingly, when you look at 
some of the President's proposal, there is a degree, at least 
as they perceive it, of competition in the President's model as 
defined, to provide more choice for seniors.
    In the House, we are working with a bipartisan group to 
further refine that concept of premium support, but all of us 
obviously are still looking for any new ideas or innovations 
that can make Medicare work better, and preferably at a cheaper 
    We can better integrate Medicare benefits under a single 
comprehensive package which would allow for more rapid access 
to new benefits and technology. Clearly, I think most people 
believe that we can improve Medicare's administrative structure 
so that choices are not just available to some but available to 
all seniors.
    And, finally, I think we can make the program more 
efficient through a better structured incentive arrangement for 
health plans to offer seniors higher quality care at 
competitive premium prices, and for seniors, to make the 
``right kinds of choices available to them.''
    I look forward to hearing the witnesses, but prior to that, 
it will be my pleasure to recognize the Ranking Member on the 
Subcommittee, the gentleman from California, Mr. Stark.
    Mr. Stark. Thank you, Mr. Chairman. I would like to yield 
for an opening statement to the gentleman from Washington, Mr. 
    Chairman Thomas. Let the Subcommittee say first of all, 
welcome back, to the gentleman from Washington.
    Mr. McDermott. Good to be back, with all his moving parts 
    Chairman Thomas. Is that kind of like it is good to be 
anywhere, considering the options? But, as I told you before, 
you look amazingly well for what has been described as to what 
happened to you. So would you dispel the myth that you just 
took a vacation, or did they really do something to you?
    Mr. McDermott. I will take my shirt off and show you the 
    I want to thank Mr. Thomas for holding this hearing and Mr. 
Stark for yielding me the time, and I would like permission to 
enter my full statement in the record.
    We are having this hearing today because Medicare is the 
Nation's most important social health insurance program. I 
think it is fair to say that most everybody in this room 
believes it is vital to the well-being of the seniors of this 
    Since Medicare was enacting in 1965, Medicare has had an 
enormous impact on the quality of life of America's families by 
drastically increasing the number of seniors who have health 
care coverage. Before Medicare, only 46 percent of seniors had 
health insurance. Today, 99 percent do. We must never forget 
that basic fact when we talk about Medicare's future. So I 
think you can understand I get nervous when folks start talking 
about the magic of health care competition strengthening 
Medicare for the future, when before Medicare the marketplace 
left 54 percent of America's seniors uninsured.
    The objective of Medicare reform should not be to further 
segment the market under the guise of competition, that is, to 
make it easier for insurance companies to pick off the 
healthiest beneficiaries as subscribers and leave the rest for 
the Government to take care of. The issue of market competition 
through the issuance of vouchers, versus the importance of 
maintaining a commitment to a social insurance program, was 
essentially the crux of the debate that Mr. Thomas referred to 
on the Medicare Commission, and it is why the Commission 
ultimately was unable to fulfill its congressional mandate.
    As an aside, I would say a lot of people think we ought to 
have things decided by sixty and two-thirds percent and all 
these kind, and suddenly it turns out that maybe that is a 
little tougher to get done, so when you do that with taxes, you 
have got to remember that.
    I would be naive if I did not suspect that the proposal 
that the Chairman will propose today looks a lot like the 
premium support program that was presented to the Commission. 
The problem is that in the 6 months since that proposal was 
unveiled, it still lacks sufficient detail. The concept and the 
proposal itself remain mostly spin and not very much substance, 
in my view.
    In fact, in a recent memo to Mr. Stark, the HCFA actuary 
wrote that there is insufficient detail available regarding 
that proposal to permit the estimation of its financial 
effects. Now, I think if those details were given us, I am sure 
the actuary could do it.
    Conversely, the President has been using the last 6 months 
to develop a detailed Medicare reform plan that addresses many 
of the holes left by the Commission; most importantly, both 
extends the life of the Medicare Trust Fund beyond 20, 25, and 
guarantees a prescription drug benefit to all beneficiaries.
    The irony is that the plan that the chairman of the 
Commission presented cut costs by really putting it onto the 
beneficiaries of Medicare. Only a small part of the cost-
cutting comes from so-called premium support competition, that 
is, putting people in HMOs. Most of the savings comes from 
raising the costs on beneficiaries and cutting payments to 
doctors and hospitals.
    Now, if there is some change, we will have to have that 
discussed here today. But I find it particularly hypocritical 
that the same people, both Democrats and Republicans, who 
advocate premium and by inference to extend the BBA cuts 
another 5 years, have been running around this Hill for the 
last few weeks saying that we have to give tens of billions of 
dollars back to the health care industry in lieu of 
comprehensive Medicare reform.
    You cannot have it both ways. You can't talk about saving 
money by extending those BBA cuts on the one hand, and on the 
other hand have a budget process over here where we are bogged 
down on the HHS appropriation because we can't decide how much 
to give back in this process.
    Radical Medicare reform that replaces the guarantee of 
health care with an inadequate defined contribution voucher 
will harm the typical Medicare beneficiary. Premium support, 
advanced by the leaders of the Commission, is not a solution in 
my view but a worsening of health care problems.
    So I would like to enter into the record the dissent myself 
and the other Democratic Members prepared in March, detailing 
the failure of the Commission to meet its statutory directives 
to look at what it did to seniors and to the disabled, and how 
it would improve the long-term health of Medicare. This dissent 
also describes a more rational framework for reform, which I am 
glad to say the administration has used a number of pieces from 
in their proposal.
    [The information had not been received at the time of 
    Mr. McDermott. I think it is important that the Chairman 
have this hearing, and I appreciate having this discussion. I 
think we are going to have to ultimately have this debate 
inside the Congress, and I applaud you for starting it, and we 
will have a long and interesting debate. Thank you.
    [The opening statement follows:]

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

    Mr. Chairman, thank you for calling this important hearing 
to discuss ways to preserve and protect Medicare.
    We all know we must make some changes to strengthen 
Medicare if it is going to be operational beyond 2015. But we 
need to do more than make sure the program is simply still in 
    While Medicare is clearly a vital program in many respects 
for seniors today, I think we could do much more for these 
seniors if we introduced greater innovation into the system 
overall. Today, we will hear about many alterations we can 
make, and I am pleased that we have someone from my home state 
of Minnesota to talk about his proposal.
    Minnesota is a leader in health care innovation, and has 
done many things to make our health care delivery system one of 
the most efficient in the country. But as the saying goes, ``no 
good deed goes unpunished.'' Minnesota has been penalized for 
being efficient because other states have been allowed to 
continue with less efficient practices. Just as it is time to 
change a tax system that penalizes saving and marriage, it is 
also time to reform a health care system that penalizes 
    I hear from beneficiaries from Minnesota every day who want 
greater equity in the system today and improvements for future 
generations. They know the problems that face Medicare are more 
complex and daunting, and they support comprehensive reforms 
sooner rather than later.
    Thanks again, Mr. Chairman, for calling this important 
hearing. I look forward to hearing from today's witness on ways 
we can improve this important health care program for all those 
who have paid into it.


    Chairman Thomas. I thank the gentleman from Washington, and 
it is clearly evident he has fully recovered.
    Mr. McDermott. I think I am stronger than when I went away.
    Chairman Thomas. That is the problem with this modern 
    Our first witness will be the director of the Congressional 
Budget Office, the fifth director of the Congressional Budget 
Office. Mr. Crippen, you have a written testimony. We will make 
it a part of the record, and you may address us in any way you 
see fit in the time allotted to you, and there may be some 


    Mr. Crippen. I should hope so. Thank you, Mr. Chairman. I 
am pleased to be here today to discuss reforming Medicare, 
especially for the long term.
    While I apologize to the Committee for being a little 
redundant in saying things about how bad the problem is, I 
think it is always important to characterize what we think we 
know about the near future and the long term, and the stability 
of the program and its financial condition, so I will start 
there with the numbers and comments that are familiar to you. I 
will not stop there, but I will spend a minute.
    Spending for Medicare is expected to exceed $200 billion 
this year, providing benefits to 39 million elderly and 
disabled. Growth in Medicare spending has slowed remarkably in 
the last 2 years, partly because of provisions enacted in the 
Balanced Budget Act of 1997. Nonetheless, without reform, the 
program is expected to face mounting pressures in coming years, 
arising from rapid growth in the number of eligible people and 
increases in the cost of care per patient.
    Mr. Chairman, I have found it useful and would invite you 
to think about dividing the future into three distinct periods: 
the next 10 years, before the baby boomers retire; the period 
2010 to 2030, which is when most of the boomers do retire; and 
then kind of the time thereafter, 2030 to 2070.
    In the first instance of the next 10 years, despite the 
recent slowdown of growth in spending, outlays for benefits are 
expected to more than double in this decade. Medicare spending 
will account for almost 20 percent of the budget by 2009, up 
from about 12 percent this year.
    Mr. Chairman, after that it gets worse. Medicare's share of 
the budget will continue to increase rapidly for 20 years 
thereafter, largely because of the influx of the baby boom 
population. The Medicare trustees estimate that program 
spending will double as a percent of our economy, double as a 
percent of GDP, from 2.5 to 4.9 percent in 2030. At the same 
time, Social Security is expected to absorb an additional 6.8 
percent of GDP, bringing the total for these programs together 
to 12 percent of the economy, compared to 6.9 percent today. 
And that doesn't include other likely increases for the 
retirees, such as Medicare and Medicaid for long-term care.
    The elderly population, Mr. Chairman, will increase by 
almost 3 percent a year between 2010 and 2030, rising from 39 
million to 69 million people. The number of workers for each 
retiree will fall from 3.8 today to 2.2 by 2030, making the 
current system of financing virtually impossible to maintain 
without tax increases or substantial cost reductions. By 2070, 
Medicare spending is projected to grow to 5.7 percent of GDP, 
or a total of 13 percent with Social Security. Meanwhile, the 
ratio of active workers to retirees continues to fall to 2.
    As the chart illustrates, the gap between spending and 
revenues dedicated to the program is projected to increase 
dramatically over time. We estimate that revenues dedicated to 
Medicare equals about 1.8 percent of GDP this year, 
substantially less than program spending.
    By 2030, dedicated revenues will be about 2.2 percent of 
GDP, while total Medicare spending will be about 4.9 percent. 
By 2030, then, Mr. Chairman, general funds equal to almost 3 
percent of the economy would be needed to supplement current 
revenues. The financial imbalance will continue to grow after 
    That turns out to be the good news. The bad news is that 
these projections assume that the growth in spending per 
beneficiary will gradually decline to be more in line with 
growth in hourly earnings, even without a significant policy 
change. That assumption is likely unrealistic.
    Since 1980, Medicare's costs grew more than twice as fast 
as wages and salaries. Contrary to the assumptions made in the 
Trustees' Report, Medicare's costs will probably continue to 
grow faster than wages, reflecting continuing advances in 
medical technology and increases in the use of services by 
    At the risk of stating the obvious, if a slow growth in 
Medicare is not realized, the fiscal future quickly gets 
bleaker. For example, if the long-term growth in hospital 
spending per beneficiary increased by 1 percentage point more 
than wages, the payroll tax increase needed to restore 
actuarial balance in the trust fund would more than double, 
from 2.9 percent of current wages to 6.5 percent.
    So, in light of these sobering projections, which likely 
understate the extent of the problem, what can we do? There are 
two aspects to keep in mind in evaluating both short- and long-
run reforms.
    First, we need to always be mindful that the ability to pay 
for goods and services, including health care services, grows 
as the economy grows. Thus, policies that enhance economic 
growth will make it easier to meet the needs of the elderly 
population. What is most important is not necessarily the 
status of the trust fund, or ultimately the source of the 
funding for the benefits, but rather the portion of the economy 
that is promised to the retired population, the amount of goods 
and services, including health care, that must be transferred 
from the working population to the non-working.
    Second, the tradeoff between health care and other goods 
and services will be less marked if Medicare is more efficient, 
meeting enrollees' needs in the least costly way. Improving 
Medicare's efficiency may require restructuring the program 
more fundamentally than has been accomplished so far.
    About 85 percent of Medicare enrollees remain in the 
program's traditional fee-for-service sector. According to our 
projections, that share will fall to only 70 percent by 2009. 
Unless reform proposals markedly reduce fee-for-service 
enrollment, that sector will remain dominant over the next 
decade, especially in less populated areas, until at least the 
boomers retire.
    Consequently, the costs of care in the fee-for-service 
sector will significantly determine overall Medicare spending 
and efficiency for the next decade. Despite your best efforts 
to constrain fee-for-service costs, more fundamental reform is 
almost certainly necessary. A more complete discussion is 
included in my written statement and other CBO reports on 
reforms to the fee-for-service program.
    Quickly, Mr. Chairman, I want to speak to a couple of long-
run options that seem to be in the debate today. There may be 
others, but recently the debate seems to have centered around 
two broad approaches to restructuring the Medicare Program: 
shifting from pay-as-you-go financing to prefunding, and 
shifting from open-ended Federal payments to a defined 
contribution. Both of these approaches would attempt to make 
beneficiaries more aware of the costs and benefits of seeking 
additional care, and would depend on competition among health 
plans to ensure efficiency and maintain high standards of 
    On the prefunding side, proposals to prefund Medicare would 
require people to save during their working years to finance 
health insurance after they retire. Ironically, that approach 
would put into place a self-financing mechanism that many 
people believe already exists with the Medicare Trust Funds. 
Prefunding would obviously require the working population to 
pay twice, once for themselves and once for their parents.
    In its simplest form, a defined contribution plan would 
make a fixed payment, in most cases adjustable at least every 
year, to beneficiaries who would choose from a range of health 
plans, including the traditional fee-for-service program. In 
principle, health plans would have an incentive to compete on 
the basis of price and become more efficient, thereby lowering 
costs and reducing the future fiscal burden on workers.
    The design most frequently discussed in current debates has 
already been evidenced here today, is the premium support 
model. It would retain a basic benefit package that all plans 
would offer. The Government's payment would ensure that at 
least one plan could be purchased with no more than a modest 
additional premium paid by beneficiaries. Plans could offer 
additional services and would be free to set higher premiums.
    For any of these plans, Mr. Chairman, accurate risk 
adjustment methods are necessary if the plans are to compete on 
the basis of benefits, quality of service, and premium cost. 
Indeed, Mr. McDermott just mentioned the severe problems of 
adverse selection.
    Eliminating all of the risks associated with high-cost 
enrollees would be undesirable, since financial risk promotes 
more efficient practices. Nonetheless, undue vulnerability to 
financial risk could be used by adjusting payments using risk 
adjusters which account for the expected greater use of 
services by sicker beneficiaries. Alternatively, the Federal 
Government could share some of the risks through such methods 
as blending a capitated rate with a fee-for-service payment, or 
providing reinsurance and stop-loss coverage for high cost 
cases to the providers.
    The Balanced Budget Act of 1997 attempted to improve the 
efficiency of Medicare's fee-for-service system through payment 
reforms, and laid the groundwork for a more competitive system 
through the creation of Medicare Plus Choice. The resulting 
changes to Medicare's risk-based and fee-for-service sectors 
have slowed the growth in costs, but the BBA reforms still do 
not promote the best health outcomes at the lowest cost to 
taxpayers and beneficiaries.
    The Congress could consider raising Medicare revenues by 
increasing the payroll tax; allocating more revenues to the 
program from the general fund; or increasing the costs imposed 
on enrollees. Options to raise revenues for the program, 
however, are likely to succeed only temporarily in shoring up 
Medicare's financing as health costs continue to escalate.
    Congress could also consider reducing Medicare benefits, 
but that would impose greater financial burdens, obviously, on 
the elderly and disabled, and eventually could prove to be 
    A third approach would address the inefficient use of 
medical resources in Medicare. Treatment patterns vary greatly 
nationwide, with consequences for both health outcomes and 
program costs. For example, patients are more likely to be 
hospitalized in areas with high bed-to-population ratios than 
in other areas, even though they have identical medical 
    Medicare could be restructured to allow health plans to 
compete on the basis of price as well as benefits and quality. 
Premium support approaches, such as recent proposals from the 
President and that of the National Bipartisan Commission on the 
Future of Medicare, are potentially promising strategies to do 
    Enrollees could be given better information about their 
health plan choices, including a report card that could help 
them assess the quality of care the plans provide. Payment 
systems and cost-sharing requirements could be revamped to 
provide plans with clear financial incentives to improve both 
the quality of care and the efficient use of resources.
    Those changes could also provide beneficiaries with better 
incentives to enroll in efficient, high-quality health plans, 
but those types of changes are possible only through 
fundamental reform. Making marginal changes to the current 
program while adding significant benefits would likely only 
hasten the day of reckoning.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Dan L. Crippen, Director, Congressional Budget Office

    Mr. Chairman and Members of the Committee, I am pleased to 
be here today to discuss reforming Medicare for the long term. 
Growth in Medicare spending has slowed remarkably in 1998 and 
1999, partly because of provisions in the Balanced Budget Act 
of 1997 (BBA). Nonetheless, without reform, the program is 
expected to face mounting pressures in coming years, arising 
from rapid growth in the number of eligible people and 
increases in the cost of care per patient.

            Projections of Medicare Costs Under Current Law

    Spending for Medicare is expected to exceed $200 billion 
this year, providing benefits to 39 million elderly or disabled 
people. Despite the recent slowdown in the growth of spending, 
outlays for benefits are expected to more than double in the 
next decade.
    At that rate, Medicare spending will account for almost 20 
percent of the federal budget by 2009, up from about 12 percent 
this year. Under current law, Medicare's share of the budget 
will continue to increase rapidly thereafter, partly because of 
the influx of the baby-boom population. According to the 
intermediate assumptions of the Social Security trustees, the 
elderly population will increase by about 1 percent a year 
between 2000 and 2010 but by almost 3 percent a year between 
2010 and 2030--rising from 39 million to 69 million people. 
And, as in the past, Medicare's costs will probably grow faster 
than its enrollment, reflecting continuing advances in medical 
technology and increases in the use of services by enrollees.
    Although such projections involve much uncertainty, 
Medicare has to prepare for the unprecedented demands that the 
baby-boom population will soon impose on it. Assuming no change 
in policy, the Medicare trustees estimate that program spending 
will grow from about 2.5 percent of gross domestic product 
(GDP) this year to 4.9 percent of GDP in 2030, as the last of 
the baby boomers enroll in the program. By 2070, spending is 
projected to grow to 5.7 percent of GDP. Meanwhile, the ratio 
of active workers to retirees will fall, making the current 
system of financing difficult to maintain without tax increases 
or substantial cost reductions.
    There is a widening gap between spending for Medicare and 
the revenues that are specifically dedicated to the program 
(see Figure 1). The Congressional Budget Office (CBO) estimates 
that revenues dedicated to Medicare equal about 1.8 percent of 
GDP this year, substantially less than program spending.\1\ The 
gap largely reflects the infusion of general funds into 
Supplementary Medical Insurance (SMI), which accounts for 75 
percent of the cost of that program. The gap between spending 
and dedicated revenues is projected to increase over time, as 
the Hospital Insurance (HI) Trust Fund goes into deficit. By 
2030, dedicated revenues will be about 2.2 percent of GDP while 
spending will be about 4.9 percent of GDP. The financial 
imbalance will continue to grow after 2030.
    \1\ Dedicated revenues include payroll taxes and income taxes on 
Social Security benefits, which are paid into the Hospital Insurance 
Trust Fund, plus premiums for Supplementary Medical Insurance 
(estimated as 25 percent of the costs of that insurance).

    Restoring actuarial balance to the HI trust fund for the 
next 75 years would require significantly increasing revenues 
or decreasing spending. According to the latest report of the 
Medicare trustees, balance would be restored in the HI trust 
fund if the payroll tax was immediately increased by about 50 
percent--from 2.9 percent of wages to 4.36 percent--or spending 
was reduced by an equivalent amount. Such policies would not 
address the growth of SMI, which is already largely funded by 
general revenues.
    Moreover, those projections assume that growth in spending 
per beneficiary will gradually decline to be more in line with 
growth in hourly earnings, even without a significant policy 
change. That assumption is probably unrealistic; if spending 
per beneficiary does not slow, the financial status of the HI 
trust fund will be considerably worse. For example, if the 
long-term growth in HI spending per beneficiary increased by 1 
percentage point, the payroll tax increase needed to restore 
actuarial balance in the trust fund would more than double. 
Under that circumstance, the Medicare trustees estimate that 
the HI payroll tax would immediately increase from 2.9 percent 
of wages to 6.52 percent.
    The nation will most likely devote more of its income to 
health care in the coming decades, and since the elderly will 
become an increasingly dominant part of the population, public 
acceptance of larger federal health spending may grow. 
Furthermore, the ability to pay for goods and services, 
including health care services, grows as the economy grows. 
Thus, policies that enhance economic growth will make it easier 
to meet the needs of the elderly population. But the trade-off 
between health care and other goods and services would be less 
marked if Medicare was more efficient, meeting enrollees' needs 
in the least costly way. Improving Medicare's efficiency may 
involve restructuring the program more fundamentally than has 
been done so far.

         BBA Policies to Promote Competition Among Health Plans

    In establishing the Medicare+Choice system under the 
Balanced Budget Act, the Congress wanted to make Medicare's 
risk-based sector more competitive by expanding the range of 
available plans--both the kinds of plans offered and the areas 
in which they were offered. The Congress also mandated a 
coordinated open-enrollment process intended to better inform 
beneficiaries about their options.
    But the BBA left in place the administered pricing system, 
which sets Medicare's payments to plans. Consequently, the 
program has no meaningful price competition among plans for the 
basic benefit package. Instead, plans have incentives to 
increase optional benefits rather than to reduce costs, just as 
they did before the BBA. Changing to a premium-support or 
bidding system could expand competition to include price as 
well as benefits and quality of service, so that Medicare could 
capture some of the savings from plans' more efficient health 
care management. Many issues would have to be resolved, 
however, before Medicare could carry out such an approach 
nationwide. The competitive-bidding demonstrations mandated by 
the BBA, if successfully implemented, could provide some 

                   Options for Restructuring Medicare

    Recent policy debate has centered around two broad 
approaches to restructuring the Medicare program: shifting from 
pay-as-you-go financing to prefunding and shifting from open-
ended federal payments to a defined contribution. Both of those 
approaches would attempt to make beneficiaries more aware of 
the costs and benefits of seeking additional care and would 
depend on vigorous competition among health plans to ensure 
efficiency and maintain high standards of quality.


    Proposals to prefund Medicare would require people to save 
during their working years to finance health insurance after 
they retire. Ironically, that approach would put into place a 
self-financing mechanism that many people believe already 
exists with the Medicare trust funds. When fully implemented, 
prefunding would largely eliminate the current flow of 
subsidies from workers to retirees. Those subsidies will become 
increasingly burdensome as the number of workers for each 
retiree falls from 3.8 today to 2.2 by 2030. Because each 
generation would pay for its own Medicare costs, prefunding 
would avoid the prospect of generations with relatively few 
workers having to finance the health expenditures of larger 
generations--a problem inherent in Medicare's current financing 
    Any switch from a pay-as-you-go system to prefunding faces 
a potentially long, complex, and costly transition period. 
Current Medicare enrollees and older workers, who have 
insufficient working years left to save enough to cover their 
health spending in retirement, will continue to depend on pay-
as-you-go financing. Younger workers could face significant 
mandatory contributions to finance their own future insurance 
needs while paying additional taxes to fund the transition.

Defined Contribution

    Under a defined contribution (or voucher) plan, Medicare 
would make a fixed payment to beneficiaries, who would choose 
from a range of health plans--including the traditional fee-
for-service program. If their chosen plan's premium exceeded 
Medicare's payment, they would pay the extra amount. In 
principle, with beneficiaries required to pay the additional 
costs of more expensive plans, health plans would have an 
incentive to compete on the basis of price and become more 
efficient, thereby lowering costs and reducing the future 
fiscal burden on workers.
    The design most frequently discussed in current debates--
the premium-support model--would retain a basic benefit package 
that all plans would offer. The government's payment would 
ensure that at least one plan could be purchased with no more 
than a modest additional premium paid by beneficiaries. Plans 
could offer additional services and would be free to set higher 
    Accurate risk-adjustment methods are necessary if plans are 
to compete on the basis of benefits, quality of service, and 
premium cost. Plans that attracted higher percentages of high-
cost enrollees would find it difficult to compete if the 
payments they could expect for those people did not reflect 
their probable costs. Instead of focusing on ways to improve 
efficiency, plans in those circumstances might focus on 
attracting healthier enrollees (a situation known as favorable 
    Eliminating all of the risks associated with high-cost 
enrollees would be undesirable since financial risk promotes 
more efficient practices. Nonetheless, undue vulnerability to 
financial risk could be reduced in the following ways:
     Payment adjusters: The Health Care Financing 
Administration (HCFA) currently uses demographic factors for 
age, sex, Medicaid receipt, and institutionalization to adjust 
payments to plans for the expected costs of their enrollees. 
Beginning in 2000, HCFA will add an adjuster based on prior 
inpatient admissions to better account for health status. 
However, a payment adjustment based on prior inpatient 
admissions creates an obvious way for plans to increase their 
Medicare payments by hospitalizing enrollees unnecessarily--a 
problem that HCFA is well aware of. Consequently, HCFA intends 
to develop a more comprehensive health status adjuster as soon 
as possible.
     Partial capitation: Because even the best payment 
adjuster can account for only a modest amount of variation in 
health spending at the plan level, the Medicare Payment 
Advisory Commission and others have suggested that some kind of 
partial capitation may be necessary to ensure that plans do not 
skimp on the services provided to their enrollees. Partial 
capitation could be introduced by blending a capitated rate and 
a fee-for-service rate, supplementing payments for unusually 
costly cases, providing stop-loss protection on total costs at 
the plan level, or carving out selected high-cost services. All 
of those approaches would reduce the capitation rate across the 
board, imposing a kind of premium on plans in return for 
insurance against excessive risk.
    Other strategies for controlling adverse selection could 
reduce the demands on risk adjustment. Such strategies include 
coordinated open-enrollment periods, controls on the marketing 
of plans, and a requirement that plans offer a standardized 
benefit package.

                   Reforming Fee-for-Service Medicare

    About 85 percent of Medicare enrollees remain in the 
program's traditional fee-for-service sector. According to 
current CBO projections, that share will fall to 70 percent by 
2009. Thus, Medicare's fee-for-service sector should remain 
dominant, especially in less populated areas, at least through 
the next decade. Consequently, efforts at cost control must 
include the fee-for-service sector. Previous efforts have 
focused almost entirely on providers. Although some additional 
policy changes affecting providers could be made, changes 
affecting enrollees could also be considered.

Policies Affecting Providers

    Paying separately for each service a patient receives 
encourages the provision of unnecessary services. One 
alternative to separate payments is a single payment, 
determined prospectively, for all services deemed appropriate 
to treat a given condition. Prospective payment encourages 
providers to treat the patient with the fewest services 
possible to adequately address the condition. Medicare has had 
a prospective payment system for hospital inpatient services 
since 1983. The BBA mandates new prospective payment systems 
for hospital outpatient, skilled nursing, and home health 
    Prospective payment could be expanded. One way is to bundle 
together payments for acute and postacute hospital services. 
Another way is to combine payments for physician and facility 
services during a hospital stay. However, developing viable 
prospective payment systems is difficult. Having more 
comprehensive bundles of services reduces providers' 
opportunity to shift services to sites or times not included in 
the prospective payment, increasing their incentive to reduce 
costs; but such bundling also imposes greater financial risk on 
providers. One way to reduce excessive risk and the resulting 
incentive to avoid difficult cases is to include severity 
adjustments in the payment system, similar to the risk 
adjusters applied to capitation rates for paying 
Medicare+Choice plans. Another option is to expand the current 
hospital outlier policy to compensate providers for unusually 
expensive cases.
    An alternative approach could use competitive bidding to 
establish prices for individual services in the fee-for-service 
program. HCFA is conducting a demonstration of competitive 
bidding for certain categories of durable medical equipment, 
which Medicare currently pays for according to a fee schedule. 
The demonstration, in Polk County, Florida, covers hospital 
beds and four other categories of supplies. The agency received 
bids from 30 suppliers and plans to contract with 16 of them. 
Price reductions range from 13 percent for surgical dressings 
to 31 percent for enteral nutrition products. HCFA plans to 
begin paying suppliers under the new pricing system on October 
1, although legal challenges could delay that. The animosity of 
suppliers toward the demonstration illustrates the general 
problem that HCFA faces in testing competitive bidding as an 
alternative to administrative price setting.

Policies Affecting Enrollees

    Enrollees in Medicare's fee-for-service sector currently 
have to pay some of the costs of their covered services and all 
of the costs of outpatient prescription drugs, which are not 
typically covered by Medicare. In principle, cost sharing gives 
patients an incentive to use services more prudently. For 
several reasons, however, Medicare's cost-sharing requirements 
are not as effective in that regard as they might be. First, 
the requirements are too varied and complex to be well 
understood by patients. Second, some services (such as home 
health care) have no cost-sharing requirements. Instituting 
such requirements could help reduce inappropriate utilization. 
Third, some circumstances (such as long hospital inpatient 
stays for severely ill patients) require high cost sharing, 
even though there is little possibility of reducing the use of 
services. Fourth, because Medicare does not limit enrollees' 
cost-sharing liabilities, most enrollees seek some kind of 
supplementary (or medigap) coverage to limit their financial 
risk. Such supplementary coverage often eliminates the 
incentives for prudent use of services that cost sharing is 
intended to create.
    In its recent volume on maintaining budgetary discipline, 
CBO discussed one policy option that could better protect 
enrollees from catastrophic expenses and improve the 
effectiveness of Medicare's cost-sharing requirements. That 
option would change those requirements to more accurately 
reflect the costs of the services used and make the 
requirements easier for enrollees to understand. It would also 
cap each enrollee's annual liability for cost-sharing expenses. 
Medicare could implement the option for no net cost by raising 
cost-sharing requirements somewhat for the majority of 
enrollees, who use relatively few services during the year, and 
using those savings to finance the cost-sharing cap for the 
minority of patients with more serious health problems that 
year. One option would replace the current complicated mix of 
cost-sharing requirements with a single $750 deductible, a 
uniform coinsurance rate of 20 percent for amounts above the 
deductible, and a cap of $2,000 on each beneficiary's total 
cost-sharing expenses. That would yield $8 billion in federal 
savings over the next 10 years.
    A complementary option, which would further increase the 
effect of Medicare's cost-sharing requirements, would restrict 
the kind of coverage that medigap plans could provide. Under 
one approach, those plans might be prohibited from covering 
Medicare's deductible amounts. Alternatively, they might be 
permitted to offer coverage only for a cost-sharing cap that 
was lower than the one provided under Medicare--such as one set 
at $1,000 a year when Medicare's cap was set at $2,000. 
Restricting medigap coverage could generate considerable 
savings for Medicare, which pays most of the costs of the 
additional services that medigap policyholders use. If, for 
example, medigap plans were prohibited from covering any part 
of Medicare's new deductible under the cost-sharing option 
discussed above, program savings would be about $46 billion 
over 10 years. Those savings could be used to improve 
Medicare's benefits--for example, by financing the costs of a 
prescription drug benefit.
              The President's Proposal for Medicare Reform
    The President's recent proposal to reform Medicare provides 
a framework for making significant changes to the program. It 
is intended to modernize Medicare's benefits, enable the 
federal government to become a more prudent purchaser of health 
services, and encourage price competition among health plans to 
slow the growth of Medicare spending in the longer term. CBO 
estimates that the President's Medicare reform plan would 
increase federal outlays by $111 billion over the 2000-2009 
period (see Table 1). By comparison, the Administration 
estimates the 10-year cost of the proposal at $46 billion.

    Table 1.--Ten-Year Estimates of the President's Medicare Proposal
                        [In billions of dollars]
                                                 Administration    CBO
Benefit Payments (Increase) a:
  Prescription drug benefit....................           118.8    168.2
  Changes to fee-for-service Medicare..........           -64.2    -48.2
  Competitive defined benefit b................            -8.9     -8.9
  Subtotal.....................................            45.7    111.1
Transfers from the General Fund................           327.7    327.7
  Total........................................           373.4    438.8
Sources: Congressional Budget Office (based on the July 1999 baseline)
  and Office of Management and Budget.
aIncludes effect on Medicaid.
bAdministration's estimate.

    The President proposes a new prescription drug benefit that 
would provide first-dollar coverage, with an annual limit of 
$2,500 in 2008, when the benefit was fully phased in. Although 
most Medicare enrollees would receive some benefit, the 
proposal would not substantially protect those in poor health 
who incurred very large out-of-pocket expenses for prescription 
    Under the President's proposal, the federal share of the 
prescription drug benefit would be paid through transfers from 
the Treasury's general fund. Those transfers are simply 
promises to pay future benefits with future tax dollars. How 
burdensome that commitment might become depends on both the 
growth of future spending for prescription drugs and the growth 
of the economy over the coming decades.
    The Balanced Budget Act includes provisions that limit 
updates, and the President proposes to extend some of them 
beyond their 2002 expiration date. The President would also 
provide a small amount of additional funds to reduce the impact 
of the act's payment reductions through as-yet-unspecified 
legislation. On balance, payments to providers would be lower 
than baseline levels, but only after 2002.
    Reducing payment rates for fee-for-service providers would 
yield Medicare savings without contributing to the program's 
efficiency. But improving the efficiency of the fee-for-service 
sector is key to achieving short-term cost savings and longer-
term reform. Successful adoption of the contracting and payment 
methods that private health plans use to manage their costs 
could establish the basis for a competitive fee-for-service 
sector. But recent efforts to test such methods have not found 
much acceptance among providers, and the President's proposal 
treads lightly on that issue.
    The President's provisions for rationalizing cost-sharing 
requirements would modestly increase some of those requirements 
and lower others, without reducing their complexity. A more 
thorough reform might subject all Medicare-covered services to 
a single deductible and uniform coinsurance rates, at the same 
time placing an annual limit on the amount that enrollees paid 
in cost sharing for all covered services (including drugs if 
that benefit was added to the program).
    The President's proposal for a competitive defined benefit 
would provide new opportunities for Medicare's managed care 
plans to compete on the basis of price as well as the 
generosity of benefits and the quality of service. Although the 
proposal would introduce elements of competition among health 
plans that could help slow the growth of Medicare spending in 
the longer term, it would fall short of a fully competitive 
program. By establishing the fee-for-service sector as the 
benchmark for defining Medicare benefits and setting premiums 
for health plans, it would blunt the incentives for efficiency.


    The Balanced Budget Act of 1997 attempted to improve the 
efficiency of Medicare's fee-for-service system through payment 
reforms and laid the groundwork for a more competitive system 
through the creation of Medicare+Choice. The resulting changes 
to Medicare's risk-based and fee-for-service sectors have 
slowed the growth in costs. But the BBA reforms still do not 
promote the best health outcomes at the lowest cost to 
taxpayers and beneficiaries.
    The Congress could consider raising Medicare revenues by 
increasing the payroll tax, allocating more revenues to the 
program from the general fund, or increasing the costs imposed 
on enrollees. Options to raise revenues for the program, 
however, are likely to succeed only temporarily in shoring up 
Medicare's financing as health care costs continue to escalate. 
The Congress could also consider reducing Medicare benefits, 
but that would impose greater financial burdens on the elderly 
and disabled that could eventually prove unacceptable.
    A third approach would address the inefficient use of 
medical resources in Medicare. Treatment patterns vary greatly 
nationwide, with consequences for both health outcomes and 
program costs. For example, patients are more likely to be 
hospitalized in areas with high bed-to-population ratios than 
in other areas, even though they have identical medical 
conditions. Patients in fee-for-service settings rely more on 
specialist and hospital care than patients in managed care. In 
addition, managed care settings emphasize disease prevention 
and primary care more than fee-for-service settings do.
    Medicare could be restructured to allow health plans to 
compete on the basis of price as well as benefits and quality. 
Premium-support approaches, such as recent proposals from the 
President and the National Bipartisan Commission on the Future 
of Medicare, are potentially promising strategies. Enrollees 
could be given better information about their health plan 
choices, including a report card that could help them assess 
the quality of care that plans provide. Payment systems and 
cost-sharing requirements could be revamped to provide plans 
with clear financial incentives to improve both the quality of 
care and the efficient use of resources. Those changes could 
also provide beneficiaries with better incentives to enroll in 
efficient, high-quality health plans. But those types of 
changes are possible only through fundamental reform. Making 
marginal changes to the current program while adding 
significant benefits would only hasten the day of reckoning.


    Chairman Thomas. Thank you, Mr. Crippen.
    In terms of your chart, and I know it is on page 3 of your 
testimony, so people appreciate what ``dedicated revenues'' 
mean, that is basically the HI Trust Fund, any Social Security 
transfers, and it is the part B premium----
    Mr. Crippen. Yes, sir.
    Chairman Thomas [continuing]. That is paid, as well. So, 
obviously, take 2070, since that is a vertical line that we can 
measure. The white part on the lower end would be the dedicated 
revenues. The red up to spending would be the general fund?
    Mr. Crippen. Yes.
    Chairman Thomas. And of course some of the concern that 
folks have, recalling membership on the Commission, Senator 
Kerrey, I think, was one of the more adamant ones about the 
problem of relying more and more on general fund means you have 
fewer dollars available for other programs.
    My guess is that the 50-50 mark is somewhere around 2025, 
and that is, beyond that there would be more coming out of 
general fund than the dedicated revenues.
    Mr. Crippen. It is probably toward the end of the baby boom 
    Chairman Thomas. Roughly.
    Mr. Crippen. But you are right, 2030, 2025.
    Chairman Thomas. And it starts flattening out after that 
baby boomer climb, because once we digest the baby boomers, if 
we can get through to about 2050, at least current demographic 
trends indicate that that will be more of a constant line that 
we are dealing with.
    Mr. Crippen. Yes.
    Chairman Thomas. Do you have any idea, from what we project 
budgeting to be, what that red zone would be from the general 
    Mr. Crippen. In billions, I don't. Everything we prepared 
for today----
    Chairman Thomas. Percentagewise?
    Mr. Crippen [continuing]. Was percent of GDP, in which it 
will be almost 7 percent of GDP by 2030.
    Chairman Thomas. And it is currently now, what did you say?
    Mr. Crippen. 2.9, I believe.
    Chairman Thomas. 2.9, and you extrapolate that out, the 
concern of Senator Kerrey was that the portion of the general 
fund being dedicated to this one particular program would begin 
to crowd out options available, not unlike the concern that 
people were having about the interest payments on the national 
    Mr. Crippen. Yes.
    Chairman Thomas [continuing]. Going for yesterday's 
payments and not current uses.
    Mr. Crippen. For comparison purposes, today the Federal 
Government employs about 20 percent of GDP for all of its 
various programs. By 2030, Social Security and Medicare alone, 
we project, would consume 12 percent, so well over half of what 
the Federal Government currently enjoys as part of the economy 
would be in these two programs alone.
    Chairman Thomas. One additional question, because the 
President has offered, as you indicated in your testimony and 
the gentleman from Washington indicated, at least a partial 
proposal in terms of competition, but he also included the 
concept of prescription drugs, and the Bipartisan Commission 
proposed an integrated approach to prescription drugs.
    Doesn't the President's plan, if in fact it were enacted, 
require greater contributions on the part of beneficiaries for 
the overall program as envisioned? Or does he do it for the 
same beneficiary contribution?
    Mr. Crippen. No, it would envision that there would be--50 
percent of the premiums would be paid by beneficiaries.
    Chairman Thomas. So it would be an increase on the 
beneficiaries. So the President's plan says the beneficiaries 
need to pay more, for sure to get more, but they have to pay 
more. The Commission plan said beneficiaries would have to pay 
more to get more.
    I think the basic concept is that if you are going to give 
more, you have got to talk about paying more, and I was pleased 
to see that the President was realistic in that regard and 
didn't try to talk about the fact that you can get something 
from nothing, either from changing from traditional payment of 
Medicare operating costs and shifting to drugs. In fact, I 
think they talked about that a little bit, but backed away from 
it relatively quickly.
    No one, I think, is talking about putting less money into 
Medicare. We are talking about bending the growth curves in 
ways that we can live with them, and hopefully we can generate 
some additional new ways of talking about providing responsive 
and appropriate care for seniors at reasonable cost. And I want 
to thank you very much for your testimony.
    The gentleman from California?
    Mr. Stark. Thank you, Mr. Chairman. I am inclined to agree 
with you. Somebody is going to have to pay more, but I guess 
the debate may come down to whom, what cat we bell.
    Mr. Crippen, off the top of your hat, can you pick a 
payroll tax figure that would make Medicare solvent for all 
time, whatever ``all time'' is? I think I have heard bandied 
around that if we kicked it up 1 percent, a half percent for 
employers and a half percent for employees----
    Mr. Crippen. That may be right, Mr. Stark. I have got the--
    Mr. Stark. Do you know, is there a figure that you are 
aware of?
    Mr. Crippen. There is a figure. The trustees have it in 
their report, I believe. I think it is more like 2 percent of 
payroll under----
    Mr. Stark. A point on each. So there is an alternative, at 
an extreme, I suppose, to say OK, instead of paying what we pay 
now, we could increase that a percent on wage earners and on 
employers, and that would take care of it without making any 
other changes, basically. That is not to say we wouldn't, but--
    Mr. Crippen. It would, under the current trustees' 
assumptions. As I cautioned, those assumptions may be 
optimistic, but----
    Mr. Stark. Yes, but that is a long time out, too, that we 
are talking about.
    Chairman Thomas. Would the gentleman yield for 
clarification purposes?
    Mr. Stark. Sure.
    Chairman Thomas. A 1-percent increase is not a 1-percent 
    Mr. Stark. No, it is an additional percentage.
    Chairman Thomas. And what would that be in terms of a 
percentage above the current rate?
    Mr. Stark. What do we pay now?
    Chairman Thomas. When you say 1 percent, it sounds like 
that is a pretty easy solution. So it would be total 2 percent, 
and what is the current HI tax?
    Mr. Crippen. 2.9 percent.
    Mr. Stark. 2.9.
    Chairman Thomas. So it would be, what, a 40 percent, 40 to 
50-percent increase in the current HI tax, in other words?
    Mr. Crippen. It looks like, Mr. Stark, the answer to your 
question is that the trustees estimate it would take to go from 
2.9 percent to 4.36 percent, so it is not--you know, two points 
altogether, one on employees, one on----
    Chairman Thomas. And what percentage is that of an increase 
of the amount they pay now?
    Mr. Crippen. It is almost 50 percent.
    Mr. Stark. So it is a 50-percent increase.
    Chairman Thomas. OK. Thanks. Fifty-percent increase.
    Mr. Stark. And the question, you know, would come down to 
if it is a 50-percent increase on all of us, on a very modest 
and small tax, as opposed to maybe several thousand dollars, 
$3, $4, $5, $6,000 on seniors, particularly those who, if they 
have no pharmaceutical benefits, that is taking 10 percent of 
their--10, 20, 30 percent, it might kick the percentage they 
now pay.
    What do seniors on average now pay of their income for 
medical costs? There is a number. Does that one ring a bell in 
your memory?
    Mr. Crippen. I don't have here an exact number. It might be 
$2,500 out of pocket?
    Mr. Stark. $2,500 out of pocket, and their median is about 
$25 grand, maybe less, so 10 percent. So either way you want to 
slice it, if you kick up a couple thousand dollars for those 
folks in increased pharmaceutical costs, that could be a 100-
percent increase on people who perhaps can less well afford it.
    But I just kind of would like to focus everybody's 
attention that the choices might very well be, certainly the 1 
percent on employers, who are making all time high profits, 
shouldn't be of any problem in today's booming economy. And for 
the rest of us, we all just got a raise, thanks to the 
generosity of our Republican leadership. We could afford it. 
And that might be less painful than it would be, certainly it 
would be less painful for me than it would be for my mother 
with her modest income.
    I just wanted to get those numbers out and say there are 
those alternatives. I guess my one other question--well, thank 
you. I yield back.
    Chairman Thomas. The gentlewoman from Connecticut wish to 
    Mrs. Johnson. Thank you, Dr. Crippen. I want you to enlarge 
on the part of your testimony where you discuss the issue of 
competition, and particularly how you move from or what the 
relationship between an administered price system and a 
competitive system, and what you see as how the administered 
price system--at least your testimony implies that it inhibits 
the base from which the competition in the competitive system 
would start. I mean, that is the way I hear it. Could you 
enlarge on that?
    Mr. Crippen. Let me try.
    Mrs. Johnson. And what would be the way out?
    Mr. Crippen. Let me make one point and then one example, 
and go from there, and see if this gets to your question.
    The example is, and actually Mr. McDermott and I had an 
exchange about this a couple of months ago, there are currently 
about 50 percent too many hospital rooms across the country. We 
don't know where exactly, but there is excess capacity.
    It is not to say you could ever cut 50 percent of costs by 
eliminating hospitals, but the point is, there is some excess 
capacity, so there is room for efficiencies of some sort, 
whether it is deploying those rooms for skilled nursing 
facilities, shutting them down, all kinds of other options. So 
the point is, the system as currently constructed has room to 
do better.
    How we get competition in could be slow and incremental. It 
could be by giving the beneficiaries more choices and letting 
them instill the competition by choosing. Let me give you one 
quick example.
    One thing that we have talked about a little is, for 
Medicare recipients, for example, there are some very costly 
procedures, although not common, but costly, such as liver 
transplants. One could offer up a national competition on liver 
transplanting, or on both price and outcome, because we do have 
some outcomes data on whole organ transplants that might make 
sense: the length of hospital stay, rehospitalization, 
mortality, other things.
    In such a competition, the last I checked, at least, the 
Mayo Clinic would likely win on both points. That is, it would 
provide a less costly liver transplant with at least as good if 
not better outcome than other places. One could use that result 
to come up with an average price that Medicare is willing to 
    You could allow beneficiaries to go wherever they wanted, 
but the price that Medicare would pay would be based on this 
competition, which would give you the best price but also 
potentially the best outcome, give information to beneficiaries 
as to who does a better job with these kinds of procedures. And 
by pulling these very costly measures out of a capitated 
payment or even the current fee-for-service system, you start 
to put more competition into the system, and you make the 
resulting pool that is left a little less risky, which makes it 
easier to have a risk-sharing arrangement or indeed a fully 
capitated arrangement.
    Mrs. Johnson. Now, the private sector, for instance the 
Federal Employee Health Benefit Plans, don't exclude liver 
transplants as a possible medical treatment. Why couldn't we 
set the premiums for a Medicare managed care plan in a sense 
the same way we set premiums for the Federal Employee Health 
Benefit Plans, adjusted of course for age, and let that premium 
deal with this issue of liver transplants and what we are going 
to pay?
    The problem with the model you describe, of determining 
what should be paid for a liver transplant, is that it doesn't 
take into account so many other factors like transportation and 
the distance from family and things like that, and all the 
other things that go with having one or two centers that 
perform a certain service for Medicare recipients. And then you 
get into frailty issues and a lot of things.
    So why can't you just move to this other system which we 
use in every other sector of the health care industry?
    Mr. Crippen. That is certainly what the chairman's 
Commission recommended, was I mean very much modeled after the 
FEHB Plan, and you could do something like that. Frankly, the 
pricing in FEHB is, because of my ignorance, still a bit of a 
mystery for me. There are a lot of moving pieces in it. There 
is not a fixed benefit plan, as you know, and people can move 
easily between plans.
    Mrs. Johnson. So one of the things you would need to do is 
to clarify what the fixed benefit plan is.
    Mr. Crippen. You would have to go from a mandated price to 
a mandated benefit, and then in the system adjust prices around 
for that. But again, our view essentially as an institution at 
CBO is, anywhere you can instill some competition to take 
advantage of what appears to be the potential efficiencies, 
whether it is hospital rooms or differences in procedures, 
currently will better utilize current resources. So in addition 
to adding resources, you can better utilize what you are doing 
    Mrs. Johnson. Thank you.
    Chairman Thomas. The gentleman from Wisconsin wish to 
    Mr. Kleczka. Thank you very much, Mr. Chairman.
    Dr. Crippen, I have a quick question. You indicated that 
currently about 85 percent of the Medicare beneficiaries avail 
themselves of fee-for-service, and projected over the coming 
years that will probably drop to about 70, but you indicated 
that wasn't a heck of a lot of a drop.
    Is it your view that if we move to a premium support plan, 
that that fee-for-service percentage would drop much more 
    Mr. Crippen. I don't really have a view on that. We have 
not had and do not have in front of us a specific legislative 
proposal that we have had to make those decisions about.
    Mr. Kleczka. Well, based on the Commission proposal, would 
you view that as----
    Mr. Crippen. The actuaries, when they first looked at it, 
not in this last round apparently for Mr. Stark, but when they 
first looked at it, did think there would be some diminution, 
more people moving out of fee-for-service into other health 
plans. We don't, I don't think, have an opinion on that.
    Mr. Kleczka. And the theory was that the program would then 
save X amount of dollars because of this shift?
    Mr. Crippen. Not so much because of the shift. It is 
because we think there may be efficiencies out there, whether 
it is in fee-for-service, and there are some ways to get at 
those, that inefficiency, as well. But because of the ability 
of recipients to choose, and in the exercise of that choice 
instilling some competition between plans on, if not price, 
then quality or benefits, that if that--it is the choice, it is 
the competition that produces it.
    Mr. Kleczka. But it seems to me that if the goal is to try 
to decrease the number of fee-for-service beneficiaries, we can 
do that by legislation without a wholesale shift to a program 
like premium support.
    Mr. Crippen. I think it is the ability of the recipients to 
choose. Not only is it desirable in some metaphysical way----
    Mr. Kleczka. Well, that is something we say every 2 years 
when we are back on the streets of our districts, running for 
    Mr. Crippen. Right.
    Mr. Kleczka. ``I'm not going to take away your right to 
    Mr. Crippen. Yes.
    Mr. Kleczka. Then when we come to Washington, and in my 
case 800 miles away, now we start doing certain little things 
to reduce the participation in fee-for-service without saying 
the words ``right to choose.''
    Mr. Crippen. But it is in that exercise of choice, not in 
the kind of metaphysical or political sense, it is in the 
exercise of that choice we expect consumers would help instill 
more efficiency in the delivery systems.
    Mr. Kleczka. OK. Thank you.
    Chairman Thomas. I thank the gentleman.
    The gentleman from Louisiana wish to inquire?
    Mr. McCrery. Yes, thank you, Mr. Chairman.
    Mr. Crippen, I thought I heard you say that the payroll tax 
fix for Medicare would require the Federal tax to go up from 
2.9 percent to 4.63 percent. Is that right.
    Mr. Crippen. Thirty-six. Four point thirty-six.
    Mr. McCrery. Four point thirty-six. OK. Well, even at that, 
I think we are looking at closer to a 60-percent increase than 
we are a 50-percent increase in the payroll tax, so I just 
wanted to get that straight.
    Also, does that assume that the payroll tax increase would 
go into effect immediately?
    Mr. Crippen. Yes.
    Mr. McCrery. At January 2000 or January 1999 or----
    Mr. Crippen. I would have to look at the Trustees' Report, 
Mr. McCrery. We get that number directly from the trustees, and 
I think it is a calendar year, so it would be--but it is 
assumed that you have to raise it now, forever, that amount, in 
order to close the gap.
    Mr. McCrery. And, again, I would assume that to close that 
gap, the trustees would assume that the excess in Federal tax 
revenues over expenditures in the short term would be invested 
and interest gained on that investment. That is part of the 
    Mr. Crippen. Presumably, yes.
    Mr. McCrery. And those interest payments are going to have 
to be paid from general revenues at some point.
    Mr. Crippen. Yes.
    Mr. McCrery. So if we were to wait a year or two or five, 
the 4.36 percent would become something higher than that?
    Mr. Crippen. Yes. And I should say again, too, that the 
percentages we are talking about are for the Hospital Insurance 
Trust Fund. It doesn't include increases in premiums in part B, 
which have of course general revenues going into as well.
    Mr. McCrery. Right.
    Mr. Crippen. So there would be more general revenue in 
addition to this payroll tax increase.
    Mr. McCrery. And since I don't hear anybody yet proposing 
that we increase the payroll tax today, or January 2000, we are 
really talking about a higher increase than the 4.36 percent, 
aren't we?
    Mr. Crippen. Most likely.
    Mr. McCrery. I don't know how much you have looked at 
health care and Medicare, but have you looked at it enough to 
draw a conclusion as to the inevitability of these rises in 
cost to the Medicare Program? Is that inevitable, no matter 
what we do in terms of structural reforms, or do you think 
there are flaws in the way the program is designed now which 
lead to some of the increases in costs?
    Mr. Crippen. I guess, on the whole, the short form of the 
answer is more the latter. That is to say, we are hopeful that 
some reforms could instill some competition that would take 
advantage of potential efficiencies in delivery, so that the 
current system may spend more money than it needs to. So 
reforms, in other words, could help bring down these cost 
    It is, however, immutable that we are going to have a lot 
more people before very long taking advantage of this program. 
That is not something you can change. It will go from 39 
million recipients to 69 million recipients in from 2010 to 
2030, and you and I aren't going to change that.
    Mr. McCrery. Can you give us some of the elements of the 
structural reform that would lead to increased competition and 
therefore lower increases in costs?
    Mr. Crippen. Well, some of the things we have already 
talked about, I think. In general, what CBO believes is that 
anywhere you can instill more competition and more choice by 
beneficiaries, they will do what is in their self-interest, 
which is to pick either cheaper or better plans. And in so 
doing, you will drive some of the inefficiencies out of the 
current system.
    So that is the overarching umbrella. Now, below that, I 
mean, it is easy for me to say, because it is very hard for 
anyone to write a bill and implement it. Your colleagues are 
grappling with that now.
    Mr. McCrery. If that is the case, then what is the 
explanation for Mr. Stark's statement, which I think is 
accurate--or maybe it is Mr. McDermott's statement that was 
accurate--that very little of the savings associated with the 
Commission's plan comes from the structural changes? First of 
all, is that accurate? And, second, why is that, if what you 
have just said is true?
    Mr. Crippen. I can't answer the first question. We have not 
priced or otherwise scored a plan like the Commission's.
    But, again, to the extent we believe there are savings 
possible in these reforms, it comes mostly from giving people 
more choice and competition, therefore more efficient delivery. 
It does not come so much from any inherent cuts in benefits.
    Mr. McCrery. OK. Thank you.
    Chairman Thomas. The gentleman from Georgia wish to 
    Mr. Lewis.
    Mr. Lewis. Thank you, Mr. Chairman.
    Mr. Director, during the August break I had an opportunity 
to meet and visit with several hospital administrators, and 
based on those visits in the fifth district of Georgia and from 
people throughout the State of Georgia, I wrote a letter, I 
believe to the Ranking Member and to the Chairman of the 
Subcommittee, regarding my strong concern about the financial 
impact of the Balanced Budget Act on hospital and skilled 
nursing facilities in my district and the State of Georgia.
    I notice in the President's Medicare reform proposal he set 
aside $7.5 billion for BBA fixes. To my knowledge, the Breaux-
Thomas proposal doesn't set aside any money for such fixes. Is 
there any plan by Chairman Thomas, to your knowledge, to fix 
the financial impact of the BBA, and where would the money come 
    Mr. Crippen. I will let the Chairman address the question 
of him. We do have and I can report that we are working with 
the Congress on just scoring and helping them analyze a number 
of additions back to some of the BBA reductions, but they are 
all over the board.
    I mean, whether it is 7.5 that the President over 10 years 
proposed, or more or less, it depends on what day and which 
proposal. But there certainly is active consideration, I am 
assuming by Mr. Thomas as well as his colleagues in the Senate, 
on adding back to some of these areas before the end of this 
    Mr. Lewis. In your position----
    Chairman Thomas. Would the gentleman yield?
    Mr. Lewis. Yes, briefly.
    Chairman Thomas. The discussions have been over where it 
might be appropriate. Where numbers were used as plug numbers 
because there was to be generated new scoring mechanisms, 
prospective payment systems, and where they have not been able 
to be generated, the argument being the Y2K problem, some of 
those numbers that were supposed to be there for 6 to 9 months 
are now going to be there for 2 or 3 years, and that is just 
not a reasonable way to go.
    The costs can be adjusted in part by administrative 
decisions, if it is possible statutorily, stretching out time 
lines, or there may have to be some legislatively enacted 
provisions. And what we are doing is discussing actively with 
the Administration what seems to be the administrative changes, 
No. 1, that could be made and, 
No. 2, that would be made by the Administration.
    So it is very difficult to put a dollar value on what we 
would have to carry from a legislative or a statutory point of 
view until we work out what portion of the load they can and 
would be able to carry, versus what we think needs to be done 
and would have to do legislatively. And we are in those 
discussions right now.
    I thank the gentleman for yielding.
    Mr. Lewis. Thank you. Thank you, Mr. Chairman.
    Chairman Thomas. The gentleman from Minnesota wish to 
    Mr. Ramstad. Just briefly, Mr. Chairman.
    Dr. Crippen, as you know, Minnesota delivers high quality 
health care very cost efficiently and effectively, and we are 
penalized under the current program for being efficient. Could 
you comment on, in your judgment, how a premium support model 
like the Breaux-Thomas proposal would address inequities facing 
Minnesota's seniors? Wouldn't it at least bring a more level 
playing field, not only for Minnesota's seniors but across the 
Nation for all beneficiaries?
    Mr. Crippen. It could, Mr. Ramstad. Again, the devil is in 
the details and how one establishes the floor and the 
allocation formulas. It certainly has every prospect for doing 
that, from what we know at the moment, but one cannot say 
definitively that the Minnesota recipients would get more or 
less until we had looked at the details. But it would appear 
that it is possible that using the national averages for the 
basic benefit package in the kinds of proposal that are being 
discussed would raise the rates.
    Mr. Ramstad. And I certainly will follow up with the other 
witnesses and the other panels with that major concern that we 
have. Too many times do I hear that seniors can receive two and 
a half Medicare surgeries at the Mayo Clinic, which you 
mentioned earlier in your testimony, for every one in Miami, 
Florida or New York City or a lot of other places.
    I want to just shift gears and ask also, in your testimony 
you refer to premium support as a defined contribution. Isn't 
there, however, a difference between premium support and a 
defined contribution model, where in premium support the 
government contribution varies with the average cost, not some 
arbitrary fixed amount that may not actually cover seniors' 
health care needs?
    Mr. Crippen. No, you are absolutely right. I didn't mean to 
imply, and I apologize if I did in the testimony, that it would 
be one number for everyone. Clearly there are abilities to 
adjust. What I was trying to connote was, as a broad category 
it would be a move away from what is currently thought of as a 
defined benefit to one in which it was more like a defined 
    But, again, one of the characteristics at least of the 
Commission's recommendation was that there would be a basic 
benefit package, and then on top of that you would add 
essentially a defined contribution. So it would be a hybrid of 
both. I didn't mean to make it sound that there is only one or 
the other choice. You can obviously mix them.
    Mr. Ramstad. I appreciate that clarification, and yield 
back, Mr. Chairman. Thank you, Dr. Crippen.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from Washington wish to inquire?
    Mr. McDermott. Thank you, Mr. Chairman.
    I have a feeling I am before the Kansas school board here, 
where we are talking about competition and there is the belief 
that it works. I have a chart here which is compiled from 
looking at CBO figures and our own figures.
    In 1998 Medicare went up 1.5 percent and Federal Employees 
Health Benefit Plan went up 8.5 percent. Now, one is an 
administered plan, that is Medicare, and the other has 
competition in it. Everybody says managed competition is just 
like the FEHBP. And so we have a 7-percent increase over what 
Medicare was able to do during that period.
    Then we go to 1999, where the estimates from CBO were 
minus, actually a reduction of 1.2 percent, and the FEHBP went 
up 8.9 percent, so we have got more than a 10-percent increase 
over what Medicare did in 1999. And in 2000 we have the CBO 
projections of 7.2 percent, and in yesterday's paper or 
Monday's paper, I guess, Sunday's paper, we had an article that 
the Federal Employees Health Benefit Plan is going to go up 9 
percent, so we are even 2 percent this year.
    Now, I hear you say, and I listened very carefully, you 
said, ``We believe that competition will lower costs.'' But the 
Federal Employees Health Benefit Plan, which is put out there 
as the model that we should be creating for senior citizens, 
with a totally different population--not young people, not 
working people, but we're talking about old people--that this 
plan that can't do it for young people is suddenly going to 
work for old people. Where do you get that belief?
    Mr. Crippen. Let me answer in a couple of ways. First, as I 
understand, at least part of the debate on creationism versus 
evolution depends on where you begin. If you think the Earth is 
3 million years old, you may be an evolutionist. If it is 6,000 
years old, you may be a creationist.
    Mr. McDermott. I was thinking 4004 B.C. was where we 
started. Maybe it is----
    Mr. Crippen. And making that a little more relevant to your 
    Chairman Thomas. Maybe we should ask Strom Thurmond.
    Mr. Crippen. That is true. He would know. He would know the 
    It depends on when you begin, and even with the FEHB 
comparisons. In fact, the folks that work with me anticipated 
that this might come up and have given me a list of increases 
in FEHB compared to both private and Medicare, and it depends 
largely on what year you pick as to whether or not, and 
therefore probably doesn't show you much. For example, in 1994 
Medicare spending went up 11.4 percent, FEHB premiums went up 
1.6 percent. So it depends a bit on when you start and stop.
    There is also a lot, as I suggested to Mrs. Johnson, a lot 
of moving parts in FEHB in terms of what the plans can provide, 
do provide, and also that the announced increases, such as you 
heard earlier this week, don't necessarily end up being the 
actual increases because people do exercise choice and go to 
lower cost plans. So the weighted average, although it is 
anticipated would be whatever the announcement was this week, 9 
percent, will probably end up being more like 6 or 7.
    That is not to take away your point. All I am saying is, 
there are a lot of moving parts and it depends. That comparison 
between FEHB and Medicare, varies from year to year. It looks 
like FEHB is just picking up in the end of an underwriting 
cycle. They have been lower than Medicare for a while. Now they 
are going to be higher. That, as you well know, in private or 
public insurance, happens.
    Mr. McDermott. The fact is, the Urban Institute put out a 
chart which I assume maybe Dr. Moon or someone will speak to, 
which shows that the private health insurance industry has 
always been higher than the Medicare spending over the last--
well, beginning as far back as 1970.
    Chairman Thomas. Would the gentleman yield?
    Mr. McDermott. I mean, this is 1970 to 1997, and the 
cumulative growth has been considerably less than private 
insurance, where we have had all this competition and we have 
had all this putting people in HMOs and everything else, and 
the fact is that we now have, today's article out of the 
newspaper is that the HMOs are taking back all their drug 
coverage. That is the most recent thing, and we saw all over 
this country HMOs pulling out of rural areas. So the idea that 
competition is the way to work I think comes off a very shaky 
base. And I think, Mr. Chairman, before we go leaping to see 
that as our solution, we have to be very careful to look at the 
numbers and see that it really does work. I don't think there 
is any evidence that you can show, that really shows that they 
win in the end.
    Chairman Thomas. I thank the gentleman. My query was, as 
Dr. Crippen indicated, it depends on what years you pick. My 
question would have been, why did she start it in 1970, since 
Medicare started in 1965? My assumption is that starting the 
curve in 1970 gave a different look than going back to 1965. 
Again, it depends upon when and how you want an outcome, as to 
what you use.
    The gentlewoman from Florida wish to inquire?
    Mrs. Thurman. Thank you, Mr. Chairman.
    Dr. Crippen, let me go to maybe what Mr. Ramstad was 
talking about as well, because some of us feel a little 
neglected on this HMO stuff, and particularly as we then start 
talking about going into a premium support theory or the theory 
of this premium support.
    In your testimony you say that they would retain a basic 
benefit package that all plans would offer. Now, is that based 
on the same costs that are being given to these HMOs today, 
where there would be the built-in difference from regions in 
what is being costed out?
    Mr. Crippen. Again, presumably the--we don't have at CBO a 
bill to which we could answer that very specifically. 
Presumably, any system of payment for a basic benefit package 
would include regional or State variations in costs. The old 
AAPCC, as you may know, on which were kind of based managed 
care payments now, was down to a county level. There were some 
problems with that.
    But presumably there will be some factoring in of 
differences in regional variations in costs. The policy, one of 
the policy questions is, do you also factor in regional 
variations in practice patterns? As you know, it varies across 
the country, depending upon where you are and what kind of 
treatment you get. Some of those treatments are more expensive 
than others. And do you want to encourage that?
    I mean, those are the kinds of complex mixes. But I would 
imagine virtually any plan would account for basic cost 
differences among regions.
    Mrs. Thurman. However, I mean, it has just been reported 
that in the Medicare Plus Choice we have overextended maybe 
about $1.3 billion in some of these cases. I think GAO came out 
with that.
    Mr. Crippen. That I am not aware of, Mrs. Thurman, but the 
Comptroller General is right behind me, so you can----
    Mrs. Thurman. Fine. And I guess my concern is if we built 
back in the same problems that we have had in the past, and the 
issue really to me is one of parity. I mean, I am spending my 
money into my payroll to get my Medicare when I reach that 
magical age, and if I live in one part of the country they may 
get $800, where this other part, or even within a State, only 
gets $400.
    Well, what really becomes something that I think all of us 
should be very concerned about is, that is that same person's 
money, and one is getting $800, one is getting $400. But worse 
yet, what ends up happening is that the one who is getting the 
$800, because we have built this in, gets an extra benefit. 
They might get the prescription drug or they might get 
eyeglasses or they might get something else. The person or the 
beneficiary over here who gets $400 in this region is getting 
no extra benefit, and any extra benefit that they get, they are 
having to pay a premium on top of this, where this other group 
is not.
    So I am trying to figure out, why would I go into any of 
this and not stay in some sort of a fee-for-service, where at 
least I am treated equally, or at least to get rid of these 
choice issues or straighten out this formula somehow? I mean, 
how does a premium support help that situation?
    Mr. Crippen. In theory, those who are joining a managed 
care plan now are giving up something, whether it is choice of 
doctors or something else, so that they are willing to give up 
part of their choice in order to have better benefits. I mean, 
that is part of the notion of care. Clearly, the $400 versus 
$800, whether it is Iowa versus New York, originally was based 
on differences in costs for a roughly equal benefit package. 
Again, it incorporates some differences in practice patterns.
    To the extent that is the case, I mean, the person in Iowa 
presumably paid in less as well. Payroll taxes would probably 
be lower, wages are lower, all that stuff. How it all comes out 
is a complex question of what you paid in versus what you 
expect to get out, how sick you are, and all of those things 
that we try to factor in. But clearly there are----
    Mrs. Thurman. But you still end up in the same situation if 
you did then a cost at the end. So say you were that person or 
this area that was getting $800, and in the testimony it talks 
about, well, you could add a premium onto there so you could 
get additional. But if you were getting $800, the premium for 
that additional benefit still may be less than what somebody 
who over here is getting $400, so you are back into the same 
situation that we are today.
    Mr. Crippen. It is possible, sure. I mean, again, the devil 
is in the details of how the distribution is going to work. I 
think that at least, at a minimum, cost differences would be 
accounted for.
    Beyond that, it does--it can be--I worked for a fellow at 
Brookings at one time who said that people have a propensity to 
complexity things. We can certainly make this formula very 
complex, in a way that could have unforeseen outcomes. But, 
again, if it at least reflects the differences in costs for 
some basic benefit package, as it in theory does----
    Mrs. Thurman. However we are not sure that that is what has 
happened. We think that these have been just set in the BBA and 
they have not changed, and we have not looked at any of those 
    Mr. Crippen. No. They have been frozen, yes.
    Mrs. Thurman. OK. Thank you.
    Chairman Thomas. I will tell the gentlewoman that that was 
one of the concerns about arbitrary formula rather than 
reflecting real world prices, but that is not unlike the 
problem where people collect pensions, having worked in one 
State, moved to another one because the costs are so much 
lower, their dollars go further, and the attempt by the first 
State to try to collect taxes because, after all, they made 
their money here and they have left. Florida should have some 
familiarity with----
    Mrs. Thurman. It is called a source tax.
    Chairman Thomas. Yes, the idea being that there are 
different prices in different regions, and one's dollar can go 
further in one region versus another. So trying to create some 
equity on a pure dollar amount would, in fact, result in 
significantly different or more housing, groceries, medical 
care, or any other number of items, based upon the prevailing 
wage rate and other structures in the community that they are 
    The best solution, for me, is to simply take whatever the 
real costs are in that location and have folks compete against 
each other, using those real dollar costs, to produce a 
product. I mean, that is kind of what we have been talking 
    Mrs. Thurman. But those also can be inflated from one 
region to another by whoever is making those determinations, 
and I think that is all----
    Chairman Thomas. The determination should be one plan 
against another, and the key there is to have enough plans so 
that it is a competitive controlling factor. But we will 
obviously be talking about this.
    Mrs. Thurman. We will talk, yes.
    Chairman Thomas. I thank the gentlewoman very much.
    If there are no additional questions, I want to thank the 
director very much for your presentation.
    And I want to announce to the audience that although we had 
planned a separate presentation by Mr. Walker, Comptroller 
General of the U.S. General Accounting Office, because of the 
time constraints of several of our witnesses who have gone out 
of their way to come here again this week, if the panelists 
would allow us, we could perhaps combine Dr. Walker with the 
other panel and put the presentations and the questions 
together and try to do it all at once.
    If I hear no strenuous objection to that, I would ask Mr. 
Walker to come forward, and then the panel that was to follow 
after that: Gail Wilensky, Dr. Wilensky, as you know, Project 
HOPE, Bethesda, Maryland, but also chairman of MedPAC, a 
structure we rely heavily on for information and policy 
decisions; Dr. Bryan Dowd, who is a professor of the Division 
of Health Services, Research and Policy at the University of 
Minnesota in Minneapolis; and the aforementioned Marilyn Moon. 
Dr. Moon is a senior fellow at Urban Institute.
    I want to thank all of you for your cooperation. I would 
then say that Mr. Walker is the seventh Comptroller General of 
the United States. It is a pleasure to have you with us. Your 
written testimony will be made a part of the record, and you 
can address us in any way you see fit in the time that you have 


    Mr. Walker. Thank you, Mr. Chairman, Members of the 
Subcommittee. I appreciate the opportunity to be here today to 
discuss efforts to reform the administration, structure and 
financing of Medicare, steps that are essential to maintain the 
programs long-term sustainability and to its modernization.
    The long-term cost pressures facing this program are 
significant. In fact, Medicare and other health care 
expenditures may represent the single largest threat to our 
fiscal future. Fundamental program reforms are vital to 
reducing the program's growth, which threatens to absorb an 
ever-increasing share of the Nation's budgetary and economic 
    Currently, Medicare is not a sustainable program, based on 
current financing. As noted in Exhibit 1, which is on the left, 
Medicare's HI component is on a cash basis in the red, and it 
has been in the red since 1992. To finance this deficit, 
Medicare has been drawing on its special issue Treasury 
securities acquired during the years when the program generated 
an annual cash surplus.
    Consequently, Medicare is already a net claimant on the 
Treasury, a threshold that Social Security is not expected to 
reach until 2014. In essence, for Medicare to redeem its 
securities, the Government must either raise taxes, cut 
spending on other programs, or reduce the projected surplus. 
Outlays for Medicare services covered by SMI are already funded 
largely through general revenues, and as you know, HI is not.
    Without meaningful reform, the long-term financial outlook 
for Medicare is bleak. Today, Medicare's HI and SMI 
expenditures are expected to increase dramatically, rising from 
12 percent of all Federal revenues in 1999 to more than a 
quarter of Federal revenues by mid-next century.
    As noted in Exhibit 2, over the same timeframe, on the 
right, Medicare's expenditures are expected to more than double 
as a share of our economy, rising from 2.5 to 5.3 percent. When 
viewed from a perspective of the entire budget and the economy, 
the growth of Medicare spending will become progressively 
unsustain- able over the longer term. Our updated budget 
simulations show that to move into a future without making 
changes in Social Security, Medicare and Medicaid Programs is 
to envision a very different role for the Federal Government 
for future generations.
    As noted in the next exhibit on the left, Exhibit 3, even 
assuming that all projected surpluses are saved and 
discretionary budget caps are complied with--which many if not 
most believe are not realistic assumptions--our long-term 
budget simulation model shows the world in 2030, whereby Social 
Security, Medicare and Medicaid increasingly absorb larger 
available resources in the Federal budget and they start to 
haircut other discretionary spending.
    If, on the other hand, as noted on the right, the surplus 
is not saved and the unified surplus is spent, then based upon 
projected growth in Medicare and other health care programs, 
virtually the entire discretionary spending portion of the 
Federal budget will be scalped. And the discretionary spending 
portion of the budget includes national defense, the young, 
infrastructure, and law enforcement.
    Now, realistically, spending is going to be made in those 
programs. The point here is, there are tremendous pressures on 
the mandatory part of the budget, largely fueled by known 
demographic trends, primarily but not exclusively health care 
issues, and Medicare is a major part of it.
    Given the size of Medicare's unfunded liability, it is 
realistic to expect that reforms intended to bring down future 
costs will have to proceed incrementally. The time to begin the 
difficult but necessary steps to reclaim our fiscal future is 
now, when we have budget surpluses and a demographic holiday, 
with retirees now representing a smaller portion of our 
population and before the baby boom generation, my generation, 
begins to retire.
    Ideally, the unfunded promises associated with today's 
programs should be addressed before or concurrent with 
proposals to make new ones, such as adding prescription drug 
coverage. To do otherwise might be politically attractive but 
not fiscally prudent.
    If benefits are added, policymakers need to consider 
targeting strategies and fully offsetting the related costs. 
They may also want to design a mechanism to monitor these and 
aggregate program costs over time, as well as to establish 
expenditure or funding thresholds that would trigger a call for 
fiscal action.
    Our history shows that when benefits are attractive, fiscal 
controls and constraints are difficult to maintain. In 
addition, any potential program expansion should be accompanied 
by meaningful reform of the current Medicare Program to ensure 
its sustainability, which is more important than solvency.
    Proposals to reform Medicare should be assessed against the 
following criteria: affordability, equity, adequacy, 
feasibility, and acceptability. People want unfettered access 
to health care, and some have needs that are not being met. 
However, health care costs compete with other legitimate 
priorities in the Federal budget, and their projected future 
growth threatens to crowd out future generations' flexibility 
to decide which of these competing priorities will be met.
    Thus, in making important fiscal decisions for our Nation, 
policymakers need to consider the fundamental differences 
between wants, needs, and what both individuals and the Nation 
can collectively afford. This concept applies to all aspects of 
government, from major weapons system acquisitions to issues 
involving domestic programs, most importantly health care, 
because wants are unlimited, needs are different, and there are 
very real limits on what we can afford.
    It also points to the fiduciary and stewardship 
responsibility that we all share to ensure the sustainability 
of Medicare for current and future generations, within a 
broader context of providing for other important national needs 
and economic growth.
    A useful discussion of reform has been initiated. In March, 
the Bipartisan Commission on the Future of Medicare completed 
its deliberations, and in July the President proposed certain 
reforms. These options have spurred other proposals as well as 
discussions on the future of Medicare.
    The details of any reform plan need to be specified before 
it can be fully evaluated. Both of the major plans, Breaux-
Thomas and the President's plan, leave important details left 
unsaid, and they are important to be filled in, in order to 
assess their impact on sustainability of the Medicare Program 
as well as feasibility of adopting the proposals.
    The bottom line is that surpluses represent both an 
opportunity and an obligation. We have an opportunity to use 
our unprecedented economic wealth and fiscal good fortune to 
address today's needs, but an obligation to do so in a way that 
improves the prospects for future generations.
    This generation has a stewardship responsibility to future 
generations, to reduce the debt they inherit, to provide a 
strong foundation for future economic growth, and to get on 
with substantive entitlement reform in order to ensure that 
future commitments are both adequate and affordable. To do so, 
the Congress will need to address, as I said, the difference 
between wants, needs and affordability in connection with 
anything from weapons systems to health care. This is tough 
work, but it must be done.
    Mr. Chairman, this concludes my statement. I would be happy 
to answer any questions after my colleagues have a chance to 
make theirs.
    [The prepared statement follows:]

Statement of Hon. David M. Walker, Comptroller General, U.S. General 
Accounting Office

    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today as you discuss efforts to reform the administration, 
structure, and financing of Medicare--steps essential to maintaining 
the program's long-term solvency and to its modernization. There 
appears to be an emerging consensus that substantive financing and 
programmatic reforms are necessary to put Medicare on a sustainable 
footing for the future. The long-term cost pressures facing this 
program are considerable. Fundamental program reforms are vital to 
reducing the program's growth, which threatens to absorb ever-
increasing shares of the nation's budgetary and economic resources.
    Against this backdrop, I want to acknowledge your efforts, Mr. 
Chairman, as well as the contributions of the other members of the 
Bipartisan Commission on the Future of Medicare. The Breaux-Thomas 
proposal, which grew out of the Commission's deliberations, included a 
comprehensive reform plan on a technically difficult issue that touches 
on both the future health of beneficiaries and the fiscal health of the 
U.S. economy.\1\ I also want to commend both this Subcommittee and the 
Congress as a whole for remaining steadfast in the face of intense 
pressure to roll back the Medicare payment reforms included in the 
Balanced Budget Act of 1997 (BBA). It is in no sense hyperbole to note 
that the BBA changes constituted a critical down payment for Medicare 
reform. I know that the Subcommittee appreciates the vital importance 
of waiting for strong evidence that demonstrates the need for any 
modifications before acting.
    \1\ The National Bipartisan Commission on the Future of Medicare 
held its last meeting on March 16, 1999. By a vote of 10 to 7, the 
Commission failed to achieve the 11-member super majority required by 
law to report a recommendation to the Congress.
    You must be especially prudent during this period of prosperity as 
you consider Medicare reform initiatives. Please remember that, even as 
recent estimates have increased the size of budget surpluses, these are 
projected budget surpluses, and we know that the business cycle has not 
been repealed. Current projected surpluses could well prove to be 
fleeting, and thus appropriate caution should be exercised when 
creating new entitlements that establish permanent claims on future 
resources. While I do not relish being the accountability cop at the 
surplus celebration party, that is part of my job as Comptroller 
General of the United States.
    Moreover, while the size of future surpluses could exceed or fall 
short of projections, we know that demographic and cost trends will, in 
the absence of meaningful reform, drive Medicare spending to levels 
that will prove unsustainable for future generations of taxpayers. 
Accordingly, we need to view this period of projected prosperity as an 
opportunity to address the structural imbalances in Medicare, Social 
Security, and other entitlement programs before the approaching 
demographic tidal wave makes the imbalances more dramatic and 
meaningful reform less feasible.
    As the foregoing suggests, the stakes associated with Medicare 
reform are high for the program itself and for the rest of the federal 
budget, both now and for future generations. Current policy decisions 
can help us prepare for the challenges of an aging society in several 
important ways: (1) reducing public debt to increase national savings 
and investment, (2) reforming entitlement programs to reduce future 
claims and free up resources for other competing priorities, and (3) 
establishing a more sustainable Medicare program that delivers 
effective and affordable health care to our seniors.
    In this context, I would like to make a few summary points before 
delving into the specifics of Medicare's financial health and a 
discussion of potential reform.
     In March, the Bipartisan Commission on the Future of 
Medicare completed its deliberations. Reform options emerged from these 
and other discussions that touched on all aspects of the Medicare 
program, including (1) modernization of the traditional Medicare fee-
for-service program, both to update the benefit package and enhance its 
potential for containing program costs; (2) modernization of the 
Medicare+Choice program to ensure that beneficiaries have health plan 
choices and allow the program to more efficiently purchase plan 
services; and (3) adoption of a program like the Federal Employees 
Health Benefits Program (FEHBP) or a premium support model to foster 
quality and price based competition among health plans and to elevate 
beneficiaries' consciousness about and responsibility for program 
     Given the size of Medicare's unfunded liability, it is 
realistic to expect that reforms intended to bring down future costs 
will have to proceed incrementally. The time to begin the difficult but 
necessary steps to reclaim our fiscal future is now, when we have 
budget surpluses and a demographic ``holiday'' with retirees a far 
smaller proportion of the population than they will be in the future.
     Ideally, the unfunded promises associated with today's 
program should be addressed before or concurrent with proposals to make 
new ones, such as adding prescription drug coverage. To do otherwise 
might be politically attractive but not fiscally prudent. If benefits 
are added, policy makers need to consider targeting strategies that 
fully offset the related costs. They may also want to design a 
mechanism to monitor aggregate program costs over time and to establish 
expenditure or funding thresholds that would trigger a call for fiscal 
action. Our history shows that when benefits are attractive, fiscal 
controls and constraints are difficult to maintain. In addition, any 
potential program expansion should be accompanied by meaningful reform 
of the current Medicare program to help ensure its sustainability.
     To qualify as meaningful reform, a proposal should make a 
significant down payment toward ensuring Medicare's long-range 
financial integrity and sustainability--the most critical issue facing 
Medicare. The 1999 annual reports of the Medicare trustees project that 
program costs will continue to grow faster than the rest of the 
economy. Care must be taken to ensure that any potential expansion of 
the program is balanced with other programmatic reforms so that we do 
not worsen Medicare's existing financial imbalances. Proposals to 
reform Medicare should be assessed against the following criteria: 
affordability, equity, adequacy, feasibility, and acceptance. (See 
Table 1.)

Table 1.--Criteria for Assessing the Merits of Medicare Reform Proposals
                                                What this means for a
                 Criterion                            proposal
Affordability.............................  A proposal should be
                                             evaluated in terms of its
                                             effect on the long-term
                                             sustainability of Medicare
Equity....................................  A proposal should be fair to
                                             providers and across groups
                                             of beneficiaries
Adequacy..................................  A proposal should include
                                             resources that allow
                                             appropriate access and
                                             provisions that foster cost-
                                             effective and clinically
                                             meaningful innovations that
                                             address patients' needs
Feasibility...............................  A proposal should
                                             incorporate elements that
                                             facilitate effective
                                             implementation and adequate
Acceptance................................  A proposal should be
                                             transparent and should
                                             educate provider and
                                             beneficiary communities
                                             about its costs and the
                                             realities of tradeoffs
                                             required by significant
                                             policy changes

     People want unfettered access to health care, and 
some have needs that are not being met. However, health care 
costs compete with other legitimate priorities in the federal 
budget, and their projected future growth threatens to crowd 
out future generations' flexibility to decide which of these 
competing priorities will be met. Thus, in making important 
fiscal decisions for our nation, policymakers need to consider 
the fundamental differences between wants, needs, and what both 
individuals and our nation can afford. This concept applies to 
all major aspects of government, from major weapons system 
acquisitions to issues affecting domestic programs. It also 
points to the fiduciary and stewardship responsibility that we 
all share to ensure the sustainability of Medicare for current 
and future generations within a broader context of providing 
for other important national needs and economic growth.
     Let's not kid ourselves--reforming Medicare is 
hard work. Health care spending accounts for one-seventh of the 
nation's economy, and Medicare is the nation's single largest 
health care payer. The program's beneficiary populations 
consist of roughly 35 million seniors and 4 million disabled 
individuals under age 65. The Health Care Financing 
Administration (HCFA) estimates that the program's billers--
physicians, hospitals, equipment suppliers, and other providers 
of health services--number about 1 million.
     As the various reform options come under scrutiny, 
the importance of design details should not be overlooked. Our 
work on efforts to implement reforms mandated in the BBA is 
instructive regarding reform specifics. Three principal lessons 
can be drawn from recent experience: (1) The particulars of 
payment mechanisms largely determine the extent to which a 
reform option can eliminate excess government spending while 
protecting beneficiaries access' to care. (2) Revisions to 
newly implemented policies should be based on a thorough 
assessment of their effects so that, at one extreme, they are 
not unduly affected by external pressures and premature 
conclusions or, at the other extreme, they remain static when 
change is clearly warranted. (3) For choice-based models to 
function as intended--that is, to foster competition based on 
cost and quality--consumers must have information that is 
sufficiently comparable.
    At this time, I would like to discuss the competing 
concerns at the crux of Medicare reform, in general, and to 
provide a conceptual framework for considering the various 
possible combinations of reform options, in particular.
         Competing Concerns Pose Challenges for Medicare Reform
    The current Medicare program, without improvements, is ill 
suited to serve future generations of seniors and eligible 
disabled Americans. On the one hand, the program is fiscally 
unsustainable in its present form, as the disparity between 
program expenditures and program revenues is expected to widen 
dramatically in the coming years. On the other, the program is 
outmoded in that it has not been able to adopt modern, market-
based management tools, and its benefit package contains gaps 
in desired coverage compared to private employer coverage. 
Compounding the difficulties of responding to these competing 
concerns is the sheer size of the Medicare program--even modest 
program changes send ripples across the program's 39-million-
strong beneficiary population and the approximately 1 million 
health care providers that bill the program. Balancing the 
needs of all these parties requires hard choices that have been 
brought before this Subcommittee, the Congress, and the 
National Bipartisan Commission on the Future of Medicare.

Medicare Is Already in the Red

    Unlike private trust funds that can set aside money for the 
future by investing in financial assets, the Medicare Hospital 
Insurance (HI) Trust Fund--which pays for inpatient hospital 
stays, skilled nursing care, hospice, and certain home health 
services--is essentially an accounting device. It allows the 
government to track the extent to which earmarked payroll taxes 
cover Medicare's HI outlays. In serving the tracking purpose, 
annual trust fund reports show that Medicare's HI component is, 
on a cash basis, in the red and has been since 1992. (See fig. 
1.) Currently, earmarked payroll taxes cover only 89 percent of 
HI spending and, including all earmarked revenue, the fund is 
projected to have a $7 billion cash deficit for fiscal year 
1999 alone. To finance this deficit, Medicare has been drawing 
on its special issue Treasury securities acquired during the 
years when the program generated a cash surplus. Consequently, 
Medicare is already a net claimant on the Treasury--a threshold 
that Social Security is not currently expected to reach until 
2014. In essence, for Medicare to ``redeem'' its securities, 
the government must raise taxes, cut spending for other 
programs, or reduce the projected surplus. Outlays for Medicare 
services covered under Supplementary Medical Insurance (SMI)--
physician and outpatient hospital services, diagnostic tests, 
and certain other medical services and supplies--are already 
funded largely through general revenues.

    Without meaningful reform, the long-term financial outlook 
for Medicare is bleak. Together, Medicare's HI and SMI 
expenditures are expected to increase dramatically, rising from 
12 percent in 1999 to more than a quarter of all federal 
revenues by mid century. Over the same time frame, Medicare's 
expenditures are expected to double as a share of the economy, 
from 2.5 to 5.3 percent, as shown in figure 2.

    The progressive absorption of a greater share of the 
nation's resources for health care, like Social Security, is in 
part a reflection of the rising share of elderly in the 
population. Medicare's rolls are expanding and are projected to 
increase rapidly with the retirement of the baby boom. Today's 
elderly make up about 13 percent of the total population; by 
2030, they will comprise 20 percent as the baby boom generation 
ages and the ratio of workers to retirees declines from 3.4 to 
one today to roughly two to one.
    However, Medicare growth rates also reflect the escalation 
of health care costs at rates well exceeding general rates of 
inflation. Increases in the number and quality of health care 
services have been fueled by the explosive growth of medical 
technology. Moreover, the actual costs of health care 
consumption are not transparent. Third-party payers generally 
insulate consumers from the cost of care decisions. In 
traditional Medicare, for example, the impact of the cost-
sharing provisions designed to curb the use of services is 
muted because about 80 percent of beneficiaries have some form 
of supplemental health care coverage (such as Medigap 
insurance) that pays these costs. For these reasons, among 
others, Medicare represents a much greater and more complex 
fiscal challenge than even Social Security over the longer 
    When viewed from the perspective of the entire budget and 
the economy, the growth in Medicare spending will become 
progressively unsustainable over the longer term. Our updated 
budget simulations show that to move into the future without 
making changes in the Social Security, Medicare, and Medicaid 
programs is to envision a very different role for the federal 
government. Even assuming that all projected surpluses are 
saved and existing discretionary budget caps are complied with, 
our long-term model shows a world by 2030 in which Social 
Security, Medicare, and Medicaid increasingly absorb available 
revenues within the federal budget. (See fig. 3.) If none of 
the surplus is saved, the long-term outlook is even more 
daunting. (See fig. 4.) Budgetary flexibility declines 
drastically, and there is little or no room for programs for 
national defense, the young, infrastructure, and law 
enforcement. In short, there will be essentially no 
discretionary programs at all.


    When viewed together with Social Security, the financial burden of 
Medicare on the future taxpayers becomes unsustainable. As figure 5 
shows, the cost of these two programs combined would nearly double as a 
share of the payroll tax base over the long term. Assuming no other 
changes, these programs would constitute an unimaginable drain on the 
earnings of our future workers.

    While the problems facing the Social Security program are 
significant, Medicare's challenges are even more daunting. To close 
Social Security's deficit today would require a 17 percent increase in 
the payroll tax, whereas the HI payroll tax would have to be raised 50 
percent to restore actuarial balance to the trust fund. This analysis, 
moreover, does not incorporate the financing challenges associated with 
the SMI and Medicaid programs.
    Early action to address the structural imbalances in Medicare is 
critical. First, ample time is required to phase in the reforms needed 
to put this program on a more sustainable footing before the baby 
boomers retire. Second, timely action to bring costs down pays large 
fiscal dividends for the program and the budget. Our long-term budget 
simulations, as shown in figure 6, illustrate how critical early action 
on Medicare reform is to our long-term fiscal future. If the annual 
growth in per person Medicare spending could be slowed to 4 percent 
over the 70-year period it would yield the kind of savings needed to 
establish a truly sustainable budget policy for the long term. This is 
not easy however. Although over 70 years the projected average annual 
growth in per person spending is 4.5 percent, over the next 10 years it 
is nearly 5 percent. The high projected growth of Medicare in the 
coming years, means that the earlier the reform begins, the greater the 
savings will be as a result of the effects of compounding. Reforms 
fully phased in by 2005 would enable us to maintain surpluses over the 
entire 70-year simulation period.

    The actions necessary to bring about a more sustainable program 
will no doubt call for some hard choices. Some suggest that the size of 
the imbalances between Medicare's outlays and payroll tax revenues for 
the HI program may well justify the need for additional resources. One 
possible source could be general revenues. Although this may eventually 
prove necessary, such additional financing should be considered as part 
of a broader initiative to ensure the program's long-range financial 
integrity and sustainability.
    What concerns me most is that devoting general funds to the HI may 
be used to extend HI's solvency without addressing the hard choices 
needed to make the whole Medicare program more sustainable in economic 
or budgetary terms. Increasing the HI trust fund balance alone, without 
underlying program reform, does nothing to make the Medicare program 
more sustainable--that is, it does not reduce the program's projected 
share of GDP or the federal budget. From a macro economic perspective, 
the critical question is not how much a trust fund has in assets but 
whether the government as a whole has the economic capacity to finance 
all Medicare's promised benefits--both now and in the future.
    If more fundamental program reforms are not made, I fear that 
general fund infusions would interfere with the vital signaling 
function that trust fund mechanisms can serve for policymakers about 
underlying fiscal imbalances in covered programs. The greatest risk is 
that dedicating general funds to the HI program will reduce the sense 
of urgency that impending trust fund bankruptcy provides to 
policymakers by artificially extending the solvency of the HI program. 
Furthermore, increasing the trust fund's paper solvency does not 
address cost growth in the SMI portion of Medicare, which is projected 
to grow even faster than HI in coming decades.

Long-Term Fiscal Policy Choices

    Beyond reforming the Medicare program itself, maintaining 
an overall sustainable fiscal policy and strong economy is 
vital to enhancing our nation's future capacity to afford 
paying benefits in the face of an aging society. Decisions on 
how we use today's surpluses can have wide-ranging impacts on 
our ability to afford tomorrow's commitments.
    As we know, there have been a variety of proposals to use 
the surpluses for purposes other than debt reduction. Although 
these proposals have various pros and cons, we need to be 
mindful of the risk associated with using projected surpluses 
to finance permanent future claims on the budget, whether they 
are on the spending or tax side.\2\ Commitments often prove to 
be permanent while projected surpluses can be fleeting. For 
instance, current projections assume full compliance with tight 
discretionary spending caps. Moreover, relatively small changes 
in economic assumptions can lead to very large changes in the 
fiscal outlook, especially when carried out over a decade. In a 
recent report, the Congressional Budget Office (CBO) compared 
the actual deficits or surpluses for 1988 through 1998 with the 
first projection it had produced 5 years before the start of 
each fiscal year. Excluding the estimated impact of 
legislation, CBO says that its errors averaged about 13 percent 
of actual outlays. Such a shift in 2004 would mean a potential 
swing of about $250 billion in the projected surplus.
    \2\ See Federal Budget: The President's Midsession Review (GAO/OCG-
99-29, July 21, 1999).
    Although most would not argue for devoting 100 percent of 
the surplus to debt reduction over the next 10 years, saving a 
good portion of our surpluses would yield fiscal and economic 
dividends as the nation faces the challenges of financing an 
aging society. Our work on the long-term budget outlook 
illustrates the benefits of maintaining surpluses for debt 
reduction. Reducing the publicly held debt reduces interest 
costs, freeing up budgetary resources for other programmatic 
priorities. For the economy, running surpluses and reducing 
debt increase national saving and free up resources for private 
investment. These results, in turn, lead to stronger economic 
growth and higher incomes over the long term.
    Over the last several years, our simulations illustrate the 
long-term economic consequences flowing from different fiscal 
policy paths.\3\ Our models consistently show that saving all 
or a major share of projected budget surpluses ultimately leads 
to demonstrable gains in GDP per capita. Over a 50-year period, 
GDP per capita would more than double from present levels by 
saving all or most of projected surpluses, while incomes would 
eventually fall if we failed to sustain any of the surplus. 
Although rising productivity and living standards are always 
important, they are especially critical for the 21st century, 
for they will increase the economic capacity of the projected 
smaller workforce to finance future government programs along 
with the obligations and commitments for the baby boomers' 
    \3\ See Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-
83, Feb. 25, 1998) and Budget Issues: Analysis of Long-Term Fiscal 
Outlook (GAO/AIMD/OCE-98-19, Oct. 22, 1997).

BBA Made Medicare Reform Down Payment

    In addition to its significant financial imbalance, 
Medicare is outmoded from a programmatic perspective. In its 
current form, the program lacks the flexibility to readily 
adjust its administered prices and fees in line with market 
rates and lacks the tools to exercise meaningful control over 
the volume of services used. Nevertheless, BBA reforms enacted 
in 1997 have begun to address certain programmatic shortcomings 
by modernizing the program's pricing and payment strategies and 
by moving toward quality-based competition among health plans. 
The act's combination of structural reforms, constraints on 
provider fees, and increases in beneficiary payments was 
expected to lower program spending by $386 billion over 10 
years. Because certain key provisions have only recently or 
have not yet been phased in, the full effects of the BBA on 
providers, beneficiaries, and taxpayers will not be known for 
some time.
    Of particular significance was BBA's creation of the 
Medicare+Choice program, which furthered the use of a choice-
based model of providing Medicare benefits. Medicare+Choice 
expanded Medicare's managed care options to include, in 
addition to health maintenance organizations (HMO), health 
plans such as preferred provider organizations, provider-
sponsored organizations, and private fee-for-service plans. In 
making this expanded consumer choice program, BBA provisions 
placed a dramatic new emphasis on the development and 
dissemination of comparative plan information to consumers to 
foster quality-based plan competition. Other BBA provisions 
were designed to pay health plans more appropriately than 
Medicare had done under the previous HMO payment formula.
    BBA also made historic changes to traditional Medicare. It 
is gradually eliminating, for the most part, cost-based 
reimbursement methods and replacing them with prospective 
payment systems (PPS). The intent is to foster the more 
efficient use of services and to lower growth rates in spending 
for these providers, replicating the experience for acute care 
hospitals following the implementation of Medicare's PPS for 
hospitals, which began in the mid-1980s. BBA mandated phasing 
in PPSs for skilled nursing facilities, home health agencies 
(HHA), hospital outpatient services, and certain hospitals not 
already paid under such arrangements.
    Yet pressures mount to undo some of these changes. Affected 
providers are currently seeking to repeal various BBA 
provisions, some relying on anecdotal evidence rather than 
systematic analysis to make their case. An illustration is the 
reporting of health plan withdrawals from the Medicare+Choice 
program for 1999. Plans cite, and the press reports, inadequate 
payment rates as the reason for dropping out of Medicare or 
reducing enrollees' benefits. We have another point of view 
based on our fact-gathering and analyses.
    BBA sought to moderate Medicare's payments to managed care 
plans because, ironically, Medicare managed care cost, not 
saved, the government money. That is, the government was paying 
more to cover beneficiaries in managed care than it would have 
if these individuals had remained in the traditional fee-for-
service program. In our report, we noted that BBA has reduced, 
but not eliminated, excess payments.\4\ In fact, Medicare's 
payments to some plans are generous enough for plans to make 
profits and to finance prescription drugs and other extras not 
available to the majority of senior and disabled beneficiaries 
who remain in traditional Medicare. We have also reported that 
factors additional to or even exclusive of payment rates--
including competition and other market conditions--played a 
significant role in the 1999 plan dropouts.\5\ Our ongoing 
analysis of the year 2000 plan dropouts reveals similar 
findings. The question this raises for policymakers is the 
extent to which they should be concerned about health plan 
dropouts from Medicare when plan participation means that the 
government finances non-Medicare benefits for a minority of 
beneficiaries while paying more for these beneficiaries than 
for similar ones in traditional Medicare. Among other lessons, 
however, the intensity of pressure to roll back BBA's curbs on 
managed care rate increases teaches us the difficulty that this 
Subcommittee and the Congress as a whole face in making 
Medicare payment reforms.
    \4\ See Medicare+Choice: Reforms Have Reduced, but Likely Not 
Eliminated, Excess Plan Payments (GAO/HEHS-99-144, June 18, 1999).
    \5\ See Medicare Managed Care Plans: Many Factors Contribute to 
Recent Withdrawals; Plan Interest Continues (GAO/HEHS-99-91, Apr. 27, 
 Dimensions of Reform Include Benefit Expansions and Financing Changes
    Concern continues to be voiced about the obvious gaps in 
protections for Medicare beneficiaries, in contrast to what is 
available for most individuals with private employer-based 
coverage. At the same time, competing concerns remain about the 
need to check Medicare's cost growth, even without adding new 
benefits. In response, the various reform options, including 
those favored by a majority of the Bipartisan Commission, have 
two major dimensions: (1) expansion of Medicare's benefit 
package and (2) cost containment through financing and other 
structural transformations. Two commonly discussed benefit 
expansions are the inclusion of a prescription drug benefit and 
coverage for extraordinary out-of-pocket costs, known as 
catastrophic coverage. The financing reforms are reflected in 
three models: fee-for-service modernization, Medicare+Choice 
modernization, and a premium support system fashioned after 
FEHBP. Each of these models is designed, to different degrees, 
to alter program incentives currently in place to make 
beneficiaries more cost conscious and providers more efficient 
(see Table 2).

        Table 2.--Major Dimensions of Medicare Reform, by Option
                                            Financing and organizational
      Updated benefit package options              change options
Coverage for outpatient prescription drugs  Fee-for-service
Limit on beneficiary liability............  Medicare+Choice
                                            FEHBP-type premium support

Benefit Expansion Reforms

    Medicare's basic benefit package largely reflects the 
offerings of the commercial insurance market in 1965 when the 
program began. Although commercial policies have evolved since 
then, Medicare's package--for the most part--has not.\6\ For 
example, unlike many current commercial policies, Medicare does 
not cover outpatient prescription drugs or cap beneficiaries' 
annual out-of-pocket spending. Some beneficiaries can augment 
their coverage by participating in the Medicaid program (if 
their incomes are low enough), obtaining a supplemental 
insurance policy privately or through an employer, or enrolling 
in a Medicare+Choice plan. However, these options are not 
available to or affordable for all beneficiaries. Furthermore, 
to the extent that Medicaid and supplemental policies provide 
first-dollar coverage of services, the beneficiary population's 
sensitivity to service costs is dulled, contributing to some 
continued excess utilization. Consequently, many reform 
advocates believe that Medicare's basic benefit package should 
be brought into line with current commercial norms for active 
    \6\ Some Medicare benefits have changed. For example, BBA added or 
expanded coverage for screening mammograms, prostate cancer screening 
tests, bone mass measurements, and several screening or preventive 
    Two benefit reforms under discussion by policymakers are 
the inclusion of prescription drugs and stop-loss coverage that 
caps beneficiary out-of-pocket spending. Each involves myriad 
options, and assessing the merit of these reforms would depend 
on the specifics included. For instance, a Medicare 
prescription drug benefit could be targeted to provide coverage 
for all beneficiaries, coverage only for beneficiaries with 
extraordinary drug expenses, coverage only for low-income 
beneficiaries, or coverage for selected drugs, such as those 
deemed to be cost beneficial. Such coverage decisions would 
hinge on understanding how a new pharmaceutical benefit would 
shift to Medicare portions of the out-of-pocket costs borne by 
beneficiaries as well as those costs paid by Medicaid, Medigap, 
or employer plans covering prescription drugs for retirees. How 
would these new program costs be shared between taxpayers and 
beneficiaries through premiums, deductibles, and copayments? 
Would subsidies be provided to help low-income beneficiaries 
not eligible for Medicaid with these costs? The administration 
of the benefit raises other questions, such as, Who would set 
and enforce drug coverage standards among the private health 
plans participating in Medicare? And, for traditional Medicare, 
How would reimbursable prices be set? Price-setting options 
include using a formula based on market prices, negotiating 
directly with manufacturers, or contracting with pharmaceutical 
benefit management companies. The Breaux-Thomas proposal 
favored targeting a drug benefit to low-income beneficiaries 
while allowing those at higher incomes to buy into the benefit. 
A catastrophic, or stop-loss, coverage benefit would similarly 
entail its own design permutations and variables.

Financing and Other Structural Reforms

    Many Medicare reforms are designed to slow spending growth 
to keep the program viable for the nation's growing aged 
population. Although the various proposals, including those 
considered by the Bipartisan Commission, differ from one 
another in concept, they generally include mechanisms to make 
beneficiaries more cost conscious, and incorporate provider 
incentives to improve the efficiency of health care delivery. 
The various financing and structural reforms consist of 
components of three general models: fee-for-service 
modernization, Medicare+Choice modernization, and a premium 
support system fashioned after FEHBP (see Table 3).

                            Table 3.--Three Medicare Financing and Structural Reforms
                                           Fee-for-service          Medicare+Choice         FEHBP-type premium
                                            modernization            modernization               support
Pending under BBA....................  Prospective payment      Health-based risk
                                        systems for HHAs,        adjustment of rates.
                                        hospital outpatient     Annual enrollment and
                                        departments, and         lock-in.
                                        others.                 Competitive pricing
Potential under current proposals....  Selective purchasing...  Plan savings shared      Premium based on
                                       Negotiated pricing.....   with program and/or      offered or negotiated
                                       Case management for       beneficiaries.           price
                                        complex and chronic     Competitive premium      Beneficiary
                                        conditions.              pricing.                 contribution based on
                                       Utilization management.                            plan cost
                                       Medigap and beneficiary                           Traditional Medicare
                                        cost-sharing reforms.                             incorporated
                                       Expanded use of centers                           Enhanced flexibility
                                        of excellence.                                   Self-financed

Fee-for-Service Modernization

    BBA improved the efficiency of Medicare's traditional fee-
for-service program by substituting a variety of PPSs and other 
fee changes for its cost-based reimbursement methods and 
outdated fees. Nevertheless, Medicare is still not an efficient 
purchaser. Adjusting its systems of administered prices and 
fees up or down to ensure beneficiary access or to capture 
potential savings as the market changes poses an overwhelming, 
if not impossible, challenge. Medicare largely remains a 
passive bill payer, exercising little meaningful control over 
the volume of services used. Proposals to modernize fee-for-
service Medicare aim at providing flexibility to take advantage 
of market prices and introducing some management of service 
utilization. In proposing to make fee-for-service more fiscally 
accountable and to provide it with additional flexibility to 
achieve these fiscal goals, the Bipartisan Commission also 
discussed fee-for-service modernization as one of the critical 
elements of reform.
    Preferred provider arrangements, whereby insurers select 
certain providers because of their willingness to accept lower 
fees and their efficient style of practice, have become 
commonplace in the commercial insurance market. By accepting 
negotiated or competitively bid fees that fall below the usual 
levels, selected providers and the beneficiaries using their 
services would be afforded certain advantages. The selected 
providers with lower fees may experience increased demand, 
while beneficiaries using their services could be subject to 
lower cost sharing. Comparable arrangements have been proposed 
for fee-for-service Medicare. Testing of this concept has been 
under way in the HCFA's Centers of Excellence demonstrations, 
where hospitals and physicians agree to provide certain 
procedures for negotiated all-inclusive fees. BBA also allowed 
for testing of competitive bidding for medical equipment and 
supplies, with high bidders being excluded from serving 
Medicare beneficiaries.
    About 87 percent of beneficiaries in traditional Medicare 
face little cost sharing in the form of deductibles or 
copayments for services by virtue of their eligibility for 
Medicaid or their enrollment in a supplementary insurance plan. 
While increases in cost sharing have been common in private 
insurance to make beneficiaries sensitive to the value and cost 
of services, it has been a cost-containment tool largely 
unavailable to Medicare. Protecting low-income beneficiaries 
from financial barriers to care remains a critical concern. One 
possible change in allowable supplementary coverage would be to 
restructure cost sharing to heighten beneficiary sensitivity to 
the cost of services while removing catastrophic costs for 
those who have intensive health care needs.
    Private indemnity insurers have moved to incorporate 
certain utilization management techniques into their policies, 
such as prior authorization of some expensive services and case 
management for persons with serious chronic conditions. 
Although such techniques are increasingly common among private 
insurers, their effectiveness on the population Medicare covers 
is unknown.

Medicare+Choice Modernization

    Medicare+Choice signaled a new phase in efforts to 
transform Medicare. Built on the program that allowed 
beneficiaries to enroll in participating managed care plans, 
Medicare+Choice expands options available to beneficiaries and 
substantially changes plan payment methods. By raising payments 
in certain areas and allowing additional types of entities to 
contract with Medicare, Medicare+Choice is intended to boost 
plan participation and beneficiary enrollment. Payment changes 
are designed to adjust the per capita rates to more accurately 
reflect enrollees' expected resource use and slow the growth of 
spending over time.
    Among other payment changes, BBA required HCFA to implement 
by January 1, 2000, a methodology to adjust plan payments to 
reflect the health status of plan members. Favorable 
selection--that is, the tendency for healthier beneficiaries to 
enroll in managed care plans--has resulted in payments that are 
higher than warranted. The new risk adjustment method developed 
for Medicare will more closely align payments to the expected 
health care costs of plans' enrollees. This will help produce 
the savings originally envisioned when managed care enrollment 
options were offered to Medicare beneficiaries and will foster 
competition among plans on the basis of benefits and quality 
rather than enrollment strategies.
    The design of the Medicare+Choice program does not, 
however, allow taxpayers to benefit from the current 
competition among health plans. If a plan can provide the 
Medicare package of benefits for less than the Medicare 
payment, it must cover additional benefits, reduce fees, or 
both.\7\ Plans that offer enriched benefit packages--such as 
including coverage for outpatient prescription drugs or routine 
physical examinations--may attract beneficiaries and gain 
market share. Medicare, however, pays the predetermined price 
even in fiercely competitive markets.
    \7\ Alternatively, plans can contribute to a stabilization fund 
that would allow them to provide additional benefits or lower fees in 
future years. Before BBA, health plans also had the option of accepting 
a lower capitation payment. In practice, plans preferred to add 
benefits to attract beneficiaries.
    The Medicare+Choice program could be modified, through new 
legislation, to require that taxpayers and beneficiaries both 
benefit from health plan competition. The Congress could 
require that when payments exceed a plan's cost of services 
(including reasonable profit), part of the savings be returned 
to the program and the rest be used to fund additional 
benefits. Another alternative would be to set plan payments 
through competitive bidding. In fact, BBA mandates a 
competitive pricing demonstration. However, setting the 
parameters of a competitive pricing system is a formidable 
task. Furthermore, this payment-setting approach may be best 
suited to urban areas with high concentrations of managed care 

FEHBP-Type Premium Support

    Although modernizing traditional Medicare and 
Medicare+Choice could improve the control of program spending, 
several incentives would remain unaltered. For example, 
beneficiaries would remain partially insulated from the cost 
consequences of their choices. They would not benefit directly 
from selecting plans capable of delivering Medicare-covered 
benefits less expensively because the premiums they pay might 
well remain constant. Program payments to plans would continue 
to be established administratively. The Breaux-Thomas proposal 
recognized beneficiary sensitivity to cost as the critical 
element missing from the current Medicare program. To remedy 
this situation, the Breaux-Thomas proposal and others have 
proposed the adoption of an FEHBP-type premium support for 
Medicare--a mechanism that could, at the same time, serve to 
increase beneficiary sensitivity to the cost consequences of 
their choices and enhance quality/cost based competition.
    The two defining elements of an FEHBP-type of premium 
support are (1) the establishment of premium levels for plans 
through negotiations between the program and plans and (2) the 
linking of beneficiaries' contributions to the premiums of the 
plans they join. This system makes transparent to beneficiaries 
which plans operate less expensively and can therefore charge 
lower premiums. In principle, it encourages competition because 
plans that can deliver services more efficiently can lower 
premiums and attract more enrollees. In practice, some caveats 
remain. Differences in premiums can reflect more than variation 
in efficiency. For example, plans may achieve savings through 
narrower provider networks that, while capable of providing 
Medicare-covered benefits, could cause beneficiaries 
inconveniences and delays in accessing services. Providing 
beneficiaries adequate comparative information on plans' 
expected and actual performance becomes even more critical.
    Because most beneficiaries participate--and are expected to 
continue to participate--in traditional fee-for-service 
Medicare, its incorporation into the FEHBP-type system is seen 
as important. Under current arrangements, the only premium for 
participating in the traditional program is the fixed monthly 
amount that beneficiaries voluntarily pay to receive coverage 
for SMI or to be eligible to enroll in a Medicare+Choice plan. 
Because the premium amount represents only 25 percent of the 
program's cost and is deducted from beneficiaries' monthly 
Social Security payments, participants are not as aware of the 
cost of the traditional Medicare program. The Breaux-Thomas 
proposal incorporates traditional Medicare as another plan 
under an FEHBP-type premium support system. Traditional 
Medicare would propose and negotiate premiums like any other 
plan and be expected to be self-financing and self-sustaining. 
Recognizing the challenge the latter requirement creates, the 
proposal would also provide traditional Medicare more 
flexibility to manage costs using tools similar to proposals 
for fee-for-service modernization.
    Incorporating traditional Medicare as another plan puts all 
plans on equal footing and maximizes beneficiaries awareness of 
costs. However, the sheer size of the traditional program 
creates questions. How much flexibility can be granted to 
traditional Medicare, given its market power? What will it mean 
for a public plan to be self-sustaining and self-financing? Can 
it generate and retain reserves as a protection against future 
losses? How will losses be managed? The insolvency of 
traditional Medicare, which may continue to enroll the majority 
of beneficiaries and may be the only plan serving many areas of 
the country, is not acceptable. The dilemma of how to guarantee 
traditional Medicare's solvency in the context of an FEHBP-type 
premium support system needs to be addressed.
    An FEHBP-type premium support system would increase the 
importance of effective program management and design. In 
particular, the ability to risk-adjust premiums to reflect the 
variation in health status of beneficiaries joining different 
plans would become paramount. Participating plans that attract 
a disproportionate number of more seriously ill and costly 
beneficiaries would be at a competitive disadvantage if their 
premium revenues were not adjusted adequately. In turn, 
enrollees in those plans might find services compromised by the 
plans' financial situation. Inadequate risk adjustment may be a 
particular problem for the traditional Medicare plan, which may 
function as a refuge for many chronically ill persons who find 
selecting among plans challenging and opt for something 
                        Concluding Observations
    In determining how to reform the Medicare program, much is 
at stake--not only the future of Medicare itself but also 
assuring the nation's future fiscal flexibility to pursue other 
important national goals and programs. Mr. Chairman, I feel 
that the greatest risk lies in doing nothing to improve the 
program's long-term sustainability or, worse, in adopting 
changes that may aggravate the long-term financial outlook for 
the program and the budget.
    It is my hope that we will think about the unprecedented 
challenge facing future generations in our aging society. 
Relieving them of some of the burden of today's financing 
commitments would help fulfill this generation's fiduciary 
responsibility. It would also preserve some capacity to make 
their own choices by strengthening both the budget and the 
economy they inherit. While not ignoring today's needs and 
demands, we should remember that surpluses can be used as an 
occasion to promote the transition to a more sustainable future 
for our children and grandchildren.
    General fund infusions and expanded benefits may well be a 
necessary part of any major reform initiative. Updating the 
benefit package may be a necessary part of any realistic reform 
program to address the legitimate expectations of an aging 
society for health care, both now and in the future. Such 
changes, however, need to be considered as part of a broader 
initiative to address Medicare's current fiscal imbalance and 
promote the program's longer-term sustainability. In addition, 
the Congress should consider adequate fiscal incentives to 
control costs and a targeting strategy in connection with any 
proposal to provide any new benefit such as prescription drugs.
    I am under no illusions about how difficult Medicare reform 
will be. The Breaux-Thomas proposal addresses the principal 
elements of reform, but many of the details need to be worked 
out. Those details will determine whether reforms will be both 
effective and acceptable--that is, seen as guaranteeing the 
sustainability and preservation of the Medicare entitlement, a 
key goal on which there appears to be consensus. Experience 
shows that forecasts can be far off the mark. Benefit 
expansions are often permanent, while the more belt-tightening 
payment reforms--vulnerable to erosion--could be discarded 
altogether. Recent experience implementing BBA reforms provides 
us some sobering lessons about the difficulty of undertaking 
reform and the need for effectiveness, flexibility, and 
steadfastness. Effectiveness involves collecting the data 
necessary to assess impact--separating the transitory from the 
permanent and the trivial from the important. Flexibility is 
critical to make changes and refinements when conditions 
warrant and when actual outcomes differ substantially from the 
expected ones. Steadfastness is needed when particular 
interests pit the primacy of their needs against the more 
global interest of making Medicare affordable, sustainable, and 
effective for current and future generations of Americans. This 
makes it all the more important that any new benefit expansion 
be carefully designed to balance needs and affordability, both 
now and over the longer term.
    The bottom line is that surpluses represent both an 
opportunity and an obligation. We have an opportunity to use 
our unprecedented economic wealth and fiscal good fortune to 
address today's needs but an obligation to do so in a way that 
improves the prospects for future generations. This generation 
has a stewardship responsibility to future generations to 
reduce the debt burden they inherit, to provide a strong 
foundation for future economic growth, and to ensure that 
future commitments are both adequate and affordable. Prudence 
requires making the tough choices today while the economy is 
healthy and the workforce is relatively large. National saving 
pays future dividends over the long term but only if meaningful 
reform begins soon. Entitlement reform is best done with 
considerable lead time to phase in changes and before the 
changes that are needed become dramatic and disruptive. The 
prudent use of the nation's current and projected budget 
surpluses combined with meaningful Medicare and Social Security 
program reforms can help achieve both of these goals.
    Mr. Chairman, this concludes my prepared statement. I will 
be happy to answer any questions you or other Members of the 
Subcommittee may have.
                    GAO Contacts and Acknowledgments
    If you have any questions regarding this testimony, please call 
Paul L. Posner, Director of Budget Issues, at (202) 512-9573 or William 
J. Scanlon, Director of Health Financing and Public Health at (202) 
512-7114. Other individuals who made key contributions include Linda F. 
Baker, James Cosgrove, Hannah F. Fein, James R. McTigue, Walter 
Ochinko, and Deborah Spielberg.


    Chairman Thomas. Thank you very much, Mr. Walker.
    And given the structuring, why don't we just start, Dr. 
Moon, with you, and then we will swing this way and wind up 
with the gentleman, if that is OK. And any written testimony 
you have will be made a part of the record, and you can address 
this in any way you see fit in the time you have.


    Ms. Moon. Thank you, Mr. Thomas. It is a privilege to be 
here this afternoon and address your Committee.
    I would like to talk a little bit about some of the 
concerns I have with the restructuring proposals that people 
are discussing now, and to try to put them into some context in 
terms of understanding both whether or not the solution fits 
the problem, and what some of the issues in terms of 
protections that I believe should be extended to beneficiaries 
need to be in place if we are going to move in this direction.
    Projected increases in Medicare spending arise because of 
the high costs of health care and because growing numbers of 
persons will be eligible for the program. Further, the primary 
reason for higher costs over time is technological change and 
increased improvements in the health care system, a phenomenon 
that is occurring system-wide and not just in Medicare.
    But both of these reasons for higher spending are not 
necessarily solved by proposals to restructure Medicare. Claims 
for savings from options that shift Medicare more to a system 
of private insurance usually rest on two basic arguments, 
first, that the private sector is per se more efficient than 
Medicare; and, second, that competition among plans will 
generate more price sensitivity on the part of beneficiaries 
and plans alike.
    In the chart that you have already discussed to some extent 
here, I looked back over the last 27 years, starting in 1970 
when the National Health Expenditure Accounts really set up a 
consistent series to look at. And also in the early years it is 
interesting that both Medicare and private insurance were 
largely just pass-through systems, where they were just paying 
the bills and not much was being done to manage health care.
    Over this 27-year period, though, Medicare's performance in 
terms of growth in the costs of care has been better than that 
of private insurance, largely because Medicare started early on 
in the eighties to be serious about cost containment efforts 
and made substantial improvements at that point in time.
    To date, most of the cost savings generated by all payers 
of care has come from slowing growth in the prices paid for 
services and making only preliminary inroads in reducing the 
use of services or addressing the issue of technology. Reining 
in the use of services will constitute a major challenge for 
both private insurance and Medicare in the future, and I think 
it is not clear whether the public or private sector is better 
able to do this.
    The other way in which people talk about saving money 
through restructuring the Medicare Program is by requiring that 
beneficiaries who choose higher cost plans pay substantially 
higher premiums, and here there is some evidence from Calpers 
and the FEHBP program that that does have some impact on the 
costs of care. I think the question for Medicare is whether or 
not beneficiaries of this program will operate in the same way 
as younger persons have operated in the FEHBP and Calpers 
systems, and you can look to a number of other places, such as 
the California retirement system for the university, where 
retirees have not behaved in the same way as the younger 
population, so there is some concern here.
    Moreover, new approaches to the delivery of health care 
under Medicare may generate a whole set of problems, including 
problems in areas where Medicare is now working well. For 
example, shifting across plans is not necessarily good for 
patients. It is disruptive and can raise the cost of care. And 
if it is only the healthier beneficiaries who choose to switch 
plans, the sickest and most vulnerable beneficiaries will end 
up being concentrated in plans that become increasingly 
expensive over time.
    I believe there are also some critical protections that 
exist in the Medicare Program now, that would need to be 
rethought and redone if we moved primarily to a private system. 
That is protecting the universality and redistribution that 
occurs in Medicare; the pooling of risks that occurs in the 
current Medicare system; and recognizing that there are 
protections that the Government has traditionally provided. So 
these are issues that I think are particularly important and 
must be part of a reform system if we move in that direction.
    What are the tradeoffs from increasingly relying on private 
plans to serve Medicare beneficiaries? The modest gains and 
lower costs that are likely to come from some increased 
competition, and from the flexibility that the private sector 
enjoys, could be more than offset by the loss of social 
insurance protection. In addition, not all the consequences of 
a competitive market are positive. For example, some plans will 
not do well in a particular market, and as a result they will 
leave, creating the same kinds of disruptions that people have 
been very upset about in terms of the withdrawals from the 
Medicare Plus Choice program that have been recently announced.
    Rather than focusing on restructuring Medicare to emphasize 
private insurance, I would place emphasis on innovations 
necessary for improvements in health care delivery regardless 
of setting, and many of these, such as improvements in the 
standards and norms of care, protection for individuals' 
information, can be better done often in a public setting than 
in a private setting.
    Finally, Medicare as a default plan, as the traditional 
program, needs to get a lot of attention and care. As people 
have already mentioned, it will continue to be a major part of 
this program, and I think a considerable amount of emphasis 
needs to go there, to improve that program.
    Thank you.
    [The prepared statement follows:]

Statement of Marilyn Moon, Senior Fellow, Urban Institute

    The aging of the U.S. population will generate many 
challenges in the years ahead, but none more dramatic than the 
costs of providing health care services for older Americans. 
Largely because of advances in medicine and technology, 
spending on both the old and the young has grown at a rate 
faster than spending on other goods and services. Combining a 
population that will increasingly be over the age of 65 with 
health care costs that will likely continue to rise over time 
is certain to mean an increasing share of national resources 
devoted to this group. How will the burden of that expense be 
shared over time and what role will Medicare play in meeting 
these needs?
    Projections from the 1999 Trustees Report indicate that 
Medicare's share of the Gross Domestic Product (GDP) from both 
parts of the program will reach 4.43 percent in 2025, up from 
2.53 percent in 1998. This projection is lower than just a few 
years ago, however. For example, the estimates of the date of 
exhaustion of the Part A Trust fund have been pushed out to 
2015. While this new date of exhaustion reduces some of the 
perceived urgency in addressing the issue, it is important not 
to underestimate the need for addressing reforms and financing 
issues for Medicare. This reprieve in the deadline for action 
offers an opportunity to engage in a careful discussion of the 
issues surrounding Medicare that extends beyond the budgetary 
focus that has thus far dominated much of the debate. Action is 
needed, but there is time to do it deliberately.
                    The Focus on Structural Reforms
    Projected increases in Medicare's spending arise because of 
the high costs of health care and growing numbers of persons 
eligible for the program. But most of the debate over Medicare 
reforms centers on only a piece of the cost issue. That is, 
changes to reduce Medicare spending through restructuring can 
only go so far. Technological advances that raise the costs of 
care are the primary reason for higher costs over time, and 
this phenomenon is occurring system wide, not just in Medicare. 
Further, a beneficiary population that is growing now because 
of increased life expectancy and will be exacerbated in the 
future by the retirement of the baby boom raises issues well 
beyond any restructuring options. Nonetheless, restructuring 
could profoundly affect Medicare's future.
    Claims for savings from options that shift Medicare more to 
a system of private insurance usually rest on two basic 
arguments: first, it is commonly claimed that the private 
sector is per se more efficient than Medicare, and second, that 
competition among plans will generate more price sensitivity on 
the part of beneficiaries and plans alike. What about these 
    Medicare vs. the Private Sector: Looking back over the last 
27 years (between 1970 and 1997), Medicare's performance in 
terms of growth in the costs of care has been better than that 
of private insurance. Starting in the 1970s, Medicare and 
private insurance plans initially grew very much in tandem, 
showing few discernible differences (See Chart 1). By the 
1980s, per capita spending had more than doubled in both 
sectors. But Medicare became more proactive than private health 
insurance in the 1980s, and cost containment efforts, 
particularly through hospital payment reforms, began to pay 
off. From about 1984 through 1988, Medicare's per capita costs 
grew much more slowly than those in the private sector.
    This gap in overall growth in Medicare's favor stayed 
relatively constant until the early 1990s when private insurers 
began to take seriously the rising costs of health insurance. 
At that time, growth in private insurance moderated in a 
fashion similar to Medicare's slower growth in the 1980s. Thus, 
it can be argued that the private sector was playing ``catch 
up'' to Medicare in achieving cost containment. Private 
insurance thus narrowed the difference with Medicare in the 
1990s, but as of 1997, there was still a considerable way for 
the private sector to go before its cost growth would match 
Medicare's achievement of lower overall growth.
    It should not be surprising that the per capita rates over 
time are similar between Medicare and private sector spending 
since all health care spending shares technological change and 
improvement as a major factor driving high rates of expenditure 
growth. To date, most of the cost savings generated by all 
payers of care has come from slowing growth in the prices paid 
for services and making only preliminary inroads in reducing 
the use of services or addressing the issue of technology. 
Reining in use of services will constitute a major challenge 
for both private insurance and Medicare in the future, and it 
is not clear whether the public or private sector is better 
equipped to do this. Further, Medicare's experience with 
private plans has been a distinctly mixed.
    Using Competition to Generate Savings: Reform options such 
as the premium support approach seek savings by allowing the 
premiums paid by beneficiaries to vary such that those choosing 
higher cost plans pay substantially higher premiums. The theory 
is that beneficiaries will become more price conscious and 
choose lower cost plans. This in turn will reward private 
insurers that are able to hold down costs. And there is some 
evidence from the federal employees system and the Calpers 
system in California that this has disciplined the insurance 
market to some degree. Studies that have focused on retirees, 
however, show much less sensitivity to price differences. Thus, 
what is not known is how well this will work for Medicare 
    For example, for a premium support model to work, at least 
some beneficiaries must be willing to shift plans each year 
(and to change providers and learn new rules) in order to 
reward the more efficient plans. Without that shifting, savings 
will not occur. In addition, there is the question of how 
private insurers will respond. Will they seek to improve 
service or instead focus on marketing and other techniques to 
attract a desirable, healthy patient base? It is simply not 
known if the competition will really do what it is supposed to 
    In addition, new approaches to the delivery of health care 
under Medicare may generate a whole new set of problems, 
including problems in areas where Medicare is now working well. 
For example, shifting across plans is not necessarily good for 
patients; it is not only disruptive, it can raise costs of 
care. Some studies have shown that having one physician over a 
long period of time reduces costs of care. And if it is only 
the healthier beneficiaries who choose to switch plans, the 
sickest and most vulnerable beneficiaries may end up being 
concentrated in plans that become increasingly expensive over 
time. The case of retirees left in the federal employees high 
option Blue Cross plan and in a study of retirees in California 
suggest that even when plans become very expensive, 
beneficiaries may be fearful of switching and end up 
substantially disadvantaged. Further, private plans by design 
are interested in satisfying their own customers and generating 
profits for stockholders. They cannot be expected to meet 
larger social goals; and to the extent that such goals remain 
important, reforms in Medicare will have to incorporate 
additional protections to balance these concerns as described 
               What It is Crucial To Retain from Medicare
    The reason to ``save'' Medicare is to retain for future 
generations the qualities of the program that are valued by 
Americans and that have served them well over the last 33 
years. This means that any reform proposal ought to be judged 
on principles that go well beyond the savings that they might 
generate for the federal government.
    In this testimony I stress three crucial principles that 
are integrally related to Medicare's role as a social insurance 
     The universal nature of the program and its 
consequent redistributive function.
     The pooling of risks that Medicare has achieved to 
share the burdens across sick and healthy.
     The role of government in protecting the rights of 
beneficiaries--often referred to as its entitlement nature.
    While there are clearly other goals and contributions of 
Medicare, these three are part of its essential core. 
Traditional Medicare, designed as a social insurance program, 
has done well in meeting these goals. What about options 
relying more on the private sector?
    Universality and Redistribution: An essential 
characteristic of social insurance that Americans have long 
accepted is the sense that once the criterion for eligibility 
of contributing to the program has been met, that benefits will 
be available to all beneficiaries. One of Medicare's great 
strengths has been providing much improved access to health 
care. Before Medicare's passage, many elderly persons could not 
afford insurance, and others who could not obtain it were 
denied coverage as poor risks. That changed in 1966 and had a 
profound impact on the lives of millions of seniors. The 
desegregation of many hospitals occurred under Medicare's 
watch. And although there is substantial variation in the 
ability of beneficiaries to supplement Medicare's basic 
benefits that should be of concern, basic care is available to 
all who carry that Medicare card. Hospitals, physicians and 
other providers largely accept the card without question.
    Once on Medicare, illness or high medical expenses no 
longer place enrollees in fear of losing care or battling to 
retain coverage with a private plan--a problem that still 
happens too often in the private sector. This assurance is an 
extremely important benefit to many older Americans and persons 
with disabilities. Developing a major health problem is not 
grounds for losing the card; in fact, in the case of the 
disabled, it is grounds for coverage. This is vastly different 
than the philosophy of the private sector towards health 
coverage. Even though many private insurers are willing and 
able to care for Medicare patients, the easiest way to stay in 
business as an insurer is to seek out the healthy and avoid the 
    Will reforms that lead to a greater reliance on the market 
still retain the emphasis on equal access to care and plans? 
For example, differential premiums could undermine some of the 
redistributive nature of the program that assures even low 
income beneficiaries access to high quality care and responsive 
    The Pooling of Risks: One of Medicare's important features 
is the achievement of a pooling of risks among the healthy and 
sick covered by the program. Even among the oldest of the 
beneficiaries, there is a broad continuum across individuals' 
needs for care. While some of this distribution is totally 
unpredictable (because even people who have historically had 
few health problems can be stricken with catastrophic health 
expenses), a large portion of seniors and disabled persons have 
chronic problems known to be costly to treat. If these 
individuals can be identified and segregated, the costs of 
their care can expand beyond the ability of even well-off 
individuals to pay over time.
    A major impetus for Medicare was the need to protect the 
most vulnerable. That's why the program focused exclusively on 
the old in 1965 and then added the disabled in 1972. About one 
in every three Medicare beneficiaries has severe mental or 
physical health problems. In contrast, the healthy and 
relatively well-off (with incomes over $32,000 per year for 
singles and $40,000 per year for couples) make up less than 10 
percent of the Medicare population. Consequently, anything that 
puts the sickest at greater risk relative to the healthy is out 
of sync with this basic tenet of Medicare. A key test of any 
reform should be who it best serves.
    If the advantages of one large risk pool (such as the 
traditional Medicare program) are eliminated, other means will 
have to be found to make sure that insurers cannot find ways to 
serve only the healthy population. This is a very difficult 
challenge that has been studied extensively; as yet no 
satisfactory risk adjustor has been developed. What has been 
developed to a finer degree, however, are marketing tools and 
mechanisms to select risks. High quality plans that attract 
people with health care needs are likely to be more expensive 
than plans that focus on serving the relatively healthy. If 
risk adjustors are never powerful enough to eliminate these 
distinctions and level the playing field, then those with 
health problems--who disproportionately have lower incomes--
would have to pay the highest prices under many reform schemes.
    The Role of Government: Related to the two above principles 
is the role that government has played in protecting 
beneficiaries. In traditional Medicare, this has meant having 
rules that apply consistently to individuals and assuring 
everyone in the program access to care. It has sometimes fallen 
short in terms of the variations that occur around the country 
in benefits, in part because of interpretation of coverage 
decisions but also because of differences in the practice of 
medicine. But in general, Medicare has to meet substantial 
standards and accountability that protect its beneficiaries.
    If the day-to-day provision of care is left to the 
oversight of private insurers, what will be the impact on 
beneficiaries? It is not clear whether the government will be 
able to provide sufficient oversight to protect beneficiaries 
and assure them of access to high quality care. Particularly is 
an independent board is established, to whom will it be 
accountable. Further, what provisions will be in place to step 
in when plans fail to meet requirements or who leave an area 
abruptly? What recourse will patients have when they are denied 
    One of the advantages touted for private plans is their 
ability to be flexible and even arbitrary in making decisions. 
This allows private insurers to respond more quickly than a 
large government program and to intervene where they believe 
too much care is being delivered. But one plan's cost 
effectiveness activities may translate into a beneficiary's 
loss of potentially essential care. Which is more alarming, too 
much care or care denied that cannot be corrected later? Some 
of the ``inefficiencies'' in the health care system may be 
viewed as a reasonable response to uncertainty when the costs 
of doing too little can be very high indeed.

    What Should Be the Direction for Reform of the Delivery of Care?

    Much of the debate over how to reform the Medicare program 
has focused on broad restructuring proposals. However, it is 
useful to think about reform in terms of a continuum of options 
that vary in their reliance on private insurance. Few advocate 
a fully private approach with little oversight; similarly few 
advocate moving back to 1965 Medicare with its unfettered fee-
for-service and absence of any private plan options. In 
between, however, are many possible options and variations. And 
while the differences may seem technical or obscure, many of 
these ``details'' matter a great deal in terms of how the 
program will change over time and how well beneficiaries will 
be protected. Perhaps the most crucial issue is how the 
traditional Medicare program is treated. Is it just one of many 
plans that beneficiaries choose among, or does it remain the 
basic default option with private plans playing a comparable or 
larger role than under the current Medicare+Choice arrangement?
    What are the tradeoffs from increasingly relying on private 
plans to serve Medicare beneficiaries? The modest gains in 
lower costs that are likely to come from some increased 
competition and from the flexibility that the private sector 
enjoys could be more than offset by the loss of social 
insurance protection. The effort necessary to create in a 
private plan environment all the protections needed to 
compensate for moving away from traditional Medicare seems too 
great and too uncertain. And, on a practical note, many of the 
provisions in the Balanced Budget Act of 1997 that would be 
essential in any further moves to emphasize private insurance--
generating new ways of paying private plans, improving risk 
adjustment and developing information for beneficiaries, for 
example--still need a lot of work.
    In addition, it is not clear that there is a full 
appreciation by policy makers or the public at large of all the 
consequences of a competitive market. Choice among competing 
plans and the discipline that such competition can bring to 
prices and innovation are often stressed as potential 
advantages of relying on private plans for serving the Medicare 
population. But, if there is to be choice and competition, some 
plans will not do well in a particular market and as a result 
they will leave. In a market system, withdrawals should be 
expected; indeed, they are a natural part of the process by 
which uncompetitive plans that cannot attract enough enrollees 
leave particular markets. If HMOs have a hard time working with 
doctors, hospitals and other providers in an area, they may 
decide that this is not a good market. And if they cannot 
attract enough enrollees to justify their overhead and 
administrative expenses, they will also leave an area. The 
whole idea of competition is that some plans will do well--and 
in the process drive others out of those areas. In fact, if no 
plans ever left, that would likely be a sign that competition 
was not working well. This will result in disruptions and 
complaints by beneficiaries--much like those now occurring 
surrounding the recently announced withdrawals from 
    What I would prefer to see instead is emphasis on 
improvements in both the private plan options and the 
traditional Medicare program, basically retaining the current 
structure in which traditional Medicare is the primary option. 
Rather than focusing on restructuring Medicare to emphasize 
private insurance, I would place the emphasis on innovations 
necessary for improvements in health care delivery regardless 
of setting.
    That is, better norms and standards of care are needed if 
we are to provide quality of care protections to all Americans. 
Investment in outcomes research, disease management and other 
techniques that could lead to improvements in treatment of 
patients will require a substantial public commitment. This 
cannot be done as well in a proprietary, for-profit environment 
where dissemination of new ways of coordinating care may not be 
shared. Private plans can play an important role and may 
develop some innovations on their own, but in much the same way 
that we view basic research on medicine as requiring a public 
component, innovations in health delivery also need such 
support. Further, innovations in treatment and coordination of 
care should focus on those with substantial health problems--
exactly the population that many private plans seek to avoid. 
Some private plans might be willing to specialize in 
individuals with specific needs, but this is not going to 
happen if the environment is one emphasizing price competition 
and with barely adequate risk adjustors. Innovative plans would 
likely suffer in that environment.
    Finally, the default plan--where those who do not or cannot 
choose or who find a hostile environment in the world of 
competition--must, at least for the time being, be traditional 
Medicare. Thus, there needs to be a strong commitment to 
maintaining a strong traditional Medicare program while seeking 
to define the appropriate role for alternative options. But for 
the time being, there cannot and should not be a ``level 
playing field'' between traditional Medicare and private plans. 
Indeed, if Medicare truly used its market power like other 
dominant firms in an industry, it could set its prices in 
markets in order to drive out competitors. It could sign 
exclusive contracts with providers, squeezing out private 
plans. When private plans suggest that Medicare should compete 
on a ``level playing field,'' it is unlikely that they have 
such activities in mind, however.
                          Other Reform Issues
    While most of the attention on reform focuses on structural 
questions, there are other key issues that must also be 
addressed, including the adequacy of benefits, reforms that 
pass costs on to beneficiaries, and the need for more general 
financing. Even after accounting for changes that may improve 
the efficiency of the Medicare program through either 
structural or incremental reforms, the costs of health care for 
this population group will still likely grow as a share of GDP. 
That will mean the important issue of who will pay for this 
health care--beneficiaries, taxpayers or a combination of the 
two--must ultimately be addressed to resolve Medicare's future.
    Improved Benefits: It is hard to imagine a ``reformed'' 
Medicare program that did not address two key areas of 
coverage: prescription drugs and a limit on the out-of-pocket 
costs that any individual beneficiary must pay in a year. 
Critics of Medicare rightly point out that its inadequacy has 
led to the development of a variety of supplemental insurance 
arrangements which in turn create an inefficient system in 
which most beneficiaries rely on two sources of insurance to 
meet their needs. Further, without a comprehensive benefit 
package that includes those elements of care that are likely to 
naturally attract sicker patients, viable competition without 
risk selection will be difficult to attain.
    It is sometimes argued that improvements in coverage can 
only occur in combination with structural reform. And some 
advocates of a private approach to insurance go further, 
suggesting that the structural reform itself will naturally 
produce such benefit improvements. This implicitly holds the 
debate on improved benefits hostage to accepting other 
unrelated changes. And to suggest that a change in structure, 
without any further financial contributions to support expanded 
benefits, will yield large expansions in benefits is wishful 
thinking. A system designed to foster price competition is 
unlikely to stimulate expansion of benefits.
    Expanding benefits is a separable issue from how the 
structure of the program evolves over time. It is not separable 
from the issue of the cost of new benefits, however. This is 
quite simply a financing issue and it would require new 
revenues, likely from a combination of beneficiary and taxpayer 
dollars. A voluntary approach to provide such benefits through 
private insurance, such as we have at present, is seriously 
flawed. Prescription drug benefits generate risk selection 
problems; already the costs charged by many private 
supplemental plans for prescription drugs equal or outweigh 
their total possible benefits because such coverage attracts a 
sicker than average set of enrollees. A concerted effort to 
expand benefits is necessary if Medicare is to be an efficient 
and effective program.
    Benefits and Eligibility Issues for Disability 
Beneficiaries: A number of special problems face the under-65 
disabled population on Medicare. The 18 month waiting period 
before a Social Security disability recipient becomes eligible 
for coverage creates severe hardships for some beneficiaries 
who must pay enormous costs out of pocket or delay treatments 
that could improve their disabilities if they do not have 
access to other insurance. In addition, a disproportionate 
share of the disability population has mental health needs and 
Medicare's benefits in this area are seriously lacking. Special 
attention to the needs of this population should not get lost 
in the broader debate.
    Beneficiaries' Contributions: Some piece of a long-term 
solution probably will (and should) include further increases 
in contributions from beneficiaries beyond what is already 
scheduled to go into place. The question is how to do so 
fairly. Options for passing more costs of the program onto 
beneficiaries, either directly through new premiums or cost 
sharing or indirectly through options that place them at risk 
for health care costs over time, need to be carefully balanced 
against beneficiaries' ability to absorb these changes. Just as 
Medicare's costs will rise to unprecedented levels in the 
future, so will the burdens on beneficiaries and their 
families. Even under current law, Medicare beneficiaries will 
be paying a larger share of the overall costs of the program 
and more of their incomes in meeting these health care expenses 
(see Chart 2).
    In addition, options to increase beneficiary contributions 
to the cost of Medicare further increase the need to provide 
protections for low income beneficiaries. The current programs 
to provide protections to low income beneficiaries are 
inadequate, particularly if new premium or cost sharing 
requirements are added to the program. And the issue of whether 
such protections should be housed in the Medicaid program also 
needs further consideration.
    Financing: Last, but not least, Medicare's financing must 
be part of any discussion about the future. We simply cannot 
expect as a society to provide care to the most needy of our 
citizens for services that are likely to rise in costs and to 
absorb a rapid increase in the number of individuals becoming 
eligible for Medicare without taking the financing issue head 
on. Medicare now serves one in every eight Americans; by 2030 
it will serve nearly one in every four. And these people will 
need to get care somewhere. If not through Medicare, then 


    Chairman Thomas. Thank you very much.
    Dr. Wilensky.


    Ms. Wilensky. Thank you very much, Mr. Chairman and Members 
of the Subcommittee, for including me on this panel. I am here 
as a health policy person and economist rather than in my 
official position as MedPAC Chair, although I am going to draw 
on some of my experiences as having been Administrator of the 
Health Care Financing Administration in the early nineties.
    I want to summarize with a few points. The first one has to 
do with the continuing need to reform. As the Comptroller 
General has indicated, there is a problem with regard to 
financial pressures. I know you have heard about this in the 
    Recently, in the spring, it was announced that there was an 
extra 5 years in terms of the time when the part A trust fund 
would go into bankruptcy. I only want to point out that those 
extra 5 years depend on razor-thin surpluses in each of the 
years in the early part of this next decade, and if for any 
reason they were to go away, either because expenditures go up 
just a little bit or income drops just a little bit because of 
an employment drop, those surpluses would disappear very 
    But at least as important as the solvency issues is the 
fact that there are other reasons to reform Medicare. The 
current benefit structure is inadequate, and, importantly, it 
is unfair.
    We have heard from Members of your Committee the 
frustration that in some parts of the country far less is spent 
on Medicare than in other parts of the country, not because of 
cost-of-living differences or because of health status 
differences, but because of the way that health care is 
practiced or because of the demands of seniors. That is an 
issue that we need to address because it means that there is a 
lot of cross-subsidizing going on in this country from areas 
with conservative practice styles to areas with more aggressive 
practice styles.
    As many of you know, I personally support a premium support 
model as a reform vehicle to address this, and the reason is 
because I believe it gives people choices between traditional 
Medicare as they have known it and other Medicare replacement 
plans, but more importantly, it rewards both the seniors who 
choose low-cost programs and also it rewards the physicians and 
other health care providers in providing them with better 
    Now, I know that not all Members of your Committee agree 
with this model, and so I want to also be clear that people 
understand that some of the most vexing issues with regard to 
premium support are present in our current system that allows 
for either traditional Medicare or Medicare replacement. And by 
that I mean risk adjustment, the need to educate seniors 
seriously so that they understand what they are choosing, and 
the issue about very different spending patterns across the 
    One of the areas that will need reform if we are to change 
the Medicare Program has to do with building an infrastructure 
and who or what agency is actually to administer that 
infrastructure. I support the notion of a Medicare board if we 
are to have a serious package of Medicare replacement programs 
along with the Health Care Financing Administration as the 
administrator of a traditional Medicare Program. And I say that 
with both affection and respect for what HCFA can do in terms 
of administering a traditional Medicare Program.
    They have a clear focus and expertise, and that is in 
administering a public program with administered prices. And I 
think they most of the time, although I know occasionally you 
disagree, do a good job of running that program. But I think it 
is a conflict of interest, and it also draws far beyond their 
expertise to have them also be administering a set of insurance 
replacement programs. So my advice is that a Medicare board, or 
whatever you may choose to name it, would be better for 
administering the replacement programs and allowing HCFA to 
administer the traditional program.
    Having said that, I think it is important that the Congress 
extend to HCFA more flexibility than it has tended to allow 
HCFA in the past. Its relationship with HCFA has been very 
micro-prescriptive, allowing very little flexibility. If you 
are serious about talking about a modernized fee-for-service, 
you will need to allow HCFA some of the authority that exists 
now with the private plans--centers of excellence, disease 
management, selective contracting, best practices, the kinds of 
things that HCFA cannot do.
    A part of me was a little skeptical about whether HCFA will 
be able to get beyond its own bureaucratic inertia to make use 
of that flexibility, but we will not know and we will not see a 
modernized fee-for-service plan if you do not extend that 
additional flexibility.
    Two points, and then I will close. The first is, reform 
will take some time. MedPAC, whenever we make recommendations, 
almost always recommends phasing in change. That is clearly 
true in terms of a major restructuring of Medicare. My advice 
is start now. It will take some time.
    The second point I would like to leave with you is remember 
that tomorrow's seniors will be different, a different 
generation than today's seniors. Almost all of the women will 
have had working experiences for many of them, including those 
on the panel, all of our adult life. We will see many more 
people with assets that they have developed and some pension 
differences. And so while it is important to understand the 
needs and concerns of today's senior population, we do need to 
understand that the baby-boomer generation will be a different 
population and to plan for Medicare for the 21st century with 
that in mind.
    Thank you.
    [The prepared statement follows:]

Statement of Hon. Gail R. Wilensky, Ph.D., John M. Olin Senior Fellow, 
Project HOPE, Bethesda, Maryland

    Let me summarize my points as follows:
     There is a continuing need to reform Medicare
          1. Solvency and financial pressures continue as important 
          2. The current benefit structure is inadequate and unfair
     A premium support model is a reform vehicle to address 
these issues
          1. It rewards seniors choosing low-cost, efficient plans, 
        allows seniors to choose plans that best suit their needs, and 
        provides better incentives to physicians and other providers
          2. Many of the most vexing issues of premium support are also 
        present with the current combination of fee-for-service 
        Medicare and Medicare replacement plans
     Medicare reform will require a series of changes
          1. Reform should start now; building the infrastructure will 
        take time
          2. Future seniors will be different from today's seniors in 
        terms of work experiences, health plan experiences, income and 
     Premium support model requires a different institutional 
          1. A Medicare Board, separate from HCFA, to oversee and 
        negotiate with plans
          2. A Modernized FFS Medicare requires a different mind-set 
        from HCFA and a more flexible relationship with the Congress
    Mr. Chairman and members of the subcommittee, thank you for 
inviting me to appear before you. My name is Gail Wilensky. I am the 
John M. Olin Senior Fellow at Project HOPE, an international health 
education foundation and I chair the Medicare Payment Advisory 
Commission. I am also a former Administrator of the Health Care 
Financing Administration. My testimony today reflects my views as an 
economist and a health policy analyst as well as my experiences running 
HCFA. I am not here in any official capacity and should not be regarded 
as representing the position of either Project HOPE or MedPAC.

                          The Need for Reform

    Medicare's popularity as a social program notwithstanding, 
the program is in need of major reform. Although Medicare 
solved the primary problem it was designed to address, ensuring 
that seniors had access to health care, there are a variety of 
problems with Medicare as it is currently constructed.
    Much of the motivation for Medicare reform has been 
financial. Medicare, as it is currently structured, is 
partially dependent on a Part A trust fund that is scheduled to 
be depleted of funds just as the pressure of the baby boomers 
retirement starts to be felt. Although the April 1999 report of 
the Social Security Trustees moved the date of depletion from 
2010 to 2015, the new estimate is extremely fragile. The 
additional five years of Part A solvency are based on razor-
thin surpluses over several years that could easily disappear 
if Part A expenditures increase slightly faster than 
anticipated or wage tax revenue grows slightly slower than 
anticipated. In addition, the pressure on general revenues from 
Part B growth will continue although this is less observable 
since Part B is not funded by a stand-alone trust fund.
    However, the motivation for Medicare reform is and should 
be more than financial. Traditional Medicare is modeled after 
the indemnity insurance plans that dominated the way health 
care was organized and delivered in the 1960's. The benefit 
package also reflects the 1960's, not covering outpatient 
pharmaceuticals or protection against very large medical bills.
    Because of the limited nature of the benefit package and, 
at least until recently, the restricted nature of plan choices 
allowed under Medicare, almost all seniors supplement 
traditional Medicare. The use of this two-tiered insurance 
strategy has had important consequences for both seniors and 
for the Medicare program. For many seniors, it has meant 
substantial additional costs, with annual premiums varying 
between $1000 and $3000 or more.
    The supplemental plans have also meant additional costs for 
Medicare. By filling in the cost-sharing requirements of 
Medicare, the plans make seniors and the providers that care 
for them less sensitive to the costs of care, resulting in the 
greater use of Medicare-covered services and thus increased 
Medicare costs.
    In addition to concerns about the incentives associated 
with Medicare, there are also issues of equity. The amount 
Medicare spends on seniors varies substantially across the 
country, far more than can be accounted for by differences in 
the cost of living or differences in health status among 
seniors. Since seniors and others pay into the program on the 
basis of income or wages and pay the same premium for Part B 
services, this results in substantial cross-subsidies from 
people living in low cost states and states with conservative 
practice styles to people living in higher cost states and 
states with aggressive practice styles.

                        The Direction of Reform

    I believe a program modeled after the Federal Employees Health 
Benefits Program or what is now generically referred to as a premium-
support program would provide a better structure for Medicare. Such a 
program could produce a more financially stable and viable program, and 
would provide better incentives for seniors to choose efficient plans 
and/or providers and better financial incentives for physicians and 
other health care providers to produce high-quality, low-cost care. 
This type of program would allow seniors to choose among competing 
private plans, including a modernized fee-for-service Medicare program, 
for the plan that suited their needs.
    I am well aware that the premium support model remains 
controversial among some Members of Congress. However, I think it is 
important that committee members understand that many of the most 
vexing issues that need to be resolved for a premium support program 
must also be resolved for the current Medicare program. This will be 
true as long as the Medicare program includes a traditional fee-for-
service benefit and a variety of Medicare replacement programs. These 
issues include risk adjustment, providing understandable and user-
friendly information to seniors, assuring that quality care is being 
delivered and providing safeguards for frail and vulnerable 
    Some are raising questions about the difficulties surrounding the 
Medicare+ Choice program and what that portends for premium support. 
Although the Medicare+Choice program continues to grow, the growth rate 
has slowed down dramatically.
    Understanding the problems being experienced by Medicare+Choice may 
help to prevent them from occurring in a premium support program. In 
some cases, plans just made bad business decisions. They went into too 
many markets or tried to enter markets where they were unable to form 
networks. Plans also found special problems entering rural areas, 
especially those with a single hospital or a few dominant provider 
groups. Finding ways to make more plan choices available in rural areas 
will clearly need more effort.
    But other problems reflect actions by the government that can and 
should be addressed. There is substantial uncertainty about the ``rules 
of the road'' --new regulations and requirements, reimbursement 
changes, changing models of risk adjustment, etc. Equally disturbing is 
the growing differential in spending rates for Medicare services in 
traditional Medicare versus spending in Medicare replacement plans. 
These are issues that need to be resolved for Medicare+Choice as well 
as a premium-support model.

                   Getting From ``Here'' to ``There''

    Historically, changes in Medicare reimbursement policy and 
structure have been phased in over several years. This has 
helped to cushion the disruption that abrupt changes could 
cause. It also makes sense to consider phasing-in changes in 
the structure or organization of a reformed Medicare program 
that requires substantially different roles for government or 
substantially different roles for the administrative 
institutions supporting the program such as exists with premium 
support. Any interest in experimenting with various strategies 
for reform or the administrative structures supporting reform 
makes it even more urgent that we begin the process now.
    Concerns have been raised about instituting significant 
changes in a program involving the elderly. Many of today's 
seniors have had little experience with health plans other than 
fee-for-service indemnity plans, many seniors have modest 
incomes and some have little education. Whatever changes are 
made to the Medicare program may need to be modified for at 
least some subsets of the existing senior population. Some 
groups of seniors may be need to be excluded from any change.
    Because of the difficulties that comes with changing 
programs involving seniors, it is important that we establish 
now where we want to go with a reformed Medicare program.
    It is also important to understand that the people who will 
be reaching age 65 over the next decade as well as the baby-
boomers have had very different experiences relative to today's 
seniors. Most of them have had health plans involving some 
forms of managed care, many of them have had at least some 
experience choosing among health plans, most have had more 
education than their parents and many will have more income and 
assets. The biggest change involves the women who will be 
turning 65. Most of these women will have had substantial 
periods in the labor force, many will have had direct 
experience with employer-sponsored insurance and at least some 
will have their own pensions and income as they reach 
retirement age. This means we need to think about tomorrow's 
seniors as a different generation, with different experiences, 
with potentially different health problems, and if we start 
soon, with different expectations.

      The Administrative Structure Supporting a Reformed Medicare

    At least two major administrative issues need to be 
addressed. The first involves using a Medicare Board as the 
major administrative structure supporting a premium support 
type of program. The second involves the potential role of the 
Health Care Financing Administration in running a modernized 
fee-for-service Medicare program.
    I support the notion of a separate Medicare Board that 
would oversee and negotiate with the private plans and the 
traditional Medicare program. The most important functions of 
such a Medicare Board would be to review and approve benefit 
packages, to negotiate premiums, make payment modifications 
(such as risk adjustment), direct open enrollment periods and 
to provide information about plan choices.
    While I think it is appropriate and proper that the 
individuals who have been involved in administering the 
Medicare+Choice program at HCFA be moved to the Board, it would 
be better to have a Board that is separate from HCFA and with 
leadership from outside of HCFA. It would be desirable to 
include people with experience administering the FEHB program, 
the CalPERS program and some of the more comparable programs 
from the private sector.
    The reason I think a separate Medicare Board is desirable 
is that the mind-set of HCFA is focused on running a publicly 
administered, price-setting, fee-for-service system. The 
functions and roles for government in running and monitoring a 
premium support system are so fundamentally different from the 
experiences and mind-set of HCFA personnel that it would 
detract from rather than enhance the successful operations of a 
premium-support program.
    The more difficult issue is whether HCFA or any 
governmental entity could administer a modernized fee-for-
service system that competes effectively with privately 
administered plans. A series of changes would be needed to 
modernize the traditional Medicare program. These include the 
use of selective contracting, centers of excellence, disease 
management programs, best practice programs, variations in 
benefit structures and other changes that are commonplace in 
the better-run private sector plans.
    The question in my mind is whether the Congress will allow 
HCFA the flexibility that would be needed to run such a program 
and whether the Congress and the Administration will provide 
HCFA with the resources needed to carry out such a task. 
History is not encouraging on either of these issues.
    If HCFA or any other governmental agency is to run a 
modernized fee-for-service program, Congress will need to 
change its relationship with HCFA and retreat from its very 
micro-prescriptive directives. This would require both changes 
in statute and changes in attitude. It would also require 
changes in attitude and behavior by the employees of HCFA. 
Demonstration and/or adoption of promising ideas from the 
private sector have been painfully slow to be undertaken by 
HCFA. Some of this slowness may be caused by political 
difficulties associated with these strategies, such as the 
selective exclusion of providers, or by a lack of appropriate 
funding. But too often it appears to be the results of 
bureaucratic inaction and indecision.
    An alternative to a publicly-administered, modernized fee-
for-service Medicare program is the use of competitively-
procured, private fee-for-service plans. These plans could be 
bid out on a risk basis at a national, regional or state level 
with plans using administered pricing if they chose to do so.
    The attraction of the privately administered fee-for-
service plans is that they can introduce changes in local 
markets that HCFA may not be able to do. But for many people, 
this is also the fundamental drawback of the privately 
administered plans. The public oversight and control of a 
publicly administered plan provides a sense of protection that 
will be difficult to ignore and at least to me, the political 
objections likely to result from eliminating a publicly 
administered traditional Medicare program, seem overwhelming.
    This means that if there is to be a publicly-administered, 
modernized fee-for-service component to a premium support 
program, which I think is both desirable and politically 
necessary, Congress will need to change its relationship with 
HCFA and grant it more flexibility than it has done in the 
past. In return, HCFA will need to be more responsive, more 
pragmatic and more creative in its behavior.


    Chairman Thomas. Thank you very much, Dr. Wilensky.
    Dr. Dowd.

                    UNIVERSITY OF MINNESOTA

    Dr. Dowd. Thank you, Mr. Chairman and Subcommittee Members, 
and thank you for the opportunity to appear here today.
    I am a professor at the University of Minnesota. My 
colleagues and I have spent the last 20 years analyzing health 
insurance purchasing strategies and ways to apply the most 
successful of those strategies to the Medicare Program. Our 
research is non-partisan. It has been sponsored by HCFA, the 
American Enterprise Institute, the Robert Wood Johnson 
Foundation, and the National Academy for Social Insurance. 
Currently, we are providing technical assistance to HCFA on the 
congressionally-mandated competitive pricing demonstration 
project. Despite these various affiliations, I want to be clear 
that the opinions that I express today are purely my own.
    Under the current payment system for Medicare+Choice plans, 
the Government tells health plans how much it will pay them to 
care for Medicare beneficiaries. In other words, information 
about the cost of caring for beneficiaries flows from the 
organization that knows the least about the health plan's true 
cost, that is, the Government, toward the organization that 
knows the most about the true cost of care, that is, the health 
plan. That to use seems perverse. Instead, we think health 
plans should be telling the Government how much it costs to 
care for Medicare beneficiaries.
    Our proposal for competitive pricing in the Medicare 
Program, which is virtually identical to the system used by the 
State of Minnesota, would offer fee-for-service Medicare to all 
beneficiaries, regardless of their location, and would contract 
with HMOs in market areas where HMOs are available.
    The government would pay the full cost of the low-cost 
health plan and beneficiaries would pay the cost of more 
expensive plans out of their pocket. That is how I get my 
health insurance and how I have gotten it for the last 15 
    Now, apparently, we are not alone in our admiration of 
purchasing systems that are used by large employers. Virtually 
every Medicare reform proposal being discussed today, from the 
Clinton administration proposal to that of the Heritage 
Foundation, contains some element of competitive pricing. Most 
importantly, in 1997, Congress mandated HCFA to conduct a 
demonstration of competitive pricing for Medicare in at least 
four sites. Congress established the Competitive Pricing 
Advisory Committee, or CPAC, to design the demonstration and 
pick the sites.
    Now, CPAC members include former Senator Dave Durenberger, 
Bob Reischauer, John Rother, Chip Kahn, and other national 
experts. CPAC subjected 30 different design parameters and over 
300 potential demonstration sites to expert analysis and open 
public debate. Their final design was not our proposal, nor was 
it the Breaux-Thomas proposal, the Clinton proposal, or HCFA's 
proposal. It was a negotiated compromise hammered out by people 
who were face to face with the reality of putting a 
demonstration project on the ground in short order.
    CPAC also selected two initial demonstration sites: Kansas 
City and Phoenix. The result, as you probably know, is that 
legislation to kill the demonstration in these two sites 
already has been passed by the Senate as a rider to their 
Patient Protection Act. If this legislation comes before you, I 
would implore you to consider your decision carefully.
    I know there is discussion about establishing an 
independent board to run various aspects of the Medicare 
Program, but I suggest to you that Congress has already 
established an independent board of national experts to run 
what is perhaps the most important demonstration project in the 
history of the Medicare Program. The question before Congress 
at this point is whether that independent board will be allowed 
to complete the tasks that it was assigned by Congress.
    I want to finish my testimony today by addressing one of 
the most controversial points in the Medicare competitive 
pricing debate, that is, the degree to which fee-for-service 
Medicare should be included in a competitive pricing system.
    Now, there are good arguments in favor of including fee-
for-service Medicare. That system is most likely to produce the 
best bids from health plans. We found that employers who adopt 
a defined contribution system for all of their health plans 
have total health insurance costs, that is, the part paid by 
both employers and employees, that are about 7 percent lower on 
average than employers who subsidize the cost of high-priced 
health plans.
    However, there are also good arguments in favor of 
providing some subsidy for the consumer's cost of high-cost 
plans. The main empirical argument, despite our advice to the 
contrary, is that most employers do it. The Federal Employees 
Health Benefit Plan is a good example, with its level 
percentage contribution up to a cap. About two-thirds of the 
employers in our survey data subsidize high-cost plans to some 
    Another consideration, for better or worse, is that the 
fee-for-service Medicare sector operates under a different set 
of rules than private sector plans, and those differences 
either must be addressed or accommodated in any competitive 
pricing system that includes the fee-for-service sector. I 
think that what I have seen of the Breaux-Thomas proposal is 
very clear on that point.
    Federal and State governments also subsidize the cost of 
higher-priced health plans through the tax exemption of health 
insurance premiums which provide an equal percentage subsidy of 
higher-cost plans for any given consumer.
    It is our hope, in the interest of addressing the 
fundamental problems of information flows, inefficiency, and 
inequity in the current Medicare Program, that some compromise 
can be reached on inclusion of fee-for-service and the 
appropriate level of subsidy for high-priced health plans.
    That concludes my remarks. I will be happy to provide 
copies of our studies to anyone who would like them, and I look 
forward to your questions. Thank you.
    [The prepared statement follows:]

Statement of Bryan Dowd, Ph.D., Professor, Division of Health Services 
and Policy, School of Public Health, University of Minnesota


    I. Two objectives of Medicare contracts with private health plans:
     A. Offer Medicare beneficiaries the same choices that are 
available through employment-based insurance.
     B. Create price-based competition to improve quality and reduce 
    II. The primary problem with the current payment system for 
Medicare+Choice plans:
     A. Information about cost flows from the government to the health 
     B. Competitive pricing reverses that information flow
    III. Large employers provide an interesting model
     A. They offer multiple health plans during open enrollment periods 
with good consumer information
     B. They often offer their own self-insured FFS plan, in addition 
to HMOs that are available in each market area.
     C. Premium contribution methods vary widely.
    IV. Growing consensus on bidding models
     A. Our proposal, Breaux-Thomas, the FEHBP proposals and even 
President Clinton's plan include some type of bidding.
     B. Congress mandated a demonstration of bidding for M+C plans as 
part of 1997 BBA
    V. The Congressionally-Mandated Demonstration of Competitive 
    A. Established an independent national expert advisory panel (The 
Competitive Pricing Advisory Committee or CPAC)
    B. Told CPAC to design the demonstration and choose the sites.
    C. CPAC complete its tasks.
    D. Congressionally-mandated Area Advisory Commissions (AACs) were 
formed and provided input.
    E. Congress is threatening to kill the Demonstration.
    VI. Should traditional FFS Medicare be included in the bidding 
    A. Arguments in favor of including FFS Medicare:
          1. Fairness (level playing field with private plans)
          2. Defined contribution for all plans reduces costs.
    B. Arguments in favor of subsidizing the consumer's cost of high-
priced health plans:
    1. Most employers do it.
    2. May help compensate plans that attract high cost enrollees.
    3. Consumers may like being protected from having to pay the full 
premium differential of the high-cost plan, should they ever want to 
join it.

        Remarks to the House Ways and Means Health Subcommittee

    Mr. Chairman and Committee members, thank you for the 
opportunity to appear before this Committee. I and Roger 
Feldman, my colleague at the University of Minnesota, have 
spent the last twenty years working on analyses of private 
sector health insurance purchasing strategies, and thinking 
about ways to apply the most successful of those strategies to 
the Medicare program. Our work is non-partisan. We have 
completed several design projects for HCFA, written a book on 
the subject that was published by the American Enterprise 
Institute, and contributed to a book on Medicare reform edited 
by the National Academy of Social Insurance. For the past four 
years, along with Abt Associates, we have provided technical 
assistance to HCFA on the Competitive Pricing Demonstration 
     When we first took up the question of how to pay Medicare 
HMOs in 1989 we started by asking two basic questions: what are 
the goals of contracting with private health plans in the 
Medicare program; and what sort of payment system would advance 
those goals?
     The goals are two-fold:
       (1) to offer Medicare beneficiaries the same health plan 
choices that are available through employment-based health 
insurance, and
       (2) to create price-based competition among health plans 
that can help improve quality and reduce cost.
     Unfortunately, the government's method of contracting with 
private health plans does not meet those goals. In the 1980s, 
despite some sound advice to the contrary, Congress set up an 
administrative pricing system to pay Medicare HMOs. Under that 
system, the government tells health plans how much it will pay 
them to care for Medicare beneficiaries. Prior to the Balanced 
Budget Act of 1997 (BBA), the government told health plans they 
would be paid 95 percent of the estimated cost of caring for 
``similar'' beneficiaries in the FFS sector. Post-BBA, the 
government tells health plans they will be paid an amount based 
on the old payment system, adjusted by a schedule of fixed 
percentage increases. In both systems, the information about 
the cost of caring for beneficiaries flows from the 
organization that knows the least about true costs, i.e., the 
government, to the organization that knows the most about the 
true cost of care, i.e., the health plan. That strikes us as 
     A number of prominent analyses of the HMO payment system 
have defined that problem with the current system as the 
government not being very good at guessing the health plans' 
true cost. They have proposed a multitude of ways to help the 
government guess better, primarily by including more variables 
in the government's payment formula for HMOs.
     Our analysis of the problem in 1989 was quite different. 
We thought that the primary problem was not that the government 
was guessing badly, but that the government was guessing at 
all. We proposed that the flow of information should be 
reversed. In other words, the health plans should be telling 
the government how much it cost to care for Medicare 
beneficiaries, not the other way around. Ten years later, that 
simple idea still makes sense to us.
     We began to look for a model of how to reverse the flow of 
information, and of course, we didn't have to look far, because 
virtually all major purchasers of health insurance except the 
federal government, ask health plans to submit bids. Of course, 
when you ask health plans to reveal their cost through the 
bidding process, you need to give them some incentive to tell 
you the truth, and that market discipline generally is provided 
by the threat of not being offered, or having consumers face a 
higher out-of-pocket premium.
     In our own proposal for competitive pricing, we suggested 
that rather than throwing health plans out of the Medicare 
program, the government simply should set its contribution to 
premiums at the lowest bid submitted by a qualified health plan 
in each market area, so that consumers pay the marginal cost of 
more expensive plans out of their own pocket. That is the same 
system under which I get my health insurance through the State 
of Minnesota, and over the past ten years it has produced very 
low premium increase including some years in which premiums 
actually declined. In fact, our entire proposal was modelled in 
the success of large employers that offer multiple health plans 
to their employees. Many of those employers, like Medicare, 
also offer a self-insured fee-for-service plan that is 
available to all consumers in all locations. Again, that is 
exactly the model used by my employer.
     Our proposal combined a defined benefit with a defined 
contribution. The government's premium contribution was limited 
to the lowest priced plan, but unlike some voucher proposals, 
beneficiaries were guaranteed that they could purchase the 
benefits to which they were entitled for no more than the Part 
B premium. In our proposal, FFS Medicare was included as a 
bidding health plan, as in the Breaux-Thomas proposal.
     Apparently we were not alone in our admiration of the 
purchasing systems of large employers. Virtually every Medicare 
reform proposal being discussed today contains some version of 
competitive pricing. In fact, competitive pricing is one of the 
few common elements among the major reform proposals.
     Most importantly, in 1997, Congress agreed that 
competitive pricing should have a fair test in the marketplace. 
Congress mandated HCFA to conduct a demonstration of 
competitive pricing in at least four sites. Congress also 
established the Competitive Pricing Advisory Committee or 
``CPAC'' with representation from consumers, health plans, 
providers, employers and policymakers. Congress charged CPAC 
with designing the demonstration and choosing the demonstration 
sites. CPAC members include former Senator Dave Durenberger, 
Bob Reischauer, John Rother, Chip Kahn, and other national 
experts. CPAC carried out its duties carefully and 
expeditiously. They subjected 30 different design decisions and 
300 potential sites to expert analysis and open public debate. 
Their final design was not our proposal. Nor was it the Breaux-
Thomas proposal, the Clinton proposal, HCFA's proposal, the 
FEHBP proposal or the Heritage Foundation's proposal. It did, 
however contain the common element in all those proposals: 
health plans submit bids, rather than being told by the 
government how much they will be paid.
     CPAC also selected two initial demonstration sites: Kansas 
City and Phoenix. The Congressionally-mandated Area Advisory 
Committees or AACs were established in each demonstration site, 
again consisting of representatives of consumers, health plans, 
providers, employers and policymakers. The Kansas City AAC met 
for the first time on March 22, of this year, under the 
direction of Edward Holland, Assistant Vice-President for 
Corporate Benefits at Sprint Corporation. By May 12, the Kansas 
City AAC had completed all the tasks assigned to it by CPAC.\1\ 
The Phoenix AAC was not as successful in completing its tasks, 
but had made substantial progress by July of this year.
    \1\  The four tasks delegated to the AACs by the CPAC were (1) 
specifying the ``market norm'' standard benefit package in each site, 
(2) choosing the median or weighted average bid as the government 
contribution rule, (3) exercising an option to delay the new PIP-DCG 
risk adjustment system in the first year of the demonstration, and (4) 
deciding whether plans should submit separate bids on each county in 
the demonstration area, or bid on a ``reference'' county with payments 
to other counties determined by payment ratios under the current 
     So what we have here is a Congressionally-mandated 
demonstration project, designed by a Congressionally-mandated, 
independent task force of national experts, implemented in 
sites chosen by that independent task force, and advised at the 
local level by the Congressionally-mandated, independent Area 
Advisory Committees. Only the most cynical among you will not 
be surprised when I tell you that the greatest current threat 
to this Congressionally-mandated demonstration is Congress 
itself. In fact, legislation to kill the demonstration in 
Kansas City and Phoenix already has been passed by the Senate 
as a rider to their Patient Protection Act (Senate Bill 1344).
     Recently, the Co-Chairs of CPAC, Bob Berenson of HCFA and 
James Cubbin, Executive Director of Health Care Initiatives for 
General Motors, wrote to Chairman Thomas saying, and I quote:

          The Balanced Budget Act gave CPAC the sole authority to 
        select sites for this demonstration. If Congress decides to 
        override CPAC's decision on sites and take action to exempt 
        Kansas City and Phoenix as demonstration sites, in our 
        judgement, CPAC would not be able to carry out its mission as 
        specified in BBA 97.

     If this legislation comes before you, I would implore you to 
consider your decision carefully. I left a meeting of CPAC at noon 
today to come to this hearing. The message I would like to take back to 
CPAC at 3:30 this afternoon is that the members of this Subcommittee 
place a high value on the hundreds of hours that these national health 
care leaders have devoted to the tasks that Congress assigned them, and 
that you intend to be a reliable partner with them in Medicare reform 
efforts, not a group that mandates demonstrations one day and kills 
them the next.
     I would like to finish my testimony today by addressing one of the 
most controversial points in the Medicare competitive pricing debate: 
the degree to which traditional FFS Medicare should be included in the 
competitive pricing system. There are good arguments in favor of 
including FFS Medicare in a defined contribution system. Such a system 
is viewed as fair by the private health plans that must compete against 
the government-sponsored FFS plan. Furthermore, a defined contribution 
that applies to all health plans is likely to produce the best prices 
from health plans. In a recent study of large employers, we found that 
employers who adopt a defined contribution have total health insurance 
costs (including the portion of the premium paid by both employers and 
employees) that are about seven percent lower, on average, than 
employers who subsidize the cost of high-priced health plans.
     However, there also are good arguments in favor of subsidizing the 
consumer's cost of higher-priced health plans. The main empirical 
argument favoring that approach is that most employers do it. Only 
about one-third of the employers in our sample set a defined 
contribution to premiums. The Federal Employees Health Benefit Plan 
(FEHBP) is an example of a large employer that does not set a defined 
contribution to premiums. FEHBP sets a level percentage contribution to 
premiums, up to a cap, thus subsidizing the consumer's cost of higher-
priced plans.
     Why would employers reject a defined contribution system that has 
been shown to save money? There are several possible answers. 
Subsidizing high cost plans may be one way to compensate plans that 
attract higher cost enrollees. Also, consumers currently in low cost 
plans may like knowing that if they ever wanted to join the high cost 
plan, the premium would be subsidized, to some degree. We don't know 
all the reasons why employers subsidize the consumer's cost of higher-
priced health plans, but it appears to be common practice. Federal and 
state governments also subsidize the cost of higher-priced health 
plans, through the tax exemption of health insurance premiums, which 
provides an equal percentage subsidy of higher cost plans for any given 
consumer. It seems to us that a some compromise on the inclusion of 
FFS, and the appropriate level of subsidy, could be reached.
     I will conclude my remarks at this time. I will be happy to 
provide copies of our studies to anyone who would like them, and I look 
forward to your questions.


    Chairman Thomas. Thank you, Doctor.
    Mr. Walker, one of the things that the Medicare Commission 
looked at what the concern that historically part of the 
driving force for change on Medicare was the ``insolvency'' of 
Medicare. And when we tried to look at a model--and Social 
Security came to mind--it was fairly obvious that applying a 
dedicated tax model from Social Security, which has 100 percent 
of its funds in that model and then when it has no money there, 
it truly is insolvent, versus a plan that is partially paid out 
of a general fund and, in fact, based upon recent decisions in 
BBA 1997 and the President's ongoing proposal, one of the 
easiest ways to solve the insolvency of Medicare is to continue 
to transfer either programmatically to the general fund or 
simply dollars over to the HI Trust Fund.
    We tried to focus on the sources of money, the dedicated 
payroll taxes, the general fund, and the beneficiaries. One of 
the difficulties in getting a good dialog going about what the 
problem is is that the general fund portion is an entitlement, 
and it really does stay below the surface in any kind of a 
    We came to the conclusion that, in essence, forcing a 
public discussion about the relative share of the costs of the 
Medicare Program between those funding sources and the need for 
more money carried on as a general debate before you could 
transfer funds from the general fund or increase beneficiaries 
or increase payroll taxes, was in part inhibited because of the 
way we define solvency and insolvency today. So we came up with 
a different way of doing it called programmatic insolvency.
    Did you look at that portion of the----
    Mr. Walker. I am somewhat familiar with it, yes.
    Chairman Thomas. Is that a useful concept. Does it help us 
at least elevate it to a public discussion of the relative 
share of moneys?
    Mr. Walker. I think solvency is too limited. I think 
solvency can be misleading. It is not that it is unimportant, 
but the fact of the matter is that the assets that are in the 
trust fund right now represent Government securities. Basically 
what they represent is a first claim on future general 
revenues. That is what they are.
    I think if you are going to move to a shared financing 
source, partially dedicated payroll taxes, partially premiums, 
partially general revenues. I think it is important to look 
beyond solvency, to look at such things as percentage of the 
economy, percentage of the budget, to look at other factors. 
Because one of the concerns that we have, Mr. Chairman and 
Members of the Committee is we need to also look at 
sustainability. Can we keep the promises that have been made? 
And looking at it from the standpoint of percentage of the 
budget and percentage of the economy, is frankly a lot more 
relevant in making those judgments than solvency.
    Chairman Thomas. And, in fact, that is what the Commission 
did. It took an arbitrary figure of 40 percent of the General 
Fund exposure and used that as a programmatic insolvency 
criteria, which would trigger the discussion of where and how 
the finances would come from.
    Mr. Walker. Mr. Chairman, I think one of the basic problems 
we have in health care, which is not just Medicare, it's much 
broader, is a fundamental disconnect between who gets and who 
pays, a fundamental disconnect on behalf of individuals, not 
the Government, not employers, not providers, but individuals 
on cost and quality of care. They do not have adequate 
transparency, they do not have adequate incentives. Whether it 
be through Medicare or whether it be through, frankly, the tax 
system, that is the fundamental problem.
    Chairman Thomas. Well, I would even go one step further. We 
don't have a very educated consumer in this area, with woefully 
inadequate information available to make a decision, even if 
you wanted to be an educated consumer. That is why 
confidentiality, the collection of data, the ability to put 
outcomes and all of that is part of the solution to the 
    Dr. Moon, I want to thank you in recent publications where 
you have taken the time in print to distinguish, at least in 
concept, defined contributions from a premium support versus 
voucher. It is true that if you mess up in a number of ways, 
they can all wind up looking the same. But that if you do 
understand that there is a difference, it allows you to at 
least see what we believe to be some significant differences on 
the emphasis of the ability to share the cost of increases. I 
know others have not been as discriminating or as 
sophisticated, and I want to thank you for that.
    But the question I want to ask you runs through I think all 
three of the other panelists. In terms of this business of fee-
for-service being such a big chunk, and we know it is going to 
be a big chunk, and then the managed plans as an option, the 
difficulty I have is that today, in Medicare+Choice and in some 
models that have been discussed, is that the managed one, 
because of the way in which it is run, lends itself to a 
requirement of a cost-quality comparison. And the idea of a 
risk adjuster, as is contemplated by the administration, is 
within the managed area, with dollars being removed from a 
fixed amount.
    But you have got an entitlement program over here that is 
not subjected to the same cost and quality criteria with an 
unlimited funding arrangement. And I guess I would tell you, 
Dr. Wilensky, that some of us would be more willing to give the 
management tools you talked about to HCFA if they would subject 
themselves to some of the cost and quality comparisons that we 
are utilizing in other areas. There are two sides to the 
ledger. Let them go out and be ``competitive.'' But the 
downside of that, of course, is that you also have to be 
measured by the same measurements that are used elsewhere.
    Any reactions from anybody?
    Ms. Moon. I would like to indicate that I think that one of 
the things that you are talking about, in terms of holding fee-
for-service accountable I think is very important. We need to 
work very hard on finding new tools and new ways to deal with a 
part of the Medicare Program that is going to be around for a 
long time.
    Chairman Thomas. But just let me interrupt, just briefly, 
because we do have what we call cost and quality comparisons, 
but they are surrogates for the real thing, which is what do 
you do in the real world on a direct relationship on a cost 
basis. And I would really like real world cost and quality 
comparisons rather than the surrogates that we now use.
    Ms. Moon. OK. But I do think that whether you have the 
current system of Medicare+Choice or a premium support kind of 
model, you are going to have people comparing the private plans 
to the traditional Medicare Program. And so, to some extent, 
there is, I think already, that kind of a comparison that 
people can make. They do need some additional information and 
tools to be able to understand those tradeoffs. And I think 
that those tradeoffs are not very clear to individuals right 
    Ms. Wilensky. I support the notion that we ought to have 
common requirements and common payment, common spending with 
regard to the risk plans or however we want to call these 
Medicare replacement or Medicare Choice plans and traditional 
    As I indicated in my testimony, I am very concerned that 
the spending between traditional Medicare and the Choice plans 
or the risk plans is diverging at both ends of the scale. I 
think that is an invitation to difficulty. I think it is 
important that we have information on the quality and the 
outcomes. It needs to be available for traditional Medicare, as 
well as the Choice plan. I very much agree with the comments 
you made, that if the Congress is to grant HCFA more 
flexibility, it ought to demand more accountability. It has not 
in the past. It is within your right to so demand.
    We need to get these issues so that, frankly, the 
Government is not trying to push or pull people either out of 
or into various plans, but to give them information, to make 
adjustments for a health status that is critical and to make 
sure that plans are providing quality health care, and they are 
not cheating in any way in terms of their enrollment. That is a 
very important job that needs to be done.
    Chairman Thomas. And the long overdue education program 
ought not to be funded by one particular element of the program 
across the entire structure, which obviously was the----
    Ms. Wilensky. MedPAC has, as you know, already recommended 
that it is inappropriate to use only the risk plans to fund 
medical education. We think it is important that people know 
what they are choosing, but that is a broad Medicare function.
    Chairman Thomas. But that mental set is the key to the 
point you made about HCFA doing fairly well on an administered, 
bureaucratic fee-for-service structure, but doesn't understand 
the concept of managed care.
    Does the gentleman wish to respond at all, Mr. Dowd?
    Mr. Dowd. Yes. We have been fans for a long time of trying 
to level the playing field between HMOs and fee-for-service 
Medicare. That will cut both ways, though, as you suggest, and 
so that is important.
    I also support the idea of very careful monitoring of what 
is going on in both fee-for-service Medicare and HMOs. To a 
certain extent, we are sort of running a competitive pricing 
demonstration now on the HMO side because, with the changes in 
the HMO payment that are put in place by BBA, we are lowering 
the payments on the high side relative to the true cost of 
care. We are raising them on the low side. In a sense, that is 
what we would call a Dutch auction. You keep raising the prices 
until something good happens or lowering them until something 
bad happens. And it is important to me that we have the 
monitoring systems in place so that we know when good things 
and bad things happen.
    Chairman Thomas. Thank you. My time is up, and I want to 
turn it over to the gentleman from California.
    But to, Mr. Walker, I want to say thank you. In your 
written testimony, you made some very nice statements about 
some things that have been done and that you wanted Congress to 
hold the line on the Balanced Budget amendment changes that we 
    I want to assure you that if we decide to make any 
adjustments in the area, it is not because we have caved to any 
pressure about rolling back. We cannot roll back. But part of 
the deal was that prospective payment structures, going from 
the old Cost Plus to these new ones, were promised on a certain 
time table, and they haven't been delivered. And we put some 
plug numbers in there, and those plug numbers were not designed 
to be a 2- to 3-year period.
    And in legislation, as broad-based as the BBA, you 
inevitably think you said one thing, and the lawyers are now 
telling you that you actually did something else. So the 
traditional term is a ``trailer bill.'' There are some 
provisions for that. But I can assure you that your concern, at 
least from the Chairman of this Subcommittee, is not that we 
intend to rollback BBA, in any way, but to fine-tune it in 
areas where we believe there is potentially a need.
    So I appreciate your written comments.
    Mr. Walker. Mr. Chairman, obviously, some refinements may 
be necessary for a lot of the reasons that you articulated. But 
it is important to target those refinements, to base them on 
hard data. For example, some of the data for 1998 is just now 
becoming available.
    And in addition, I think what this does is it serves as a 
precursor of how tough this is going to be going forward. I 
mean, the fact of the matter is everybody has unlimited wants 
here, whether it is the individuals, whether it is the 
providers, meaning the hospitals, the physicians or whatever. 
And ultimately I think we are going to have to ask ourselves a 
much more fundamental question than historically we have done. 
Rather than incrementally making changes to existing systems, 
we are going to have step back and say, OK. Where are we at? 
Where should we be going? What do people need versus what they 
want? And what is the best way to address that in a way that is 
affordable that we can deliver on the promise, not just today, 
but for future generations?
    Chairman Thomas. Appreciate that. We made our first run at 
it, got 10 out of 11 votes. We will do it again.
    The gentleman from California?
    Mr. Stark. Thank you, Mr. Chairman.
    General Walker, I don't think I heard you deal with the 
part of your testimony on 12 and 13, pages 12 and 13, where, in 
effect, you say--or not in effect--but if I may quote you, You 
say, ``Ironically, Medicare Managed Care cost, not saved, the 
Government money.'' And then you further go on that you have 
reported in a paper or a monograph that you reference in your 
footnote that ``Factors additional to or exclusive of payment 
rates, including competition and market conditions, played a 
significant role in the 1999 plan dropouts.''
    Now, I suspect that what you are saying there was that if 
we were going to try and save some money with the Cost Plus 
Choice or whatever it is, we didn't. That is fair?
    Mr. Walker. Yes, Congressman Stark.
    Basically, what happened was the failure to have a proper 
risk adjustment meant that caused this, in part.
    Mr. Stark. Well, and now we find that all Medicare HMOs 
offering drug coverage will charge copayments for that next 
year, which was not the case in a large number. So that these 
experiments, I guess my only quarrel, coming from an area that 
has been served by Kaiser, and there are other excellent areas 
of the country, that we are just pushing it too fast; that the 
HMO's biggest worry is one of two, they will have too many 
patients or too few. And anything below or above causes them 
real problems. And by our trying to force-feed whatever might 
happen, we do create some problems.
    Second, I wanted to just point out that the premium 
support, as I read it, is an attempt to end Medicare as an 
entitlement. This 40-percent draw, on page 8 of the March 15 
description, says that ``If the draw is exceeded by 40 percent 
. . .'' that means that more than 40 percent of the program 
comes out of general revenues ``. . . it would require 
congressional approval to authorize any additional 
    Now, General, isn't that correct that if that's what it 
says, if you did that, that ends it as an entitlement and turns 
it into a defined contribution, wherein the Government will 
contribute no more than 40 percent of the aggregate from 
general revenues? Am I saying that----
    Mr. Walker. Basically, what it does is provide a mechanism 
which would, as I understand it, force Congress to go back and 
make a conscious decision----
    Mr. Stark. To appropriate the money.
    Mr. Walker. Correct. To make a conscious decision whether 
or not to violate the limit.
    Mr. Stark. Then it ain't an entitlement any more. And the 
third or last thing that I would----
    Chairman Thomas. Would the gentleman yield just briefly?
    Mr. Stark. Sure.
    Chairman Thomas. That would be one of the choices 
available. They could just as easily raise the HI taxes or to 
increase beneficiaries' amount----
    Mr. Stark. But they have to act. Now they don't. Now it's 
an entitlement, and I get my Medicare benefits regardless of 
what we do here. And so, by definition, Medicare would cease to 
be an entitlement.
    Now, I have heard an awful lot about people purchasing 
medical care, and I contend, have always contended it is 
impossible for the layman, even those of us in this room who 
are perhaps more familiar with medical provider options than 
others, but I just would suggest this. One of our interns of 
the Joint Economic Committee spent a couple of weeks, and she 
dreamed up this question for health care providers in the 
Washington, D.C., area. Her father, she said, was 63 and had no 
health insurance and was having a severe attack of kidney 
stones, but had a lot of money or she was willing to pay for 
lithotripsy to help pop. How much would it cost?
    Well, it took her 2 weeks to get answers. Now, if any of 
you have had any experience with kidney stones, 2 weeks is 
beyond the millennium. Well, it is interesting that in the area 
here, in the Washington, D.C., area, out of eight providers 
who--some wouldn't answer at all. They just wouldn't tell her 
what it cost or wouldn't call back--Johns Hopkins won with 
$5,300 for the hospital and the doc, and UVA in Charlottesville 
somewhere they said between $8- and $10,000.
    So let's take $9,000, almost a $4 thousand difference here 
for the same procedure if you get down and you can possibly 
drag that information out of these providers who don't really 
choose to tell you. And some, in the initial calls, just said, 
``Well, we don't give that information out.''
    Well, my question is I am not sure that it is the 
Government and the payers. I am not sure the providers, quite 
frankly, want to tell us what it costs, particularly until they 
see how much money we have got, and then I will bet you the 
cost tends to come amazingly close to whatever they think we 
can pay.
    So I have always said that I don't think the market can 
work because there is no good basis for any of us getting the 
information. And without reasonable information, markets can't 
    So, Mr. Chairman, I hope we don't have entitlements. I hope 
we don't have premium support. I hope we slow down the growth 
of for-profit managed care plans, which they may all go broke, 
and that would probably be the best thing we could do for 
Medicare beneficiaries.
    Thanks again for the hearing.
    Mr. Walker. Mr. Chairman, may I comment?
    Chairman Thomas. Sure.
    Mr. Walker. I think one of the things, with all due 
respect, Congressman, I think that the Congress really needs to 
consider, given these charts, because these are based upon 
trusty intermediate assumptions for Social Security and 
Medicare, they are based upon CBO estimates, economic 
assumptions, which are not that different from OMB. And 
basically what they say is the debate needs to be also what 
percentage of our economy and what percentage of our budget do 
we want to dedicate to health care.
    And you are right, Congressman, that managed competition is 
not a panacea, by any means, as we have heard. But I think we 
have to ask ourselves some of those fundamental questions and 
figure out how to get there.
    Chairman Thomas. The gentleman's time has expired. We have 
got less than 5 minutes to vote. And just briefly, the 
gentleman from Louisiana.
    Mr. McCrery. I have a quick question for any of the 
panelists. I don't know the answer to this, but I am curious. 
It goes along the lines of the entitlement question that Mr. 
Stark posed.
    If the HI Trust Fund runs out of money, if we don't have 
sufficient money--or let me put it another way--if we don't 
have sufficient money in the trust fund to pay all of the 
bills, does current law authorize us to simply make up the 
difference with general revenues?
    Mr. Walker. That is a legal question. My understanding is, 
that you can only use the trust fund assets to pay for 
benefits. But if the trust fund runs out of assets, then I 
would ask the trustee what happens.
    Ms. Moon. I think the legislation is not clear on that 
point. And I know that that had come up at some point.
    Chairman Thomas. We are down to 3 minutes, and we are 
getting pressed again. And the point is entitlements would end 
in that situation as well.
    Mr. McCrery. Yes. I mean, we may not have an entitlement in 
the ideal that Mr. Stark posed it.
    Chairman Thomas. Exactly.
    Mr. McCrery. So if we run bone dry in the trust fund, it 
may, in fact, require congressional action, just as it would 
under the Commission's proposal.
    Chairman Thomas. Does the gentlewoman from Connecticut wish 
to make a----
    Mrs. Johnson. I just want to make a comment. I appreciate 
the quality of your testimony and the degree to which this 
hearing has focused on the seriousness of the problems in 
Medicare and their significance to the whole country long term. 
But I wish you would, and I also appreciate, Dr. Dowd, your 
pointing out to us what happened in the Senate Patient Bill of 
Rights. I will, at least, certainly support knocking out that 
provision. I think it is outrageous to set up a demonstration 
project and then not have the courage to stand by it.
    But I would appreciate it if you would try to focus on what 
are the two concrete actions we should take this session to 
secure Medicare in the future? Because we have got to start 
acting now. Clearly, we can't get a macro solution. And so, if 
you would get back to me in writing with the two things you 
think it would be wisest for us to accomplish in this year's 
legislation, I would appreciate it.
    Chairman Thomas. Thank the gentlewoman.
    The Subcommittee is adjourned.
    [Whereupon, at 4 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of Douglas R. Wilwerding, Chief Executive Officer, 
Omnium Worldwide, Omaha, NE, and Accent Insurance Recovery Solutions, 
Omoha, NE

    The administration of the Medicare program greatly rests on 
the shoulders of its contractors who are responsible for: (1) 
receiving claims; (2) judging their appropriateness; (3) paying 
appropriate claims promptly; (4) identifying potentially 
fraudulent claims or providers, and withholding payment if 
necessary; and (5) recovering overpayments or inappropriate 
payments. When Medicare contractors do not perform these 
functions correctly or appropriately, the Medicare program 
loses billions of dollars. The actions of Medicare contractors, 
therefore, greatly impact the future of the Medicare program.
    As reported in the September 20th New York Times--as well 
as in recent reports by the General Accounting Office--
contractors are not performing the most basic claim paying 
functions, and are, in fact, defrauding the Medicare program. 
If contractors are not acting in a manner to stop the flow of 
inappropriate dollars from the Medicare program, and are in 
fact acting in a manner that promotes the inappropriate flow of 
dollars, then the Health Care Financing Administration should 
implement resources from the private sector to halt the waste 
of taxpayer money.
    I can speak specifically for the fifth function named 
above: overpayment identification and recovery. Medicare 
contractors make overpayments during the normal course of 
business. An overpayment is excess money released on a claim, 
in total or in part, paid to a provider of service or a 
beneficiary. Medicare contractors make billions of dollars of 
overpayments every year. However, they are not doing enough to 
identify overpaid claims nor are they doing enough to pursue 
recovery from the overpaid party.
    The private health insurance industry also makes billions 
of dollars in overpayments a year. But, the private sector 
realizes the value of retrieving this overpaid money. Private 
insurance companies employ specialized recovery firms to 
identify and pursue overpaid funds, resulting in millions of 
dollars returned back to the health insurance plan, helping to 
keep health care premiums down. The same successful procedures 
could be used to return billions to the Medicare program, funds 
that could be used to extend the life of the program, or 
provide additional benefits such as pharmaceutical coverage.
    The concept of private recovery firms working on Medicare 
claims has been recognized and contemplated by other 
Congressional committees. H.R. 1827, introduced by the 
Government Reform Committee, would mandate the identification 
and recovery of overpayments, paying particular attention to 
the Medicare program by singling it out for a demonstration 
project testing the abilities of private recovery firms. In 
addition, the Senate Appropriations bill is recommending the 
Department of Health and Human Services' Inspector General's 
office to perform a study on the use of private recovery firms 
on Medicare overpayments.
    Under the Health Insurance Portability and Accountability 
Act, HCFA has complete authority to contract with eligible 
entities for the recovery of payments that should not have been 
made. HIPAA also gives HCFA the funding to enter such 
contracts. HCFA has been slow to implement any such program 
despite its vast resources. Instead they continue to rely on 
their contractors for overpayment identification and recovery. 
However, as the reported in the New York Times and by the GAO, 
contractors are not even performing the most important 
functions of paying claims or answering phones. It can 
therefore be reasonably assumed they aren't adequately 
performing identification and recovery of overpayment, which is 
a process that is usually overlooked because it doesn't impact 
the daily functions of paying claims.
    I look forward to discussing with the Committee the 
services the private sector can offer the Medicare program and 
how such private sector services could easily be tested with 
Medicare contractors. Thank you for the opportunity to submit 
this written testimony.


Statement of Karen S. Fennell, RN, MS, Senior Policy Analyst, American 
College of Nurse-Midwives

    The American College of Nurse-Midwives (ACNM) believes that 
the Medicare program would be strengthened by expanding access 
for disabled women to preventive health services and maternity 
care services provided by Certified Nurse-Midwives (CNMs) and 
free-standing birth centers.
    The ACNM makes the following recommendations:
     Medicare reimbursement for CNM services should be 
increased from 65 percent of the physician fee schedule to 95 percent 
of the physician fee schedule.
     Medicare should establish a global payment for accredited 
free-standing birth centers.
    These recommendations are included in The Certified Nurse-
Midwives Medicare Services Act of 1999 (HR 2817). We urge the 
Committee to approve this important legislation.
    The American College of Nurse-Midwives (ACNM), the national 
professional organization for certified nurse-midwives (CNMs), 
welcomes the opportunity to submit testimony before the Health 
Subcommittee on Strengthening Medicare by ensuring enrollees' 
access to benefits and by improving their choice of plans and 

                  A. The Professional Practice of CNMs

    A certified nurse-midwife is a registered nurse with 
advanced, formal education in midwifery who cares for women 
throughout the life cycle. Nurse-midwifery practice is the 
independent management of women's primary health care, focusing 
on pregnancy, childbirth, the postpartum period, care of the 
newborn, and the family planning and gynecological needs of 
women. The certified nurse-midwife practices within a health 
care system that provides for consultation, collaborative 
management or referral as indicated by the health status of the 
    In 1996, nurse-midwives attended over 239,000 births in 
hospitals, free-standing birth centers and homes, and provided 
over five million visits to women and newborns. Fifty-six 
percent of women who are cared for by CNMs live in areas that 
are designated as underserved, within inner city or rural 
areas. In fact, 70 percent of women and newborns seen by nurse-
midwives are considered vulnerable by virtue of age, 
socioeconomic status, education, ethnicity, or place of 
residence. In addition, CNMs have a long history of working 
collaboratively with physicians and other health care providers 
to assure that quality, individualized care is available to 
high risk mothers, newborns and the disabled. Over 200 
certified nurse-midwives serve as faculty of medical schools, 
teaching and supervising residents.

                      B. Provision of Primary Care

    As is documented in many research publications, nurse-
midwives have a long history of providing first contact, 
comprehensive care with a focus on health promotion and disease 
    The ACNM is committed to ensuring that disabled women and 
their families do not get short-changed in the primary care 
movement. We are concerned about models of ``primary care'' 
that: do not provide continuity of care to disabled women, do 
not allow for choice of different types of providers, decrease 
access to individualized care, and lose the voice of women in 
determining what is appropriate for themselves and their 
families. For example, studies have documented that chronically 
disabled women who have specialists as their primary care 
providers are sometimes neglected with regard to their 
obstetrical and gynecological needs. Often, too little time and 
resources are allocated to nutrition counseling, STD screening 
and education, family planning services, risk reduction 
counseling, as well as mental health evaluation and treatment. 
The recent Medicare Managed Care demonstration projects totally 
left out disabled women of childbearing years. However, in 1996 
there were approximately 5,200,000 women under 65 years of age 
enrolled in Medicare through the disabled program. The Medicare 
statistical files for 1996, the most recent available data from 
HCFA, indicate that in the MCH 14 grouping over 50,000 women 
were cared for in hospitals with a primary diagnosis related to 
``pregnancy, childbirth and puerperium.''

C. The Medicare Population and Accessability to CNMs and Free-standing 
                             Birth Centers

    The ACNM is committed to increasing Medicare beneficiaries' 
access to midwifery care. Medicare payment policies have made 
it almost impossible for CNMs to serve this population. 
Medicare has provided for coverage of the professional services 
of CNMs since July 1, 1988. The law provided the Secretary of 
Health and Human Services with very little guidance as to how 
the fee schedule should be established, except to stipulate 
that payment for the CNM service cannot be greater than 65 
percent of the applicable prevailing charge for the same 
services when performed by a physician.
    This low level of payment results in CNMs being paid $800-
1,200 for nine to ten months of care for pregnancy, including 
deliveries. At this level, CNMs can not afford to serve the 
Medicare population.
    Legislation has been introduced this fall in Congress to 
raise the payments to 95 percent of the physician fee schedule. 
The CNM Medicare Services Act of 1999 (HR 2817) is a bipartisan 
bill that will strengthen the Medicare program. Dramatic cost 
savings can be achieved by using nurse-midwives. It is 
estimated that for every $1 million invested in nurse-midwifery 
education, there could be a saving of $6 million in health care 
costs annually. (Summary findings: ``Nurse Midwifery Care for 
Vulnerable Populations in the United States,'' October 1994, 
grant funded by the Robert Wood Johnson Foundation).
    As has just been discussed, preventive health, a proven 
cost containment strategy, is an integral part of nurse-
midwifery care. The lower costs of labor and birth care, when 
managed by nurse-midwives, is partly due to a judicious use of 
technology. Less reliance on routine electronic fetal 
monitoring and ultrasound, reduced need for medication and 
epidural anesthesia, fewer routine episiotomies, and fewer 
cesarean sections reduce costs without compromising quality of 
    A recent study commissioned by the Centers for Disease 
Control and published in The Journal of Epidemiology & 
Community Health (May, 1998) shows that nurse-midwives' 
outcomes are excellent when compared to those of physicians. 
The study of 3.5 million births compared physician's and CNM's 
outcomes in the U.S. in 1991, and after controlling for various 
risk factors, reported the following outcomes:
    1. The risk for neonatal mortality was 33 percent lower for births 
attended by CNMs.
    2. The risk of delivering a low birth weight infant was 31 percent 
lower for CNM attended births.
    3. The mean birth weight was 37 grams higher for CNM attend births.
    4. The infant mortality rate was 19 percent lower for CNM attended 
births than for physician attended births.
    Currently, the Medicare program does not recognize free-
standing birth centers. Birth centers are non-hospital 
facilities organized to provide family -centered maternity care 
and primary care services for women evaluated to be at low risk 
for obstetrical complications.
    In 1975, the Maternity Center Association established the 
first urban birth center in New York City. Birth centers have 
also been developed to serve rural communities, such as the 
Monroe Maternity Center in Madisonville, Tennessee. Today there 
are 145 such facilities.
    The excellent quality of care, accompanied by great cost-
savings, has been demonstrated in many research studies. The 
New England Journal of Medicine 
(12/28/89) reported that:

         Few innovations in health service promote lower cost, greater 
        availability, and a high degree of satisfaction with a 
        comparable degree of safety. The results of this study suggest 
        that modern birth centers can identify women who are at low 
        risk for obstetrical complications and care for them in a way 
        that provides these benefits.

    Specifically the study found that:
     The quality of care in birth centers reported in the ``The 
National Birth Center Study'' reflects the low overall intrapartum and 
neonatal mortality rate of 1.3/1000 births; 0.7/1000 if lethal 
anomalies are excluded. These rates are comparable to studies of low 
risk, in-hospital births.\1\
    \1\ Rooks, J., et al., ``Outcomes of Care in Birth Centers: The 
National Birth Center Study,'' New England Journal of Medicine, 
321:1804-1811, (December 28), 1989.
     The cesarean section rate for women receiving care in 
birth centers averages 4.4 percent, approximately one half the rate 
reported in studies of low risk births in hospitals.\1\
     Birth centers nationally have consistently displayed 
charges for care for normal birth that average up to 50 percent less 
than regular hospital stays and 30 percent less than short stays--
including practitioner fees.\2\, \3\
    \2\ Health Insurance Association of America, Source Book of Health 
Insurance Data--1996, 1196, Washington, DC.
    \3\ National Association of Childbearing Centers, NACC 1996 Annual 
Survey Report of Birth Centers Experience, 1997, Perkomenville, PA.
     More than half of birth centers include routine laboratory 
exams, childbirth education, home visits, extra office visits, and 
initial newborn examinations in their charges.
     Most major health insurers contract with birth centers for 
reimbursement. Because charges reflect cost and since the birth center 
is a single service unit, there is no opportunity for cost shifting or 
operating the birth center as a ``loss leader'' to other services.
     98.8 percent of women using the birth center would 
recommend it to friends and/or return to the center for a subsequent 
    The most recent data released by the Health Insurance 
Association of America and the National Association of 
Childbearing Centers showed that in 1995 there was a cost 
savings of over $3,000 per birth when comparing a vaginal birth 
at a birth center to a hospital.
     Birth Centers Birth: $3,3241
     Hospital Vaginal Births: $6,378
     Hospital Cesarean Births: $10,638

    If only 25,000 Medicare births were attended in birth 
centers, not only would access to care be greatly improved, 
annual savings could be almost $78.5 million. Plus, for every 
500 women that birth centers prevent from having a cesarean 
birth, savings could equal $3.7 million. This savings to the 
payers of care has been consistently shown for more than two 
decades of birth center operation.
    The CNM Medicare Services Act (HR 2817) will include 
accredited free-standing birth centers in the Medicare program.


    The ACNM believes that the lack of recognition for the 
contributions of CNMs and birth centers must be addressed by a 
concentrated effort to eliminate unnecessary payment 
restrictions to nurse-midwifery practices at the federal level. 
Therefore, we seek the Subcommittee's support for HR 2817.


Statement of the American Counseling Association, Alexandria, VA

    The American Counseling Association (ACA) is the nation's 
largest non-profit membership organization representing 
professional mental health counselors. Counselors are master's-
degreed mental health providers, licensed or certified in 45 
states and the District of Columbia. Under the typical 
standards required for licensure, counselors must complete a 
master's degree in counseling, accumulate two years and 3,000 
hours of post-master's supervised experience, and pass a 
national examination. Licensed professional counselors practice 
in a variety of settings, including private practice, clinics, 
agencies, health plans, hospitals, and group practices.
    ACA strongly supports efforts by Congress to modernize and 
strengthen the Medicare program. With an increasingly large 
segment of the U.S. population entering eligibility for the 
program, it is imperative that Medicare provide effective care 
in an efficient manner. We believe any effort to strengthen 
Medicare must do so in part by improving beneficiaries' access 
to mental health care.
    Older Americans are not getting the mental health treatment 
they need. According to testimony from the National Institute 
of Mental Health delivered at a Senate Special Committee on 
Aging hearing in 1996, of the older Americans in need of mental 
health care, only an estimated one in three receives care from 
a mental health professional. Approximately one-third of this 
population receives no care at all, and another third receives 
care only through a primary care physician.\1\ According to 
other testimony presented at the hearing, those over age 65 are 
more likely to commit suicide than any other age group \2\, and 
of the elderly who commit suicide, more than \3/4\ths had 
visited a primary care physician within the month before their 
suicide, and 35 percent had done so within the past week.\3\
    \1\ Senate Special Committee on Aging, Treatment of Mental 
Disorders in the Elderly: Reducing Health and Human Costs, 104th 
Congress, 2nd session, 1996, 46.
    \2\ Senate Committee, Treatment of Mental Disorders in the Elderly, 
    \3\ Senate Committee, Treatment of Mental Disorders in the Elderly, 
    As with all other populations and demographic groups, 
inadequate treatment of mental disorders among the elderly 
leads to higher general medical care costs. Medicare enrollees 
with untreated severe depression experience general health care 
costs roughly 91 percent greater than those without depression, 
and it is estimated that if only 25 percent of Medicare 
enrollees with depression were effectively treated, the system 
would save about $500 million per year.\4\ Depression is only 
the most common, and not the only, mental disorder experienced 
by older Americans.
    \4\ Senate Committee, Treatment of Mental Disorders in the Elderly, 
    Policy analysts, members of Congress, and Congress's own 
Congressional Budget Office have all stated that important keys 
to improving patient care while constraining costs are 
increasing choice and competition within the Medicare program. 
In the area of mental health, one of the ways in which choice 
and competition can be added to the system is through the 
reimbursement by Medicare of the services of licensed 
professional counselors.
    In the private sector, the vast majority of health plans 
contract with or employ licensed professional counselors in 
providing services to plan enrollees. Licensed professional 
counselors (LPC's) are master's degreed mental health 
providers, meeting education, training, and examination 
requirements virtually identical to those of clinical social 
workers. Professional counselors are licensed or certified in 
45 states and the District of Columbia, and are recognized as 
core mental health professionals by the Health Resources and 
Services Administration, the federal Center for Mental Health 
Services, and under the Public Health Service Act.
    Patient choice of provider is important in all forms of 
health care, but perhaps is most important in the area of 
mental health treatment. Under current Medicare law 
beneficiaries are precluded from seeing licensed professional 
counselors, even though an LPC may be the beneficiary's first 
choice of provider. Anecdotal evidence suggests that many older 
Americans feel more comfortable seeing a counselor than a 
psychiatrist or a psychologist, or than confiding highly 
personal mental or emotional problems in his or her primary 
care physician. In many cases, counselors with good working 
relationships with primary care or other physicians have older 
patients referred to them by the physician, and must inform the 
patient that counselors' services are not covered by Medicare. 
This fact usually comes as a surprise to the physician.
    Access to care is also an issue for older Americans, who 
often do not have ready access to reliable transportation. In 
many areas and communities, a counselor may be the only mental 
health specialist available. Consequently, current Medicare 
policy both limits choice of provider for program enrollees and 
makes mental health care less accessible.
    Coverage of LPC's under Medicare would not represent the 
addition of a new type of benefit. Counselors provide the same 
types of psychotherapy and counseling currently provided under 
the program by psychologists and clinical social workers, and 
coverage of counselors would increase competition in the 
program. This analysis has been borne out by the experience of 
states which have enacted counselor coverage laws. According to 
a 1996 survey by the Texas Department of Insurance, payments to 
licensed professional counselors amounted to only \1/10\th of 1 
percent of total claims paid by insurers.\5\ In the private 
sector, professional counselors typically charge roughly the 
same rates as clinical social workers for therapy sessions, and 
charge less than is charged by clinical psychologists.
    \5\ Texas Department of Insurance, Health Insurance Regulation in 
Texas: The Impact of Mandated Health Benefits, report to the Texas 
Legislature, 1998, 57.
    In summation, any attempt to increase competition and 
consumer choice in the Medicare program and to reduce the costs 
of inadequate mental health treatment for beneficiaries should 
include recognizing licensed professional counselors under the 
program. Medicare beneficiaries deserve the same choice of 
provider and access to high-quality services as is enjoyed by 
those with private insurance. Current Medicare policy is not 
meeting the mental health needs of its enrollees.
    ACA looks forward to working with members of Congress to 
bring Medicare's mental health coverage up to date.


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.
    The AMA applauds the efforts of the members of this 
subcommittee for focusing on this important issue. For years 
the AMA has been a strong advocate of basic, essential reforms 
of the Medicare program. It is clear that the system, as 
currently structured, cannot continue to support the provision 
of quality medical services to the elderly and disabled in this 
country, particularly as the baby boom generation becomes 
Medicare-eligible while at the same time the numbers of 
employees in the workforce who financially support the system 
    Congress has already acknowledged that Medicare must be 
reformed to keep the promise of health care for this and future 
generations of elderly Americans, as represented by the 
establishment under The Balanced Budget Act of 1997 (BBA) of 
the National Bipartisan Commission on the Future of Medicare. 
We urge, however, that this subcommittee and Congress not delay 
in passing badly needed reform. Now is the time, before the new 
millennium, to fix the Medicare program.
    Medicare's current tax-based ``pay-as-you-go'' financing 
structure makes it highly unlikely that the promise of health 
care to our elderly can be sustained in the coming years. 
Moving Medicare from an open-ended entitlement system to one in 
which the government makes a contribution that allows 
individuals to have meaningful choice and quality care is the 
key to gaining budgetary control over outlays.
            For the Long Term: Deal with the Trust Fund Myth
    Because the term ``trust fund'' is officially used to 
describe the financing of Medicare, many people think that the 
payroll taxes they pay are saved and accumulate interest to pay 
for their personal medical needs in retirement. In fact, the 
Part A program is financed on a ``pay-as-you-go'' basis, with 
taxes paid into the program being used to pay for the benefits 
received by current retirees, and the excess used to purchase 
federal debt. Part B is financed mostly out of general 
revenues, with the premiums that retirees pay calculated to 
cover only about 25% of the outlays. Part B is modeled after 
private sector health plans, with a significant difference: 
beneficiaries fund only 25% of the cost of their services 
through premiums, leaving taxpayers to fund a significant 
portion of the remaining cost of providing Part B services.
    Most retirees have received much more in benefits than 
their contributions to the program could purchase. The pay-as-
you-go financing is often likened to a ``Ponzi'' or ``pyramid'' 
scheme. The similarity lies in the promise of future benefits 
to those who fund services for current beneficiaries, and the 
need for a growing number of new contributors to fund the 
growing number of beneficiaries. Pyramid schemes, almost by 
definition, must eventually collapse from an insufficient 
influx of new participants. The number of workers contributing 
payroll taxes to finance the current hospital trust fund is 
declining. In 1965 when Medicare was enacted, there were 5.5 
working-age Americans for every individual over age 65. Today, 
there are only 3.9 workers supporting each Medicare-age 
individual. In the coming decades, as the ``baby boom'' 
generation continues to age, this number will fall more 
rapidly. By the year 2030, it is estimated that there will be 
only 2.2 working-age Americans for each individual over age 65. 
By that time, Medicare will enroll 20% of the population, 
compared with the 12.8% of the population now enrolled.
    Medicare's actuaries base their calculations for funding 
the Medicare fee-for-service program on the assumption that the 
rate of health care cost inflation will be controlled over the 
next 25 years. This assumption allows them to project a 
significantly lower tax increase needed to fund the program 
than would be needed if the historical rate of cost inflation 
continued. Continuing the ``pay-as-you-go'' system of financing 
Medicare will impose an ever-increasing burden on working U.S. 
taxpayers. While this country's obligations to those who are 
and will be dependent on Medicare in the future must clearly be 
honored, we need to implement reforms so that the program is 
available for future generations.
    How would we design Medicare if we had it to do over again? 
How would we protect the younger generations that will face 
ever-increasing taxes and prospects of eroding benefits and 
less choice if the current program were to be continued?
    To restore the viability of the program's promise to future 
generations, certain immediate priorities must be met, 
including shifting away from the ``pay-as-you-go'' system; 
establishing a system under which the government makes a 
contribution that allows individuals to have meaningful choice 
and quality care; and improving the fee-for-service Medicare 
    This will assure that all working Americans have access to 
health care in retirement and will maintain choice and quality 
of care for the elderly.
                   Improving Fee-for-Service Medicare
    Despite the establishment of and focus on Medicare+Choice, 
85% of Medicare beneficiaries receive health care through the 
Medicare fee-for-service program. It is imperative to improve 
the efficiency of the fee-for-service program, thereby 
constraining Medicare's cost growth at a reasonable level over 
the next several decades and limiting out-of-pocket costs 
incurred by beneficiaries. The AMA proposes the following 
structural modifications to the program that would save both 
beneficiaries and the government money by providing needed 
incentives for efficiency.

The Path to Scoreable Savings: Eliminate the ``Gap'' Problem

    The large cost imposed on the Medicare program and 
beneficiaries by the ``Medigap problem'' has long been 
recognized as a potential source of significant government 
budget savings. When Medicare's intended cost sharing is 
covered by private supplemental insurance (Medigap), it has 
been demonstrated that beneficiaries use more services than 
they would otherwise. Since more than 75% of beneficiaries own 
such supplemental coverage, Medicare's outlays are considerably 
higher than they would be if the cost sharing were not 
subverted by Medigap insurance.
    Effectively solving this problem presents the best source 
of scoreable budget savings because the savings produced are 
the result of efficiency improvements, rather than from 
imposing additional costs on taxpayers, beneficiaries or 
providers of medical care.
    The potential cost sharing exposure for beneficiaries under 
the current system can reach more than $34,000 per year since, 
unlike most private insurance policies, Medicare does not place 
a ceiling on the out-of-pocket cost that beneficiaries can be 
required to pay. The current system is designed so that the 
beneficiary's rational response is to purchase supplemental 
coverage, which over three-quarters of beneficiaries do as a 
hedge against economic catastrophe. This occurs, despite the 
fact that 20% of beneficiaries incur no actual cost sharing 
liability each year, while 70% incur a cost sharing liability 
under $500 and 80% incur under $1000 of expense. The risk of 
paying tens of thousands of dollars out-of-pocket is not one 
that most beneficiaries want to take.
    It is safe to assume that if beneficiaries were not exposed 
to such potentially high out-of-pocket costs, they (and/or 
their former employers who provide insurance to supplement 
Medicare as a retirement benefit) would not feel compelled to 
insure against it. In fact, the government does not need to 
expose beneficiaries to such high risk, precipitating the 
increased burden on beneficiaries and its own budget. The 
government can give beneficiaries and their former employers an 
economic break by eliminating their need for supplemental 
coverage. In so doing, the government can also lessen the 
pressure that Medigap puts on the federal budget.
    The AMA proposes that Medicare restructure its cost sharing 
to reduce potential beneficiary liability in a manner that 
eliminates the need for private Medigap insurance. In exchange, 
beneficiaries would pay a somewhat higher premium than they do 
now, but they would also have more money available to help 
cover out-of-pocket costs, such as prescription drugs that are 
not currently covered by Medicare. The premium charged by 
Medicare for the expanded coverage would be much less than that 
charged by private insurance companies because the government's 
premium would not be padded by marketing expense and profit.
    The reinstitution of effective cost sharing would reduce 
government outlays for medical services. The balance to be 
struck would be one in which beneficiaries would be provided an 
effective incentive to reasonably moderate their demand for 
covered services, while eliminating their need to insure 
against an enormous potential out-of-pocket liability.
    One alternative that the AMA has developed is for Medicare 
to convert its current cost sharing into a modest deductible 
with no coinsurance requirement above the deductible, and 
charge a fair premium for the extra coverage implied by 
lowering the cost sharing. In this way, beneficiaries would 
readily know in advance the maximum liability to which they 
would be exposed. In turn, few would be motivated to buy 
supplemental insurance (which would no longer be valuable 
because its premium cost would meet or exceed the liability it 
would be purchased to insure against). Beneficiaries would be 
trading the unknown for the known.
    As an illustration of this reallocation approach, we 
estimate that the average cost of the Medigap ``Plan C'' that 
covers all of Medicare's potential cost sharing liability as 
about $1,330 in 1999. This amount could be divided into two 
parts, consisting of a modest, single deductible for both Parts 
A and B of Medicare, and a premium for the extra Medicare 
coverage represented by eliminating all existing cost sharing 
liability except for the single deductible. Dividing the 
current cost of Medigap Plan C into two parts--a deductible and 
a premium for extra coverage--would guarantee that 
beneficiaries would incur no greater out-of-pocket expense than 
they do now, and many of them would actually save money.
    For example, consider dividing the current Medigap cost 
into a $500 deductible and a premium of $830. According to the 
most recent actuarial analysis by PriceWaterhouse, the average 
beneficiary would spend only $400 of the $500 deductible, 
saving $100 per year from the cost of $1,330 for Medigap. By 
neutralizing the first-dollar-coverage incentive of Medigap, 
the Medicare program would save an average of $334 per 
beneficiary, which could be returned to beneficiaries in the 
form of reduced Part B premiums or additional coverage. If the 
government savings were used to reduce the deficit, a total of 
$40 billion of savings would accrue over the 5-year budget 
period 1999-2003.
    Medicare's current cost sharing requirements are self-
defeating because they frighten beneficiaries into insuring 
against them with expensive private coverage. By incorporating 
most of Medigap's coverage into Medicare benefits, the 
government could save beneficiaries money by reducing the 
premium required for the coverage. In turn, the government can 
achieve the intended benefit of effective cost sharing to 
reduce program expenditures.
    Neutralizing Medigap is a ``win'' for patients and 
beneficiaries, the government and taxpayers. For example, we 
understand that Congress and the Administration are exploring 
various methods to help beneficiaries pay the exorbitant cost 
of pharmaceutical drugs. As discussed above, it is expected 
that beneficiaries' out-of-pocket costs will almost double over 
the next couple of decades. A significant portion of those 
costs will be for pharmaceutical drugs that are covered by the 
Medicare fee-for-service program, which CBO projects will 
increase between 13% and 21% each year during the next decade. 
The savings received by beneficiaries as a result of 
eliminating the Medigap problem will help offset the cost of 
the drugs.
    Even if Congress does not enact broad program restructuring 
now, we urge Congress to avoid approving legislation in the 
interim that would either:
     increase beneficiary uncertainty regarding 
potential out-of-pocket costs, which will drive up demand for 
Medigap insurance;
     increase availability of first-dollar coverage for 
covered Medicare benefits, which will promote inefficient 
utilization of services, thus driving up program costs; or
     greatly expand Medicare benefits in a manner that 
adds significantly to Medicare's future financing problems.

Improving Medicare's Sustainable Growth Rate System

    Improving Medicare's sustainable growth rate (SGR) system 
is a major priority for the physician community. We urge 
inclusion of legislation to fix the problems with the SGR in 
any legislation approved by the Committee to reform Medicare or 
refine elements of the Balanced Budget Act of 1997.
    Enacted under the BBA, the SGR establishes a target growth 
rate for Medicare spending on physician services, then annually 
adjusts payments up or down, depending on whether actual 
spending is below or above the target. The SGR system was 
intended to slow the projected rate of growth in Medicare 
expenditures for physicians' services.
    Physicians are the only group subject to this target, 
despite the fact that Medicare spending on physician services 
has been growing more slowly than other Medicare benefits. 
Although the BBA included measures to slow projected growth in 
these other benefits, the Congressional Budget Office continues 
to forecast much higher average annual growth rates for other 
services than for physician services over the next decade. In 
contrast to annual growth in outlays of 4.6 percent for 
inpatient hospital services, 5.7 percent for skilled nursing 
facilities, 6.5 percent for home health, and 14.6 percent for 
Medicare+Choice plans, average annual growth in physician 
services is projected at only 3.1 percent from 2000-2009.
    Physicians were subject to significant and disproportionate 
Medicare payment cuts prior to the BBA, yet we have never 
abandoned our elderly and disabled patients. From 1991-97, 
physician payment updates already had slipped 10 percent below 
growth in medical practice costs.
    In its March 1999 Report to Congress, the Medicare Payment 
Advisory Commission (MedPAC) identified serious problems in the 
SGR system and recommended significant improvements to it. The 
AMA and the national medical specialty societies share MedPAC's 
concerns and believe that improving the SGR is a critical 
component of efforts to ensure that the 85 percent of Medicare 
beneficiaries who are enrolled in the fee-for-service program 
continue to receive the benefits to which they are entitled.
    Specifically, the physician community is concerned that the 
growth limits in the current SGR system are so stringent that 
they will have a chilling effect on the adoption and diffusion 
of innovations in medical practice and new medical 
technologies. In addition, we are concerned that the Health 
Care Financing Administration (HCFA) did not revise the 
projections it used in the 1998 SGR when data proved HCFA 
erroneous. Further, HCFA stated it will not correct 1999 SGR 
errors without a congressional mandate, despite that in the 
first two years of the SGR, erroneous HCFA estimates have 
already shortchanged the target by more than $3 billion. 
Finally, we are concerned that the SGR could also cause future 
payments to be highly volatile and fall well behind inflation 
in practice costs.
    Medicare Physician Payments and the BBA: Medicare payments 
for physicians' services are updated annually by HCFA. Payment 
rates are based on a relative value scale system, enacted under 
OBRA 89, that reflects the physician work, practice expense and 
professional liability insurance costs involved in each 
service. The relative value for each service is multiplied by a 
dollar conversion factor to establish actual payment amounts. 
The conversion factor is required to be updated each calendar 
year, which involves, in part, establishing an update 
adjustment factor that is adjusted annually by the SGR.
    MedPAC recommends, and the AMA agrees, that Congress revise 
the SGR system as follows:
     The SGR should include a factor of growth in real 
gross domestic product per capita plus an allowance for cost 
increases due to improvements in medical capabilities and 
advancements in scientific technology,
     The Secretary should be required to publish an 
estimate of conversion factor updates by March 31 of the year 
before their implementation;
     The time lags between SGR measurement periods 
should be reduced by allowing calculation of the SGR and update 
adjustment factors on a calendar year basis;
     HCFA should be required to correct the estimates 
used in the SGR calculations every year; and
     The SGR should reflect changes in the composition 
of Medicare fee-for-service enrollment.
    The SGR system was enacted under the BBA and replaces the 
Medicare Volume Performance Standard system, which had been the 
basis for setting Medicare conversion factor updates since 
1992. The SGR sets a target rate of spending growth based on 
four factors: changes in payments for physician services before 
legislative adjustments (essentially inflation); changes in 
Medicare fee-for-service enrollment; changes in real per capita 
gross domestic product (GDP); and an allowance for legislative 
and regulatory factors affecting physician expenditures. Growth 
in real per capita GDP represents the formula's allowance for 
growth in the utilization of physician services.
    The target rate of spending growth is calculated each year 
and is designed to hold annual growth in utilization of 
services per beneficiary to the same level as annual GDP. 
Physician payment updates depend on whether utilization growth 
exceeds or falls short of the target rate. If utilization 
growth exceeds GDP, then payment updates are less than 
inflation. If utilization is less than GDP, payment updates are 
above inflation.
    Because of the serious problems with the SGR system, as 
discussed below, four improvements must be included in 
legislation to fix the SGR:
     There must be a requirement to correct HCFA's 
projection errors and to restore the $3 billion SGR shortfall 
resulting from these errors;
     The SGR must be increased to account for physician 
costs due to adoption of new technology;
     Measures must be implemented to curtail volatility 
in physician payment rates and avoid steep cuts in the future; 
     HCFA and MedPAC must be required to provide 
information and data on payment updates.
    Problems with the SGR System: Of the needed improvements 
listed above, we wish to focus on two major problems with the 
SGR. First, there is a ``projection error'' problem. 
Specifically, in determining the SGR each year, HCFA must 
estimate certain factors that are used to calculate the SGR. In 
the first two years of the SGR system, HCFA has seriously 
miscalculated these factors, and thus physicians have been 
shortchanged by several billion dollars. In addition, these 
projection errors will continue each year, and the resulting 
shortfalls will be compounded. Second, the SGR system does not 
allow growth in physician payments sufficient to account for 
physicians' costs due to technological innovations.
    Unlike some other Medicare payment issues, the problems 
with the SGR system and their solutions are a matter on which 
the physician community is unified. National organizations 
representing diverse medical specialties, including surgeons, 
primary care physicians and others, as well as organizations 
representing medical colleges and group practices, have been 
working closely together with the AMA to address these complex 
issues. On behalf of the entire physician community, we are 
asking Congress to take the necessary steps to assure that we 
can continue to afford to provide our Medicare patients with 
the best medical care available in the world.
    I. The Projection Error Problem.--Two of the four factors 
used to calculate the SGR target each year are growth in U.S. 
GDP and fee-for-service enrollment growth. Because the target 
must be calculated before the year begins, HCFA can only 
speculate as to what GDP growth will be and how many people 
will enroll in fee-for-service versus managed care. Recognizing 
the need for such speculation, HCFA acknowledged in a 1997 
physician rate update regulatory notice that the actual data 
for each year, once available, might reveal errors in its 
estimates of as much as 1 percent, or $400 million. HCFA also 
promised that the difference between its projections and actual 
data would be corrected in future years.
    In the first two years of the SGR, erroneous HCFA estimates 
have already shortchanged physician payments by more than $3 
billion. These projection errors have not been corrected and 
HCFA does not plan to do so. Specifically, one year after the 
1997 notice, HCFA reneged on its pledge to correct SGR errors 
and simultaneously issued its most egregious error, projecting 
Medicare managed care enrollment would rise 29 percent in 1999, 
despite the many HMOs abandoning Medicare in 1999. This error 
led, in turn, to a projected drop in fee-for-service enrollment 
and a negative 1999 SGR. Data now show that managed care 
enrollment has increased only 11 percent, a fraction of HCFA's 
projection, which means physicians are caring for 1 million 
more patients in Medicare fee-for-service than were forecast.
    The 1998 and 1999 SGR projection errors are a serious 
problem. The SGR is a cumulative (as opposed to an annual) 
system, and the cumulative SGR target is like a savings account 
for physician services. As discussed, HCFA's errors have left a 
$3 billion shortfall in this account, which, if not restored, 
will either produce unwarranted payment cuts or deficient 
payment increases. Although the President's 2000 budget 
proposes to address the projection errors, we are concerned 
that HCFA may correct the errors in a way that will effectively 
cancel any benefit to payment rates from using accurate data.
    Physicians have faced a decade of payment cuts without ever 
abandoning Medicare patients. We have done our part to keep 
costs within the limits imposed by the BBA. Now, Congress must 
do its part by insisting that payment updates be based on 
correct SGR estimates.
    II. The SGR Must Allow for Technological Innovations and 
Other Factors Impacting Utilization of Health Care Services.--
MedPAC has also recommended that Congress revise the SGR to 
include a factor of growth in real gross domestic product per 
capita plus an allowance for cost increases due to improvements 
in medical capabilities and advancements in scientific 
    The system is currently designed to hold annual utilization 
growth at or below annual GDP growth. A common method for 
policymakers to evaluate trends in national health expenditures 
is to look at growth in health spending as a percentage of GDP, 
but this approach is replete with problems. There is no true 
relationship between GDP growth and health care needs. 
Forecasts by Congressional Budget Office and the U.S. Census 
Bureau indicate that real per capita GDP growth will average 
about 1.5 percent per year over the next decade. This is far 
below historical rates of Medicare utilization growth. Indeed, 
at 5.9 percent, average annual per beneficiary growth in 
utilization of physicians' services was three to four times 
higher than GDP growth from 1981-1996. Thus, if history is any 
guide, holding utilization growth to the level of GDP growth 
virtually guarantees that Medicare physician payments will 
    A primary reason for this lack of congruity between GDP and 
Medicare utilization is that GDP does not take into account 
health status trends nor site-of-service changes. Thus, if 
there were an economic downturn with negative GDP growth at the 
same time that a serious health threat struck a large 
proportion of Medicare beneficiaries, the consequences could be 
    Secondly, GDP does not take into account technological 
innovations. The only way for technological innovations in 
medical care to really take root and improve standards of care 
is for physicians to invest in those technologies and 
incorporate them into their regular clinical practice. The 
invention of a new medical device cannot, in and of itself, 
improve health care--physicians must take the time to learn 
about the equipment, practice using it, train their staff, 
integrate it into their diagnosis and treatment plans and 
invest significant capital in it. Yet physician spending is the 
only sector of Medicare that is held to as stringent a growth 
standard as GDP and that faces a real possibility of payment 
cuts of as much as 5 percent each year. Keeping utilization 
growth at GDP growth will hold total spending growth for 
physician services well below that of the total Medicare 
program and other service providers.
    To address this problem, as recommended by MedPAC, the 
factor of growth under the SGR relating to GDP must be adjusted 
to allow for innovation in medical technology. We believe to 
implement adequately MedPAC's recommendation, the SGR should be 
set at GDP + 2 percentage points to take into account 
technological innovation, as discussed further below.
    In addition, we urge that Congress consider a long-term 
approach to setting an appropriate growth target that takes 
into account site-of-service changes, as well as health status 
and other differences between Medicare's fee-for-service and 
managed care populations that lead to differential utilization 
growth. Thus, we believe that the Agency for Health Care Policy 
and Research (AHCPR) should be directed to analyze and provide 
a report to MedPAC on one or more methods for accurately 
estimating the economic impact on Medicare expenditures for 
physician services resulting from: improvements in medical 
capabilities and advancements in scientific technology; changes 
in the composition of enrollment of beneficiaries under the 
fee-for-service Medicare program; and shifts in usage of sites-
    Technological Advances: Congress has demonstrated its 
interest in fostering advances in medical technology and making 
these advances available to Medicare beneficiaries through FDA 
modernization, increases in the National Institutes of Health 
budget, and efforts to improve Medicare's coverage policy 
decision process. The benefits of these efforts could be 
seriously undermined if physicians face disincentives to invest 
in new medical technologies as a result of inadequate 
expenditure targets.
    As first envisioned by the PPRC, the SGR included a 1 to 2 
percentage point add-on to GDP for changes in medical 
technology. Ever-improving diagnostic tools such as magnetic 
resonance imaging, new surgical techniques including 
laparoscopy and other minimally-invasive approaches, and new 
medical treatments have undoubtedly contributed to growth in 
utilization of physician services and the well-being of 
Medicare beneficiaries. For example, a recent paper published 
by the National Academy of Sciences indicated that from 1982-
1994 the rates of chronic disability among the elderly declined 
1.5 percent annually.
    With GDP projected to grow by 1.5 percent annually, the 
failure to allow an additional 1 to 2 percentage points to the 
SGR for technological innovation means that the utilization 
target is only half the rate that was originally planned. 
Technological change in medicine shows no sign of abating, and 
the SGR should include a technology add-on to assure Medicare 
beneficiaries continued access to mainstream, state-of-the art 
quality medical care.
    Site-of-Service Shifts: Another concern that should be 
taken into account by the GDP growth factor is the effect of 
the shift in care from hospital inpatient settings to 
outpatient sites. As MedPAC has pointed out, hospitals have 
reduced the cost of inpatient care by reducing lengths-of-stay 
and staff and moving more services to outpatient sites, 
including physician offices. These declines in inpatient costs, 
however, are partially offset by increased costs in physician 
offices. Thus, an add-on to the SGR target is needed to allow 
for this trend.
    Beneficiary Characteristics: The SGR should also be 
adjusted for changes over time in the characteristics of 
patients enrolling the fee-for-service program. A MedPAC 
analysis has shown that the fee-for-service population is 
older, with proportions in the oldest age groups (aged 75 to 84 
and those age 85 and over) increasing, while proportions in the 
younger age group (aged 65-74) has decreased as a percent of 
total fee-for-service enrollment. Older beneficiaries likely 
require increased health care services, and in fact MedPAC 
reported a correlation between the foregoing change in 
composition of fee-for-service enrollment and increased 
spending on physician services. If those requiring a greater 
intensity of service remain in fee-for-service, the SGR 
utilization standard should be adjusted accordingly.
    III. Other Problems with the SGR System.--The AMA strongly 
agrees with MedPAC's further recommendation that Congress 
should stabilize the SGR system by calculating the SGR and the 
update adjustment factor on a calendar year basis.
    Instability in annual payment updates to physicians is 
another serious problem under the SGR system, as has been 
acknowledged by HCFA. Projections by the AMA, MedPAC and HCFA 
show the SGR formula producing alternating periods of maximum 
and minimum payment updates, from inflation plus 3 percent to 
inflation minus 7 percent. Assuming a constant inflation rate, 
these alternating periods could produce payment decreases of 5 
percent or more for several consecutive years, followed by 
increases of similar magnitude for several years, only to shift 
back again. These projections are based on constant rates of 
inflation (2 percent), enrollment changes, GDP growth and 
utilization growth. There is a serious problem when constant, 
stable rates of change in the factors driving the targets lead 
to extreme volatility in payments that are entirely formula-
    A primary reason for this instability is the fact that 
there is a time lag in measurement periods for the SGR. 
Specifically, while physician payment updates are established 
on a calendar year basis, SGR targets are established on a 
federal fiscal year basis (October 1 through September 30) and 
cumulative spending (used to calculate the SGR) is established 
on an April 1 through March 31 basis. These time periods must 
all be consistent and calculated on a calendar year basis to 
attempt to restore some modicum of stability to the SGR system.
    Simulations by the AMA and MedPAC have also shown, however, 
that the change to a calendar year system will not, by itself, 
solve the instability problem. Additional steps would be 
needed. The wide range of updates that are possible under the 
current system, from inflation + 3 percent to -7 percent, is 
one reason for the instability. The lower limit is also 
unacceptably low, and, assuming an MEI of 2 percent, represents 
an actual 5 percent cut in the conversion factor in a single 
year. These levels of payment cuts would be highly disruptive 
to the market, and likely would have the ``domino effect'' of 
impacting the entire industry, not simply Medicare fee-for-
service. Many managed care plans, including Medicare+Choice and 
state Medicaid plans, tie their physician payment updates to 
Medicare's rates. Thus, payment limits under current law must 
be modified to assist in stabilizing the SGR system. We 
recommend that the current limits on physician payment updates 
(MEI +3 percent to MEI -7 percent) be replaced with new, 
narrower limits set at MEI +2 percent and MEI -2 percent.
    Use of the GDP itself also contributes to the instability 
of the payment updates since GDP growth fluctuates from year to 
year. Thus, we recommend measuring GDP growth on the basis of a 
rolling 5-year average.
    Finally, MedPAC has also recommended that Congress should 
require the Secretary of the Department of Health and Human 
Services to publish an estimate of conversion factor updates 
prior to the year of implementation. We agree.
    When the SGR system was enacted to replace the previous 
Medicare Volume Performance Standards, the requirements for 
annual payment review reports from HCFA and the PPRC were 
eliminated along with the old system. Without these reports, it 
is impossible to predict what the payment update is likely to 
be in the coming year, and it is impossible for Congress to 
anticipate and respond to any potential problems that may ensue 
from an inappropriate update or a severe projection error.
    Changes in Medicare physician payment levels have 
consequences for access to and utilization of services, as well 
as physician practice management. These consequences are of 
sufficient importance that the system for determining Medicare 
fee-for-service payment levels should not be left unattended on 
a kind of ``cruise control'' status, with no ``brake'' 
mechanism available to avoid a collision.
    The AMA, therefore, urges that the payment preview reports 
be reinstated. Specifically, we believe that HCFA should be 
required to provide to MedPAC, Congress and organizations 
representing physicians quarterly physician expenditure data 
and an estimate each spring of the next year's payment update. 
MedPAC could then review and analyze the expenditure data and 
update preview, and make recommendations to Congress, as 
    The Importance of Fixing the SGRL: Enactment of the SGR 
system improvements recommended by MedPAC are critical to the 
continued ability of our nation's physicians to be able to 
offer our Medicare patients the benefits of the finest medical 
care available in the world. If these improvements are not put 
in place, the SGR system could lead to severe payment cuts in 
the Medicare physician fee schedule and payments for services 
that do not accurately reflect their costs. The cuts resulting 
from both the statutory design of the SGR system and 
administration of the system by HCFA would be in addition to 
more than a decade of cuts in physician payments. For example, 
in the six years from 1991-1997, overall Medicare physician 
payment levels fell 10 percent behind the rate of growth in 
medical practice costs. Many individual services and procedures 
faced even deeper cuts.
    Recent survey data from the AMA's Socioeconomic Monitoring 
System indicates that these payment changes are having very 
significant effects on the practice of medicine. Of 2,450 
randomly selected physicians that were surveyed from April-
August 1998, 35 percent reported they are not renewing or 
updating equipment used in their office, are postponing or 
canceling purchasing equipment for promising new procedures and 
techniques, or are performing many procedures in hospitals that 
were formerly performed in the office. Three quarters of these 
physicians reported that Medicare payment cuts were an 
important factor in their decisions to defer or cancel these 
investments in capital.
    With these kinds of changes already taking place in 
response to previous payment changes, we have grave concerns 
about the effects of the further reductions that could take 
place due to the SGR or incorrect practice expense values. In 
order for the medical innovations that will come from Congress' 
enhanced funding of biomedical research, FDA modernization, and 
better Medicare coverage policies to translate into ever-
improving standards of medical care, physicians must be able to 
adopt these innovations into their practices. It is already 
clear that Medicare payment cuts are threatening continued 
technological advancement in medicine, and this is a threat 
that affects all of us, not just Medicare beneficiaries. 
Clearly, reversal of the trend to move services away from 
inpatient sites into ambulatory settings could also have severe 
consequences for health care costs, as well as patient care.

Additional Modifications to Fee-For-Service Medicare

    There are several other considerations that we believe are 
necessary for reforming fee-for-service Medicare. First, 
Medicare reform legislation must address funding for graduate 
medical education. We believe that a national all-payer fund 
should be established to provide a stable source of funding for 
the direct costs of GME, including resident stipends and 
benefits, faculty supervision and program administration and 
allowable institutional costs. Without predictable and reliable 
funding, this important training program is seriously 
undermined, with a resulting adverse impact on patient care.
    Additionally, other issues should be addressed as well, 
including increasing the age of Medicare eligibility to match 
the eligibility requirements for purposes of Social Security 
and establishing income-related premium payments for Medicare 
    The AMA is also aware that there is interest among a number 
of states in allowing them to make managed care enrollment 
mandatory for dually-eligible Medicare and Medicaid 
beneficiaries. State medical societies have told us of numerous 
serious problems in states with mandated Medicaid managed care 
programs for their non-Medicare populations, including 
Tennessee, Kentucky, Massachusetts, Florida, Nebraska, 
Washington, and others. Given the current instability within 
both Medicare and Medicaid managed care plans, we urge Congress 
not to extend the states' authority to mandate managed care 
enrollment to their dually-eligible populations.
    In addition, we agree with concerns raised by Members of 
the National Bipartisan Commission on the Future of Medicare 
about providing HCFA with increased authority to contract for 
health care services with lowest cost bidders, and believe 
HCFA's contracting authority should be strictly limited. Such 
authority often permits HCFA to contract selectively for 
individual services. Competition should be based on choice of a 
comprehensive health plan, not with respect to individual 
services. Proposals that carve out certain services dangerously 
fail to recognize a crucial dynamic within the health care 
market. That is, certain services are a mainstay for many 
providers' economic base. If that base is jeopardized because 
HCFA has the ability to contract elsewhere for this singular 
service, the cost of other services offered by that provider 
will significantly increase, or, worse, the provider may cease 
to exist due to insolvency. Either alternative is extremely 
damaging to patients with respect to cost, quality and 
continuity of care and convenience.
    Indeed, AMA policy firmly opposes competitive bidding 
initiatives for professional medical services with respect to 
the Medicare program and health care payers generally. First, 
as discussed above, this type of system threatens a dramatic 
decrease in quality of and access to medical care. In any bid 
process, there are always low cost bidders that wish to corner 
a large share of the market. The low cost bidder may drive 
competitors out of the market, in which case the bidder will 
obtain a monopoly and will be free to set prices in an 
environment that is unconstrained by competition. Since the 
current health care payer market has become more significantly 
concentrated, this result would be a significant threat. 
Additionally, providers, including those that provide the 
highest quality of care using new state-of-the art technology, 
will have a strong incentive to provide less costly and lower 
quality alternatives to maintain competitiveness within a 
competitive bidding environment. Further, there have been cases 
when the competitive bidding process has resulted in the 
procurement of services from organizations that have gone 
bankrupt, thereby disrupting continuity of and access to care, 
as well as causing harm to physicians and other providers who 
rely on a failed contractor for payment. This would be even 
more damaging if competitors have already been driven from the 

                       Evaluating Medicare+Choice

    Since most Medicare reform plans envision an expanded role 
for private plans, we believe that it is important to evaluate 
the new private options mandated under the BBA. Experience to 
date with the new program called Medicare+Choice suggests 
several areas which warrant Congressional attention.
    To date, Congressional concern has focused primarily on the 
financial complaints of the traditional managed care plans that 
have long been part of Medicare. While we agree that the spate 
of plan withdrawals in 1999 and 2000 have created significant 
problems for Medicare's 39 million beneficiaries, we think that 
proposals to correct the situation by increasing payments to 
plans are short-sighted.
    Rather than channeling more funds to these long-time 
players, lawmakers might have more effect by removing some of 
the roadblocks that have stymied the entry of other types of 
plans into Medicare. In addition, with more than 80% of all the 
nation's elderly and disabled citizens still enrolled in fee-
for-service Medicare, it is important to keep that program 
strong and ensure that it is possible for beneficiaries to 
return to fee-for-service when their managed care plan 
withdraws from Medicare. And since there will always be some 
withdrawals in a market-based program, protecting beneficiaries 
who find themselves in this situation will be critical to the 
success of Medicare+Choice and any further reforms that build 
on private sector initiatives.

Beneficiary Protections

    The AMA's House of Delegates has called for additional 
safeguards for beneficiaries abandoned by their Medicare+Choice 
plan and we believe that these protections will become even 
more important as more beneficiaries move into private plans. A 
number of such provisions have been offered and have bipartisan 
support and the AMA urges Congress to make the protection of 
beneficiaries orphaned by their health plan a key part of any 
Medicare bill it should approve.
    Among the protections the AMA would like to see are several 
that would extend and improve the Medigap guaranteed issue 
rights included in the BBA. These provisions would provide all 
beneficiaries--including those who have disabilities or End 
Stage Renal Disease (ESRD)--with the right to purchase Medigap 
coverage following a plan termination. In addition, they would 
modify current law to include policies with drug coverage among 
the Medigap plans that are available to beneficiaries abandoned 
by their Medicare+Choice plan.
    Another thrust of many of the new beneficiary safeguards 
that have been proposed this year is to let beneficiaries leave 
a plan as soon as it announces its intent to withdraw from 
Medicare. Under the BBA, beneficiaries' ability to switch to a 
new plan or switch back to Medicare fee-for-service, except at 
the beginning of a new year, will be restricted after 2002. 
Several proposed amendments would let beneficiaries switch out 
of a withdrawing plan without waiting until the new year.
    The AMA supports these amendments. However, according to 
the General Accounting Office (GAO), half of the 400,000 
orphaned beneficiaries who could have switched to another plan 
in 1999 returned to fee-for-service Medicare. It is 
understandable that beneficiaries who have experienced a plan 
withdrawal should prefer fee-for-service Medicare to another 
Medicare+Choice plan. Therefore we believe that in addition to 
switching to a new plan, beneficiaries should have the right to 
return to fee-for-service Medicare. To make this a plausible 
option, the Medigap guaranteed issue rights should also become 
available as soon as the beneficiary is notified that his or 
her plan intends to leave Medicare.
    While these steps would protect beneficiaries when their 
relationship with the plan is severed, they do not address an 
equally traumatic event: the severing of relationships between 
patients and their physicians. Medicare patients often pick a 
particular Medicare+Choice plan because their physician is part 
of that network. We are also aware of physicians who joined a 
particular network based on the requests of patients who desire 
to continue seeing their long-time physician. Maintaining a 
relationship with a trusted physician is important to patients 
of all ages. It can be absolutely critical for some frail 
elderly and disabled patients who are facing serious illness.
    That is why the AMA believes that it is of utmost 
importance that Medicare+Choice plans be required to stress in 
their marketing materials and brochures that their network of 
physicians and hospitals may change during the course of the 
year. In addition, we believe that Medicare should follow the 
example of the numerous states that have enacted continuity of 
care provisions to protect patients when their physician/s 
leaves their Medicare+Choice plan.
    Essentially, such provisions require plans to continue 
covering treatment by the departing physician for a specified 
period of time (usually 60 to 120 days) if the patient is 
undergoing a course of treatment, hospitalized or pregnant. The 
National Committee for Quality Assurance (NCQA) requires a 
continuation of coverage provision for accreditation of managed 
care plans. The AMA believes that Medicare should do no less.

The So-Called Fairness Gap

    The managed care industry has repeatedly complained that 
the BBA created a so-called ``fairness gap'' between managed 
care and fee-for-service. In the AMA's view, nothing could be 
further from the truth. Rather than creating a fairness gap, 
the BBA in fact began to eliminate a fairness gap that favored 
the managed care industry with more than a decade of 
substantial overpayments.
    As evidence that health plans are suffering from a 
``fairness gap,'' the industry points to a Price Waterhouse 
analysis which concludes that by 2004, two-thirds of 
Medicare+Choice enrollees will live in areas where the Medicare 
payment for managed care is at least $1,000 less per year than 
the government spends for each fee-for-service beneficiary in 
the area. The enrollees in question are characterized as living 
in the ``top 100 counties'' (i.e., they live in the counties 
that have the highest Medicare+Choice rates in the country).
    The AMA submits that one of the goals of the BBA was to 
reduce the differences between payments in the ``top'' and the 
``bottom'' counties. It is important to remember that about a 
third of all counties in the U.S. are seeing significant 
increases in payments for Medicare beneficiaries who enroll in 
managed care. In most of these counties, Medicare is now 
spending more per capita for managed care enrollees than for 
fee-for-service beneficiaries.
    In other words, there are two sides to this picture. 
Payment restraints in ``top'' counties are balanced by payment 
increases in ``bottom'' counties. The managed care industry 
proposes to improve the lot of plans in the ``top'' counties by 
having Congress guarantee Medicare+Choice plans payment rates 
equal to at least 91% of fee-for-service per capita 
expenditures. Ironically, however, the industry has totally 
ignored the other side of the equation. Should Congress also 
reduce Medicare+Choice payments that exceed fee-for-service 
    The Congressional Budget Office (CBO), GAO, Physician 
Payment Review Commission (PPRC) and Mathematica all have 
concluded that Medicare overpaid HMOs by 7% to 14% prior to the 
BBA. In addition, PPRC found some evidence that the excess 
tended to be greatest in the so-called ``top'' counties. The 
BBA reduced these overpayments. But due to an oversight, 
Congress inadvertently precluded Medicare officials from 
adjusting 1997 county rates for previous forecast errors, 
thereby building a $1.3-billion-a-year excess into the 
Medicare+Choice rates. Moreover, all plans are guaranteed 
annual payment increases of at least 2% a year.
    The AMA therefore agrees with the GAO's conclusion that 
managed care plans should be able to continue offering 
supplemental benefits despite the payment modifications enacted 
in the BBA. In our view, reducing some of the payment and 
coverage disparities that existed under the Medicare risk 
program was an intended and desirable impact of those payment 
modifications. As noted earlier, we also do not agree that 
payment rates are the key ingredient in the spate of program 
withdrawals seen to date in the Medicare+Choice program.
    As a result, the AMA cannot at this time support amendments 
that would increase plan payment rates. It would not be 
fiscally prudent to increase financial incentives to keep plans 
and beneficiaries in Medicare+Choice if the only way to 
accomplish this is to pay plans more than it would cost to 
treat a given beneficiary under Medicare's traditional fee-for-
service program. Therefore, our preference is to make across-
the-board improvements in both fee-for-service and 
Medicare+Choice as part of an overall reform strategy.

Risk Adjustment

    More than half of all Medicare beneficiaries have covered 
health care costs of less than $500 a year. Another 5% have 
costs of more than $25,000 per year and this 5% generate more 
than half of all Medicare expenditures each year. Clearly any 
system that makes similar payments on behalf of all patients 
will overpay for some and greatly underpay for others. Yet that 
is essentially how Medicare has paid managed care plans until 
    This might not have mattered much if expensive and 
inexpensive patients were evenly dispersed among plans and 
between fee-for-service and managed care. For a variety of 
reasons, however, Medicare beneficiaries choosing managed care 
have tended to be younger and healthier than those who remain 
in fee-for-service. A 1996 beneficiary survey indicated that 
Medicare beneficiaries in fee-for-service are about one-and-a-
half times as likely to report poor health as those in managed 
care. Costs in the same survey were three to five times higher 
for beneficiaries in poor health than those in excellent or 
good health.
    Medicare obviously needs to adjust payments to reflect 
these differences and under the BBA, Congress ordered HCFA to 
replace the relatively crude demographic adjustment it had 
previously used with a new risk adjuster that includes health 
status. Although we are sympathetic to the managed care 
industry's concerns that the new risk adjuster initially will 
only be based on hospital data, the AMA believes that the 
proposed adjustment is a marked improvement over the current 
system nonetheless.
    Although the new adjuster is predicted to reduce aggregate 
payments to Medicare+Choice plans by 7.6% a year when fully 
implemented, we note that this will only be the case if plans 
continue to attract a relatively healthy mix of patients. If, 
on the other hand, they enroll a larger number of patients who 
are seriously ill, their aggregate payments will actually 
    The AMA has generally been supportive of transition periods 
whenever Congress orders significant changes in Medicare 
payments and we are pleased that HCFA has decided to phase the 
new risk adjuster in over five years. However, we cannot 
support proposals to require the agency to recalculate the 
rates to guarantee a budget neutral implementation of the risk 
    Such proposals, in effect, assume that Medicare's total 
expenditures on managed care have been about right in the past 
and that we need only to redistribute these payments among 
plans. However, as noted earlier, most experts agree that 
Medicare has been paying 7% to 14% more per year for managed 
care enrollees than for similar beneficiaries who remained in 
fee-for-service. A budget neutral risk adjuster would continue 
that disparity, diverting money that might be better spent in 
across-the-board program improvements.
    While we are anxious to see improved risk adjusters 
implemented as soon as possible, the AMA concurs with the 
managed care industry's contention that better risk adjusters 
are needed. Risk adjustment will assume an increasingly 
important role as private sector options are expanded and it is 
important that HCFA continue to work to develop risk adjusters 
that can more accurately predict expenses for individual 
Medicare beneficiaries.

Other Medicare+Choice Issues

    Although Congress to date has focused primarily on the 
withdrawal of managed care plans from Medicare+Choice, the AMA 
believes that it is just as important to determine how the 
other private sector alternatives envisioned in the BBA have 
fared. As the BBA Conference Report observes, private fee-for-
service (PFFS) plans represent ``the first defined contribution 
plan. . .in the history of the program.'' PFFS plans thus could 
serve as a test case for Medicare reforms that legislators 
would like to see expanded. In addition, alternatives such as 
medical savings accounts and PFFS plans could serve as a viable 
option to Medicare fee-for-service in some communities that are 
too small to support managed care. To date, however, neither of 
these options is available to Medicare beneficiaries.
    As pointed out in a recent study by Families USA, three-
quarters of elderly and disabled Americans living in rural 
counties do not have access to a managed care plan. Moreover, 
this situation could worsen next year because according to 
HCFA, a disproportionate number of Medicare+Choice withdrawals 
in the year 2000 are occurring in rural areas.
    There clearly is a need for other Medicare+Choice options 
in rural communities and a number of analysts had speculated 
that PFFS plans could fill the void in small communities. That 
this has not proven true to date likely is due to obstacles 
that were set up in the legislation and then magnified in the 
implementing regulations.
    One area of particular concern is the so-called ``deeming'' 
requirement, which was included in the BBA and then expanded 
upon in the regulation. Essentially, this provision stipulates 
that in addition to participating and nonparticipating 
providers, PFFS plans must create a ``deemed'' contractor 
category. Deeming is assumed if ``the provider, professional, 
or other entity has been informed of the individual's 
enrollment'' in a PFFS plan and was either ``informed of the 
terms and conditions of payment'' or ``given a reasonable 
opportunity to obtain information concerning such terms and 
    This provision is extremely confusing and has no precedent 
in the real world. It has the potential to disadvantage the so-
called ``deemed'' providers in some circumstances and the PFFS 
organization in others. The resulting uncertainty will 
undoubtedly discourage the development of PFFS organizations 
and should such an organization ever emerge, disputes over 
``deemed'' status are highly likely. Both physicians and their 
patients could be caught up in endless billing hassles that 
cannot be easily or quickly resolved.
    To make matters worse, the interim final regulation 
implementing Medicare+Choice appears to create a situation in 
which a PFFS organization could contend that it had met the 
``deemed'' requirement with a mass mailing to hospitals and 
physicians or even to billing agencies. Busy hospitals and 
physicians might not even see the notice. Those that do would 
have the burden of notifying the plan that they do not intend 
to participate, accepting payment rates they would not 
otherwise have agreed to, or turning away any beneficiary 
enrolled in a PFFS plan.
    This situation is particularly problematic for emergency 
physicians who by law cannot turn away any beneficiary with a 
real emergency. In addition, all physicians will be in danger 
of violating PFFS billing rules they knew nothing of, 
potentially generating a fraud investigation in the process. 
Medicare beneficiaries could also be disadvantaged if they 
choose what appears to be a large PFFS network only to discover 
later that many of the network's physicians were ``deemed'' to 
be participating and have now decided not to treat any PFFS 
patient except in an emergency.
    To make the PFFS program tenable and provide a fair test of 
the defined contribution concept, the AMA believes that the 
conditions under which deeming can be presumed must be limited. 
We urge Congress to include amendments to this effect in any 
Medicare+Choice package that it approves. At the very least, we 
believe that deeming should never be presumed in any situation 
where services were required under the Emergency Medical 
Treatment and Labor Act.
    Medicare+Choice plan accountability is another important 
issue. Currently, we believe plans in this program are being 
held to a lower standard than is applicable to the Medicare 
fee-for-service program, especially with respect to payment 
policy and timeframes. For example, while carriers that process 
Medicare fee-for-service claims are required to pay 95% of 
claims within 30 days, there are no deadlines for payments to 
physicians who contract with Medicare+Choice plans that use 
fee-for-service reimbursement. There is no reasonable 
justification for this duality of accountability standards 
between the Medicare+Choice and Medicare fee-for-service 
programs. Medicare+Choice plans using fee-for-service 
reimbursement or that make capitation payments should be held 
to the same payment deadlines and policies as apply under the 
fee-for-service program.
    Finally, as plans pull out of the Medicare+Choice market, 
resulting in a significantly more concentrated payer market, 
there must be checks and balances in place to protect against 
arbitrary health plan anti-patient actions and to increase 
quality of care for patients by permitting effective advocacy 
by their physicians. Physicians increasingly face enormous 
health plan bureaucracies at the negotiating table, and are 
thus not in a position to advocate effectively on behalf of 
their patients. Thus, we strongly urge Congress to pass 
legislation that would allow self-employed physicians and other 
health care professionals to engage in joint negotiations with 
Medicare+Choice plans without violating the antitrust laws.


    The tax-based method of financing Medicare originally 
envisioned is no longer sustainable. Putting Medicare on sound 
financial footing requires a multi-faceted transformation of 
the program's funding, actuarial design, and incentive 
structure, as outlined above. We urge this Committee and 
Congress to consider these proposals and to act now to fulfill 
the promise of health care for the elderly in this country.
    We appreciate the efforts of the members of this 
subcommittee to explore approaches to Medicare reform, and also 
appreciate the opportunity to present our reform proposal and 
comments on the Medicare+Choice program. We are prepared to 
engage fully in detailed discussions with this subcommittee and 
Congress as we work to find a common solution.


Statement of Dr. John C. Goodman, President, National Center for 
Policy Analysis

    My name is John C. Goodman and I am president and chief 
executive officer of the National Center for Policy Analysis. 
The National Center for Policy Analysis is a non-profit public 
policy research institute headquartered in Dallas, Texas. We 
are internationally known for our studies on public policy 
    My remarks today are drawn from our most recent study on 
Medicare and prescription drugs prepared for NCPA by Milliman & 
Robertson, the nation's leading actuarial consulting firm on 
health benefits.
    The results of the Milliman & Robertson study indicate that 
senior citizens could have comprehensive coverage for 
prescription drugs in addition to other Medicare benefits--with 
virtually no increase in personal costs--if private health 
plans were allowed to administer the benefits.

                             Study Findings

    The study finds that private health plans have the ability 
to eliminate much of the waste and inefficiency in Medicare and 
use the savings to cover the cost of prescription drugs not 
currently covered. Specifically:
     Because Medicare coverage is incomplete, seniors are 
exposed to thousands of dollars in out-of-pocket costs; separate 
analysis by the NCPA shows that last year 360,000 Medicare 
beneficiaries faced costs in excess of $5,000.
     To avoid the prospects of financial devastation, a 
majority of seniors acquire private insurance to fill the gaps in 
Medicare--either through a former employer (33 percent) or by 
purchasing supplemental ``Medigap'' insurance (36 percent).
     However, economic studies show that seniors with Medigap 
insurance consume significantly more health care than those without the 
insurance; moreover, much of the extra care is wasteful and arises 
because when patients have first-dollar coverage they are less prudent 
consumers of care.
     In addition, most Medigap policies do not cover drugs and 
many employer plans have incomplete coverage; as a result, patients and 
their doctors have a perverse incentive to use doctor and hospital 
services when less expensive drug therapy would have been preferable.
     A private plan can potentially eliminate much of this 
waste by providing a unified set of benefits with the same health care 
    Currently, the 17 percent of Medicare beneficiaries who are 
enrolled in a private HMO are enjoying more benefits at a lower 
cost. However, because the government's method of paying 
premiums to these private plans is highly imperfect, 
discrepancies exist. The average HMO is probably overpaid. 
However, a number have been underpaid--and those are the ones 
that are leaving the market.
    The NCPA study assumes that if seniors leave Medicare and 
join a private plan, the plan will receive from Medicare a sum 
equal to the amount Medicare would have spent. Thus, private 
contracting occurs under conditions that promise no profit and 
no loss for the government. The study concludes that:
     Upon receiving an amount of money equal to the expected 
amount Medicare would have spent on each senior plus an amount slightly 
above what seniors currently spend on Medigap insurance, an HMO should 
be able to provide comprehensive coverage, including coverage for 
prescription drugs.
     Seniors who want to exercise more choices should be able 
to enroll in a fee-for-service plan with a high deductible and a 
Medical Savings Account--in many cases for a premium that is 
considerably less than what they currently pay for Medigap. The out-of-
pocket cost under these plans would vary, depending on the degree of 
managed care, and would average about $1,200 a year--far less than the 
unlimited exposure most seniors now face for the potential cost of 
     In many cases, moving to a private plan would not only 
provide coverage for prescription drugs, but would also generate 
considerable financial savings; for example, the average senior who 
currently has Medigap insurance would save more than $1,000 a year in 
lower premiums and out-of-pocket costs.

                       Some Representative Cases

    The following are representative cases for seniors with 
different types of insurance coverage under the current system. 
In all cases, the senior is assumed to continue paying the Part 
B Medicare premium to the government. The results summarized 
are depicted in the table that follows the discussion.
    Case 1: A Senior With No Supplemental Coverage.--This 
includes those without any Medigap insurance, employer-provided 
insurance, risk contract, Medicaid coverage or direct subsidy 
from the government. Given private alternatives, we assume that 
this senior will buy a $3,000 deductible plan with no 
coinsurance above the deductible and moderate to aggressive 
managed care. That is, we assume that these people will tend to 
buy the lowest cost coverage available. The MSA deposit in this 
case is about $600. The result:
     For no additional premium, the senior now has catastrophic 
coverage for prescription drugs.
     The senior's expected annual personal costs are now 
substantially lower, leading to expected savings of more than $1,000 
per year.
     The senior's out-of-pocket costs are now limited to $2,400 
per year, compared to an almost unlimited exposure under Medicare.
    Case 2: A Senior With Supplemental ``Medigap'' Coverage.--
We have assumed these people own the Medicare policy Plan F, 
which does not cover prescription drugs. Given private 
alternatives, we believe they will tend to buy primarily middle 
and higher cost coverage. Thus, we have assumed the average 
premium will be the midpoint of plans with no managed care and 
low to moderate managed care. The deductible is $3,000 with no 
coinsurance above the deductible and the additional average 
premium for this coverage (beyond money provided by Medicare) 
is slightly more than $200 per year. The average out-of-pocket 
expense for the new plan is estimated to be roughly $1,500, 
compared to the average out-of-pocket expense with Medigap 
plans of slightly under $1,200. The result:
     For a private plan premium that is only a fraction of what 
the senior currently pays, the private plan can provide catastrophic 
coverage for all medical expenses.
     The expected savings to the enrollee are more than $1,000 
per year.
     If the senior takes the amount he or she was spending on 
Medigap insurance plus the average annual out-of-pocket expense and 
subtracts the premium for the new plan, the remainder will equal 
$2,546; if this amount is deposited in an MSA account, the maximum 
annual exposure will be $454--compared to unlimited exposure for 
potential drug costs under the current system.
    Case 3: A Senior With Employer-Provided Supplemental 
Coverage.--This coverage is provided by an employer to cover 
benefits not covered by Medicare. These plans can vary 
dramatically, but on average we have assumed that today's 
coverage is consistent with medigap Plan F--paying all 
copayments and deductibles for physicians' fees and hospital 
expenses--and also paying 50 percent of all costs of 
prescription drugs. Under the private program, we have assumed 
that the employer can become the ``risk contractor,'' supplying 
full coverage, or that the employee can apply the employer's 
expected cost to some other private plan. We assume that the 
new private plan will be pure fee-for-service with no managed 
care plan. The deductible in this case will be $3,000 with no 
coinsurance above the deductible and the additional average 
premium for this coverage is expected to be roughly $500. 
     Whereas the senior previously faced unlimited exposure for 
one-half of potential drug costs, there is now catastrophic coverage 
for all health care costs.
     Even though the senior obtains additional coverage, there 
is actually a small reduction in additional expected costs.
     If the senior takes the amount that was being spent on the 
employer plan plus the average annual out-of-pocket expense and 
subtracts the premium for the new plan, the remainder will equal 
$1,552; if this amount is deposited in an MSA account, the maximum 
annual exposure will be $1,448--compared to unlimited exposure for one-
half of potential drug costs under the current system.
    Case 4: A Senior Enrolled In A ``Risk Contract'' HMO.--
These are plans that individuals may choose instead of coverage 
through traditional Medicare. Currently, the government's 
payment to the HMO is equal to 93.2 percent of the Medicare 
Aged Adjusted Per Capita Cost. (Despite this discount, we 
estimate that the average HMO is overpaid.) The payment to a 
new HMO covering prescription drug costs is assumed to be 
consistent with that for HMO Risk Contracts in the market 
today, or roughly $5,500. The following table assumes that 
Medicare continues to overpay the private plan. However, to be 
consistent with the other cases and to achieve a no profit, no 
loss effect on Medicare, we would need to reduce the payment 
(and increase the seniors' premium) by about $400 per year. The 
     For only $153 additional expected cost, seniors can have 
comprehensive coverage for prescription drugs.
     The tradeoff: seniors must accept small copayments (say 
$10 for a doctor's visit, $10 to $15 to fill a prescription, etc.) in 
order to discourage abuse, typical limits on mental health benefits and 
a $50 copay for emergency room care.
     However, for a small increase in expected expense ($153), 
seniors will have traded away unlimited exposure to potential out-of-
pocket drug costs.

   TABLE 1.--Opportunity to Obtain Prescription Drug Coverage: Comparison of Average Costs for All Health Care
                           Expenses for Seniors with Different Kinds of Coverage Today
                                                                               Current Coverage
                                                                  No                                   ``Risk*
                                                             Supplemental    Medigap      Employer    Contract''
                                                                Coverage     Coverage     Coverage       HMO
Senior Costs Today:
  Average Out-of-Pocket Expense............................        $1,406       $1,161         $667         $866
  Private Plan Premium.....................................             0        1,611        1,370          150
  Total Cost Today.........................................        $1,406       $2,772       $2,037       $1,016

Senior Cost Under A Private Plan that Covers Prescription
  Average Out-of-Pocket Expense (net of any MSA deposit)...           218        1,489        1,475          503
  Private Plan Premium.....................................            $0         $226         $485         $666
  Total Cost With Private Plan.............................          $218       $1,715       $1,960       $1,169

Savings With Private Plan (Private Plan Cost Minus Today           $1,188       $1,057          $77        -$153
*Assumes the voucher equals the same amount paid to HMO risk contractors today. However, to be consistent with
  the other three columns and to achieve a no-profit, no-loss outcome to Medicare, both the risk contract amount
  and the voucher need to be reduced (and senior premiums increased) by about $400 per year.