[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]





                            MEDICARE REFORM

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 28, 2001

                               __________

                            Serial No. 107-4

                               __________

         Printed for the use of the Committee on Ways and Means






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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                NANCY L. JOHNSON, Connecticut, Chairman

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


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.




                            C O N T E N T S

                               __________
                                                                   Page
Advisories announcing the hearing................................     2

                               WITNESSES

Altman, Stuart H., Brandeis University...........................    37
Breaux, Hon. John B., a United States Senator from the State of 
  Louisiana......................................................    11
Francis, Walton J., Fairfax, Virginia............................    54
Georgetown University, Judith Feder..............................    46
Progressive Policy Institute, Jeff Lemieux.......................    65

                                 ______

                       SUBMISSIONS FOR THE RECORD

Advanced Medical Technology Association, statement...............    73
Alliance to Improve Medicare, statement..........................    74
Citizens Against Government Waste, statement.....................    76
Healthcare Leadership Council, statement.........................    78
National Association of Chain Drug Stores, Alexandria, VA, 
  statement......................................................    78
TREA Senior Citizens League, Alexandria, VA, statement...........    83

 
                            MEDICARE REFORM

                              ----------                              


                      Wednesday, February 28, 2001

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:04 a.m., in 
room B-318 Rayburn House Office Building, Hon. Nancy L. 
Johnson, (Chairman of the Subcommittee) presiding.
    [The advisory and revised advisory announcing the hearing 
follow:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

February 21, 2001

No. HL-1

                  Johnson Announces Hearing Series on

                            Medicare Reform

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on Medicare reform. The hearing will 
take place on Wednesday, February 28, 2001, in the main Committee 
hearing room, 1100 Longworth House Office Building, beginning at 10 
a.m.
      
    Oral testimony at this hearing will be from invited witnesses only. 
Witnesses will include Senator John Breaux (D-LA) and other leading 
Medicare reform experts. However, any individual or organization not 
scheduled for an oral appearance may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    This hearing will be the first in a series to be held this Spring. 
These hearings will lay the groundwork for reforming and modernizing 
the Medicare program, including incorporating outpatient prescription 
drugs into the program.
      
    In announcing the hearing, Chairman Johnson stated: ``Strengthening 
and improving Medicare is one of the most important challenges facing 
Congress this year--and one of my top priorities as Chairman of the 
Health Subcommittee. It is time for us to get to work. The American 
people are waiting for us to act.''
      

FOCUS OF THE HEARING:

      
    This first hearing will provide a general overview of major 
Medicare reform proposals, including the recommendations of the 
National Bipartisan Commission on the Future of Medicare and the ideas 
set forth by the Clinton Administration. In addition, the hearing will 
feature testimony on new solutions that have emerged to bridge 
differences between these competing plans and provide concrete guidance 
on specific reform elements that can be enacted this year.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Wednesday, 
March 14, 2001, to Allison Giles, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

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

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

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

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE

February 21, 2001

No. HL-1-Revised

                         Change in Location for

                        Subcommittee Hearing on

                            Medicare Reform

                      Wednesday, February 28, 2001

    Congresswoman Nancy L. Johnson, Chairman of the Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on Medicare reform, previously scheduled for 
Wednesday, February 28, 2001, B-318 Rayburn House Office Building.
      
    All other details for the hearing remain the same. (See 
Subcommittee press release No. HL-1, dated February 21, 2001.)

                                


    Chairman Johnson. Since the Senator is here, we are going 
to start. I understand Mr. Stark is on his way, and when he 
comes, we will let him contribute his opening thoughts as well. 
But let me start welcoming you all to this first hearing of the 
Health Subcommittee of the Ways and Means Committee. We do have 
a formidable agenda this session, and this first hearing on 
Medicare reform follows a half-day retreat that we had 
yesterday to begin to lay a stronger foundation among ourselves 
of facts and information as we look at the issue of 
prescription drugs for seniors and the future of Medicare.
    Medicare is as important a government program as there is 
in America at any level of government. And as you all know, 
local governments and State governments do some things that are 
pretty important in people's lives. The whole movement to 
shelter battered women didn't start in Washington, it started 
in communities. So I say that Medicare is as important a 
program as any program any level of government has ever 
developed, with a very deep respect for the programs that other 
levels of government have developed to address terrible needs 
in our lives.
    Medicare unfortunately is also an antiquated program. It is 
one of the few health programs that doesn't cover prescription 
drugs. It is the only program I know of that legally prohibits 
preventative care. It is really truly quite astounding and a 
good indicator and reminder of the era in which this program 
was founded and the degree to which it is desperately behind in 
the quality of health care it provides to its recipients.
    It has become incredibly bureaucratic, incredibly 
bureaucratic, and any of you who don't believe that, get out of 
Washington. Go home. Look and see what your nursing homes are 
hiring their nurses to do. They can't hire them for patient 
care because they have to hire them for paperwork. Sit down 
with home health agencies in New England, who looked me 
straight in the face 10 days ago and said, you let that demand 
billing memo go through, this is not even a regulation or a 
guideline, this is even lower than that, and we will have to 
stop serving dual-eligibles; from agencies who have sacrificed, 
raised money, struggled to keep in there providing home care 
services in our urban neighborhoods.
    So if you don't think this program is on the verge of 
denying care in every category to the seniors of America, then 
you don't--you aren't thinking, and you are too in Washington, 
and I don't want to know, because I am telling you I consider 
this program as troubled a program as any program I have ever 
had contact with, including the programs that we put in place 
with the States to manage children at risk.
    So I face our challenges very seriously. I believe they are 
formidable. And when the 77 million baby boomers retire, and 
the number of workers per retiree declines from 4 : 1 today to 
2 : 1 in 2030, if we have not prepared for that, we will not be 
able to meet the needs of our seniors. And I am bound and 
determined to meet those needs, though I appreciate the 
enormity of the challenge and the difficulty of the choices we 
will have to make.
    Nearly 2 years ago, by a 10 to 8 majority of the bipartisan 
Medicare Commission, the premium support program to modernize 
Medicare was supported. Now, that wasn't the majority required 
by the law, so the Commission did fall one short, one vote 
short, of the supermajority statutory requirement to officially 
report recommendations to Congress. But the Commission's 
recommendations, because they rested on a vast amount of 
information, research and discussion among a remarkable group 
of people, have lived on, have been very useful, and are 
providing a useful framework for reforming Medicare. President 
Clinton responded with a Medicare reform proposal of his own, 
which was then followed by proposals put forth by Members of 
both parties in the House and the Senate.
    Today the Subcommittee begins to examine all of the major 
reform proposals in an attempt to develop consensus on how we 
can best modernize this critical program so that it ably serves 
beneficiaries, taxpayers, and providers in the decades ahead.
    We will continue our investigation throughout the spring 
and build upon the work already performed with fresh and new 
ideas of our own, but this is going to be real work, and we are 
going to welcome ideas and those who want to contribute to the 
thinking about how--where we go and how we get there.
    [The opening statement of Chairman Johnson follows:]
Opening Statement of the Hon. Nancy L. Johnson, M.C., Connecticut, and 
                    Chairman, Subcommittee on Health
    Medicare has improved the health and lives of millions of seniors 
and disabled Americans for more than 35 years. However, Medicare has 
also become increasingly antiquated, bureaucratic and unwieldy.
    The fiscal challenges to the program are formidable. Soon, 77 
million baby boomers will begin to retire and the number of workers per 
retiree will decline from 4 : 1 today to about 2 : 1 in 2030. Our 
seniors will be living longer than ever before and economists predict 
that health inflation, fueled largely by new technology, will far 
outpace the growth of the overall economy.
    But perhaps more important, Medicare has failed to keep pace with 
modern health care. Just to cite one example, last year it took an act 
of Congress to add important new preventive benefits--bi-annual pap 
smear screenings and pelvic exams and colon cancer screenings for all 
Medicare beneficiaries--to the program, when private sector plans had 
done this years ago.
    Similarly, no one today would design a seniors' health care program 
that did not fully incorporate outpatient prescription drugs. Yet 
because Medicare must wait for Congress to enact a law for it to 
modernize its benefits or delivery structure, it will, by definition, 
be behind the curve. Many of our seniors therefore lack prescription 
drug coverage and the bargaining power to reduce the price of drugs.
    In addition, the health care providers that we rely on to serve 
Medicare beneficiaries are being crushed by more than 130,000 pages of 
overly burdensome regulations, which hamper their ability to provide 
quality care to our seniors.
    Nearly two years ago, a 10-8 majority of the bipartisan Medicare 
Commission supported a ``premium support'' proposal to modernize 
Medicare. While the Commission fell one vote short of the 
supermajority, statutory requirement to officially report the 
recommendation to Congress, the Commission's recommendations are still 
seen by many as a useful framework for reforming Medicare.
    President Clinton responded with a Medicare reform proposal of his 
own, which was then followed by proposals put forth by Members of both 
parties in the House and Senate.
    Today, the Health Subcommittee begins an examination of all of the 
major reform proposals in an attempt to develop a consensus on how we 
can best modernize this critical program so that it ably serves 
beneficiaries, taxpayers and providers. We will continue our 
investigation throughout this Spring and build upon the work already 
performed with fresh new ideas of our own. Let's get to work.

                                


    Chairman Johnson. Mr. Stark.
    Mr. Stark. Thank you, Madam Chairman, and thank you for 
calling this hearing.
    I have submitted to you a written statement describing in 
detail a bill that I have introduced to ``save'' Medicare for 
the long run. It contains a number of reforms, including a 
generous drug benefit with tough cost containment.
    It uses a competitive bidding system, similar in some ways 
to the Breaux-Frist II legislation, as I refer to it, to obtain 
some savings in the program, but it does so without hurting 
beneficiaries who need or choose to stay in traditional 
Medicare--I want to talk about that in just a moment. It uses 
new purchasing tools to provide better coordinated care, most 
of which are designed to improve quality and outcomes, and some 
of which will also generate savings.
    It makes major changes to narrow the differences in medical 
spending in this Nation, which seem to have no relationship to 
outcomes, quality or need. There is no reason to be paying two 
or three times as much for a patient in Miami as we do in 
Minneapolis, without getting better quality in Miami.
    Most of all this bill recognizes that we will need new 
revenue to keep Medicare sound through the retirement of the 
baby-boom generation.
    We had a wonderful seminar yesterday in which it was 
explained to us that the number of people on Medicare are going 
to double. They are going to live longer. They are going to 
want to access more new technologies. We can try to preserve 
Medicare if we just shift the cost to the beneficiaries, cut 
providers, and claim that there are massive efficiencies that 
will save us from needing new revenues. But I am afraid we are 
going to have to look for revenues. Nobody wants to do it. 
Nobody has done it.
    Tobacco related disease for instance, costs Medicare $20 
billion a year in treatment costs. Once before this 
Subcommittee voted narrowly to increase the tax on cigarettes 
to pay for some of the health care costs.
    Senator Breaux, I appreciate your being here and your work 
on Medicare. But I urge you and my colleagues to start reform 
discussions based on Breaux-Frist 2000 and not the first bill. 
Many of us believe the first bill would shift huge costs onto 
vulnerable seniors and push many of them into HMOs that 
basically do a poor job.
    I believe it would be possible to develop a bipartisan bill 
by using Breaux-Frist II as a base and by improving it with a 
provision from the Moynihan-Clinton bill from last year, while 
ensuring the plans compete on the basis of core package of 
Medicare benefits and that payments are risk-adjusted as soon 
as possible. And if we take this road, I also urge you to look 
at many of the ideas in our bill that improve quality, save 
money and would make Medicare a much better program.
    However, if we are going to truly look and learn, and I 
appreciate the Chair's efforts to educate us and learn what is 
going on, I think we have to recognize that managed care has 
not been overwhelmingly popular with the beneficiaries and 
their families. The public wants the patient's bill of rights 
because they don't like what managed care is doing. Managed 
care is unpopular with the physician community. Managed care is 
unpopular with the hospitals. Medicare managed care costs more 
than fee-for-service. It is supposed to cost less. It is 
supposed to cost 95 percent of fee-for-service costs; instead, 
it costs up to 10 percent more. Its quality is of dubious 
character. And too many of the managed care companies are being 
sued by various providers and others who have to deal with 
them.
    Managed care has not helped Medicare. Quite the opposite. 
It has wasted money. Too often, it has provided less than 
adequate services. It has aggravated the beneficiaries and the 
providers. Why we keep looking to managed care as a solution 
eludes me.
    I hope in the hearing today we can see something that says 
there is some evidence that managed care helps the system; 
otherwise I think we ought to erase that one and start over, 
look for something completely new, and I would like to join the 
Chair in that search. Thank you.
    [The opening statements of Mr. Stark and Mr. Ramstad 
follow:]
   Opening Statement of the Hon. Fortney Pete Stark, M.C., California

                            SAVING MEDICARE

    Madame Chair, Colleagues, I've introduced a bill to modernize and 
extend the life of Medicare that does not raise premiums for seniors 
who choose to stay in fee-for-service Medicare because their health 
conditions require a wide array of providers. It is basically the 
Clinton Administration proposal of June 1999, greatly strengthened to 
achieve major savings and more program improvements. As we consider 
reforms this year, I hope this proposal, or portions of it, can be 
discussed and included.

                          Benefit Improvements

    The current Medicare benefit is woefully inadequate. Medicare only 
covers about half of the average beneficiary's total medical expenses, 
and includes no outpatient prescription drug coverage. The benefit 
structure needs to be improved. This bill
  --provides a generous drug benefit coupled with strong cost 
        containment that encourages research on breakthrough drugs;
  --improves Medicare's preventive care package, eliminates co-pays and 
        deductibles on preventive services, and does more to prevent 
        blindness;
  --coordinates Medicare with an optional, Medicare-run supplemental 
        policy that reduces beneficiary paperwork and, because there 
        are no sales and overhead costs, provides more affordable 
        medigap coverage than the private sector;
  --helps low income seniors use Social Security offices and data 
        matches to enroll in the QMBy and SLMBy programs which help pay 
        premiums and (for QMBy) co-pays for those under 135% of poverty 
        (today only about half the eligible seniors are enrolled in 
        these two programs);
  --reduces hospital outpatient department co-pays from 40% in 2006 to 
        20% by 2010 (a process that will otherwise take several 
        decades);
  --permits uninsured individuals age 62-65 to buy into Medicare at 
        full cost, but with the help of a refundable tax credit equal 
        to 50% of the cost of the Medicare premium; provides similar 
        help to those 55-62 who lose their health insurance;
  --improves quality of care for beneficiaries by creating an extensive 
        program of case and disease chronic care management (with 
        special emphasis on rural case management), more information on 
        treatment options, more bundled packages of care, and use of a 
        new VA advanced illness coordinated care program, and
  --adds adult day care as a service under a home health plan of care.

                 Saving Medicare for Future Generations

    With increasing use of high technology and expensive 
pharmaceuticals, health expenditures are becoming an increasing part of 
our economy. As a rich society, there is nothing particularly wrong 
with that--it is a choice we make. But with so many younger people 
uninsured and so many other unmet needs, it is imperative that Medicare 
be run as efficiently as possible, so that Medicare taxes on future 
generations can be kept as low as possible and so that other societal 
needs can be met.
    The number of people on Medicare will roughly double in the next 30 
years. The number of working taxpayers to support the program will 
decline from today's 3.4 per beneficiary to about 2 per beneficiary in 
2030.
    There are only 3 ways to save Medicare: shift costs to 
beneficiaries, cut payments to providers (and that includes so-called 
program `efficiencies'), or inject new tax revenues.
    I believe it will take all three: beneficiary cuts, provider cuts, 
and new taxes. Anyone who says differently is not being honest with the 
American public.
    This bill does all three:
Beneficiaries:
  --the Part B deductible is indexed for inflation;
  --the value of the Part B subsidy (of which 3/4ths is paid by general 
        taxpayers) is added to the income of beneficiaries and if the 
        beneficiary has enough income to be taxed, that subsidy will be 
        subject to tax at the taxpayer's rate of progressive tax (15%, 
        28%, etc.); lower income seniors will not be hurt.
Providers:
--Medicare will finally start to obtain savings from Medicare+Choice, 
    as plans bid to provide the core Medicare benefit and compete by 
    offering to lower the Part B premium. Plans can offer supplemental 
    packages of benefits separately priced. Any amount a plan bids 
    below 96% of Medicare fee-for-service costs in an area will be 
    shared 3/4ths with the beneficiary, 1/4th with Medicare and the 
    taxpayers. This proposal is somewhat similar to Breaux-Frist 2000, 
    and it protects beneficiaries who choose or need to stay in fee-
    for-service Medicare;
  --extends Medicare's competitive purchasing of durable medical 
        equipment and other services nationwide and gives Medicare more 
        `inherent reasonableness' authority to cut overpayments;
  --saves lives and money by using higher volume hospitals for 
        complicated and expensive surgeries;
  --modernizes Medicare's ability to contract with and use 
        intermediaries and carriers;
  --gives Medicare numerous ``private sector-type'' purchasing tools, 
        such as the ability
--(1) to act more like a Preferred Provider Organization (and requires 
            the development of PPOs in the highest cost treatment areas 
            of the nation (after adjustment for severity of illness, 
            etc.)),
--(2) to impose sustainable growth rates on sectors where there is a 
            questionable explosion of services (e.g., CORFs in doctors' 
            offices),
--(3) to receive the most favored price in an area as is appropriate 
            for a volume buyer, and
--(4) to pay for quality, safe care at the lowest rate (HOPD, ASC, or 
            doctor's office), regardless of setting;
  --allows Medicare to waive the 3-day hospitalization rule for skilled 
        nursing facility care, if less expensive quality care can be 
        provided by going directly into the SNF rather than the 
        hospital (it is increasingly likely that some DRGs can be 
        treated in quality SNFs);
  --develops key long range (ten-year or more) cost reforms, such as
--(1) a single bundled payment system for an illness or injury; and
--(2) a system of profiling patterns of care, educating providers when 
            their pattern of care is abnormal (both for `excessive' or 
            `inadequate' care), and eventually reducing payment updates 
            to institutional and individual providers who bill for 
            abnormally expensive care without a quality or severity of 
            illness justification. This proposal is a long-term effort 
            to begin to reduce the huge regional disparities of 
            treatment and health care costs in America which do not 
            appear to provide any particular quality of life 
            difference. As the work of Dr. Wennberg of Dartmouth has 
            repeatedly shown, if we could adopt the style and practice 
            of medicine of certain States where people have high 
            quality health care, the Medicare trust funds would be 
            solvent indefinitely!
  --encourages a more rational hospital policy, by using Medicare 
        capital payments and other special payments to discourage over-
        capacity (the nation's hospitals are roughly half empty, and 
        utilization is expected to continue to decline in the coming 
        decades) and to encourage a trade adjustment assistance-type 
        program to help essential community hospitals ``right-size'' 
        and achieve long-term financial solvency.
New tax revenue:
    With a doubling of the number of seniors and with people living 
longer, and with new hi-tech devices and medications, we estimate that 
over the next 30 years we will need about 2.5 times as much money for 
Medicare as we spend today (in current dollars).
    That means new taxes--or at least keeping old taxes.
    In addition to upper-income beneficiaries contributing more (as 
previously noted), the bill proposes
  --to forgo some of this year's proposed tax cuts and save the money 
        for Medicare, by transferring 20% of the projected on-budget 
        surplus to Medicare ($542 billion over ten years);
  --dedicating any revenues received from the Federal government's 
        legal actions against the tobacco companies to Medicare 
        (treating smoking related diseases is estimated to cost 
        Medicare over $20 billion a year); if that court case is not 
        successful or pursued by the new Administration we should 
        increase the tax on cigarettes an equivalent amount;
  --Rather than repealing the estate tax, the bill dedicates the amount 
        raised by the estate and gift tax to Medicare. We are about to 
        give this tax revenue away to 2% of decedents. In the year of 
        its proposed total repeal, the revenue loss will be $50 billion 
        per year--enough to provide a drug benefit to what will then be 
        47 million beneficiaries: the choice should be made clear to 
        the American people--help improve and extend the life of 
        Medicare, or (per the letter from 300 multi-millionaires 
        opposed to estate and gift repeal) help create a plutocracy; 
        and
  --dedicate to Medicare a tax on excess profits of certain 
        pharmaceutical sales, in cases where the company's 
        administrative and sales budgets exceed twice their Research 
        and Development budgets; while this provision is not expected 
        to raise any money, it is designed to encourage the drug 
        companies to spend more on R&D and less on political campaigns 
        to defeat adding a drug benefit to Medicare or ads telling us 
        how much they spend on research!
    Colleagues, this is a very ambitious bill that would make enormous 
long-term savings, while also making the Medicare benefit truly 
adequate. I certainly do not expect it all to pass this Congress, but I 
hope portions could be included in whatever we are able to accomplish.
    It is an attempt to honestly point out the need for more revenues, 
and for increased efficiencies in our fee-for-service payment systems. 
It does not include everything we need to do, such as provide
  --an error reduction and quality improvement program to stop the 
        50,000 to 100,000 accidental hospital deaths per year;
  --true mental health parity in Medicare, and
  --a dependable source of funding for HCFA's administrative costs, or
  --`reform' the agency, perhaps by making it a free-standing agency 
        like Social Security.
    Nevertheless, this bill is a major blueprint for a comprehensive, 
long-term way to Save Medicare. As this Subcommittee prepares to 
investigate Medicare reform, it is my hope that this new legislation 
will be a major part of our discussion.

                                


       Opening Statement of the Hon. Jim Ramstad, M.C., Minnesota
    Madam Chairwoman, thank you for calling this important hearing 
today to begin exploring Medicare reform.
    I strongly believe that Medicare needs comprehensive reform. We 
cannot focus on simply tinkering around the edges, and we must not take 
the easy road of simply adding a prescription drug benefit to an 
already overburdened program.
    As a representative of a state hurt by the unfair and unjust 
inequity in the Medicare managed care reimbursement formula, I know 
firsthand the difficulties faced by seniors when irrational decisions 
at the federal level deny them the choices they deserve.
    And as a member who represents literally hundreds of medical 
technology companies, I know firsthand the damage to small businesses, 
their employees and seniors when the federal system irrationally delays 
or denies coverage of their innovative products. I understand the 
difficulty faced by seniors when they are denied life-saving and life-
improving technology. I've even authored legislation to ensure that 
seniors have access, through Medicare, to new technologies.
    That's why I'm so glad that Senator Breaux is here today to discuss 
his work on the bipartisan Medicare commission. I applaud his work, and 
I hope that today's hearing sheds more light on other proposals to 
address this important issue.
    Since anything worth doing is worth doing well, we must carefully 
review all proposals for their strengths and weaknesses, as well as 
intended and unintended consequences. We must look for methods that 
will expand access to prescription drugs, rationalize the reimbursement 
process and provide seniors access to new medical technologies.
    I believe that together, in a bipartisan way, we can design an 
effective and efficient way to comprehensively improve the system and 
preserve it for the 21st century.
    Madam Chairwoman, thanks again for your leadership. I look forward 
to learning more from today's witnesses on how we can best address this 
critical issue.

                                


    Chairman Johnson. Thank you, Mr. Stark. And I do agree that 
there is a real opportunity for us to work together on this 
Committee and develop a bipartisan solution. I couldn't 
disagree more strongly with your closing analysis of managed 
care, and I think the evidence is the extraordinary outcry of 
unhappiness when the managed care plans leave the market, and 
seniors were forced back into regular Medicare. But that is a 
discussion for another day, and certainly one will have to look 
more carefully in terms of the data.
    But I do consider it a great advantage, Mr. Stark, to have 
you as Ranking Member with your long experience with Medicare 
and your very deep interest in health care and commitment to 
our seniors, and I look forward to working with you and my 
Democrat colleagues--and Mr. Cardin, who has always, from the 
Ways and Means Committee, taken a special interest in health 
care issues.
    And I would like to welcome our esteemed colleague from the 
Senate, the Honorable Mr. Breaux of Louisiana, but for the 
great privilege of introducing him in greater detail, I am 
going to yield to my esteemed colleague Mr. McCrery, also from 
Louisiana.
    Senator Breaux. That is enough.
    Mr. McCrery. Thank you, Madam Chair.
    It is my pleasure to introduce my colleague from Louisiana, 
Senator John Breaux. Senator Breaux and I come from different 
sides of the political aisle, but having worked with him 
closely over the years, on behalf of the interests of our home 
State of Louisiana and on other matters affecting the entire 
Nation, I can tell you there is nobody on either side of the 
aisle that is more dedicated to doing things that will make 
this country a better place in which to live. And he is a 
recognized expert on Medicare and health care generally, and it 
is an honor to work with him on these issues, and it is 
certainly an honor for our Subcommittee today to have him 
before us to hear his testimony.
    Welcome, Senator Breaux.

STATEMENT OF HON. JOHN B. BREAUX, A UNITED STATES SENATOR FROM 
                     THE STATE OF LOUISIANA

    Senator Breaux. Thank you, Madam Chair and Congressman 
Stark and Members of the Committee on both sides of the aisle. 
Jim, I am sorry I suggested that was enough. I thank you for 
the fine introduction. I appreciate the comments and thank the 
Members of the Committee.
    Number one, congratulations to the Chair and the Ranking 
Member and to all of you for beginning this process very early. 
Too many times we spend too much time delaying and talking 
about how we are going to go about the process, and we never 
get involved in the process. So with something as complicated 
as Medicare, Madam Chair, thank you for starting early. We have 
not yet reached that point in the Senate, and it is incredibly 
important we start as early as we possibly can. So 
congratulations for beginning the process of finding a 
solution.
    The first point I would like to make is one that I think is 
becoming more and more accepted as a policy matter by more and 
more Members of Congress and by more and more people in the 
American public, and that is that while Medicare has been a 
wonderful program for a very long time, since 1965, that it is 
no longer a 21st century health care program for modern 
Americans because it is inadequate in what it does and noted 
for what it does not do. No one of you behind this desk has a 
health program that is insufficient as much as Medicare is for 
the 40 million seniors in this country. Nobody sitting behind 
us has a health care plan that is as inadequate as Medicare is 
for the 40 million American seniors.
    Almost everybody in America that has health insurance has a 
better plan than people who are on Medicare have today. Why do 
I say that? Because of what it doesn't cover. Time after time 
we have heard evidence that it only covers about 53 percent of 
the average senior's health costs. That means 47 percent of 
their costs must come from somewhere else. We don't cover it. 
They have to buy an additional Medigap policy. They have to 
become so poor, they have to get on Medicaid, or their family 
has to take care of them when they become destitute for the 
things that Medicare does not cover. It doesn't cover long-term 
care, it doesn't cover assisted living, it doesn't cover vision 
and eye care, and, most importantly, it doesn't cover probably 
the most important medical innovation that we have in the 
market today, and that is prescription drugs.
    None of us have a policy that is that inadequate. So I 
think that there is a growing admission, if you will, that 
there is an absolute necessity that we do something about this 
program. That is almost now a given. We have crossed that 
hurdle. No longer can someone say with any total degree of 
honesty that I like Medicare just like it is; don't do anything 
to change it. That argument doesn't hold water in the 21st 
century any longer.
    So what is the solution? The solution is not to have a 
totally government-run program with 133,000 pages of 
regulations that we micromanage to the nth degree in every 
detail. Nor is it to just abandon what the government does and 
tosay all of a sudden we are going to have the private sector 
do everything for the health of seniors in this country, and we are not 
going to have government involvement at all. Neither one of those 
suggestions, which we have all heard of far too many times, is the 
correct decision.
    I would suggest that the correct decision is combining the 
best of what government does with the best of what the private 
sector does, and I would submit that Breaux-Frist I and Breaux-
Frist II takes that approach.
    Now, what do I mean by that? Number one, the best of what 
government can do is help pay for it. There is no question that 
it is going to cost more money, as Congressman Stark talked 
about. We are not going to save money by reforming Medicare, 
but in the long term we will make it a better program with more 
cost efficiency. The best of what government can do is help 
finance it and help pay for it. The best of what government can 
do is help make sure that it is being run properly as opposed 
to micromanage it in detail. And that is what Breaux-Frist I 
and II does. It combines the best of what government can do 
with the best of what the private sector can do.
    And what do I mean by that? The best of what the private 
sector can do is to bring about innovation and new technology 
so that the Congress doesn't have to sit in our back rooms and 
decide that for the first time Pap smears will be covered under 
Medicare when private plans have done it for decades. We did 
that last year. When the private sector can help say that when 
you have a drug that can be orally administered for the same 
efficiency as it being intravenously administered, it will be 
done through the private sector and not take an act of 
Congress, which we had to do in past years. And the second 
thing that the private sector can do best is to help bring 
about competition, which will help lower prices.
    So the idea is to combine the best of what government can 
do with the best of what the private sector can do and create a 
program that fits the 21st century, and that is why we have 
tried to model what we have recommended after the same program 
that every one of you up here, and myself included, and all of 
our employees behind us have, and that is a Federal employees 
health benefit plan.
    I mean, every year we get a choice of a large number of 
plans that we pick from, and some have said, well, Breaux, you 
are proposing a voucher system, and that is not going to be 
realistic for seniors. Of course it wouldn't be, but our plan 
is no more a voucher than what you have and what I have and 
what all of our employees have. We don't have a voucher. We 
have an absolute government guarantee that they, in our case, 
are going to pay about 75 percent of the premiums that are the 
cost of the plans that we are offered. That is an absolute 
guarantee. There is an absolute guarantee of what the policy 
has to cover, although they can cover much more, and most of 
them do. And there is a Federal involvement through the Office 
of Management and Budget to guarantee that there is not going 
to be scamming of the system, there is not going to be programs 
that have adverse risk selection that are going to be offered.
    That is what government can do best. It pays for our 
premium. It guarantees that the program is run properly, but it 
also brings about competition because of the various plans that 
want to compete for the right to serve 10 million Americans.
    We have vision. We have prescription drugs. We have 
competition. We have guaranteed government payment for a large 
portion of the cost of our policies, and the prescription drug 
plan works in a way that I think should be available to all 
seniors as well. So, I mean, that is the concept.
    Why did we introduce Breaux-Frist I and Breaux-Frist II? 
Put the charts up if you can, Sarah. Breaux-Frist I was the 
result of really what the Commission attempted to report. We 
got a majority. We got more than a majority, but we didn't get 
the super, supermajority that was required. The concept in 
Breaux-Frist I was to really have competition among fee-for-
service as well as these private plans that will be offering 
these benefits. We wanted to do it outside of the current 
micromanaged system, so we created this Medicare Board. If you 
wanted to compare it to OPM, that would be a good comparison.
    The Medicare Board would ensure the quality standards. We 
said they would have to have the same benefits that would be 
available on the current fee-for-service. They could do more, 
but they couldn't do less. They would negotiate the premiums to 
make sure that people get the best premiums, that they would 
have the best possible price. They would have to approve the 
benefits package, which means they would not let plans be 
offered that attempt to scam the system by only adversely risk-
selecting healthier seniors, which would be a terrible mistake. 
They would say, you can't do that. You can't play. You can't 
offer if you are going to do that. And that is the safeguarding 
against adverse risk selection.
    It would also, like we get every year, provide to every 
Medicare beneficiary a book on what is available to them. And 
some people say, well, you can't give them choice because they 
are too old, they are not going to be able to make the right 
choice. And yet on the fee-for-service they make choices every 
day. They pick the doctor they want to go to, the hospital they 
want to go to. If they are not capable of doing that, their 
children help them or senior organizations help them and find 
the right place to go.
    You would have the same system under the Breaux-Frist I. 
And what you would have is have--HCFA would continue to offer 
their standard plan. They could offer a high option plan which, 
would provide prescription drugs, and it would be competing 
again in the same market with other private plans who could 
come in and offer the plans, and they would hope to get the 
business as well.
    But if you want to stay in fee-for-service, I guarantee you 
some of our older citizens will stay there. They are not ready 
to change. But 77 million baby boomers getting ready to hit 
this market, who are going to be more accustomed to coming into 
this new system, will be looking for new choices and move into 
the new plans, but if they don't want to, they could still stay 
in the fee-for-service system.
    Put up the second chart, if you would, which is Breaux-
Frist II. You might say, well, why don't you just offer I. We 
offered II because we want to give you and all of our 
colleagues an array of options that are out there. Breaux-Frist 
II is competition, but it is probably less competition than 
Breaux-Frist I. For those would feel we have to take it more 
gradually, we offered a Breaux-Frist II option, which again 
maintains the Health and Human Services and HCFA, which would 
continue to run the fee-for-service program and the Medicaid 
program and the SCHIP program for children. But we would have a 
competitive Medicare agency for the first time outside of HCFA 
running Medicare+Choice and the prescription drug plan.
    The reason I would offer Medicare+Choice has not worked is 
not because it is inherently not possible to work, but because 
of the way it has been run. What we set up was that 
Medicare+Choice was going to be competition for fee-for-
service, but guess who was going to run it? Fee-for-service.
    HCFA sets the rates on an arcane formula. They put in risk 
adjusters and all kind of problems to make Medicare+Choice not 
work. In some areas, as you know, they get paid too much, and 
some areas they get paid far too little, and they move out and 
leave the people without any Medicare+Choice managed care 
options at all.
    So you have to--if you are going to have them have a chance 
to compete, you ought to have it with an agency that is based 
on competition and that is their purpose, not on trying to fix 
the prices to make sure one side wins and one side loses. The 
Medicare Prescription Plus plan is the prescription drug plan 
that would be provided under the Medicare+Choice. And if you 
want to stay in the fee-for-service, you would be over there to 
get in the Medicare Prescription Drug Plus plan.
    I think Pete sort of indicated a lot of Democrats are 
saying, yeah, we believe in prescription drugs if it can be 
delivered in a competitive mode as opposed to being 
micromanaged by HCFA. This would do that.
    I don't think any of us want to add prescription drugs to a 
1965 model and have to sit in our back offices and try and 
figure out what the proper reimbursement rate is going to be 
for thousands and thousands of drugs, and which one should be 
approved and which one should not be offered. We can't do that. 
We shouldn't do that. We only have got one doctor and a couple 
of veterinarians over in the Senate side that you all sent us 
from over here. Glad to have them, but we ain't got a lot of 
people with a lot of medical expertise over there trying to 
decide which prescription drug should be available; should it 
be orally administered, or can it be intravenously injected; 
which one do we pay for; which one we don't pay for. We can't 
micromanage another prescription drug plan. So that is what 
that would do, and that is the way it would work.
    Anything else? OK. That is basically why we have both plans 
out there. I thank you for your attention. I am more than happy 
to try and answer any questions. Thank you.
    [The prepared statement of Mr. Breaux follows:]
        Statement of the Hon. John B. Breaux, U.S.S., Louisiana
    Madam Chairwoman, Representative Stark, and Members of the 
Committee, thank you for inviting me to testify today on an issue very 
relevant to the current discussions over the federal budget--how to 
reform an aging Medicare program while adding a long-overdue 
prescription drug benefit. I applaud this committee for beginning the 
process of addressing what I consider to be one of the most important 
issues facing this Congress.
    As you know, earlier this month Senator Bill Frist and I 
reintroduced legislation (S. 357 and S. 358) to strengthen and improve 
Medicare and add an outpatient prescription drug benefit for all 
seniors. We reintroduced both Breaux-Frist I and II in order to lay out 
legislative markers for both the Senate Finance Committee and the House 
Ways and Means Committee to consider as they begin to tackle this very 
important issue. As I've said with respect to every issue, this cannot 
be a ``my way or no way'' approach. We are open to suggestions about 
ways to improve our bills but we need to start talking about how we're 
going to get this done sooner rather than later.
    The short-term budget picture is indeed rosy but that will change 
quickly once the baby boom generation starts to retire in 2010. The 
latest budget projections estimate a $3.1 trillion on-budget surplus 
over the next ten years. Even Medicare's Part A Trust Fund will post 
nearly a $400 billion surplus over the next decade. But when making 
decisions about tax and fiscal policy this year, we should keep in mind 
the budget picture beyond the 10-year budget window when entitlement 
spending could turn surpluses into deficits overnight. As GAO 
Comptroller David Walker testified before the Senate Budget Committee 
earlier this month: ``Our long-term simulations, updated using CBO's 
new budgetary estimates, show that spending for federal health and 
retirement programs eventually overwhelms even today's projected 
surpluses.''
    We all tout the merits of debt reduction but as much of the debt as 
we may pay off in the next decade, we will almost certainly have to 
start borrowing again to pay for the Medicare and Social Security 
benefits of 77 million baby boomers unless we make much-needed changes 
to the programs.
    We all know that the fear of change and a fear of the unknown make 
Medicare reform a challenge. If this were easy, it would have been done 
long ago. But what we do know should give us the incentive to consider 
some alternatives. As good as the short-term economic outlook is today, 
the problems facing Medicare haven't changed and they bear repeating:
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   1965 health care delivery system--Medicare is a program 
        frozen in time. It takes an act of Congress to update the 
        benefit package. For example, pap smears and glaucoma screening 
        were finally covered under Medicare in last year's Medicare, 
        Medicaid and SCHIP Benefits Improvement and Protection Act of 
        2000--several years after the private sector started using 
        these important screening tools.
   Outdated Benefits--Medicare's current benefit package is 
        extremely outdated, covering a limited number of outpatient 
        prescription drugs, providing few preventive services, and 
        limiting access to new medical technologies. Medicare is too 
        rigid and slow to change. Seniors deserve access to life-saving 
        drugs and technologies as they become available. The very fact 
        that Congress must pass laws to add new benefits best 
        illustrates the problem with a heavily micromanaged program. 
        The U.S. Congress simply should not be in the business of 
        setting disease-specific or drug-specific health policy. No 
        government program can possibly keep up with the increasingly 
        rapid rate at which new life-saving and life-improving drugs 
        and technologies are brought to the market.
   Inadequate coverage--On average, Medicare only covers 53% of 
        beneficiaries health care needs. No other comprehensive health 
        plan--public or private--covers so little.
   Micromanagement by Congress and HCFA--The government-
        administered pricing system Medicare currently operates under 
        is governed by over 130,000 pages of rules and regulations--
        four times larger than the Internal Revenue Code. I strongly 
        believe that one of the reasons we don't have a prescription 
        drug benefit in Medicare today is because of its rigid pricing 
        system, which is micromanaged by Congress and slow to adapt to 
        changing health care needs and technologies.
   77 million baby boomers beginning in 2010--Again, budget 
        projections may change from one year to the next but nothing 
        will change the demographic fact that 77 million baby boomers 
        will begin retiring in 2010 and demanding their Medicare and 
        Social Security benefits.
    In addition, CBO estimates that Medicare will continue to grow by 
an average of 7.5% over the next ten years, doubling spending from $216 
billion in 2000 to $456 billion in 2011--and this obviously does not 
include the cost of adding a new prescription drug benefit to the 
program.
Elements of Breaux-Frist I and II
    The Breaux-Frist prescription for Medicare reform is to combine the 
best of what the government can do with the best of what the private 
sector can do--this is not an either/or decision. The government's role 
is to provide financing and oversight while using private markets to 
ensure that Medicare keeps pace with advances in medical technology and 
injects much-needed competition into the program.
    Many critics have mistakenly characterized Breaux-Frist as some 
sort of voucher proposal where seniors will be given a check and sent 
into the market to buy insurance. Nothing could be further from the 
truth. Breaux-Frist is no more a voucher proposal than the Federal 
Employees Health Benefits Plan (FEHBP). Under Breaux-Frist, the 
government's contribution is tied directly to the cost of health care 
and the level of government support is explicitly outlined in statute. 
The new entity overseeing Medicare (the Medicare Board in Breaux-Frist 
I; the Competitive Medicare Agency in Breaux-Frist II) will serve a 
function similar to that of the Office of Personnel Management (OPM) 
which approves plan premiums and benefits to minimize adverse 
selection.
    The primary difference between Breaux-Frist I and II is that the 
premium support model in the original bill would give HCFA the tools to 
modernize itself and become more efficient but for the first time make 
it compete with private plans based on premiums, costs and quality of 
benefits. This represents competition in the purest sense. Much of what 
we proposed in Breaux-Frist I (S. 358) reflects the policies supported 
by a bipartisan supermajority of the Medicare Commission which I had 
the privilege of co-chairing with Ways and Means Committee Chairman 
Bill Thomas. I have said many times and I continue to believe that we 
should use the addition of prescription drugs to Medicare as an 
opportunity to make important structural changes to the program.
    Breaux-Frist II (S. 357) also adds a universal prescription drug 
benefit to Medicare but does so in the context of more incremental 
program reforms. In Breaux-Frist II, plans are allowed to compete, but 
Part B premiums are used as a reference point so that beneficiaries in 
fee-for-service won't pay a higher Part B premium than they otherwise 
would under current law.
    When reintroducing our legislation 2 weeks ago, some people 
suggested that we just reintroduce Breaux-Frist I--others suggested we 
focus on Breaux-Frist II. The two bills actually share some common 
elements.
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[GRAPHIC] [TIFF OMITTED] T3535A.003

[GRAPHIC] [TIFF OMITTED] T3535A.004

    Both Breaux-Frist I and II guarantee that all seniors are entitled 
to the same benefits they get today (even though the current guarantee 
only takes care of 53% of their health care needs). We explicitly say 
in our legislation that seniors continue to be entitled to the Medicare 
benefit package outlined in Title 18.
    Both bills establish a new competitive system managed outside of 
HCFA. We must move away from a framework that gives HCFA regulatory and 
pricing authority over Medicare+Choice and any new competitive systems 
we design.
    Both Breaux-Frist I and II envision a fee-for-service drug benefit 
not micromanaged by the federal government but run through public-
private partnerships overseen by a new Medicare agency. I have serious 
reservations about giving HCFA any pricing, management or 
administrative role over a new prescription drug benefit. Moreover, 
simply using private contractors like PBMs in a given region is no 
different than how HCFA currently contracts with fiscal intermediaries 
and carriers today to deliver Part A and B benefits.
    FEHBP is a good example of how a public-private partnership could 
work in Medicare. Private plans participate in FEHBP, a program for 
nine million federal employees and their families with a 40-year proven 
track record, without major problems. Clearly the federal government 
will have to bear some risk in order to encourage the private sector to 
offer the benefit but the private sector has to bear enough risk so 
that there is an incentive to get deeper discounts and control 
utilization. Giving the federal government full risk for a drug benefit 
will lead to a system where there is no competition, no choice and a 
heavy reliance on government price controls.
    Some have mistakenly characterized these public-private 
partnerships as not giving seniors a drug benefit ``in Medicare.'' But 
just as will be the case for all other Medicare benefits, the new drug 
benefit envisioned in Breaux-Frist I and II is in Medicare--it's just 
not micromanaged and priced by HCFA.
    In both Breaux-Frist I and II a new Medicare agency (which is part 
of the executive branch) would oversee a new competitive system and 
would ultimately be responsible for guaranteeing that all seniors--
including those in rural areas--have access to a prescription drug 
benefit. This new agency, using public-private partnerships to 
administer the drug benefit, and a change in HCFA's role and mission, 
are the critical down payment Congress must make if it passes 
prescription drug legislation this year.
    Both Breaux-Frist I and II also establish new ways of measuring 
Medicare's financial health. With general revenues supporting a growing 
share of overall Medicare spending, we need to look at more accurate 
methods of gauging Medicare's solvency. In Breaux-Frist II, we require 
the Medicare Trustees to evaluate general revenue spending in Medicare, 
provide historical spending trends, provide 10-year and 50-year 
projections, and provide information regarding the rate of spending 
under the program compared to the rate of growth in the gross domestic 
product.
Conclusion
    The overwhelming public support for an outpatient prescription drug 
benefit gives us a real opportunity to make Medicare better with 
bipartisan legislation. Seniors absolutely need prescription drug 
benefits, but adding them without addressing the underlying problems 
facing the program will only exacerbate Medicare's financial 
deficiencies and administrative inefficiencies.
    Medicare must be modernized and put on a sound financial footing to 
be able to provide seniors with a drug benefit that is an integral part 
of their health care plan. No system is perfect, and change is always 
unsettling, but we must move beyond the demagoguery and disinformation 
campaigns and act responsibly to balance the very real need for 
outpatient prescription drug coverage with the need for meaningful 
program reforms. It is time for us to take the necessary steps to 
reshape Medicare, include a prescription drug benefit, and guarantee 
health care security for seniors in the decades to come. By doing this, 
I believe we can truly provide choice and security for our Medicare 
beneficiaries to ensure their individual health care needs are met, 
today and well into the future.
                               __________
      The Medicare Prescription Drug and Modernization Act of 2001
                           (Breaux-Frist II)
            IMPROVED MEDICARE MANAGEMENT AND ADMINISTRATION
 Restructures the 1965 Model
        Establishes a new executive branch agency, the Competitive 
        Medicare Agency, outside of the Department of Health and Human 
        Services to oversee Medicare+Choice plans and outpatient 
        prescription drug coverage. Eliminates the inherent conflict of 
        interest of HCFA managing both fee-for-service Medicare and 
        Medicare+Choice plans that compete for the same beneficiaries. 
        Establishes a new mission for Medicare in the 21st century 
        leaving behind the bureaucracy and outdated mindset that 
        continues to plague the program and instead guaranteeing 
        seniors choice, health care security, and improved benefits and 
        delivery of care.
      MEDICARE PRESCRIPTION DRUG AND SUPPLEMENTAL BENEFITS PROGRAM
 Establishes Voluntary, Universal Outpatient Prescription Drug 
        Coverage
        Allows all Medicare beneficiaries who are entitled to Part A 
        benefits and enrolled under Part B to elect outpatient 
        prescription drug coverage beginning in 2004. Beneficiaries can 
        receive drug coverage through either a Medicare Prescription 
        Plus Plan, designed for beneficiaries remaining in traditional 
        Medicare, or through a Medicare+Choice Plan.
 Guarantees Medicare Benefits, Standard Coverage for 
        Prescription Drugs, and Protections Against High Out-of-Pocket 
        Drug Costs
        Maintains all current Medicare benefits and offers standard 
        outpatient prescription drug coverage, which includes a $250 
        deductible, $2,100 in initial coverage and 50% cost-sharing. 
        Provides coverage and security against escalating out-of-pocket 
        drug costs by requiring that all outpatient prescription drug 
        coverage offered to beneficiaries include stop-loss protection 
        of $6,000 so a beneficiary never pays for drugs out of their 
        own pocket beyond this amount. Provides beneficiaries the 
        choice of coverage that best suits their individual needs by 
        allowing the offering of different drug benefit plans, while 
        ensuring the benefit value of standard coverage is maintained 
        along with all stop-loss protections.
 Guarantees Price Discounts off Prescription Drugs
        Requires price discounts negotiated between, pharmaceutical 
        companies and insurers to be passed along to beneficiaries 
        through a prescription drug discount card program offered by 
        the plan, to ensure beneficiaries never pay retail prices for 
        prescription drugs at any time.
 Guarantees Affordable Drug Coverage through Universal Premium 
        Subsidies
        Offers all beneficiaries a 25% subsidy toward the premium costs 
        of prescription drug coverage. In addition, all beneficiaries 
        will enjoy the benefits of additional premium reductions as a 
        result of the federal government sharing in the risk of 
        covering high-cost beneficiaries.
 Protects Low-Income Beneficiaries
        Provides subsidies for beneficiaries with incomes below 135% of 
        poverty by offering 100% full coverage of premiums, deductibles 
        and co-pays associated with prescription drug coverage. 
        Beneficiaries between 135% and 150% receive premium subsidies 
        on a sliding scale from as much as 100% to no less than 25%. 
        Since 39% of beneficiaries with incomes below 150% of poverty 
        have no drug coverage under Medicare, this provision alone will 
        provide comprehensive drug coverage for over 5 million seniors 
        and individuals with disabilities.
                  MEDICARE+CHOICE PROGRAM IMPROVEMENTS
 Improves Benefits and Health Care Delivery under Medicare
        In 2004 establishes a new competitive system under 
        Medicare+Choice where plans bid for the costs of delivering 
        care and compete based on benefits, price, and quality so that 
        beneficiaries receive the highest-quality, affordable health 
        care. Allows maximum flexibility for plans to reduce current 
        beneficiary Part B premiums and cost-sharing as well as offer 
        new and additional benefits to beneficiaries, including 
        outpatient prescription drug coverage.
            BENEFICIARY PROTECTIONS, OUTREACH AND ENROLLMENT
 Encourages Informed Choice and Maintains Beneficiary 
        Protections
        Establishes Medicare Consumer Coalitions, beneficiary supported 
        organizations, designed to provide beneficiaries timely and 
        accurate information at the federal, state, and local levels 
        with respect to Medicare benefits and options. Ensures 
        beneficiaries are protected through appropriate grievance and 
        appeals processes for all Medicare benefits, including 
        outpatient prescription drug coverage.
                       MEDICARE SOLVENCY MEASURES
 Establishes Fiscally Responsible Measures of Solvency
        Provides a true and accurate measure of solvency by 
        establishing reporting requirements for the Medicare program as 
        a whole, including both Parts A and B, in determining the 
        financial health of Medicare. Requires reports to Congress by 
        the Medicare Trustees to evaluate general revenue spending in 
        the program, provide historical spending trends, provide 10-
        year and 50-year projections, and provide information regarding 
        the rate of spending under the program compared to the rate of 
        growth in the gross domestic product.
        [GRAPHIC] [TIFF OMITTED] T3535A.005
        
                                


    Chairman Johnson. Thank you very much, Senator Breaux, for 
your presentation and for your many years of thoughtful 
evaluation of the options that we have in terms of managing the 
transition of Medicare to a more modern and responsive and 
affordable plan.
    Actually we have so many Members here that I think I am 
going to forego my right to question so that we get through 
everybody, because I have had chances to talk with you, and I 
will.
    Mr. Stark.
    Mr. Stark. Well, again, I question whether managed care or 
Medicare+Choice is any good. I happen to disagree, John. I 
think Medicare is the finest system we have in this country. We 
have starved it by wasting money on managed care, and we may 
not be paying as generous benefits as we, in fact, should. I 
think that last month it was announced that the National 
Academy of Social Insurance is going to issue a report warning 
that relying on the marketplace to solve Medicare's problems 
will make matters worse, not better--largely because of the 
quality of care problems, especially for those who are poor or 
minorities, that will be generated by a premium support system.
    I would like, Madam Chair, to enter the Medicine and Health 
article in the record that outlines the National Academy of 
Social Insurance's forthcoming action. I think our colleagues 
will find it of some interest.
    The private market has its problems. Aetna, for example, 
the largest, most prestigious insurance company in America that 
runs more managed care than anybody else is now being sued by 
the Connecticut Medical Society for not paying claims promptly. 
Too often, there are inappropriate personnel making coverage 
determinations; there are inappropriate incentives for the 
reviewers to deny care.
    Only approximately 15 percent of the seniors have chosen 
managed care, many because they have been inundated by 
advertisements from the managed care companies.
    The Chair rightly indicates that many people were concerned 
about the managed care companies closing up. I submit to you 
that is only because many beneficiaries in those plans have 
drug coverage not available in Medicare. If we had a drug 
benefit in Medicare, we would, in fact, find that few would 
want to give up the right to the absolute open choice that the 
fee-for-service system now provides,and we would have happier 
doctors, hospitals.
    Chairman Johnson. Mr. Stark, if you could direct your 
questions more directly to Mr. Breaux, I would appreciate it, 
because we have so many people who want to ask questions.
    Mr. Stark. I understand that. I will get to the question.
    Managed care does not help pay for graduate medical 
education and it does not provide benefits to those in rural 
areas, which the fee-for-service does now, to the tune of about 
$10-$12 billion a year. What possible benefit is there to the 
Medicare beneficiaries to be encouraged to go into managed 
care? That is my question. What evidence do you have that 
managed care is any good?
    Senator Breaux. I think there is a good question in there, 
and I hope I can find a good answer for you.
    Mr. Stark. I don't think there is any evidence.
    Senator Breaux. Let me try.
    Mr. Stark. All right.
    Senator Breaux. If you only took half of what we are 
suggesting, and that is to let the private sector take over all 
of the operations of the Medicare, I think Congressman Stark 
would be right, because there would be no guarantees of 
benefits. There would be no guarantees against adverse risk 
selection, and all of the problems that he talks about would 
probably be potentially existing. But what we have designed, as 
I have said, to combine the best of what government can do and 
what the best of what the private markets can do.
    And when you have a Medicare Board or you have a 
competitive Medicare agency, their role would be the same type 
of role that we have with OMB that guarantees against adverse 
risk selection, guarantees it is legitimate and fair 
competition, and also allows the private sector to bring about 
innovation and technology advancements. So you have the 
protection for the beneficiaries that I would argue is not 
there today, and you have real competition, which is clearly 
not there today.
    But the bottom line is that people who do not want to go 
into the new system, they have the right to stay in fee-for-
service if they think that serves their needs better. They have 
a choice, and I think that is the right way to go.
    Mr. Stark. Well, I would just suggest, Senator, that 
managed care has an abysmal record and their popularity is 
plummeting among Medicare and non-Medicare beneficiaries 
alike--including corporate America, which is getting sick and 
tired of it. Going to the managed care industry for help with 
reform is sort of like going to Saddam Hussein to find out how 
to teach democracy.
    Senator Breaux. The model we are going to is the model that 
you have as a Member of Congress, I have as a Member of the 
Senate, is the Federal Employees Health Benefit Plan. I would 
suggest the reason that Medicare+Choice has not been doing well 
is because of the way it has been micromanaged by HCFA.
    Mr. Stark. Senator, I will bet you a nickel that there 
aren't two people in this room that belong to a managed care 
plan.
    Chairman Johnson. Oh, everyone. There are no Federal 
employee benefit plans in my district that aren't HMOs.
    Mr. Stark. Those are PPOs. I am talking about managed care.
    Chairman Johnson. They are all managed care.
    Mr. Stark. Come on.
    Senator Breaux. He is talking about bad managed care.
    Chairman Johnson. You are talking about bad managed care.
    Mr. Stark. Thank you.
    Chairman Johnson. Mr. McCrery.
    Mr. McCrery. Thank you, Madam Chair.
    Since my good friend and colleague from California brought 
up the seminar that we had yesterday, let me refresh the memory 
of those who were there, and for those who weren't let you know 
that we are also told yesterday that in the year 2040, based on 
current projections, if the government is still spending around 
18 percent of GDP, Social Security, Medicare and Medicaid will 
consume 80 percent of the Federal budget. That leaves 20 
percent of 18 percent of GDP for national defense, for roads 
and bridges and highways, for environmental protection, court 
system, you name it; 20 percent. We all know that is untenable. 
Can't do that.
    We must do something to at least try to curb the rate of 
growth in Medicare and to curb the rate of expenditures for 
Social Security. So at least Senator Breaux and his Commission 
brought forward a plan that gives us some hope of doing that in 
the Medicare system.
    I think Senator Breaux would be the first to tell you, Mr. 
Stark, that he is not sure this will work. Nobody is. But we 
are going to do something. And I would certainly urge you and 
others who don't like the premium support model to come forward 
with something else that will control costs. So far I haven't 
heard much. But we are anxious to hear other views, and 
certainly that is going to be the job of this Subcommittee to 
look at any alternatives and try to decide what is in the best 
interest of--the best long-term interest of this program and 
the country.
    Senator Breaux, you have discussed adding a prescription 
drug benefit, and certainly I don't think there is any argument 
that Medicare is deficient in that regard. We do need to 
provide a prescription drug benefit to senior citizens in this 
country, but I have seen in print you quoted as saying that you 
don't think a prescription drug benefit should simply be added 
to the current Medicare program, that it ought to be done in 
the context of overall Medicare reform. If that is correct, 
would you expound on that just a minute?
    Senator Breaux. Congressman, that is correct, and I think 
it is important. I mean, I have used the analogy, I thought it 
was kind of good when I said it, I think it is still pretty 
good, that just adding prescription drugs to the existing 
program is like adding more gas to a 1965 automobile. It is 
still going to run like a 1965 car. Therefore, just adding more 
benefits to a 1965 Medicare system is still going to have the 
same problems. It is going to cost a lot more. It is still 
going to be micromanaged. There still will be no competition.
    So I think that what we have to do in assuring that 
Medicare does cover prescription drugs, which I feel very 
strongly it should, that it is part of a reform system that 
allows the prescription drugs to be delivered in a 21st century 
model that guarantees the protections, guarantees quality, but 
also brings about competition which will help on the prices as 
far as having competition so we don't have to micromanage it or 
price regulate it, which I think would be a serious mistake.
    Mr. McCrery. In the work of the Commission, the projections 
that were developed by the Commission showed that in the first 
10 years of Medicare reform under the premium support model, 
the system would save about $100 billion over current 
projections for the current program, but then in the outyears, 
after the first 10 years, it showed considerably more savings 
for the program. Is that correct? And how did the Commission 
explain----
    Senator Breaux. Congressman, the Commission, as I know--Jim 
McDermott was there and others behind me that were on the 
Commission with me know one of the recommendations that did not 
get the super, supermajority was an increase in the eligibility 
age, which would have caused substantial savings. That is not 
part of our plan. Neither Breaux-Frist I or Breaux-Frist II 
touches the eligibility age. But I do think going to a more 
competitive system you will still have the savings. I think we 
were scored in Breaux-Frist II as $163 billion over 10 years. 
We have resubmitted that request to be updated, and it is going 
to be more than that under Breaux-Frist II. And that is going--
will be made available as soon as we have it.
    You know, I thought in the beginning, quite frankly, you 
could devise a new system to come up with a lot of savings in a 
program. I think the best we are going to be able to do is to 
improve it and to keep the increase in costs down. I don't 
know--we are going to have to spend more money in this program, 
andthat is it.
    Mr. McCrery. Sure. I am referring to a savings from the 
baseline, not a----
    Senator Breaux. Okay. Yeah. It would be that. I mean, the 
projections we have, CBO is now estimating that Medicare will 
grow by an average of 7.5 percent over the next 10 years, 
doubling spending from $216 billion to $456 billion by the year 
2011, and that does not cover the cost of adding prescription 
drugs. So when you add that, then you are looking at some huge 
amounts, which Jim just pointed out.
    Mr. McCrery. Thank you very much.
    Chairman Johnson. I would just mention, to keep things in 
perspective, that that 7.5 percent growth leading up to very 
big spending is current law. And just since last year, the 
House-passed prescription drug bill, which was very modest, I 
think, by anyone's standards, has increased in its cost 23 
percent in 1 year. So we do have to really understand the 
implications of what we are doing.
    Mr. Crane.
    Mr. Crane. Thank you. I don't have a question. I just want 
to commend you, Senator Breaux, and your colleague Senator 
Frist for the work you have done, working toward fundamental 
reform of the problems that we are experiencing with the 
Medicare program. And I think that approach is infinitely 
superior to what we have been doing through the years, and that 
is piecemeal or patchwork. And so keep up the good work, and we 
are looking forward to continuing to work with you both on the 
Senate side.
    Senator Breaux. Thanks, Phil.
    Chairman Johnson. Mr. Kleczka.
    Mr. Kleczka. Thank you, Madam Chair. I might have a 
question somewhere along the line, but I would like to make a 
couple of observations.
    Senator, thank you for your presentation today. I think the 
debate that we are having and the discussion we are having is 
proper, and it is probably healthy, but in the bottom--or at 
the end of the day, my conclusion will be that it just ain't 
going to work.
    And one can only look back to about 35 years ago at this 
old Chevy that you are talking about that needs a lot of gas, 
and the reason that the government bought that automobile was 
because the private market wasn't providing the seniors in this 
country with health care. Over 50 percent of the seniors had 
nothing. So the government stepped in, which is the 
government's role.
    Now, when it comes to making cars, private industry does 
that, and it does it quite well. When it comes to building our 
homes, private industry does it, does it quite well. 
Governments should not get involved in that enterprise. But 
where there is a gap, where the public is not being served and 
is in need of a service, that is what we are here for. That is 
why the Founding Fathers created a Congress to look after the 
welfare of the citizens of this country.
    Well, now we are saying, well, things have changed 
dramatically in 35 years, and the insurance industry is now 
clamoring; they are clamoring to insure these seniors.
    Well, a couple of responses to that. First of all, we have 
had a pilot program. We have had a pilot Breaux-Frist program 
operating the last couple years called Medicare+Choice. What 
has been the experience? Seniors have gotten more care cheaper, 
and insurance companies are beating each other to death to 
insure them. Wrong. What is happening in the city of Milwaukee, 
which I represent and come from, we had three carriers at one 
point. Now we are down to one, who is going bankrupt and will 
probably file with HCFA that they are going to get out of the 
business, too.
    And the problem is you are insuring the sickest of our 
population, those who are going to be exposed to great medical 
costs in a short period of time. Well, you say, let's give them 
the same plan offerings like the Federal employees. Well, in 
that market the insurance system works because you are insuring 
the young, healthy and the 58-year-old somewhat healthy members 
like myself. When you put them all into a big bin and mix it 
up, you can make a buck doing that.
    Okay. So you know it is like rolling averages, but with the 
senior population, 65 to 100, you don't have that good 
exposure, all right, because as time goes on, it is going to be 
more health care, more drugs, more hospitalization, et cetera, 
so the private insurance market doesn't want them, all right? 
They ain't going to make any money on them.
    Another case in point, let's talk about the great drug 
bill, Madam Chairman, we passed last year. Well, here is a drug 
subsidy program to be run by our favorite friends again, the 
insurance industry. What we are going to do is have them go out 
and sell drug policies to seniors, and the government, 
taxpayers, will subsidize their costs or losses or whatever you 
want to call it. Well, we had a hearing, Pete, didn't we, 
before the Committee, and half of the insurance industry came 
before us and said, nice program, girls and boys, but we ain't 
buying into that, because the people who are going to sign up 
for that program need drugs.
    So here is the Republican response to a decent drug benefit 
that we produced, and the major actors came forward and said, 
nice program, but we are not buying into it because we are not 
going to make any money on it. So there are things, Madam 
Chair, that the government should rightfully do, and this is 
one of them, but now if we pass the Breaux plan, and, John, we 
could be getting to a question pretty soon----
    Senator Breaux. I am taking notes.
    Chairman Johnson. Remember you only have 5 minutes for 
question and answer. I would like our witness to have a chance 
to answer.
    Mr. Kleczka. Now I lost my train of thought. That was 
probably great. I have to start all over again. I am sorry.
    Chairman Johnson. Since the yellow light is on, why don't 
you let the Senator comment on----
    Mr. Kleczka. What has changed now? What do you see in the 
marketplace that is going to offer all the benefits that are 
not being offered in Medicare today plus the current base 
benefits that are going to be more affordable than they are 
today, and we are going to have more players, more private 
insurers coming forward to say, gosh, I like your grandma, I 
would really like to help her out. Okay.
    Senator Breaux. Let me take a crack at it and make a couple 
of points. Number one, we cannot defend the status quo.
    Mr. Kleczka. As I like to say in the South where I come 
from, it is better than nothing. You know what? It is pretty 
good.
    Senator Breaux. I will give you an alternative, which I 
think is better than the status quo, number one.
    Number two, let me take the analogy on the cars. You said 
Detroit makes cars; government doesn't. That is true. The 
private sector makes the cars, where the government is involved 
in ensuring safety standards, fuel efficiencies, and so they 
don't roll over, to make sure that the cars run according to 
certain national standards. Private sector makes them, and they 
bring about efficiency, and there is competition, but the 
government has a major role in ensuring that they are safe and 
they meet certain standards and fuel efficiency.
    The same type of concept is what we are talking about with 
health care. Let the government do what the government can do 
best: help pay for it, help guarantee that it is being run 
properly and meets certain standards, but allow the private 
sector to bring about innovation and competition and new 
technology.
    The final point: It is true that agencies that came up and 
talked about prescription drugs being available would not 
ensure it only because it is not a good insurance risk. 
Obviously we all understand that if you are only going to cover 
prescription drugs, the only people to buy those policies are 
those who will need prescription drugs. Like in the Medigap 
insurance, the premiums become so expensive that it is not a 
good investment.
    But this proposal is different, I would suggest, in a 
major, major way. Number one, the plans would be able to offer 
more than just drugs only, which is one of their complaints 
previously. They would be able to offer vision. They would be 
able to offer dental. They would be able to have coverage for 
cost-sharing. In addition to that, there would be a one-time 
enrollment to make sure that more people become involved in the 
process to give them a larger insurance pool than they had 
before.
    And the final and probably the most important thing is the 
reason why it would work is there would be substantial risk-
sharing by the government agency as well as the insurance 
companies to help with regard to the risk-sharing in selling 
this type of policy. So I think that when you look at what we 
are suggesting, that it----
    Mr. Kleczka. Are you talking subsidy just like the drug 
program we had?
    Senator Breaux. Yeah. Absolutely.
    Chairman Johnson. I thank the gentleman.
    My friend Mr. Johnson from Texas.
    Mr. Johnson OF TEXAS. Thank you, Madam Chairman. Let me 
correct the record, if I might.
    Mr. Stark, I have been getting complaints on the Medicare 
system as it is envisioned. I have been getting complaints 
about HCFA, and I haven't been getting complaints about HMOs.
    Now, I think that what we have to consider is that HCFA, as 
Senator Breaux has said, is obsolete and inefficient and 
doesn't work. And can you imagine us adding prescription drugs 
to this thing, Senator, and every year coming up here and 
saying, we got to add this one and this one and this one 
because of new innovations in medicine.
    Medicine is moving faster than we can do that. That is what 
is wrong with HCFA. It hasn't been able to keep up with it. 
Inadequate benefits, and insufficient choices, and Medicare's 
administrative inefficiency and structural obsolescence have to 
be overcome. I like what you are doing.
    Would you care to comment on any of that?
    Senator Breaux. You are right on.
    Mr. Johnson OF TEXAS. God bless you. Thank you.
    Mr. McCrery. Would the gentleman yield?
    Just to correct the record, another time there were, in 
fact, PBMs that came forward last year and said they would 
participate in the prescription drug program that we offered. 
And I think the main industry sector that was saying loudest 
they wouldn't participate is that sector that already 
participates in the Medigap policies that are so profitable. So 
I would urge you to question those sources.
    Senator Breaux. Medco said they would write a drug only 
plan.
    Mr. Johnson OF TEXAS. Thank you, Madam Chairman.
    Chairman Johnson. Thank you.
    Mr. Camp.
    Mr. Camp. Senator, thank you for all your good work. I 
would agree with you that the addition of prescription drugs 
really is an opportunity to modernize Medicare. And for 
example, this 1965 model when you get the drugs if you are in 
the hospital, but you don't if you are out of the hospital, it 
just cries out for some change.
    You said in your written statement and I think in some of 
your comments that the premium support model in Breaux-Frist I 
would give HCFA the tools to modernize itself. Could you 
elaborate on that, please?
    Senator Breaux. Okay. What do we have on that Sarah? 
Basically we are giving them more of an ability to write the 
regs this away that would encourage more competition within the 
system, giving them the flexibility to offer some of their 
benefits through a more competitive system than they do now, 
and basically giving them greater flexibility in order to be 
more competitive, because under this they are going to have to 
compete now with the private plans. So we give them more 
flexibility on how they would be able to utilize what they do 
now in a more competitive fashion in order to be able to 
compete.
    Mr. Camp. Okay. Thank you very much.
    Thank you, Madam Chair.
    Chairman Johnson. Thank you.
    Mr. McDermott.
    Mr. McDermott. Thank you, Madam Chairman.
    Sam, if you can sell the idea that Medicare has been a 
failure to the people who are on Medicare, you are a real good 
salesman. I think that anybody who looks at the program can see 
there is problems, but to say it is a failure or we ought to 
throw it out and bring in this new, has simply not looked at 
the problem.
    I would comment everybody looking at the GAO report that 
says, plans withdrawals indicate difficulty providing choice 
while achieving savings--this is September last year--and there 
has been a roughly 50 percent decline of members in the Federal 
Employees Health Benefit Program covered by managed care 
operations.
    Now, if this is such a good option, why are all the Federal 
employees leaving it? And yet, what we are seeing here is a 
proposal that is designed to push us--push seniors, I am not 
quite there--to push seniors into that program. And they are 
dangling this little benefit of drugs out there, and come on, 
folks, follow the drug, and we will get you in there.
    And the fact is that what has happened to Jerry has 
happened all over this country, that people have had--every one 
of us sits in our office and tries to deal with it, as I did in 
the State of Washington, almost 500,000 who were dumped by HMOs 
because they couldn't make money. And we started out with the 
premise that when we put the HMOs in, they should get 95 
percent of what we spent on the average beneficiary in the 
Medicare program, and they say, we can't make it on 95 percent.
    Well, where is the savings? That is what I want to ask you. 
Because we say we can get competition, and with competition we 
will get savings. And yet the technology of medicine has gotten 
more and more complicated, and for us to say that, well, we can 
do it, I guess we will just let the managed care operations do 
the rationing.
    And the question I have for you, John, is would you rather 
have the insurance companies do the rationing, or do you want 
to do it?
    Senator Breaux. Neither one. I think----
    Mr. McDermott. Well, you are going to have to do it one way 
or the other, or you are going to have to cut back on services. 
You cannot provide the level of services to an increasingly 
aging population with the technology that is going on in this 
country and not cut somewhere.
    Senator Breaux. Let us remember, every one of us, that 47 
percent of the average senior who is on Medicare's cost for 
health care every day is not covered by Medicare today. Forty-
seven percent of their illnesses and their ills that need to be 
treated, they have to go and buy another policy, they have to 
go on Medicaid, or they have to go to their children. Those 
facts are factual. It only covers about 53 percent. So you 
already have a system that is woefully inadequate.
    Now, we have to understand--the final thing we have to 
understand, I think all of us, myself included, that--I 
remember when Stuart Altman was on the Commission and who is 
here behind us, I think in the beginning we argued about this 
as a means of saving a great deal of money. It is not going to 
save a great deal of money, but it is going to help reduce the 
increases that are projected. We are still going to be spending 
more money.
    The feature that we have here is that we try to combine the 
best of what government can do with the best of what the 
private sector can do. I am not arguing that it is only the 
private sector making the decisions in terms of risk selection, 
in terms of making sure the policies offer everything that is 
needed and necessary to be offered. The government is involved 
both with that and with paying for it. And the final note is 
that people have a choice. If they like the old program, they 
stay there; if they prefer the new one, they have the 
opportunity to choose it.
    Mr. McDermott. I think that that is admirable, and I like 
that part of what you are doing. What I don't like is the 
slanting of the incentives to say, if you stay over on this old 
fee-for-service 1965 Chevy, you are not going to get that nice, 
big Cadillac that we got for you.
    Senator Breaux. You do if you pick this Breaux-Frist I.
    Mr. McDermott. It has got a drug in the front seat.
    Senator Breaux. That is the argument for Breaux-Frist I. 
Because with Breaux-Frist I, HCFA would offer their high-option 
plan and prescription drug plan as well, so you could stay in 
fee-for-service and get drugs under Breaux-Frist I; and under 
Breaux-Frist II, you would go to the competitive Medicare.
    Mr. McDermott. Why do you even bring Breaux-Frist I here 
when it is so patently designed to drive seniors into HMOs?
    Senator Breaux. I don't think it does that. You can still 
stay----
    Mr. McDermott. You mean if I offer my mother, who is 91 
years old, a drug benefit if she goes into an HMO if she 
doesn't have it now?
    Senator Breaux. For Breaux-Frist I, under HCFA's high-
option plan, they offer not only all of the current benefits 
but also prescription drugs; and the prescription drug plan 
would be available under fee-for-service and HCFA. If my father 
wanted to stay in HCFA and get prescription drugs under the 
high-option plan, they would have prescription drugs under the 
high-option plan.
    Mr. Stark. A $50 benefit for 1,200 bucks? That is a heck of 
a benefit.
    Senator Breaux. We can design it. We can pick the number. 
That is an actuarial value. That is not $800 worth of drugs. It 
is an actuarial value.
    The average senior in this country spends approximately----
    Mr. McDermott. Would you say, in closing----
    Senator Breaux. --between $600 and $700 a year on drugs. 
That is the average cost. An actuarial value policy of $800 is 
a pretty good deal.
    Mr. McDermott. Let me just say, in closing, that what you 
have to keep in mind here is that you are designing a program 
that presently has something like 9 million widows in it living 
on $8,000 a year. Now, if that is the program we are trying to 
design--we are not worried about Bill Gates when he goes into 
Medicare. He is going to be able to afford a few extras. But it 
is the people at the bottom who you give this miserable benefit 
to at a time in their life when $800 may turn out to be a 
pittance of what they spend. When the average out-of-pocket 
cost is $3,500, according to our seminar yesterday, an $800 
benefit doesn't cover it.
    Senator Breaux. Let me suggest that an $8,000 income is 
probably covered by Medicaid which covers 100 percent of their 
drugs and 100 percent of their health costs.
    Mr. McDermott. Do you make an automatic entry into 
Medicare--Medicaid? Because nobody on this Committee will 
automatically default people into Medicaid. They make them go 
down to the welfare office and beg to get in. And that is why 
this is deceptive.
    Chairman Johnson. I would like to exercise the prerogative 
of the Chair to make two comments.
    First of all, Medicare is currently a fee-for-service plan 
and a plan that offers managed care choices. It has offered 
them for many years. It has offered the HMO risk plans. Now it 
offers some other variants. In 40 years, Medicare is going to 
be there, and it is going to be offering fee-for-service 
coverage and other choices.
    So no one here is for a moment suggesting that we do away 
with Medicare, and it concerns me when we allow an opportunity 
to educate ourselves to become in a sense a political debate. 
You know, neither party, the administration, nor anyone else--
--
    Mr. Stark. No, no politics here.
    Chairman Johnson. I find that disrespectful, Mr. Stark.
    Mr. Kleczka. Madam Chair, I----
    Mr. Stark. I am just bringing some humor into the subject.
    Chairman Johnson. I understand what you are saying, but 
hear me out.
    No political party and no administration has come up with a 
plan that meets your criteria, nor that we have costed out, nor 
that we have figured out how we are going to fund.
    Now, this Committee is going to try to do that, going to 
try to get into more depth on why is it that the choice plans 
haven't met the needs of either the recipients or the taxpayers 
or the plans. But I think it is very important to remember that 
nobody is talking about doing harm to Medicare.
    What people are talking about is Medicare's inability to 
offer state-of-the-art benefits to the recipients, and how are 
we going to do that in the context of extraordinary expenditure 
estimates, and how are we going to do it in a way that we don't 
force people into choices to get benefits but do honestly give 
them a choice. And how are we going to deal with some of the 
problems of the low-income seniors who are just above the 
Medicaid level, and can we really afford to continue a program 
that doesn't take into account the very minimal needs of 
someone--just minimal abilities of someone just above the 
Medicare level or just above 150 percent of poverty to pay even 
premiums whether they are in--whatever bill they are in.
    So I think we have very big challenges before us, and I 
don't think that we have understood clearly on the 
congressional side--and I think you would agree with me on 
this, Senator Breaux--that we really haven't understood clearly 
why is it Medicare didn't work as well and what is the 
complexity of the system that it found itself facing. What are 
some of the things that it did that were good, and what are 
some of the things that it did that were bad? Because, clearly, 
if we are going to do this, we are not going to try to re-
create the experiences of the last few years. We are going to 
try to strengthen Medicare fee-for-service with prescription 
drugs; and we are going to try to provide stable, predictable, 
funded alternatives; and it is going to cost money.
    So if we can focus on our questions about Mr. Breaux's 
answer as precisely as we possibly can, I think we arm 
ourselves to go forward and work through some of the problems 
that have been brought up that are real.
    Mr. Ramstad.
    Mr. Ramstad. Thank you, Madam Chair.
    Senator Breaux, let me just first say that this is one 
Member who appreciates the fact that you have approached 
Medicare reform in a bipartisan, pragmatic, common-sense way; 
and it is just a crying shame that the final vote necessary to 
constitute a supermajority wasn't there on the Commission. 
Because to the degree possible--and I realize it is not fully 
possible to depoliticize this debate and the subject we are 
working here on, but to the degree possible that, more than 
anything, would have depoliticized and that Commission report 
would have sailed through in a bipartisan way certainly the 
Congress, both bodies, I believe.
    But let me focus in on this. In his opening remarks, Mr. 
Stark acknowledged the incredible inequities of the 
Medicare+Choice program and the reimbursement formula. In fact, 
I think he mentioned the difference between Minneapolis and 
Miami, and everyone knows that a Medicare beneficiary can 
receive 2-1/2 Medicare surgeries at the Mayo Clinic in 
Minnesota for every one in Miami, Florida. That is absolutely 
unconscionable and unfair. We did take a baby step forward in 
increasing the minimum payments or the floor last year to $525 
in urban counties and $475 in rural counties, but we still have 
incredible disparities, and seniors and providers are being 
cheated in States like Minnesota who are penalized for their 
history of prudent health care spending. Minnesota, for 
example, over the last decade has kept its costs 3 percent 
under the national average. As a result, our reimbursement 
formula is less.
    How, in your judgment, should Congress address the unfair 
equities in the Medicare+Choice reimbursement system?
    Senator Breaux. Well, I mean, you have to I think get rid 
of the arcane methodology in which Medicare+Choice plans are 
being paid for. It is a political formula. It is a somewhat 
cost-oriented formula, but that is not the premise of it. They 
ought to be paid based on competition. They ought to be asked 
to compete in the marketplace, and they would be paid 
accordingly, and we would be looking at who can do it for the 
best price, providing the best services.
    Right now, as you point out, some areas are getting paid 
more than they need; other areas are getting paid far less than 
they need. I mean, they get hit with risk adjusters and user 
fees and payment recalculations. It is no wonder 
Medicare+Choice has not been able to be working out there as it 
was intended to work, because it is managed by the organization 
that is in competition with it. It was not in their interests 
to help make it work.
    Therefore, we get out of the concept of having it paid 
based on an arcane national formula, rather than being paid 
based on the competition that they would have to compete with; 
and the ones who would do it for the best price with the best 
services would get the business and others would not.
    Mr. Ramstad. Well, I thank you for that response; and on 
behalf of all Minnesota seniors, Medicare seniors, I truly hope 
we can get that done this year, because it is simply not fair. 
I have every--every town meeting I attend, every senior center 
I visit I am barraged with complaints and questions about the 
inequities, so I appreciate your approach to that problem.
    The second question I have, I represent 300 of the best 
medical technology, medical device companies in the world, 
comprising Minnesota's Medical Alley, and they are developing 
new technologies all the time--Medtronic, for example, the 
first pacemaker--technologies that save lives and improve the 
quality of life for people all over the world. These 
technologies, as we all know, are available in the private 
sector years before they are approved by HCFA for Medicare 
beneficiaries.
    I saw in your other chart the fourth item listed was--maybe 
it was yet another chart. Anyway, it was medical----
    Senator Breaux. It is in one of our charts.
    Mr. Ramstad. Exactly, one of the charts. But, anyway, we 
have to get more access to seniors to medical technology, and 
how in your judgment should we address this in a comprehensive 
Medicare reform bill?
    Senator Breaux. Well, first, Congressman, the Commission 
had the privilege of going to your home area for one of our 
Commission hearings.
    Mr. Ramstad. I know. In fact, I was there; and I appreciate 
that.
    Senator Breaux. It was fascinating what we were able to 
learn.
    The whole question of innovative technology is part of what 
the private sector can do best, as opposed to what government 
can do. We now make technological decisions that we have not 
the competence to make in the Senate Finance Committee, and I 
would say also in your Ways and Means Committee as well, about 
what we are going to pay for and what we are not going to pay 
for. Is this the best procedure to pay for, or are we not going 
to pay for this, but we will pay for this procedure over there.
    We all have, probably, examples of industries that have 
come to us and said, we want you to introduce a bill to get 
Medicare to cover this, and the other side who is selling the 
other product will say, no, we don't want you to do that 
because they are paying for our product.
    That is not the best way to bring about innovative health 
care technology. The best way is to allow the marketplace as it 
is developed to be able to offer it, and then through choice we 
pick the thing that best fits our particular needs, as 
competition among the technologies, both on price and on 
efficiency and quality. The government in this role guarantees 
that no one is scamming it, that no one is offering quack type 
of proposals. That would be what government can do best, to see 
that it is not being run incorrectly but not micromanaging it.
    Mr. Ramstad. Thank you very much, Senator.
    Thank you, Madam Chairman.
    Chairman Johnson. Thank you.
    Congresswoman Thurman.
    Mrs. Thurman. Senator, I am sorry I missed your opening 
remarks. We have been in hearings for the last couple of days 
and my constituents were beginning to wonder if I was missing 
in action some place when they came by to see me, so I 
apologize for that.
    Senator, I guess the thing that I am most concerned about 
and am trying to understand, try to explain to me what is 
really the difference between what is going on today--I mean, 
we have a fee-for-service, we have Medicare+Choice programs. 
For those, in those regions that they can have them, I mean, 
most of them are pulling out, some of them are losing their 
prescription drugs. And I am kind of having a hard time 
understanding what exactly, if I were to go home and try to 
explain this to a constituent, why they would buy into this 
after what they have seen over the last couple of years.
    To just tell you what has happened in one of my counties, 
yes, I am from Florida, but I am not from Miami, so we don't 
get the big numbers, I kind of have some rural areas. But what 
do I say to them when they say, well, you know, our Medicare 
programs pulled out last year, our choice programs. I mean, 
only by the fact that we were able to put an incentive back in 
did they come back in, and we are only hoping they stay there 
for as long as we can keep them.
    Are we still going to have, or do you still see the 
volatility within these markets? I mean, are they still going 
to have to go back to fee-for-service? I mean, what is going to 
guarantee in this plan different from what we are seeing 
happening already? Because you are still depending on the 
private market to do this, and they are only going to do it 
based on whether or not they can get a profit, you know, what 
their profit might be at the end.
    Then let me ask this: Show me the relationship on the price 
premium as compared to what happens today with how government 
controls what we pay in and what potentially could happen, 
because I know in Breaux I, I think there was actually an idea 
that we could have to come back if it got over 40 percent, what 
was going to happen, and we would have to come back and have 
the debate on the floor.
    Senator Breaux. Well, Congresswoman Thurman, there are a 
lot of good questions in your comments.
    Number one, to make a general comment, any change is very 
difficult, particularly for senior citizens, because change is 
scary to all of us, and it is certainly probably even more 
scary to seniors, and especially when you are talking about 
something that is as important as their health. I would say 
that that group of seniors, number one, that the current plan 
you have does not cover about 47 percent of your health costs. 
It is not adequate, it is not as good as it should be, and it 
is not as good as it can be made to be.
    The second thing I would say to them is that I would like 
to give you the opportunity to have the same type of system 
that I have as your Congresswoman, or that the two senators 
from Florida have as members of the Federal Employees Health 
Benefit Plan. They have always said that if it is good enough 
for the Members of Congress, it must be a pretty decent plan; 
and they are right on that, because it is.
    Now, how it would work is that----
    Mrs. Thurman. But they have choices.
    Senator Breaux. That is exactly right. And we would 
absolutely guarantee the choices and give them, in fact, a lot 
more choices than they have today, because it is very, very 
limited and it is inadequate in its coverage. The concept would 
be that they would have all of these plans on Breaux-Frist I 
that would have to come to the Medicare Board which is like our 
OPM.
    Mrs. Thurman. And you guarantee it how?
    Senator Breaux. That would be the government role. I said 
to combine the best of what government can do with the best of 
what the private sector can do. The best that government can do 
is help pay for it, and we would guarantee to pay for it by 
exactly the same percentage that they would be paying under 
fee-for-service. It is 88 percent paid for today totally, and 
it is probably going up higher than that, and it would go up 
higher than that in our plan, too. So the government guarantees 
that they pay for it, and they guarantee that they are going to 
supervise it. It is not going to be adverse risk selected, it 
is not going to be a bunch of scam operators, because the 
Medicare Board, which is an agency of the Federal Government, 
would guarantee that that would not be allowed.
    Then, from a choice standpoint, when you have five or six 
or more plans being offered, they would be able to look at them 
and all of them would have to meet a certain standard, all of 
them would be basically paid for by the Federal government, and 
they would pick and choose. If they still do not like any of 
those new choices, then they would be able to stay in a 
traditional fee-for-service.
    I think that you can tell your constituents that what you 
are giving them is the opportunity to have something that is a 
lot better than they have today.
    Chairman Johnson. Mr. Cardin, would you like to question?
    Mr. Cardin. Just very briefly, Madam Chair. Thank you for 
the courtesy.
    First, Senator Breaux, I share the comments; and we thank 
you very much for your service to our country. I think you will 
find that on our side of the aisle the Breaux-Frist II is what 
we are going to feel more comfortable with, that model.
    I just have one question. As I understand it, you use as 
the benchmark for the payment for private insurance 100 percent 
of what it costs for Medicare fee-for-service, and you don't 
put a risk adjuster in until I think the year 2014.
    I guess my question to you, and you need not fully answer 
it today because I guess we will have the answer when we get 
the fiscal costs of Breaux-Frist II, it seems to me that those 
changes will add dramatically to the cost of the program, that 
there is a good chance that the payments made for private 
insurance will actually exceed what it would otherwise do, and 
we might just be adding to the cost of Medicare without 
providing an additional choice or benefits to our constituents.
    Senator Breaux. Well, that is a real good question. It is a 
very technical question, but it is also a very important 
question.
    The risk adjuster is something that is going to be needed. 
If you have a group of people who are sicker and older and cost 
more, you are clearly going to have to have a risk adjuster in 
that program which would allow them to be compensated for the 
extra costs that they have. In fact, I think the risk adjuster 
that we suggested was the one that the Clinton Administration 
was actually talking about and proposing. That can be refined 
and it can be updated and it can be modified, but that is where 
we got the concept of the risk adjuster from, and you would 
have to have that.
    But then you also remember, you also have the role of the 
Federal Government insuring against adverse risk selection. If 
someone submits a plan to be offered that is tailored to meet 
only healthier seniors, thereby throwing sicker seniors into 
traditional fee-for-service, that plan would not be allowed to 
be offered, and that would be the strong role of the Federal 
Government. This Medicare Board in that case is a very strong 
Federal agency and is part of our government, but they would be 
also able to have a competition which we can't handle through 
HCFA, but they would guard against adverse risk selection. But 
also recognize that if there is a preponderance or a greater 
percentage of sicker seniors, then there would have to be a 
risk adjuster, and we are very open on how we craft a risk 
adjuster to take care of the extra cost.
    Mr. Cardin. Thank you, Madam Chair.
    Chairman Johnson. Thank you.
    In concluding, Senator Breaux, it is also true that when 
you talk about setting premiums, the Board setting premiums, 
those would take into account that these insurance policies are 
covering older people with higher health care needs.
    Senator Breaux. Oh, yes. The point is that, yes, they are 
going to be covering probably people that are obviously older 
and obviously sicker than we have in the Federal Employees 
Health Benefit Plan, so that answer is yes; and that is going 
to have to be accounted for in the pool of people that they are 
going to be insuring. They are going to be older and less 
healthy.
    Chairman Johnson. That ties in with our opening comment 
about the Federal Government's role is to help pay for the 
benefits that we have guaranteed the seniors.
    Senator Breaux. The final point on that--I mean, all of 
this is so incredibly complicated. I am not in the insurance 
business and don't pretend to understand it. But the average 
premium that we pay under Medicare combined A and B is--about 
88 percent of the cost is Federal Government and 12 percent is 
the beneficiary through Part B premiums.
    If--our first bill, it was interesting, we had pegged the 
reimbursement rate under the new plan to 88 percent; and some 
said, well, suppose it goes up, isn't that going to make fee-
for-service go rocket high? We have changed that now. We are 
saying that whatever the government percentage is that they 
would pay under our bill is what they would pay. Whatever the 
government contribution, if it goes up to 90 percent, under our 
bill, that would be the premium contribution under the new 
plan.
    So there is some flexibility there. It is not tied. We 
picked 88 percent because that is what it was at that time, but 
we know it is going to be higher than that, and, therefore, the 
new legislation says that whatever the government calculation 
is as a percentage would be what they would pay under our 
proposal as well.
    Chairman Johnson. So the cost would not be shifted from the 
government to the consumers.
    Senator Breaux. Yes. They would not have an increase in 
their participation.
    Chairman Johnson. Thank you very much for your time and 
attention.
    Senator Breaux. It is always a pleasure to come to this 
side of the Capitol.
    Chairman Johnson. Thank you.
    I would like to call forward the panel. Stuart Altman, it 
is a pleasure to have you back, Stewart; Judith Feder, who has 
also come before us on other occasions; Walter Francis, the 
independent healthcare consultant from Virginia; and Jeff 
Lemieux, who is the senior economist at the Progressive Policy 
Institute.
    We thank you all for joining us, and we will move through 
each of you making your opening statement and then we will open 
the whole panel for questions.
    Dr. Altman.

   STATEMENT OF STUART H. ALTMAN, PH.D., PROFESSOR, NATIONAL 
 HEALTH POLICY, SCHNEIDER INSTITUTE FOR HEALTH POLICY, HELLER 
  GRADUATE SCHOOL, BRANDEIS UNIVERSITY, WALTHAM, MASSACHUSETTS

    Dr. Altman. Thank you, Madam Chairman.
    I am Stuart Altman, and I am a professor of National Health 
Policy at Brandeis University. I really wanted to congratulate 
you on taking over the Chair.
    I also would like to say hello to Congressman Stark who 
just left, but I did have the privilege of working under him 
for almost 12 years when I chaired the Prospective Payment 
Assessment Commission. So it is really good to be back before 
this committee again.
    You have my complete testimony, so what I would like to do 
is take my 5 minutes to focus on what I consider to be some of 
the major components of the debate.
    As Mr. McDermott knows, he and I were members of the 
bipartisan Commission along with Senator Breaux, I was one of 
those members that ultimately voted no in terms of the plan. 
But I want to focus on why I voted no and why I think things 
have changed.
    I voted no because I thought our Medicare program was in 
serious financial shape, and while I can't say that Medicare is 
not going to have financial difficulties in the future, it is 
in much better shape today and, therefore, solvency is much 
less of an issue.
    Second, I really do believe, and still believe, that we 
should have a very important and very comprehensive 
prescription drug benefit; and I think Breaux-Frist II goes 
part way towards there, although there are a number of 
suggestions I would like to make to make it better.
    What I would really like to focus on is what this 
discussion has been about: Why has Medicare+Choice not worked? 
I would like to offer my opinion. I came into government in 
1971, actually in what was then HEW; and after being there a 
month I was asked by the President to be responsible for 
controlling health care costs. I used to be 6 foot 4, Mr. 
McDermott.
    Mr. McDermott. Great job.
    Dr. Altman. My boss at that time was the current Vice 
President, and I became one of the most hated people in 
America. The AMA had a special issue of their publication that 
made me, you know, Big Brother, Public Enemy Number One.
    What the essence of this is, is that whoever tries to 
constrain the system is not going to be liked by the system. 
Managed care has been beaten up because it was responsible for 
constraining the system. I will tell you, if we didn't have 
managed care after BBA, I don't think you would find a doctor, 
a hospital, or a home health agency that wasn't ready to kill 
the Federal Government. So, yes, this is a game in which 
whoever is taking the food away from their kids is going to be 
the one that is going to get yelled at.
    Now, let's look at Medicare+Choice. Mr. Stark, you and I 
have had very good times together; and I hope you will listen a 
little to what I have to say. I have been looking hard at 
Medicare+Choice, why it doesn't work, and I would like to offer 
to this committee a little different perspective. We must 
create a true level playing field between the Federal 
government and the running of its fee-for-service system and 
the Medicare+Choice program.
    Now, I have heard the arguments about the administrative 
costs of Medicare+Choice plans, and complaints that too much 
profits are being made, and I am not here to defend them. 
However, I would submit to you that we have created a very 
unlevel playing field where it is impossible, over the long run 
for a private market to work. I am in the category, of those 
who believe that it is good for this country to have true 
competition between the private market and the public sector, 
and I think Breaux-Frist II goes a long way to do that.
    But in answer to your question, Mrs. Thurman, the current 
situation is such a lopsided event that it is hard to see how 
it can work. Why is it lopsided? It is lopsided in the 
following ways: First of all, Medicare, through the government, 
can pick and choose the prices it wants to pay. It doesn't have 
to negotiate with a hospital or a doctor. It tells the hospital 
or doctor, or home health agency what it is going to pay. The 
Congress is the vehicle for that choice.
    Ultimately, providers could say that they are not going to 
provide Medicare services, but it is very difficult for a 
hospital that has 50 percent of its patients in Medicare to 
say, I am not playing because you are not paying me enough. 
History suggests that when Medicare has been quite generous, as 
it has been in several periods like in the middle 1990s, it 
turns out that the private insurance market can come in under 
that generosity and get better discounts as they have done, and 
they wind up saving money and a lot of people joined their 
plan. That was the period of time when Medicare+Choice 
prospered.
    When you introduced BBA--and I am not arguing against BBA, 
but why did you introduce BBA? Because you looked at the growth 
rates in Medicare spending and you said Medicare is paying more 
than the private sector and the country can't sustain that. 
Well, Congress thought it was going to cut $115 billion over 5 
years. As it turned out, some estimates suggest that the 
savings amount is going to be closer to $230 billion. Of 
course, what happened? What happened is that Medicare spending 
went way down. Then you asked the managed care industry to 
compete with Medicare. But the premiums they received were 
related to Medicare paid for services. But, they don't have the 
same power to reduce payments Medicare has. So they are now at 
a disadvantage.
    If you want to make competition work, and I put it if--I 
happen to believe it is good for our country to have 
competition work, you have to level the playing field.
    Several other things have happened as well. Medicare can 
decide what a cost is and what a cost isn't. Medicare goes into 
a hospital or doctor's office and says, this we will pay for 
and this cost we won't. Again, I am not arguing that you are 
not making the right decisions, but the private sector can't go 
in and say that. It can't say to a hospital administrator, we 
will only cover your salary up to $150,000. If you receive 
$200, it doesn't count. Can't do that. Can't refuse to want all 
of your depreciation. You can go on and on.
    The point I want to make here is that if you want 
competition to work--and the reason why Medicare+Choice did not 
work, yes, maybe managed care oversold itself--estimates of 
savings of 25 or 30 percent proved to be too ambitious. Maybe 
the savings are closer to 15 percent. But, then when you add 
higher administrative costs and the fact that Medicare is 
paying in many parts of the country 90 or 85 cents on the 
dollar, it becomes impossible for a private managed care plan 
to compete.
    I provided a chart in the last part of my testimony that 
shows the relationship between what Medicare pays and what the 
private sector pays. When Medicare margins go down, private 
sector margins go up. In 1992, Medicare paid 90 cents on the 
dollar (payment to cost ratio). Private insurance paid 131 
percent. As Medicare began to pay better during the nineties, 
private margins came down. You watch what happens over the next 
couple of years. You are going to see private payment rates go 
way up. Again, you can't compete if you don't level the playing 
field.
    One last piece of that puzzle. Recently, Congress passed 
legislation that will create a 50-50 national-regional blend so 
that every area gets closer to the same amount of money. Now, I 
happen to be very sympathetic to Seattle and Minneapolis and 
Portland, Oregon, which have very good health care delivery 
systems. I also am very sympathetic to Boston and Miami and New 
York. What happens when you go to 50-50? How can a managed care 
company in a high cost area survive?
    Let's say you are right, that, in fact, in certain parts of 
this country like Florida, there is just too much care being 
provided. The providers are getting too much money. People in 
Seattle complain all the time. So what are you going to do? You 
are not going to touch the fee-for-service system. You are 
going to continue to pay the higher amount. But the legislation 
will cut back what the managed care industry in high cost areas 
receive. How are these groups going to be able to purchase the 
needed medical care? Can they change the practice of medicine? 
That is not possible. If you want to change the practice of 
medicine in this country, start with the fee-for-service 
system. Don't start with the managed care companies who are 
only 15 percent of the market. Again, I believe in competition, 
level the playing field.
    Now, with my remaining 2 minutes, I want to talk about 
prescription drugs. There is nothing more important. I think 
everyone on this committee has said this thing. We need to 
cover prescription drugs.
    My sense is, my preference is that prescription drugs be 
covered under both plans.I think it makes much more sense both 
economically and for health care that a health care delivery system 
provide prescription drugs and that it be provided under managed care 
and it be provided under fee-for-service. My preference is that it not 
be provided by private insurance separate from coverage for other 
medical care. However, I would make a couple of suggestions.
    First of all, my preference is that the Federal Government 
provide more than a 25 percent subsidy as suggested by Senator 
Breaux. I think the subsidy rate needs to be closer to 50 
percent. Why? The actuaries tell us that such a subsidy rate 
will eliminate adverse selection.
    My other preference is that we go to more catastrophic. We 
should use a $500 deductible and a 50 percent coinsurance. Our 
plans protect low income seniors, but not through Medicare.
    I believe in a Social insurance model. I think if we are 
going to cover low income seniors we need to do it through 
either a Medicaid program or some State-run program. So my 
preference is that all of the subsidies for people under 135 
percent of poverty--and, yes, they should not pay anything--
should be through a State program with mandates on the States 
to provide coverage according to Federal rules supported by an 
enhanced Federal match as in SCHIP.
    Finally, this program is the most important thing we can 
do. I would hate to see--and, unfortunately, we have done it 
all too often, whether it is with the uninsured or with parts 
of Medicare--we go only for each of our view of the optimum 
type of plan. I have given you my optimum, but if the only way 
we are going to pass a prescription drug benefit, given the 
differences in the Congress, is to have it covered by a fee-
for-service run by private insurance, I say go for it. But I 
would recommend two caveats:
    First of all, give it a 5 year trial period and see if it 
works. And, second, guarantee that in those areas where there 
is no private market the Medicare program run it so that no 
American, regardless of what part of the country they live in, 
would be denied prescription drug benefits.
    Chairman Johnson. Thank you very much, Dr. Altman.
    [The prepared statement of Dr. Altman follows:]
   Statement of Stuart H. Altman, Ph.D., Professor, National Health 
Policy, Schneider Institute for Health Policy, Heller Graduate School, 
              Brandeis University, Waltham, Massachusetts
    Good morning, Madame Chairman. My name is Stuart Altman. I am a 
Professor of National Health Policy at the Heller Graduate School, 
Brandeis University. It is indeed a great pleasure for me to again 
appear before this committee. I would like to offer my congratulations 
to you on assuming its Chair. I would also like to say hello to 
Representative Stark, who was a gracious Chairman for most of the 12 
years I appeared before the committee as Chairman of the Prospective 
Payment Assessment Commission.
    The subject of today's hearing, Medicare Reform, is an issue of 
critical importance to all citizens of this country and to most 
providers of health care services. It is also a subject in which I have 
been deeply involved for more than 30 years. Perhaps because of this, 
President Clinton appointed me as a member of the Bipartisan Commission 
on the Future of Medicare.
    Let me say at the outset of my testimony that I believe that 
Medicare has been one of the most important and successful programs 
ever created and administered by the federal government. It has allowed 
millions of Americans to receive much needed medical care with dignity, 
free from fear of financial hardship. It has helped finance the best 
health care delivery system in the world.
    With that said, Medicare is not a program without problems. Its 
design is needlessly complicated for beneficiaries to understand, and 
its funding system does not guarantee long-term financial viability. 
The health care benefits it provides have not kept pace with the 
changing structure of our health care system, and at times, it has been 
excessively expensive for both beneficiaries and the federal 
government. Furthermore, it has not always used the most cost-effective 
techniques for purchasing health care services. I know this committee 
has worked hard over the years to improve the program, but more needs 
to be done.
    Senator Breaux and Congressman Thomas, the Co-chairs of the 
Bipartisan Commission, developed a plan to fundamentally restructure 
Medicare by greatly expanding the role of private health plans. 
Although there was substantial support for their plan, it did not 
receive the necessary 11 votes to make it the official recommendation 
of the Bipartisan Commission. Despite my support for the basic 
component of this plan--creating a more market oriented system--I had a 
number of problems that prevented me from supporting it. Any 
restructured system should include a comprehensive prescription drug 
benefit for all beneficiaries and a funding system that guarantees the 
long-term financial viability of the Medicare program. The plan 
discussed by Senator Breaux this morning (Breaux-Frist II) plus 
financial events since the conclusion of the Commission go far to 
easing several of my concerns. Nevertheless, I offer this committee a 
number of recommendations that I believe will strengthen the Breaux-
Frist bill or any other plan that tries to create a more competitive 
Medicare program.
    Since the ending of the Commission 2 years ago, other issues have 
surfaced that must be confronted by those of us who wish to reform 
Medicare by expanding the role of private insurance and introducing a 
more competitive system. That is, to develop a true level playing field 
between the traditional fee-for-service Medicare program and private 
health insurance plans.
    Most Medicare reform plans, including the one introduced by 
Senators Breaux and Frist, assume the continued availability of a 
government administered fee-for-service Medicare program similar to the 
one currently in operation. Such proposals also encourage competition 
between that program and plans operated by private companies. I also 
believe that it is highly desirable to maintain effective competition 
between privately run health plans and the one operated by government. 
Such competition allows each system to learn from the other and offers 
beneficiaries the advantages of flexibility and choice. But, events of 
the last few years have convinced me that unless changes are made in 
the way Medicare reimburses health providers, expands and reduces 
benefits, and pays private health plans, it will not be possible to 
have a viable competitive market.
    Construction of a level playing field is no simple matter. This 
complexity has been demonstrated in the experience of the 
Medicare+Choice program. Much has been written about the number of 
managed care plans that have reduced or ended their participation in 
Medicare+Choice. Critics of private managed care plans attribute the 
decline in participation to high administrative costs, profits, and the 
inability to effectively manage care. Evidence also suggests that many 
of the plans still in operation have benefited from the enrollment of 
healthier then average beneficiaries. While there is certainly some 
validity in these concerns, the critics overlook an important feature 
of the health care market that has helped generate the exodus of 
private plans--the playing field is currently far from level.
    When Medicare Managed Care was first introduced in the early 1980s, 
it was assumed that private managed care plans could out-perform the 
existing fee-for-service Medicare program by 25 percent or more. Such 
an advantage would have been sufficient to cover the higher 
administrative costs necessary to enroll beneficiaries on a one-by-one 
basis. It would also have covered the cost of operating either for-
profit or not-for-profit managed care systems. In addition, the 
projected efficiencies were expected to be large enough for the 
government to share in the savings by reimbursing at 95% of what it 
would have spent under the traditional program.
    Much has changed since 1982. Medicare has introduced several major 
changes in the way it pays health providers. Many of the advantages of 
managed care have disappeared as the general practice of Medicine 
changed to incorporate some of the more obvious efficiencies (e.g., 
greater use of outpatient care and reduced inpatient admissions). 
Managed care plans have also been prevented from using a number of 
techniques, at least some of which have been shown to be medically 
appropriate, but proved to be very unpopular with patients and 
physicians. As a result the cost advantage between a reasonably 
efficient managed care plan and the current Medicare program has 
narrowed.
    Each type of system has its own advantages and disadvantages in 
terms of controlling its costs. The annual increases in Medicare 
spending per beneficiary at times have grown substantially faster and 
at times slower than the cost growth of the privately insured. Medicare 
out-performed the private sector through much of the 1980s and early 
1990s, but beginning in 1993 the trend reversed with private sector 
costs rising relatively more slowly. Medicare added greatly to its 
spending levels as a result of double digit growth in the use of its 
home health and long-term care services. Not surprisingly, it was 
during this period that we witnessed the greatest growth in enrollment 
in private Medicare managed care plans. Following passage of the 
Balanced Budget Act of 1997 (BBA), the trends reversed themselves again 
and current Medicare spending growth is considerably slower than growth 
in the private sector.
    These changes in relative spending trends are not random. In part 
they reflect the introduction of new services or the greater use of 
existing benefits paid by Medicare. For example, the Court ordered 
expansion of Medicare home health and long-term care benefits. But for 
the most part they reflect differences in what Medicare and the private 
sectors pay for the same service. Only the government has the legal 
right to unilaterally set the prices it pays to providers and to 
require them to accept such payments as a condition to participate in 
the program. At times Medicare payments have been quite generous, 
leading to higher Medicare spending and the ability of private plans to 
secure services at lower rates. That is what happened in the mid 1990s. 
But ultimately your committee and others in the federal government 
realized what had occurred and restructured provider payments and 
restricted the utilization of some benefits as part of the Balanced 
Budget Act of 1997 (BBA). Current estimates suggest that BBA could 
reduce Medicare spending by as much as $230 billion over 5 years--about 
double of what was originally estimated. I do not believe it is 
possible for a private market to function with such wide swings in 
relative spending levels. Particularly when the payments private plans 
receive are in some way tied to what health care providers receive from 
the Medicare program.
    Hence, the government's ability to restructure prices and change 
the types and amounts of services it will pay for can enable Medicare 
to out-perform the private sector whenever it wishes. Were such actions 
a net benefit to society I would say, ``so be it.'' But such savings 
are often illusory. What often happens is that health care providers 
attempt to make up for what they believe are government underpayments 
by charging higher prices to private patients and their insurers. Such 
private individuals or plans often lack the market power to stop such 
``cost shifting.'' Figure 1 shows how this has played out for hospital 
care. In 1992, when Medicare was paying only about 90 percent of 
hospital costs for the services its beneficiaries used, hospitals 
received 131 percent of their costs for the services they provided to 
private patients. As Medicare payments increased after 1992, the 
payment to cost ratio fell for the privately insured. In the last two 
years, following reductions in the rate of growth of Medicare payments 
imposed by BBA, private sector payments, including Medicare+Choice 
payments, have been under intense pressure to rise. While in some 
areas, Medicare+Choice plans have been strong enough to resist this 
pressure, most plans in most areas have not.
    Hence, traditional Medicare has the power to drive the private 
market to pay higher prices and unbalance competition between the two 
sectors. Yet, savings from lower government payments are often not real 
because they are shifted to other payers. The manner in which 
government determines the prices it will pay also generates several 
other problems for a competitive market. First, the Medicare program in 
setting its payments does not recognize all of the costs incurred by 
health care providers. In many such situations health care providers 
engage in another form of cost shifting by attempting to recoup such 
costs from other payers.
    Recently, a new and subtler issue has arisen in connection with the 
way Medicare+Choice plans are now reimbursed under the BBA. Since the 
establishment of Medicare in 1965, the federal government has been 
reluctant to intervene in how the medical community in a local area 
provides medical care. Even the Medicare utilization review systems put 
in place through the years relied for the most part on local standards 
of care. Medicare reimbursement policy for most health care services 
has also been based on regional factors. With the passage of BBA in 
1997, a change occurred with respect to how Medicare+Choice plans were 
paid. Previous to BBA, plans were paid at a capitation rate equal to 95 
percent of what was paid in that area for providing care to similar 
types of patients in the traditional Medicare program. Such a payment 
system resulted in some areas receiving capitated payments 45 percent 
or more above the national average and some areas 60 percent below the 
national average. Even such well-known medical areas as Seattle, 
Portland, Oregon, and Minneapolis received payments equal to only 83 
percent of the national average. Why such differences? There are no 
definitive studies, but it seems likely that both cost-of-living 
differences and differences in physician practice patterns and patient 
utilization accounted for most of the variation in payments.
    In the BBA, a system was developed to bring the capitated payment 
of all plans closer to the national average regardless of differences 
in regional spending under traditional Medicare. In the plan developed 
by the Bipartisan Commission, only cost-of-living differences were 
recognized in regional payments to private plans. But how are the plans 
in high cost regions going to pay for the more intense use of services 
in their area? It is unlikely that these plans will have sufficient 
enrollment or the political strength to force changes in the style of 
care in the provider or patient communities, particularly since the 
traditional Medicare plan will continue to pay for these extra 
services. The BBA called for a gradual phase-in toward paying all plans 
a 50-50 blend of local and national rates. If such a plan is included 
in any Medicare reform system, there will be few private plans that can 
survive in high-cost, medically intense areas. On the other hand, 
Medicare+Choice plans will be overpaid in low intensity areas. If 
Medicare wants to change the practice of medical care in either or both 
high cost and low cost areas it must first do so in the system it 
administers.
    Medicare pricing below costs is not the only element against which 
private plans have difficulty competing. Medicare has significantly 
lower enrollment costs because all beneficiaries are automatically 
enrolled while private plans must market their services and enroll 
subscribers one person at a time.
    To be sure, private plans also have many advantages. They can be 
more flexible and innovative, and they can better manage provider costs 
and patient utilization. They can be selective in which providers they 
use, and they have the potential to coordinate care in a more uniform 
and efficient manner. And, they can attempt to select healthier 
enrollees (an issue of some controversy) thereby retaining the same 
capitated revenue but lowering their expected costs. Recent history 
shows us that all of these advantages can help them compete with 
traditional Medicare. However, when Medicare is reimbursing below cost, 
is administratively efficient, and is paying private plans 95%, the 
playing field is too skewed and private plans, on average, simply 
cannot compete successfully.
    Research conducted at the Schneider Institute for Health Policy at 
Brandeis University bears this out. We use the term ``average payment 
rate'' (APR) to represent an HMO's predicted capitation or payment rate 
and the term ``adjusted community rate'' (ACR) to represent the 
estimated cost of providing Medicare-covered services to beneficiaries. 
This study revealed that the plans that exited the Medicare+Choice 
market in 1998 had an APR-to-ACR ratio of 96%, indicating that, on 
average, costs exceeded payments. In contrast, HMOs that remained in 
the Medicare+Choice market had an APR-to-ACR ratio of 110%. Many plans 
simply could not overcome the totality of Medicare's inherent 
advantages detailed above.
    The Brandeis study also suggested that lower payment rates as a 
result of the BBA were likely to have been a significant factor. A 
simulation showed that if payments to Medicare+Choice plans had 
remained on the 5-year trajectory that preceded the BBA, the 
probability of a plan exiting in 1999 would have been 22% less. 
Furthermore, if those plans had also been reimbursed at 100% of average 
Medicare costs rather than 95%, the predicted probability of exit in 
1999 would have been lower by 43%.
    Prior to the BBA, enrollment in Medicare+Choice plans was growing 
quite rapidly. However well intentioned, the magnitude of the spending 
reductions generated by BBA brought this growth to a halt and weakened 
the foundation of the competitive model that was being built. Many HMOs 
were forced to either sustain losses or exit the market. The number of 
plans still in operation will fall even further if the risk adjustment 
methodology specified by the BBA is implemented. While I would 
certainly support the inclusion of an appropriate ``risk adjusted'' 
premium were the playing field more balanced, in the current 
environment it could seriously erode the private Medicare market. 
Hence, I concur with the recommendations in Breaux-Frist II to limit 
the extent of the adjustment at least until the current system is 
restructured.
    We now have an opportunity to re-build the weakened foundation of a 
private Medicare program. Such a solid foundation is critical for any 
competitive system that includes both private plans and a government 
operated program. With the hindsight of our experience and the benefit 
of research data, I recommend the following changes be implemented in 
the Medicare+Choice program prior to or in coordination with the 
restructuring of the entire Medicare program.
         Stabilize the Medicare reimbursement process to limit 
        the wide swings in payment policy and set as a target that the 
        traditional fee-for-service Medicare program will pay rates 
        necessary to generate a 100 percent payment-to-cost ratio for 
        all services covered under the program.
         Enact legislation to assure that if costs are deemed 
        inappropriate for reimbursement from traditional Medicare or if 
        utilization of covered benefits are changed, than private 
        Medicare+Choice plans are also exempt from paying such costs or 
        providing the reduced benefits.
         Increase the Medicare+Choice capitation payment to 
        100% of the average fee-for-service cost in that area for both 
        the regional and national payment rates.
         Limit the blend of regional and national rates to 80% 
        regional and 20% national.
         Phase in a limited risk-adjuster consistent with the 
        recommendations in Breaux-Frist II, with the intention of 
        implementing more strict risk-adjustment when a level 
        competitive playing field exists.
         Restructure the enrollment process to reduce the high 
        administrative costs imposed on private plans.
    Such changes would go far to level the playing field and bring new, 
private Medicare+Choice plans back into the marketplace. This would 
establish a more solid foundation for a more extensive Medicare reform 
system. I fear that were we to legislate major reform of the Medicare 
program before we fix the current system, we could seriously hamper the 
success of the new system.
    Private plans have in the past and could again attract enrollees by 
offering lower premiums, reduced cost sharing, and/or additional 
services. In particular, such plans could offer more generous 
prescription drug benefits building on the plan outlined in the next 
section of my testimony.
    Given a more level playing field and greater long-term stability in 
payments to both Medicare+Choice plans and providers under the 
traditional program, private firms can be expected to compete 
vigorously for this large and growing part of the population.
Assurance of Long-Term Financial Stability for the Program
    One reason I could not support the plan put forth by the Bipartisan 
Commission is that it lacked sufficient provisions to ensure the long-
term financial viability of the Medicare program. Fortunately, events 
of the last few years has made this less of an issue as the solvency of 
the Part A Trust Fund improved. Nevertheless, I want to put on the 
record that in my view any comprehensive Medicare Reform plan that is 
enacted should include provisions to ensure the financial viability of 
the program for at least the next 30 years. There are many ways of 
accomplishing this goal and time constraints prevent me from discussing 
this issue further today. I would be more than happy to again appear 
before this committee, Madam Chairman, should you wish or respond to 
questions today or in writing.
Provide Access to a Prescription Drug Benefit for All Americans
    When the Medicare program was formulated in 1965, the capabilities 
of today's pharmaceuticals could barely be imagined. In 1960, the 
country spent less than $3 billion on prescription drugs compared to 
nearly $91 billion in 1998. Since 1990, national spending for 
prescription drugs has tripled and their share of total health 
expenditures increased from 5.6% in 1993 to 7.9% in 1998. Clearly, the 
composition of health care spending has changed significantly in this 
regard, but the Medicare program has not. With science on the threshold 
of a renaissance in biotechnology, the significance and the level of 
expenditure for prescription drugs is certain to increase even more.
    Many beneficiaries have attempted to make up for the lack of 
outpatient prescription drug coverage in the basic Medicare benefit 
package by either relying on ``wrap around'' coverage from their 
previous employer or by purchasing Medigap coverage. Unfortunately, 
fewer and fewer employers now offer such coverage for retirees, and the 
skyrocketing costs for those Medigap plans that do offer drug coverage 
is prohibitive for many senior citizens. There is also ample evidence 
that individuals without prescription drug coverage use fewer drugs 
even when prescribed by their physicians. At the heart of the problem 
are the well-documented negative health consequences of not following 
prescribed drug treatment regimens. Thus, as we restructure Medicare 
for the 21st century, no issue is more important than expanding the 
basic benefits to include coverage for prescription drugs.
    The difficulty of formulating a prescription drug program is that 
of reconciling a number of competing goals and principles that are 
important to various stakeholders. These basic goals and principles can 
be stated as follows:
         Retain the universal, non-means tested nature of the 
        Medicare program while instituting a prescription drug program.
         Avoid, wherever possible, the cost and poor incentive 
        structure that would result from first dollar coverage.
         Provide free or low cost access to pharmaceuticals for 
        those who would otherwise find them unaffordable.
    Medicare has always been a universal program with universal 
benefits and eligibility levels. Critical to the success of Medicare 
has been the inclusion of more generous benefits and reduced cost 
sharing through state-based programs to assist those seniors judged to 
be low income or medically needy. Maintaining this distinction protects 
the broad political support for Medicare. Hence, I recommend a 
structure in which Medicare will offer non first dollar insurance 
coverage on an optional basis to all beneficiaries, while those earning 
below 135% of the federal poverty level (FPL) will have access to free 
coverage through state programs supported by enhanced federal matching 
funds.
    The Medicare portion of this prescription drug plan will include an 
optional subsidized drug benefit for all beneficiaries, regardless of 
income. The premium will be paid in a manner similar to present part-B 
payments, as recommended in Breaux-Frist II, but I recommend it be set 
at the actual cost minus a subsidy of 50%. I have selected a higher 
subsidy than Breaux-Frist II to minimize the amount of adverse 
selection while providing a meaningful benefit to middle class 
beneficiaries. To keep the cost of the program acceptable and to 
maintain a cost-conscious and responsible role for patients in the 
types and amounts of drugs they purchase, I would set the annual 
deductible at $500 with a co-payment of 50%. There should also be 
complete stop-loss protection above $6,000.
    Low-income people, below 135% of the federal poverty level (FPL), 
will have access to a state-based program that will cover the entire 
premium and all or most of the cost sharing. States will additionally 
be able to offer partial premium assistance for beneficiaries between 
135% and 200% of the FPL. States will have limited discretion in their 
administration of these extra benefits in order to be eligible for an 
enhanced federal match. The match could be similar to the SCHIP program 
in which the current federal matching percentage is increased by 30% of 
the difference between 100% and the current federal matching percentage 
in each state. The enhanced match could be capped at 85%. Matching 
funds should include a reasonable amount for outreach and enrollment 
assistance, given the recent experience with SCHIP.
    It is my preference that the Medicare drug benefit be delivered by 
the same plans that offer a comprehensive set of medical benefits, 
including the government operated plan, in order to best coordinate the 
medical needs of each patient. Separating the provision of 
pharmaceutical treatments from other kinds of medical treatments makes 
little sense from a cost effectiveness standpoint and can result in 
fragmented patient care. Delivery of the drug benefit by a broad based 
medical benefit plan could also result in lower prices by utilizing 
increased purchasing power and the ability to shift patients to similar 
types of effective alternative drugs. Furthermore, given the voluntary 
nature of the program, problems of adverse selection against private 
entities that might offer a ``drug-only benefit'' would be avoided.
    Nevertheless, I recognize that other proposals, such as Breaux-
Frist II, recommend that private companies deliver the prescription 
drug benefit for the government plan through a competitive bidding 
process in each geographical area. Such an option, although not my 
first preference, might be acceptable with the following caveats. 
First, such a program should be instituted on a five-year trial basis 
and be evaluated at the end of that period. Second, the Medicare 
program should deliver the prescription drug benefit in any area in 
which competitive bidding does not provide a suitable alternative. 
Although I prefer the first of these options, I would not hold hostage 
much needed reform in wont of one that might be arguably better.
    On the federal side, a prescription drug benefit program of this 
nature would preserve the universality and popular support for 
Medicare. It would require sufficient cost sharing to avoid significant 
moral hazard, but sufficient subsidy to provide a strong incentive to 
enroll. Utilizing the part-B premium and payment structure already in 
place would not require a significantly greater administrative burden. 
Most importantly, it would foster competition between traditional 
Medicare and private plans and would enable all beneficiaries to 
benefit from competitive group purchasing arrangements.
    On the state side, it could utilize the existing framework for 
pharmacy assistance programs that are already in place in 26 states. 
States will have some flexibility in designing programs best suited to 
their individual needs. Such programs may either be part of Medicaid or 
could be integrated with existing pharmacy programs. Being similar to 
existing Medicare buy-in programs such as QMB, SLMB, QI-1, and QI-2, it 
will not require a significantly greater administrative burden. Most 
importantly, it will provide totally free access to pharmaceuticals for 
those Americans whose income is less than 135% of the Federal Poverty 
Level.
Conclusion
    Reforming Medicare is a critically important and extremely 
complicated task. How it is structured, who pays for it, what it pays 
for, and how it pays medical providers, affects almost every American. 
I believe that a well designed competitive system that includes both 
private plans and a government-administered system can enhance the 
existing program. But creating such a structure is not easy and current 
history has taught us that design problems can seriously distort the 
end result. I have tried to explain some of the complicating issues 
that exist in our current system that must be changed if an effective 
competitive market is to work.
    Among the changes I have suggested, one such change cannot wait--
Medicare coverage of outpatient prescription drugs. No issue is more 
important! The design of such coverage I outlined in this testimony is 
just one approach for addressing the problem. Others have suggested 
alternative proposals. While I recognize that the differences in plan 
design are not small, such differences should not stop you from 
enacting a meaningful plan in this session of Congress.
    Thank you, Madam Chairman, for letting me participate in this most 
important hearing.
                               __________
                                FIGURE 1
[GRAPHIC] [TIFF OMITTED] T3535A.006

    Source: ProPac and Medpac through 1998. Projections are my own.

                                


    Chairman Johnson. Dr. Feder.

STATEMENT OF JUDITH FEDER, PH.D., PROFESSOR AND DEAN OF POLICY 
                 STUDIES, GEORGETOWN UNIVERSITY

    Dr. Feder. Thank you, Chairman Johnson, for your gracious 
welcome. Congressman Stark, Members of the Committee, it is a 
pleasure to be with you this morning.
    I want to begin by defining what I see as Medicare reform. 
That is that the goal should be to meet the health care needs 
of elderly and disabled Americans in a way that effectively 
manages taxpayer resources. The pursuit of reform in Medicare 
does not mean that Medicare is broken; it is not. Can we make 
it better? Absolutely. I want to pursue some of the areas in 
which we can improve it.
    First and most clearly from your comments this morning, we 
all recognize that the primary challenge is to improve 
Medicare's benefits. Today, the question is not whether but how 
to cover prescription drugs for Medicare beneficiaries. Some 
proposals simply won't work. We can't just provide drug 
coverage for beneficiaries with low or modest incomes. That 
would ignore the fact that beneficiaries across the income 
scale experience chronic illness that requires substantial 
prescription drugs beyond what they are able to afford.
    We can't just rely on HMOs and the private market. That 
would ignore our painful experience with Medicare+Choice, which 
I will come back to in a moment, a marketplace in which private 
plans and their benefits come and go. That is what competition 
is and it can leave beneficiaries in the lurch.
    And we can't rely on a private, stand-alone drug insurance 
plan for beneficiaries in fee-for-service. That would not only 
be confusing to beneficiaries, but it would ignore the 
insurance industry's explicit warning about the inevitable risk 
selection. That will make it unworkable and ultimately 
unofferable.
    A Medicare prescription drug benefit that works must 
satisfy three principles. First, the benefit must be a 
universal entitlement that is integral to the Medicare program 
in fee-for-service and in private plans. Essentially, 
beneficiaries ought to be able to get prescription drugs just 
the way they get hospital and physician care.
    Second, the benefit must be affordable to all 
beneficiaries. And, as Stuart argued, that means significant 
subsidies across the income scale to make sure that we have 
universal participation along with universal entitlement, as 
well as full subsidies for those with low and modest incomes.
    Third, the benefit must be specified and meaningful; 
perhaps not as extensive as some would like, but a defined 
minimum benefit that makes clear what Medicare will pay for in 
private plans and in fee-for-service, and that includes 
protection against catastrophic costs.
    The second area needing improvement is in managing 
resources. Like all insurers, Medicare, the Nation's largest is 
struggling with the complexity of delivering today's health 
care. Some have proposed that Medicare approach that struggle 
by pressuring beneficiaries to move from fee-for-service into 
private HMOs, either by providing them extra benefits in those 
plans, as in Breaux-Frist II, or by requiring them essentially 
to pay more for the fee-for-service they now have, as in 
Breaux-Frist I. The strategy is pursued on grounds that HMOs 
can manage resources more effectively than Medicare fee-for-
service. But it is by no means clear that they can, as Stuart's 
comments indicated. The fact is that fee-for-service is pretty 
good at controlling its costs and at balancing the needs of 
beneficiaries, providers and taxpayers.
    HMOs do far more to manage costs than to manage care. That 
is what we have heard from some of HMO's strongest proponents. 
They may limit access to needed providers and needed services, 
and the structure of the market is to encourage them to enroll 
the healthy and disenroll the sick. That kind of risk selection 
and competition around it are very hard for any agency to 
control and have been a consistent problem in the Federal 
Employees Health Benefit Plan.
    Lower costs, then, don't mean greater efficiency. They mean 
reduced access to quality care. HMOs' continued demands for 
more resources in Medicare+Choice reflect, I believe, and I 
believe the evidence shows, the plans' belief that they can 
only attract beneficiaries when they have resources to provide 
extra benefits. They are finding it very difficult to compete 
with Medicare or to be more efficient than the Medicare 
program. We also have evidence of quality problems for Medicare 
beneficiaries in HMOs, challenging claims regarding these 
plans' ability to manage care efficiently and effectively.
    Rather than promote HMOs, reform must address fee-for-
service management, while managing HMO options for 
beneficiaries who want them. As you indicated, Mrs. Johnson, we 
need to do both.
    On benefits and provider payment, that means that Congress 
must continue to balance the competing interests of 
beneficiaries, providers and plans, and taxpayers. There is 
essentially no way out of this responsibility. It means 
assuring the Medicare administrators greater investment in 
staff and systems and greater flexibility to use new tools like 
competitive pricing for equipment and care management for high-
cost chronic illnesses. For HMO options, it means empowering 
the Medicare administrator to pay plans fairly, but not 
excessively, for Medicare benefits. Excess payments for extra 
benefits are wasteful, unfair, and unstable. The goal is to 
protect beneficiaries, not to protect plans.
    Good management also means empowering the administrator to 
manage the whole program, to serve beneficiaries and taxpayers. 
Employers with self-funded plans and HMO options don't believe 
they have a conflict of interest in management. Their job is to 
manage the whole program, and Medicare would not be improved in 
its administration by creating new arrangements that make plans 
or pharmaceutical companies more comfortable with program 
administration. The responsibility is to beneficiaries and 
taxpayers.
    The third and final area of improvement is to assure 
adequate financing. As we have indicated this morning, 
Medicare's financing problem is pretty straightforward. As the 
population ages and as health care costs rise, we will need 
more revenues to sustain and improve insurance protection for 
the Nation's elderly and disabled citizens. No magic, 
competitive or otherwise, can change this reality.But our 
economy can generate these revenues. The challenge is to secure them.
    However, some proposals would weaken, not strengthen, 
revenues available to Medicare. For example, a proposal to 
claim the current part A surplus that you have worked hard to 
achieve to finance part B expenses, or new prescription drug 
benefits, would take resources away from future beneficiaries. 
And the proposal for new accounting that would only serve to 
cap part B's access to general revenues would create a crisis 
atmosphere promoting an overreaction, because a crisis simply 
does not exist.
    What is needed instead is that we take advantage of our 
current prosperity to pay down the debt, thereby reducing 
interest costs, and begin to finance prescription drugs and 
other social needs. That way, baby boomers contribute now to 
the Nation's ability to finance their needs in the future. It 
would be ironic indeed to take the baby boom generation, my 
generation, off the hook with a tax cut, rather than expecting 
us to pay our share to make it easier to finance our needs in 
the future.
    In sum, as we look to Medicare's future, it is critical 
that any action we take in the name of reform actually secure 
rather than undermine Medicare's strengths. The Medicare 
program has assured affordable access to mainstream medical 
care for elderly and a substantial number of disabled people, 
regardless of the severity of their health care needs, and with 
help for Medicaid, regardless of their income. It is very easy 
to underestimate that accomplishment. It is easy to propose so-
called solutions that actually undermine that accomplishment. 
Instead, the job of reform should be to sustain Medicare's 
enormous achievement, both now and in the future.
    Thank you, Madam Chairman.
    Chairman Johnson. Thank you very much, Dr. Feder.
    [The prepared statement of Dr. Feder follows:]
Statement of Judith Feder, Ph.D., Professor and Dean of Policy Studies, 
                         Georgetown University
    Chairman Johnson, Congressman Stark, distinguished subcommittee 
members, thank you for inviting me to discuss my views on Medicare 
reform. As we all know, the Medicare program faces a number of 
challenges, particularly as we approach the aging of the baby boom 
generation. None of these challenges is new. But the good news it that 
our recent prosperity, which has allowed us to balance the budget, 
gives us the opportunity to address Medicare's challenges effectively.
    In addressing these challenges, our goal must be to meet the health 
care needs of elderly and disabled Americans in a way that effectively 
manages taxpayer resources. Pursuit of this goal should not imply that 
Medicare is broken; on the contrary, it continues to be an enormously 
successful program that can and should be improved. Efforts to reform 
Medicare must therefore secure, not undermine, the nation's commitment 
to health care security for elderly and disabled people.
    Since its enactment in 1965, Medicare (with some help from Medicaid 
for low-income beneficiaries) has succeeded in assuring affordable 
access to ``mainstream'' medical care for virtually all seniors and a 
substantial number of people with disabilities. Medicare has 
historically been more successful than the private sector in 
controlling health care costs, while dealing with all segments of the 
population, all providers and all parts of the country. Nevertheless, 
Medicare needs improvements--specifically in the adequacy of its 
benefits, the effectiveness of its resource management, and the 
security of its financing for an aging population.
Assuring Adequate Benefits
    In today's environment, Medicare's benefit package hardly can be 
considered generous. Four out of five employer plans have more generous 
benefits, and, on average, beneficiaries spend 20 percent of income 
out-of-pocket on premiums, cost-sharing and services Medicare does not 
cover. These substantial financial burdens reflect, in part, the 
absence in Medicare of a number of features common to employer-
sponsored health insurance for the working-aged population: protection 
against excessive cost-sharing, adequate preventive benefits, and--
particularly important to elderly and disabled people--meaningful 
coverage for outpatient prescription drugs.
    Increasingly, advances in medical treatment take the form of new 
prescription drugs that improve health outcomes, replace surgical 
treatments and provide therapies for conditions that were once 
untreatable. Medicare beneficiaries use prescription drugs at a rate 
that far exceeds the non-Medicare population but are much less likely 
to have drug coverage than are the younger, healthier population with 
employer-sponsored health insurance. More than one observer has noted 
the similarities between the current state of drug coverage for the 
Medicare population and the inadequate health insurance available to 
the elderly before Medicare was enacted. Thirty-five years ago, many 
elderly people were denied the benefits of medical advances--
represented then, primarily, by technological breakthroughs in hospital 
care--because of lack of insurance. While about half the elderly 
population then had some form of hospital insurance, the rest either 
could not afford insurance or did not have access to it.
    As was the case with hospital insurance in 1965, today's Medicare 
beneficiaries cannot count on affordable access to meaningful coverage 
for prescription drugs. Medicaid prescription benefits are available 
only to the poorest beneficiaries; employer-sponsored retiree coverage 
is reaching fewer retirees; Medicare+Choice plans provide very limited 
benefits; and Medigap policies are not comprehensive and may not even 
be available, let alone affordable, to beneficiaries who need 
prescription drugs.
    It is generally recognized that the private marketplace cannot and 
will not address the problem of limited access to affordable coverage 
for prescription drugs. Concerns about adverse selection and 
affordability render a purely private solution unworkable. Members on 
both sides of the aisle have recognized the need for a public program 
that includes significant publicly-financed subsidies to address the 
problems raised by purely private approaches.
    Some proposals that purport to address the prescription drug 
problem fall woefully short. For example, proposals to extend 
protection only to people with low and modest incomes ignore the fact 
that access and affordability problems extend well up the income scale. 
Over half the Medicare beneficiaries without drug coverage have incomes 
above 150% of the federal poverty line. Chronic illness that entails 
extensive use of prescription drugs affects beneficiaries at all income 
levels and can absorb a substantial share of income. For people with 
incomes just above 150% of the federal poverty level, for example, the 
highest drug users without coverage devote, on average, around 12 
percent of income to out-of-pocket drug expenses.
    Proposals that rely entirely on HMOs and other private plans to 
deliver prescription drug benefits ignore the maldistribution of 
private options and the instability that has plagued the 
Medicare+Choice program in recent years. Reliance on private plans will 
leave beneficiaries with tremendous uncertainty as to what plan or what 
benefits will be available at any given time.
    Proposals that extend prescription drug coverage to beneficiaries 
in traditional fee-for-service only through a stand-alone private 
insurance arrangement rather than integrating new benefits into the 
established fee-for-service structure are complicated and problematic. 
Under such arrangements, fee-for-service beneficiaries with Medigap 
coverage would be forced to purchase two separate private plans--an 
arrangement that is not only inconvenient to beneficiaries but could 
push them into HMOs just to avoid the hassle. Even more important, the 
proposal ignores the insurance industry's explicit warning that such a 
benefit is unworkable and, ultimately, unofferable. Rather than 
assisting beneficiaries, this proposal seems aimed at assuaging 
pharmaceutical manufacturers who would prefer to bargain with a bevy of 
smaller private plans than with a public program.
    Medicare reform to effectively assure prescription drug coverage 
must therefore satisfy the following principles:
    First, the benefit must be incorporated in Medicare as a universal 
entitlement for all beneficiaries. Just as Medicare beneficiaries are 
entitled to benefits for hospital and physician care--in the 
traditional fee-for-service plan as well as in any private plans--they 
should be entitled to benefits for prescription drugs.
    Second, the benefit must be affordable for all beneficiaries. That 
means significant subsidies to individuals across the income scale (as 
now occurs in Part B)--alongside full subsidies to the low and modest 
income population--to assure close to universal participation alongside 
universal entitlement.
    Third, the benefit must be specified and meaningful for all 
beneficiaries. All beneficiaries must be assured a minimum defined 
benefit. A Medicare prescription drug benefit may not provide coverage 
as full as beneficiaries currently receive for physician and hospital 
care. And, as described below, the challenge of assuring beneficiaries 
access to extra benefits will continue to exist. But meaningful 
protection must include coverage against catastrophic expenses. 
Meaningful protection also requires a benefit that makes clear what 
Medicare will pay for, whether in traditional fee-for-service or in a 
private plan, with sufficient oversight to protect beneficiaries 
against arbitrary and hidden benefit restrictions. Approaches that 
permit private plans to offer ``actuarially equivalent benefits'' raise 
the specter of risk selection, especially when proposals delay the 
implementation of risk adjustment for an extended period of time.
Assuring Effective Resource Management
    Medicare is the largest health insurance organization in the 
nation. All health insurance organizations are struggling with the 
complexity of delivering health care in today's marketplace--assuring 
value for the dollar, providing people with information about their 
health care options, promoting quality and keeping up with rapidly 
changing technology. Contrary to some assertions, Medicare has 
historically been extremely effective, relative to the private sector, 
in managing the price it pays for services (especially for hospital and 
physician care). Payment strategies pioneered by Medicare (e.g., DRGs; 
RBRVS) have been widely incorporated by private payers. Similarly, 
Medicare has always administered its benefits at very low costs.
    Nevertheless, Medicare's challenges in effectively managing 
resources are formidable. Medicare faces responsibilities that other 
payers do not--most importantly, for a growing elderly population with 
significant health care needs. In addition Medicare, unlike private 
insurers, is charged with specific responsibilities for securing the 
health care system--for example, financing graduate medical education 
and stabilizing services in rural and other underserved communities. 
Finally, the Medicare administrator's resources, flexibility and 
authority to manage the program are not on a par with private 
purchasers' and have not kept pace with the program's growing 
obligations.
    Specifically, the Medicare administrator has not been provided 
sufficient funds, staff or management tools to effectively monitor the 
private contractors who pay claims; to collect, manage and provide 
information to consumers and providers; to respond effectively to 
beneficiaries' concerns, questions, and problems; and to deal 
effectively with HMOs and other private health plans.
    Critics of Medicare's resource management have proposed to address 
these problems in several ways. Some proposals would pressure 
beneficiaries to move from traditional fee-for-service into private 
HMOs, either by increasing premiums in the traditional fee-for-service 
program or by subsidizing benefits in private HMOs that are not 
available to beneficiaries in fee-for-service. Proposals also have been 
offered that would create a new administrative structure to oversee 
HMOs and private drug plans, without adequately addressing the 
administrative needs of fee-for-service. These so-called ``solutions'' 
rest on questionable assumptions and pose significant risks.
    Expectations that competition among HMO options will save Medicare 
money rest on forcing beneficiaries to pay the difference between the 
costs of fee-for-service and HMOs. Savings from these proposals are 
more likely to result from raising premiums for beneficiaries that 
remain in traditional fee-for-service Medicare than from lower program 
costs from beneficiaries shifting into cheaper HMO options. At the same 
time, this structure poses high risks for beneficiaries.
    HMOs can keep their costs relatively low in a variety of ways: by 
constraining access to providers and services, by slowing the diffusion 
of higher cost, new technologies and by selective enrollment or 
disenrollment of patients likely to need care. In these circumstances, 
the costs to Medicare of having beneficiaries in HMOs may be lower, but 
the value of Medicare to its beneficiaries may be similarly diminished. 
In other words, pressuring beneficiaries into HMOs protects the federal 
government against financial risk by shifting financial and other risks 
to beneficiaries and their families. Further, because access to and 
quality of HMOs varies considerably around the country, building a 
system on HMO options is fundamentally unfair to beneficiaries in rural 
and other underserved areas. These beneficiaries are likely to face 
higher costs for the traditional fee-for-service benefit, with few 
alternative ways to receive care.
    Uncertainty about the ability and willingness of HMOs to truly 
manage care for an elderly and disabled population calls into question 
proposals to rely on these plans to provide beneficiaries adequate 
access to quality care. HMOs' continuing demands for more resources 
from Medicare, when payments are at least adequate for Medicare-covered 
service, challenge claims regarding these plans' ability to efficiently 
and effectively manage resources. Research findings of limited service 
and poor outcomes for beneficiaries with chronic conditions in HMOs, 
compared to beneficiaries in fee-for-service, reveal the risks 
beneficiaries face in such plans.
    The wisdom of pressuring elderly and disabled beneficiaries into 
HMOs and other private health plans seems particularly questionable, 
given recent experience among the working-aged population. Proponents 
of managed care and managed competition for the working-aged population 
have been very disappointed with private plans' focus on managing costs 
rather than managing care. And the working-aged population has been not 
only dissatisfied but angry at the abrupt shift of employer-sponsored 
coverage away from fee-for-service toward managed care; hence the 
attention to better patient protections. This experience should give 
serious pause to the assumption that coercing people into HMO or other 
private delivery systems is an appropriate strategy for Medicare.
    Finally, some proponents of managed care and private delivery have 
accused the Medicare program of a conflict of interest in overseeing 
private HMOs. This accusation ignores the fact that Medicare's 
management of both HMO options and traditional fee-for-service 
resembles many employers' management of self-funded plans alongside HMO 
offerings. Centralized management rests on the appropriate premise that 
an administrator's primary job is to serve beneficiaries, not to 
accommodate private plans.
    To assure adequate health insurance protection with efficient 
management of taxpayer dollars, Medicare reform cannot, then, simply 
promote competition among HMOs and other private plans or management 
changes that favor those plans. Rather, reform must secure effective 
management of the traditional fee-for-service program, while paying 
appropriately for HMO options for beneficiaries who want them.
    Efficient management of traditional fee-for-service Medicare 
requires the continued balancing of the competing interests of 
beneficiaries, health care providers and plans, and taxpayers. Over the 
years, this balancing process has enabled Medicare to effectively 
control growth in its payments to providers, without endangering access 
to or quality of care. Medicare policies on whether and how much to pay 
for health care services have a profound effect not only on beneficiary 
access to care, but also on the economic well-being of providers and 
their ability to fulfill broader societal missions. For the foreseeable 
future, the vast majority of beneficiaries will remain in the fee-for-
service program, and it is crucial that the administrator have 
sufficient resources to direct the program in a way that responds 
adequately to these competing interests.
    Further, the administrator must be provided greater resources for 
effective management and investment in systems for claims payment, 
information technology, and responsiveness to consumers and providers. 
The administrator should have the flexibility and authority to use new 
tools to promote efficient purchasing--like competitive pricing to pay 
for durable medical equipment and care management for high cost chronic 
illnesses. Denying Medicare the resources and authority to manage fee-
for-service well means starving the system that has most effectively 
assured beneficiaries access to quality care.
    Efficient management of HMO options requires empowering the 
administrator to pay fairly but not excessively for Medicare-covered 
services. Experience indicates that Medicare beneficiaries are 
reluctant to enroll in HMOs unless plans offer substantial benefits at 
little or no additional premium. Historically, Medicare has overpaid 
HMOs for Medicare-covered benefits, effectively subsidizing extra 
benefits. Payment constraints in the Balanced Budget Act of 1997--both 
in traditional fee-for-service and in managed care plans--reduced those 
subsidies, HMOs' ability to offer extra benefits at little or no charge 
and, accordingly, HMOs' willingness to participate in Medicare. 
Subsequently, Congress increased the subsidies, but it is by no means 
clear that greater subsidies will be used to support added benefits.
    Excessive subsidies--which favor beneficiaries in some areas at the 
expense of beneficiaries in other areas who go without adequate 
protection--are an unstable, unfair, and wasteful approach to assuring 
HMO options. Indeed, this approach protects HMOs, not beneficiaries. 
Effective Medicare reform means paying plans appropriately for 
Medicare-covered services where market conditions allow them to operate 
efficiently; including explicit payment (not hidden subsidies) for 
benefits, like prescription drugs, that all beneficiaries must have, 
and recognizing that HMO options, not HMO promotion, should be the goal 
of Medicare reform.
    Finally, the goal of Medicare administration should be to better 
serve beneficiaries and taxpayers, not to create new administrative 
arrangements to make private HMOs and private pharmaceutical plans more 
comfortable with program administration. Proposals to create separate 
administrative structures, outside the administrator's authority, 
reduce the administrator's capacity to manage the overall program 
responsibly and elevate accountability to the industry over 
accountability to beneficiaries and the public. Such measures would 
undermine, not improve, Medicare operations.
Assuring Adequate Financing
    Medicare's financing problem is relatively straightforward. At some 
point in the foreseeable future, the revenues Medicare relies upon will 
become insufficient to cover its expenses. Specifically, the payroll 
tax will fall short of fully covering Medicare's liabilities for care 
under Part A. The shortfall reflects two factors. First, health care 
costs (not just for Medicare but for the system as a whole) rise faster 
than payroll. Second, as members of the baby boom generation turn age 
65 and become eligible for Medicare, the number of people who depend 
upon the payroll tax will grow much faster than the number of workers 
who pay it. In 1970, there were 3.7 workers for each beneficiary; in 
2015, there will be fewer than 3 workers per beneficiary and by 2030, 
about 2. Even for Part B of Medicare, for which spending is not 
financed by revenue from a dedicated tax, growth in health care costs 
per capita and in the number of beneficiaries implies that Medicare's 
current protections will absorb a greater share of general revenues 
than they do today.
    Recent policy actions have substantially slowed growth in Medicare 
spending and, in combination with the revenues generated by economic 
growth, delayed the point at which payroll tax revenues are 
insufficient to cover Part A expenses. Today, estimates are that the 
surplus in the Part A Hospital Insurance Trust Fund runs out in 2025; 
as recently as 1997, the estimated date was 2001. On the expenditure 
side, this experience shows that even a one-time reduction in 
spending--as occurred in the Balanced Budget Act of 1997--dramatically 
reduces cost projections for the future.
    The lesson from recent experience is not that Medicare has no long-
term financing problem; it does. Rather, the lesson is that balancing 
revenues and expenditures is a problem, not a crisis, and that the 
problem is both less predictable and more manageable than is sometimes 
assumed.
    Unfortunately, some proposals for changes in Medicare rest on the 
assumption that future Medicare financing problems can be addressed 
simply by slowing expenditure growth. If the goal of Medicare reform is 
to meet the health care needs of the elderly, it is essential to 
recognize that we cannot maintain benefits and cut spending 
sufficiently to cover future costs. A recent report from a bipartisan 
panel of experts convened by the National Academy of Social Insurance 
(on which I participated) concluded that even with continued growth in 
the economy and cost containment of various kinds (including promotion 
of HMOs), Medicare will still require significant additional revenues 
to assure baby boomers the type of coverage current beneficiaries 
receive.
    Making those revenues available is not beyond the capacity of our 
economy or our society. Economic growth at historical levels is 
sufficient to generate the resources necessary to meet future needs, 
without sacrificing standard of living for the younger population. And 
just as society made the resources available to educate the baby boom 
generation, it can make the resources available to assure that 
generation and future generations affordable health care.
    Rather than recognize these facts and begin to address future 
revenue needs, some proposals have actually moved away from securing 
revenues. One proposal has been to claim the current surplus in Part A 
to finance Part B services that Medicare now covers or to finance a new 
prescription drug benefit. Such a proposal ignores Medicare's 
legitimate and continuing need for general revenues and creates a 
crisis atmosphere that may lead to far more dramatic action than is 
really required.
    Another proposed ``solution'' to the financing problem is to make 
Part B funding look more like funding for Part A, by specifying some 
share of GDP as a ceiling on overall program expenditures. Although 
some proponents of this approach characterize it simply as creating an 
``indicator'' of revenue needs, policy change is not required to 
provide such an indicator. The Medicare trustees already include this 
measure of revenue need in their annual reports.
    The aim of this proposal therefore seems to be to move toward 
replacing Part B's historical access to general revenues as program 
needs require with a fixed amount of revenue, regardless of program 
needs. Such a cap simply limits federal spending; it takes no action to 
assure adequate support for health insurance for elderly and disabled 
people.
    With respect to both proposals, it is not at all clear why it would 
be justifiable to limit Medicare's access to general revenues when 
other commitments--to tax exemptions for employer-paid health insurance 
premiums or pensions benefits--remain open-ended entitlements. Indeed, 
it is hard to regard this approach or other spending reductions as 
Medicare ``reform''; rather, they represent an abdication of the 
nation's promises to provide seniors and people with disabilities 
adequate health insurance protection.
    What's needed instead is a wise use of current resources to 
facilitate future financing of health insurance for seniors and people 
with disabilities. Specifically, we should take advantage of our 
current prosperity to buy down the debt and begin to finance 
prescription drugs and other social needs. Using current revenues to 
buy down debt reduces interest costs, thereby freeing up resources we 
will need to meet future health care needs. It would be ironic if 
instead we cut taxes that baby boomers are now paying--thereby reducing 
their obligation to contribute to the debt reduction that can help the 
nation more easily support their future needs.
Conclusion
    In sum, as we look to Medicare's future, it is critical that any 
action we take in the name of reform actually secure, rather than 
undermine, Medicare's strengths. The Medicare program has assured 
affordable access to mainstream medical care for elderly and a 
substantial number of disabled people, regardless of the severity of 
their health care needs and--with help from Medicaid--regardless of 
their income.
    Unfortunately, it is easy to underestimate the importance of this 
accomplishment and to put Medicare's achievements--and its protections 
to beneficiaries--at considerable risk. No financial ``crisis'' 
requires such action; no evidence of a superior approach justifies a 
departure from the means we have relied upon to achieve such success. 
We must therefore be wary of proposals that, in the guise of reform, 
risk dismantling what is probably the most successful part of the 
nation's health care system.
    Our current prosperity gives us the opportunity and the wherewithal 
to strengthen Medicare's ability to provide elderly and disabled people 
health insurance protection, while effectively managing the taxpayers' 
resources--specifically, by incorporating into Medicare a meaningful 
prescription drug benefit, by enhancing the administrator's ability to 
effectively manage Medicare's resources (including payments to private 
plans), and by using current surpluses to reduce interest costs and 
facilitate the financing of future needs. These are the kinds of 
reforms that will best serve the Medicare beneficiaries and the 
taxpayers to whom the program has been and must remain fully 
accountable.

                                


    Chairman Johnson. The Committee may have noticed that I 
have let each of the first two witnesses go beyond their 5 
minutes. You each ended up taking 10 minutes, and I will allow 
the same latitude to the following witnesses. I do think it is 
important that when you put preparation in to come to talk to 
us about such a big and important issue that you have time to 
speak, even if it reduces our time for questioning. So I did it 
intentionally.
    Mr. Francis.

    STATEMENT OF WALTON J. FRANCIS, AUTHOR AND INDEPENDENT 
            HEALTHCARE CONSULTANT, FAIRFAX, VIRGINIA

    Mr. Francis. I will try to do better.
    Congratulations, Madam Chair, on your assumption of the 
leadership of this Committee. I think it is in very good hands.
    I also want to mention that at a conservative think tank 
conference on Medicare reform a couple of months ago I 
mentioned that, in the new Congress, it looked to me pretty 
clearly that nothing was going to happen on Medicare reform 
that Mr. Stark and Mr. McDermott, for example--I named them--
did not buy into. That was met with groans and moans but, you 
know, you are going to have to craft something that is going to 
work, that is going to make the Members on both sides of the 
aisle not hold their nose.
    Chairman Johnson. I may not be able to satisfy all Members 
on both sides of the aisle.
    Mr. Francis. Perhaps not all.
    Chairman Johnson. You may have noticed the range of opinion 
on this Committee is 180 degrees.
    Mr. Francis. But I think you will find there is some middle 
ground here that will work.
    To summarize a few key points from my testimony, writing 
hurriedly last weekend I lost two very important points I think 
in the details toward the end that I want to emphasize. First, 
what we are embarked on here is improving a vital program, and 
I think that is the way this needs to be perceived. Whether you 
do go to something very close to Breaux-Frist I or II or you do 
something a little different, I think that is what it is all 
about. We can improve Medicare and include making the program 
actuarially sound in the long run to the extent possible. But 
we should not be kidding ourselves about how much we can do in 
one set of reforms. In any event, I think the whole debate and 
discussion ought to be starting from that premise.
    Second, I have said a fair number of harsh words about the 
Health Care Financing Administration, and I am going to say 
some more in just a second, but I do want to emphasize that I 
worked with people in that agency for many years. Many of them 
are good friends of mine. It is full of able and dedicated 
civil servants. I think, unfortunately, the whole is much less 
than the sum of its parts; and it is a big problem in what is 
going on. I would add to that, I think the Congress is a big 
problem in a whole raft of ways, several of which have been 
mentioned, I think quite eloquently, by Senator Breaux.
    I think that perhaps the single most important thing to 
achieve--and I will assume we are going to be fiscally sound 
and so on--is to establish the Federal government as a reliable 
business partner with private health insurance plans; and that 
is a tall order. Harry Cain wrote a wonderful article in Health 
Affairs 2 years ago called ``How to Make an Elephant Fly'' in 
discussing and adopting the FEHBP model for Medicare, and he 
didn't think it could be done. I am not at all sure it can be 
done, but this means less micromanagement; less frequent 
changes in the annual OBRA, COBRA, et cetera; less endless 
tinkering; fewer surprises that turn out to make it impossible 
to do business; and fewer executive decisions, many of which 
are on their own terms reasonable but which could have the 
cumulative effect of virtually wiping out Medicare+Choice in 
half the country.
    In this regard, when I wrote my testimony last weekend I 
noted that Secretary Thompson had not acted on the midnight 
regulations. He now has, and I congratulate him for putting the 
midnight regulation that imposed Medicare HMO rules on Medicaid 
HMOs on the table for in-depth scrutiny. I am delighted. I just 
hope he also adds to that the underlying Medicare+Choice rules 
which are an abomination, in my view.
    I think it is obvious that adding a prescription drug 
benefit available to every senior, which means adding it to 
traditional Medicare as well as in the context of a reform 
program, is vital for any number of reasons, one of which, 
though, is to provide the lubricating oil to make reform work. 
I hope you can construct--and you had several suggestions and 
there will be others--a drug package that will make some 
otherwise unpalatable changes go down a little easier.
    In this regard, I cannot overemphasize how important I 
think it is to preserve, in a general way, the pricing and 
reimbursement of drugs in this country and not move toward a 
system of administered prices similar to that used in Medicaid. 
I studied that in some depth a dozen years ago and was appalled 
at the system they used. It was clearly inefficient, unworkable 
and kind of silly; and it hasn't gotten any better in recent 
years.
    Two final points. I testified before this Subcommittee 
almost exactly two years ago on the subject of consumer 
information on health plans in Medicare. I castigated HCFA for 
its dismal performance, both in its printed materials and its 
electronic materials on the Internet.
    Speaking as someone who is a very successful purveyor of 
information comparing health plans, and in my perspective also 
as the previous co-webmaster at HHS, I know a lot about what 
can be done and how it can be done. And they were doing an 
awful job, including making a website available that most 
people on most computers couldn't even read the information or 
download it. HCFA was requiring equipment that most people 
didn't have and software that most people didn't have.
    Well, I revisited their website and their print materials 
before coming here today and I want to tell you that, though 
they have greatly improved the website in many respects, it 
still fundamentally fails in its most central purpose, which is 
to make it easy for consumers to get important, comparative 
plan information.
    This clock says I have lots of time left. That is going the 
other way now.
    Chairman Johnson. In comparison to the other speakers, you 
have about 3, 4 minutes left.
    Mr. Francis. I will not belabor you with the details, but 
it may take three dozen or more mouse clicks to get the 
information on one health plan off that website, and that is 
just unacceptable. It is absolutely unacceptable.
    Like Senator Breaux, I brought the FEHBP Consumer 
``Guide.'' It is 55 pages in 2001. It includes detailed but 
summary benefit information on 300 health plans across the 
country. I brought with me ``Medicare & You,'' 2001 version. It 
is about 85 pages, 17 of which appear to give details on health 
plans, but the format is so verbose, if you will, that there is 
hardly any actual information included. It is unbelievable, but 
true, that you cannot in this 85-page book find out what the 
prescription drug benefits are for any of the dozen local HMOs 
in the four States that it covers. This particular one covers 
Delaware, Maryland, D.C. and Virginia. The one set of facts 
seniors most want to know, what is the drug maximum, what are 
the drug copays, are left out of this book.
    Let me stop there, and I will be glad to answer any 
questions.
    Chairman Johnson. Thank you very much. We do have five 
consecutive votes, so we are going to give Mr. Lemieux equal 
time. Frankly, I think our time was better spent listening to 
your thoughts, since you have long had very good experience, 
than a long question period. We will have maybe a couple of 
minutes for questions.
    [The prepared statement of Mr. Francis follows:]
   Statement of Walton J. Francis, Author and Independent Healthcare 
                     Consultant, Fairfax, Virginia
    Madam Chairman and Members of the Subcommittee, I am honored to be 
invited to testify on Medicare reform. My experience in providing 
health insurance information to consumers, in regulatory reform, and in 
analyzing the Federal Employees Health Benefits Program and Medicare as 
health insurance systems, all contribute to my views on this vital 
issue.
    Over twenty years ago I conceived the idea of providing Federal 
employees and annuitants with information on the costs, benefits, and 
customer service of 50 or so health insurance plans then participating 
in the Federal Employees Health Benefits Program (FEHBP). As a private 
author, I worked with the Washington Center for the Study of Services 
(usually called CHECKBOOK); a non-profit organization dedicated to 
providing objective consumer information, on developing the most useful 
possible publication for participants in the FEHBP. To date, we have 
sold well over one half million copies of CHECKBOOK's Guide to Health 
Insurance for Federal Employees and have saved both the Federal 
government and program participants billions of dollars by encouraging 
the choice of more cost-effective plans. We cover some 300 plans across 
the entire nation, with comparative information on cost, coverage, and 
quality.
    For many years I served as the chief regulatory review official in 
the Department of Health and Human Services (HHS). I led efforts to 
comply with laws and executive orders requiring that proposed 
regulations achieve their objectives while minimizing unnecessary 
burden on the public. I am just completing, in collaboration with the 
CONSAD Research Corporation of Pittsburgh, a study for the Chief 
Counsel for Advocacy of the Small Business Administration entitled An 
Evaluation of Compliance with the Regulatory Flexibility Act by Federal 
Agencies.
    Because of my FEHBP expertise, I have been asked several times to 
analyze it as a model for Medicare reform. My most recent publication 
on this topic was ``The FEHBP as a Model for Reform'' (in Medicare in 
the Twenty-First Century, edited by Robert B. Helms, 1999). My general 
conclusion has been best stated by Harry Cain of Blue Cross: ``The 
FEHBP has outperformed Medicare every which way--in containment of 
costs, both to consumers and to the government, in benefit . . . 
Innovation and modernization, and in consumer satisfaction'' (from 
``Moving Medicare to the FEHBP Model, or How to Make an Elephant Fly,'' 
in Health Affairs, July-August 1999).
    It is from these perspectives that I provide my views on reform 
options and reform implementation. I believe that if, as Senator Breaux 
and Chairman Thomas have proposed, Medicare can be transformed to a 
system looking much more like the FEHBP, then the financial viability 
of the program can be extended and its inadequate benefits can be 
improved. However, there are numerous issues and problems that need to 
be addressed to make this happen and to make it work well. Experience 
with Medicare reform to date is not encouraging.
    I think that there are several essential issues--some 
interrelated--that need careful attention. These are:
         consumer information dissemination,
         using competition rather than price controls or 
        administered prices to control costs,
         creating structural reforms that remove most 
        incentives for political micro-management,
         actuarial rather than enumerative approach to 
        guaranteeing benefit levels,
         regulatory reform,
         avoiding paralysis by analysis,
         organization and management reform, and
         semantic reform and reining in the rhetoric.
Consumer Information Dissemination
    Two years ago I testified before this Subcommittee on the provision 
of consumer information in Medicare. At that time HCFA had two main 
methods of providing information to help consumers choose among 
Medicare+Choice Plans. First, it had a summary pamphlet comparing plans 
entitled Medicare & You. Second, it had a World Wide Web site called 
``Medicare Compare.'' A third key ``leg'' of essential consumer 
information, detailed, current, and plain English brochures in a common 
format from each participating health plan, was not required by HCFA 
and did not exist.
    In my testimony in 1999, I castigated both of the existing legs, 
and noted the vital necessity of the missing leg.
    I criticized the pamphlet for containing only 5 pages of 
comparative plan information out of 42 pages, while containing 4 pages 
devoted simply to telephone numbers of government agencies. In 
contrast, the comparable OPM Guide contained 42 pages of comparative 
plan information out of 60 pages.
    I characterized Medicare Compare as the ``Web site from Hell.'' It 
required a level of computer and browser power that the great majority 
of Web-using seniors did not have. Graphical information that was 
claimed to be on the Web site did not register with Netscape browsers 
at all. Legally required disenrollment data was not available. Plan 
information was bloated in verbiage and extremely difficult to use to 
compare plans because it avoided ``Yes/No'' or other simple 
comparisons.
    Worst of all, it was an act of extreme masochism to attempt to 
download summary plan-specific information. It took 62 printed pages to 
download the information on just one health plan, information that 
could have been presented in 2 typewritten pages. It took 10 minutes 
and 72 mouse clicks just to find the pages to tell the computer to 
download and print the information on just that plan. (HCFA staff later 
told me that they disagreed: it took ``only 50'' mouse clicks to get 
the information on one plan.)
    Unbelievably, the only copy of Medicare & You on the Web site in 
1999 was one that contained NO comparative plan information, not even 
the measly 5 pages of summary information that had been mailed out to 
seniors.
    That spring, HCFA staff briefed then Under Secretary Kevin Thurm on 
the status of their consumer information efforts, and provided him a 
rebuttal of my testimony. Among other things, they told him that:
         ``feedback has been overwhelmingly positive'' on their 
        unusable Web site (obviously impossible unless the testing did 
        not include actual efforts to obtain comparative information on 
        plans in an area),
         that their site was accessible to the blind (which it 
        was not because it relied heavily on PDF files--a problem that 
        was illegal then and illegal today),
         that their consumer research showed that their 
        population prefers the unnecessary verbiage that even I, an 
        expert interpreter of health plans, can barely decipher,
         that Medicare & You was available on the Web (versions 
        including the comparative plan information which is the main 
        purpose of the publication were not in fact available),
         that it was acceptable that America On Line users 
        could not use their site because only 20 percent of the site 
        visits come from AOL users, and that
         HCFA had minimized the number of clicks to the extent 
        allowed by current technology. (In contrast, the OPM Web site 
        to which I compared the HCFA site allowed all information on 
        any health plan to be downloaded with 3 mouse clicks).
    In my testimony I had cited several excellent GAO reports that 
showed how HCFA could improve consumer information. Subsequently, GAO 
produced one more, focusing on plan-specific brochures 
(Medicare+Choice: New Standards Could Improve Accuracy and Usefulness 
of Plan Literature).
    I dwell on these details because they are vital to understanding 
the problems facing Medicare+Choice and any even more far-reaching 
reform proposal. The fundamental engine driving the success of the 
FEHBP model or any close cousin is consumer choice. Choice depends on 
easily accessible and comprehensible information comparing plans.
    Since 1999, HCFA has improved its Web site. The graphics 
information now displays on a majority of browsers in use. 
Disenrollment information is available. Printing works better. However, 
it still relies heavily on programming tricks, visual displays, and PDF 
files that make it effectively and illegally unusable by the blind. 
Plan benefit details are somewhat standardized, but still presented in 
far too many words and in ways too complicated to facilitate 
comparisons. Few high school dropouts would be able to understand the 
HCFA Web site.
    Most frustratingly, it still requires many dozens of mouse clicks 
to access and print what amounts to 2 pages of information on one 
health plan. (Printing is essential because the human brain cannot 
remember the details when moving from one comparison to another, 
repeatedly, for a half dozen or more comparisons).
    Remarkably, in 2001 the state-specific versions of Medicare & You 
that include plan comparisons are still not available on the Web. 
Providing these would be trivially easy as a technical matter. Every 
Federal agency provides HTML and PDF versions of its regulations to the 
Government Printing Office. If HCFA would do the same for Medicare & 
You consumers would simply have to click once to indicate their state 
and click again to get the appropriate version in a format of their 
preference, either HTML or PDF. Of course, this is only beneficial if 
the plan specific information is what beneficiaries want and need.
    To use a simple gauge of progress, consider the print version of 
Medicare & You 2001. The version for DC/Delaware/Maryland/Virginia has 
about 85 numbered pages of information. Of these, 17 pages provide plan 
specific information on Medicare+Choice plans and the remaining pages 
other information about Medicare. (Telephone numbers take up 7 pages, 
even more than in 1999). The 17 printed pages of information, however, 
provide only 9 specific facts about each of 13 covered plans: company 
name, plan name, telephone number, service area, premium, whether or 
not any prescription drug coverage, percent rating their care highly, 
percent of women receiving mammograms, and percent disenrollment. All 
of this information for all of these plans could have fit on one 
typewritten page. In sum, HCFA uses 85 pages to produce one page of 
plan comparison information.
    In contrast, the OPM Guide for 2001 contains 55 numbered pages of 
information, of which 44 present plan specific information. Those 44 
pages present 18 specific facts about every one of about 300 plans, 
covering all 50 states. Thus, HCFA could have provided twice as much 
information on each plan, in a single edition covering the entire 
nation, in one-third fewer pages and millions of dollars less in 
printing and postal costs, had it simply used the OPM approach and 
format. (In fact, OPM saves even more money because it sends only about 
10 pages of information to every retiree, and gives each several easy 
ways to get Guide information.)
    HCFA provided summary information on prescription drugs in 1999, 
including copay and maximum. Surprisingly, it does not do so in 2001. 
In contrast, the OPM Guide tells enrollees the copayments for 
prescription drugs. Thus, the single subject on which virtually every 
Medicare beneficiary most wants and needs summary comparative 
information is virtually omitted from its publications by HCFA. Not one 
page in the 85 that are published is as important as this missing page.
    HCFA does tell beneficiaries to ``call the plan to get all the 
details of prescription drug coverage,'' but in a world of impenetrable 
automated answering services, and without comparable plain language 
brochures available at the end of that travail, HCFA has made getting 
this essential information a journey into frustration. The near 
insurmountable practical problems facing beneficiaries in getting this 
essential information are amply documented in GAO reports. Again, in 
sharp contrast, OPM makes it simple for annuitants to get complete 
brochures laying out prescription drug benefits in detail for every 
available plan, by mail, 800 number, or the Web.
    In sum, a HCFA bureaucracy whose every employee is provided 
complete, simple, clear, and timely information for choosing among 
Federal employee health plans, is seemingly incapable of providing the 
same service to its beneficiaries. This problem has persisted over 
decades of providing HMO plan choices. It has survived years of 
repeated criticisms from the GAO and critics such as me and members and 
staff of this Committee (see the 1996 GAO report entitled HCFA Should 
Release Data to Aid Consumers, Prompt Better HMO Performance). And it 
has persisted despite a generous earmarked budget that gives the agency 
carte blanche to produce consumer information at the expense of the 
plans themselves. Not only does HCFA fail to provide the information; 
it even denies that it has a problem. And to the extent that it admits 
a problem, it blames it on technology rather than its own bad judgment.
    Thus, HCFA itself is a continuing major obstacle to consumer choice 
in Medicare.
Using Competition Rather Than Price Control or Administered Prices to 
        Control Costs
    The essential mechanism by which free markets control costs is 
competition among sellers. Competition not only controls costs, but 
also allows consumers to decide how much cost they are willing to trade 
for amenities such as benefits and service.
    One way to think about this problem is to consider the automobile. 
There are literally hundreds of different models available and, with 
options, many thousands of possible purchases. Few of us are automotive 
engineers or racecar drivers, yet who else is qualified to evaluate 
those complex engines or evaluate brakes and emergency handling? The 
market creates lemons, such as the infamous Edsel and Jugo. Seductive 
advertisements permeate the airways. Not one government agency provides 
objective and unbiased advice on which cars function best (with the 
minor exception of mileage statistics on purchase stickers). A wrong 
decision can cost $20 or $30 thousand, or even cost one's life. Yet, 
somehow, things go well. Better cars get more market share. Losing 
manufacturers reinvent themselves. Lemons go out of business. Over 
time, valuable improvements are added to all makes of autos and the 
hours of work needed to purchase an auto decrease. Government 
regulation provides a floor for safety, and sometimes stimulates 
valuable improvements (crash resistance, seat belts, and air bags), but 
is neither necessary nor sufficient to create most safety enhancing 
improvements (better braking systems, better handling, better 
headlights, better tires), and impedes others (air bags too strong for 
children to survive deployment).
    I surmise that one of the most important safety innovations of the 
last decade is improved cup holders. Surely many thousands of accidents 
have been avoided because drivers did not spill hot coffee on their 
laps, or become distracted while looking for a place to put their cups. 
Yet no government regulation has mandated the size, location, and 
quantity of cup holders.
    Health insurance is a simple product compared to an automobile. 
What can we learn from the auto purchasing and FEHBP experiences when 
we consider Medicare+Choice or more fundamental reform? First, only a 
small fraction of consumers have to be highly informed to ``drive the 
market.'' We all benefit from the people who do their homework and 
advise the rest of us. Second, cost, service, and product performance 
are inextricably linked in highly complicated ways that are difficult 
to describe and whose value is impossible to estimate in advance. No 
one could have specified in a government regulation in (say) 1990 how 
to build the better cars available in 2000. Third, progress is a 
complex process, not one of lock step ``one size fits all'' or ``once 
and for all'' improvements. Fourth, government mandates can stultify 
performance.
    We have a famous example of a ``once and for all'' and ``one size 
fits all'' government designed automobile: the jeep. We have a 
successor: the humvee. Surely, no one would want to pass a law 
requiring every elder in America to buy a humvee or jeep. Yet 
traditional Medicare is just like these vehicles.
    The FEHBP provides ample evidence, directly relevant to Medicare, 
that cost, performance, and service can all be simultaneously improved 
over time. The FEHBP moved painlessly to catastrophic coverage, to 
HMOs, to prescription drug coverage, to drug reimbursement reform, and 
to PPOs. Medicare remains locked in a mid-1960s time warp.
    As documented in my studies, over decades the FEHBP has grown in 
cost about one percent a year less than Medicare, while improving 
benefits in major ways, and despite a rapidly aging covered population. 
Even the last several years, where Medicare costs have been level and 
FEHBP costs have gone up about 10 percent a year, reflect nothing more 
than the rapid rise in access to new, expensive, life saving and life 
enhancing drugs in the FEHBP program, and the concomitant reduction in 
Medicare's actuarial value compared to real world health care expenses.
    In fact, taking into account the recent huge increases in Medigap 
premiums for plans covering prescription drugs, the FEHBP substantially 
outperforms Medicare for any 10 year period, even including the last 
several years of level Medicare costs induced by provider fear of 
criminal charges for previously legal behaviors. (For Medigap costs, 
see the story in The New York Times of February 8, 2001, concerning 
annual Medigap rate increases in the 20 and 30 percent range). Medigap 
premiums for plans that cover only one-half of the cost of prescription 
drugs, up to a maximum of only $1,250 a year reimbursed, are now on the 
order of $2,000 to $3,000 a year (depending on age and plan). In this 
context, the recent premium increases in the FEHBP of about 10 percent 
annually for plans that cover prescription drugs with minimal 
coinsurance and without maximums, are positively anemic.
    The FEHBP has achieved these results while making consumers pay 
only 25 percent (or less, for postal employees) of the excess cost of 
unduly expensive plans and recouping only 25 percent (or less) of the 
savings from frugal choices. Unfortunately, in the future the FEHBP's 
already weak rewards to cost conscious consumers will be further 
attenuated by the recent granting of tax deductibility to both employee 
and employer share. Costs will rise considerably faster than would 
otherwise have occurred, and the dynamic advantage over Medicare will 
erode over time.
    In this context, the sterile and necessarily imperfect calculations 
of HHS auditors and the GAO arguing that in the short run HMOs are 
somehow being paid a few percent more than the calculated ``just 
price'' for the assumed (not proven) cost of hypothetically identical 
enrollees become as irrelevant as theological disputes. No one knows if 
HMOs are being overpaid (the debatable statistical evidence of the GAO) 
or underpaid (the hard evidence of market withdrawals). But in a 
defined contribution approach, this all becomes irrelevant. Consumers 
pay the excess for plans with above average costs; the government's 
costs are fixed by formula regardless of short term cost changes. In 
Open Season, consumers adjust their choices. Over the long run frugal 
plans are rewarded and the rate of cost increase declines.
    For a defined contribution and market competition approach to 
Medicare reform to succeed, the entire mindset of government budgeting 
and auditing will need to change. As opponents of reform fear, but 
perhaps should welcome, controlling the government contribution to the 
premium rather than controlling the amounts paid to providers will 
radically change the budgetary calculus. In the short run, costs may be 
marginally higher or lower. (Higher, for example, if drug benefits are 
added.) In the long run, budgetary performance will depend essentially 
on three variables, only two of which are controlled by the government:
         the dynamic ability of health plans to control costs, 
        using literally hundreds of ingenious approaches, all evolving 
        over time;
         the initial level of the government contribution; and
         the formula used to determine how the government 
        contribution changes over time, and changes in that formula to 
        reflect experience.
    This last variable can be either more or less generous than present 
law and the unpredictable likelihood of changes in that law over time. 
And it can be more or less generous depending on beneficiary income. 
Nothing about Medicare reform presumes adverse results to lower income 
seniors.
Structural Reforms to Reduce Incentives for Micromanagement
    The most striking contrast between the FEHBP and Medicare is that 
in the former law and regulation establish virtually no medical benefit 
details. In Medicare, almost all important benefit details are set in 
law. The essential difference is that in the FEHBP these decisions are 
made plan by plan. Some plans offer chiropractic, acupuncture, and 
cardiac rehabilitation coverage; others do not. Some deductibles are 
zero, others $200 or more; OPM and the Congress do not dictate this 
vital benefit dimension. Some plans cover drugs the same whether by 
mail order or local pharmacy; others do not. Some offer dental or 
vision coverage; others do not. And so on.
    This has a profound influence on governance. In Medicare, any given 
medical profession or provider type can achieve its ends only by 
lobbying the Congress to change the law, or by persuading HCFA to 
change regulations. Every year, hundreds of changes are proposed and 
dozens are enacted. In the FEHBP, there is always a sweet smile answer 
to these pressures: ``If you want benefit X that is not covered well in 
Plan A, join another plan.'' When the inevitable Congressional hearing 
arises, OPM can always say ``the matter is decided by consumer and plan 
decisions. If consumers want benefit X, plans will offer it to get 
their business.'' In most years, there are no coverage or benefit 
decisions mandated either by law or regulation.
    As ably documented by Bruce Vladek, the ``medical industrial 
complex'' and its lobbyists hugely benefit from the current design of 
the Medicare program (``The Political Economy of Medicare,'' Health 
Affairs, January-February 1999). These same pressure groups fare poorly 
at the FEHBP table.
    This is not to say that such pressures do not exist in a 
competitive, market-based system. And in recent years activist OPM 
directors have been uncharacteristically active in fostering benefit 
mandates. But the differences between the two programs are huge. And 
they result largely from the essential design distinction between a 
program where consumers vote with their dollars to decide benefit and 
reimbursement details and a program where legislators vote on the floor 
to decide those details.
    To return to the automobile analogy, Medicare is like the jeep: the 
government decides every specification, including the unfortunate lack 
of either a hard top or cup holders. FEHBP is like the regular consumer 
market for automobiles: consumers migrate to the plans that offer the 
combination of features that they like.
    Nothing would improve governance in America more than taking health 
plan and benefit decision decisions that properly belong to consumer-
driven markets out of the realm of politics. If the disciplines of 
Economics and Political Science prove anything about democracy's 
strengths and weaknesses, it is that consumers maximize their own 
preferences; politicians maximize their chances for reelection. For far 
too long Medicare has been hostage to the latter rather than the 
former.
Actuarial Rather Than Enumerative Approach to Guaranteeing Benefit 
        Levels
    Medicare is an ``entitlement'' program in two senses. First, every 
aged and disabled American, as defined in law, is entitled to a 
substantial package of benefits and subsidies defined in law. Second, 
the details of those benefits and subsidies are exhaustively enumerated 
in mind-numbing detail, also in law. To be sure, the Congress may 
change the law and not infrequently does, but any pedant can open a law 
book, open the Code of Federal Regulations, read a court decision, and 
discover that, indeed, Medicare does indeed cover so many pints of 
blood transfusions, so many home health visits, and not so many 
prescriptions.
    As a result of these benefit and subsidy entitlements, we have a 
grossly inferior health insurance program, design vintage 1965. To be 
sure, seniors do not die for lack of basic medical care in hospitals or 
by physicians, or go bankrupt through inability to pay catastrophically 
expensive medical bills (except for drugs, expenses incurred while 
traveling abroad, and, in very rare cases, particularly long hospital 
stays). The overall package is substantial, and vital to the well being 
of elderly Americans. But the entitlement is also deeply flawed, and 
inferior to any mainstream health insurance plan in America.
    Nothing about Medicare reform implies that the underlying, core 
promise should be broken. American seniors should continue to have most 
major medical bills paid. Indeed, those bills should be better paid 
with existing gaps closed. Why should an elderly person who happens to 
have a heart attack while traveling to Mexico or Europe be subject to 
tens of thousands of dollars in uninsured costs? (Or, alternatively, 
why should an elderly person be offered a one size fits all Medical 
plan that does not include travel coverage or prescription coverage?)
    The implicit guarantee in the FEHBP, and one that should be 
explicit in a reformed Medicare program, is that every plan available 
will pay:
         on average no less than 80 percent (or slightly more 
        or slightly less, based on detailed design decisions) of the 
        total amount spent by all beneficiaries for reasonable, 
        necessary, non-experimental medical bills of any kind, from any 
        licensed provider, whether for hospitals, doctors, or 
        prescription drugs; and
         100 percent of all such bills in excess of $5,000 (or 
        somewhat more or somewhat less) incurred in a year.
    A guarantee of this kind is compatible with a deductive of zero, 
$100, or $500 dollars; with coinsurance of zero, 10, or 20 percent; 
with a low deductible for hospital expenses and a high deductible for 
drug expenses, or vice versa; and with a host of other differences in 
benefit design and coverage. A guarantee of this kind is compatible 
with a 100 percent paid HMO or a Medical Savings Account with a high 
deductible, if properly drafted to accommodate differences in plan 
design.
    Properly drafted, a guarantee of this kind is also a far superior 
entitlement than the current Medicare program.
Regulatory Reform
    The brute fact is that the Congress dictates in excess of 90 
percent of the content of the thousands of pages (by some estimates 
over 100,000 pages) of Medicare regulations. The annual revisions in 
reimbursement regulations, driven by the latest Omnibus Budget 
Reconciliation Act (by whatever name), aimed at fine-tuning budgetary 
targets based on fictitious spending projections, would be ludicrous if 
they did not affect the livelihoods of hundreds of thousands of medical 
care providers.
    Medicare reform will never work if Congress does not learn to 
change the rules of the game far less frequently. This does not mean 
that oversight and midcourse corrections will not remain necessary; it 
does mean that a stable insurance market can never flourish if the 
stroke of the pen can, and is likely, to undo settled expectations. The 
Constitution guarantees the sanctity of settled contracts; the Congress 
has learned to evade these provisions by assuring that no Medicare 
rules are ever set by long-term contract.
    The Congress limits the HCFA role in regulation, but the agency has 
nonetheless found many ways to create regulatory excess. And the two 
institutions reinforce each other's bad habits. Senior HCFA staff 
several years ago came up with a slogan, ``surety bonds,'' as a feel-
good approach in a new regulation to reduce fraud in the provision of 
durable medical equipment. The same internal draft regulation also 
contained provisions to ban the use of cellular telephones as primary 
business phones. This plan rested on the observation that many crooks 
had no fixed address and used cellular phones. An overworked Office of 
the Secretary reviewed the draft regulation and concluded that the 
Secretary would be made a laughing stock if she were perceived, half 
correctly, as seeking to ban cellular telephones in the health care 
sector. Unfortunately, after exhausting large bureaucratic capital in 
fighting this silly scheme, OS acquiesced in the plan to require a new 
kind of surety bond that had never been available to businesses and 
never would be. Before implementation attempts proved this scheme 
unworkable, Congressional staffers, ever alert to seemingly bright 
ideas, put the surety bond idea into law.
    Average Adjusted Per Capita Costs (AAPCC) as a regulatory scheme 
for the reimbursement of HMOs has persisted for two decades. AAPCC 
rests on two demonstrably false premises: that costs paid by Medicare 
in particular counties differ in roughly the same proportion as the 
underlying costs of health care delivery differ; and that these 
underlying cost differences are large--ten, twenty, thirty, and forty 
percent or more from one county to its neighbor. Under AAPCC, the 
government has officially declared that HMOs should be paid roughly 50 
percent more for enrolling seniors in the Washington DC suburb of 
Prince Georges County than in the nearby suburb of Fairfax County. The 
premises of AAPCC have long been discredited, particularly as they 
apply to HMOs (see Stuart Schmid, ``Geographic Variation in Medical 
Costs: Evidence from HMOs, Health Affairs, Spring 1995). Unfortunately, 
this misconceived regulatory scheme has prevented the effective 
integration of HMO competitors into Medicare for the same two decades. 
In some parts of the country HMOs were grossly overpaid; in other parts 
no HMOs participated because they would have been grossly underpaid.
    While the egregious flaw of the Balanced Budget Act of 1997 in 
tying HMO payment to fee-for-service cost levels that were about to 
decline in an unprecedented reversal of historic trends was largely 
unforeseeable, the underlying premise was much like that of AAPCC: 
assuming that the ``right'' level for payment could somehow be divined 
from the costs of traditional Medicare.
    In the specific context of Medicare reform, the 1998 HCFA 
regulations on Medicare+Choice, comprising hundreds of pages of highly 
prescriptive and costly mandates devised by bureaucrats determined to 
protect against every imaginable problem, may have been the single most 
excessive set of regulations ever devised in HCFA. So draconian were 
these regulations that a year after issuance HCFA issued a modest set 
of revisions; admitting that few if any health plans could possibly 
have complied with the original regulations. Some observers believe 
that these regulations were deliberately designed to cripple the 
competition of traditional Medicare. My own view is that they reflect 
ignorance of private insurance markets and practices, and of the 
practicalities of health care and business administration, rather than 
actual malice. And, of course, they reflect the ``nanny state'' mindset 
of most government regulators.
    The underlying problem is that the bureaucratic impulses of HCFA, 
whether conscious or unconscious, seem yet again to have had the 
seemingly unintended effect of sabotaging rather than favoring Medicare 
choice.
Avoiding Paralysis by Analysis
    There are any number of vital issues that need to be addressed in 
Medicare reform. To mention several, some alluded to earlier:
         What cost sharing mechanisms will create the best 
        incentives for plans and beneficiaries to reduce the rate of 
        cost increase, improve services, and improved benefits over 
        time?
         What role, if any, should be given to presumed 
        differences in underlying health care delivery costs among and 
        between geographic areas?
         What mechanisms should be used to avoid destabilizing 
        risk selection, or to prevent ``cherry picking'' to obtain the 
        healthiest beneficiaries?
         Are there ways to prevent large scale shifting of 
        costs to beneficiaries as Fortune 500 companies discover that 
        an improved Medicare program makes Medigap insurance subsidies 
        superfluous?
         What consumer protections should be provided to 
        prevent abuse of elderly beneficiaries who are vulnerable to 
        errors of omission or commission?
    My take on these issues, and others, is that fine-tuning is a 
serious mistake. For example, actuaries and economists and budgeters 
have been agonizing over the problems of creating the perfect scheme 
for risk adjusters for decades. Year after year, the glaringly obvious 
problems in AAPCC were not even partially corrected because ``we 
haven't finished the studies to determine the best possible system.'' 
As another example, all the procedural protections and appeal rights in 
the world will not protect beneficiaries one tenth as much as the 
simple expedient of making sure that no participating health plans are 
predominantly comprised of Medicare beneficiaries, and that consumer 
information and other attributes of a well managed Open Season let 
consumers vote with their feet.
    A recent study of the National Academy of Social Insurance 
(Structuring Medicare Choices, 1998) recommended ``a program of 
research, demonstrations, and evaluations to inform decisions about 
structuring choice in Medicare. Systematic research to address specific 
technical issues is essential to the success of structured competition. 
. . .'' The report recommends ``an aggressive program to develop and 
implement risk adjusters'' and research to ``assess the benefits of 
standardized benefit options, in terms of beneficiary understanding.'' 
In other words, the Academy recommended no Medicare reform until years 
of research. Yet, we have the experience of current Medicare policy to 
demonstrate that risk adjusters can never be perfect and can greatly 
interfere with orderly plan participation and competition. We also have 
the experience of the FEHBP to demonstrate that a program with no risk 
adjusters of any kind (a huge defect) can proceed reasonably 
successfully for decades. And we have the knowledge and experience of 
the professions of Political Science and Economics, and the observed 
reality of both Medicare and state mandates, to tell us that 
standardized benefits are an invitation to political mischief and 
micromanagement of the worst kind.
    On another front, there is much hand wringing that the Congress 
blocked the competitive bidding demonstration. In theory, there are 
competitive bidding models that will save much more money than any 
consumer choice approach. We can give health plan X a monopoly in area 
Y for a year, and squeeze the pips to save money. But why would anyone 
think that the primary object of Medicare is to save money in the short 
term, no matter what the cost in consumer choice or dynamic innovation? 
Who thinks that government procurement models of any kind have ever 
proven in practice to be an effective and efficient model to obtain 
services of any kind? Would we apply such a model or practice to 
selection of automobiles for consumers, or housing, or grocery stores? 
Just think of the announcement: ``Today the Automobile Financing 
Administration announced that in the greater Denver area all consumers 
buying automobiles next year will get two-door Ford Escorts. The 
government obtained a five percent discount from the wholesale price. 
To prevent fraud, civil money penalties to prevent Nevada dealers from 
selling Hondas or four-door models to Colorado consumers have been 
increased, with Justice Department enforcement financed by an unlimited 
tap on the transportation payroll tax. . . .''
    There are many key issues in reform that require careful analysis 
of options, and objective appraisal of the likely effects of 
alternatives. But Medicare reform should not be a playing field for 
hypothetical concerns of little real world relevance.
Organization and Management Reform
    Several Medicare reform proposals, including the Breaux/Thomas and 
Breaux/Frist proposals, envision removing much or the entire locus of 
decision making from HCFA. In this regard, it is worth recalling that 
HCFA as an organization violates one of the most famous organizational 
principles of Public Administration, one most famously used by Franklin 
Delano Roosevelt: making sure that no one Federal bureaucracy has a 
monopoly on an entire area of responsibility. With competing 
bureaucracies, the ability of the decision-maker to detect 
incompetence, error, and falsification grows exponentially.
    To take an example one step removed from Medicare reform, 
implementation of the Health Insurance Portability and Accountability 
Act (HIPAA) has been frustrating to participants both within and 
without the government because it has been dominated by HCFA. The 
convenience of one health plan, albeit the largest single health plan, 
has dictated the main options presented, and most of those selected, in 
a sector of the economy with hundreds of billions dollars at stake 
quite apart from the interests of the administrators of traditional 
Medicare. Under HIPAA, HCFA has gradually assumed the role of regulator 
of American health insurance, to the point where it routinely issues 
regulatory pronouncement on such subjects as ``Circumstances Under 
Which Health Insurance Regulated As `Individual' Coverage Under State 
Law Is Subject to the Group Market Requirements Of . . . HIPAA'' (a 
copy of this impenetrable issuance can be found at www.hcfa.gov/
medicaid/hipaa/content/bulletins.asp).
    To take another subject removed from Medicare reform, what Federal 
government agency is charged with thinking creatively about the use of 
tax credits or grants to states or other options to improve health 
insurance coverage for 40 million uninsured Americans, and what expert 
resources is that agency devoting to creating workable proposals to 
mesh with tax reform and the existing employer-based insurance system? 
The answers presumably are ``HCFA, and close to zero resources.''
    My recommendation is that HCFA be dismantled or, at the very least, 
competing agencies created. I have some difficulty with the proposition 
that competitors to traditional Medicare, paid from the same trust 
funds, should not come under the stewardship of the agency in charge of 
the trust funds. I think that a better reform might be to separate all 
quality and protective regulation from operation of the Medicare health 
plan itself (what used to be called the Health Standards and Quality 
Bureau of HCFA is in financial impact probably the third or fourth 
largest regulatory agency in the Federal government). Alternatively, 
all regulation of managed care, of Medicaid, and of private sector 
initiatives such as tax credits might be placed in a separate HHS 
agency.
    But the difficulty lies in the details of the solution, not in the 
problem addressed. Clearly, HCFA is not capable of reforming itself 
more or less out of business. Clearly, HCFA is not a student of ways to 
regulate private health insurance with a light hand, and of ways to 
avoid regulation entirely. Clearly, HCFA is incapable of providing the 
most important consumer protections, such as readily accessible 
information, and all too capable of devising complex regulatory schemes 
so cleverly burdensome that they drive health plans out of the Medicare 
market. And above all, HCFA has proven over and over again that the 
convenience of traditional Medicare as perceived by ease of HCFA 
administration and HCFA's parochial interest is the dominant principal 
driving all decisions large and small.
    In other words, HCFA behaves just as public administration theory 
suggests that any agency or bureau should behave. It protects its turf, 
as it perceives that turf. During the formative years of Medicare, when 
a new program needed nurturing and then fiscal discipline, HCFA's 
motives and the larger public interest coincided. But that behavior, 
however congenial to the interests of HCFA as a bureaucracy, does not 
now meet the larger public interest. The problem is compounded because 
HCFA is far from incompetent. To the contrary, the senior staff are 
among the most able and dedicated in the Federal government. They 
control access to information, the regulatory agenda, the computer 
systems, and far more. They decide which studies get done, and which do 
not, and who writes the studies. They share common interests and a 
common view of the world (one in which private health plans play at 
most a marginal role). They succeed routinely in protecting their 
interests from outside interference, such as pesky oversight by the 
Secretary and his or her staff, or the Congress, or OMB, or even the 
President.
    Whatever organizational reform is selected, I believe it should 
result in at least two agencies, and possibly three or more agencies 
within HHS, charged with somewhat overlapping responsibilities for 
health insurance matters, so that the Secretary (and ultimately the 
President and the Congress) will have the benefit of differing views, 
information, and perspectives presented on key issues.
    The bottom line is that no matter what organizational and 
managerial model is chosen, Medicare reform based on consumer choice 
among competing health plans is highly unlikely to succeed if it is not 
placed in the hands of an agency whose basic purpose and mission, 
incentives, and even staff promotions rest on making the reformed 
program a success. HCFA as it exists today is not such an agency.
Semantic Reform and Reining in the Rhetoric
    The debate over Medicare reform is highly vulnerable to 
grandstanding and shrill accusations. To many, the word ``vouchers'' 
has become a rallying cry for opposition. A year ago, AARP issued a 
report, Medicare Benefits: a Comparison with the FEHBP, that could not 
get past the point that Medicare benefits are individually specified in 
law (i.e., ``guaranteed'' subject to the decisions of the next 
Congress) whereas FEHBP benefits seem to be only those that consumers 
drive the plans to offer. In this comparison of ``legal guarantees'' 
with ``plan offerings'' the superiority of FEHBP benefits, and their 
far better improvement over time, got lost.
    Another rhetorical swamp lurks in the opprobrium that has come to 
be attached to managed care. Paul Elwood, often credited with inventing 
the term ``health maintenance organization,'' saw the essence of his 
idea as one of empowering consumers. Elwood is bitter about the Clinton 
Administration's decision to foment hostility against HMOs, and uses 
terms such as ``perversion and political destruction of our ideas'' to 
describe the terms of debate in recent years (as quoted in the Orange 
County Register, February 16, 2001).
Next Steps
    The next steps for the Congress must await Bush Administration 
decisions. Bills can be introduced, hearings be held, proposals tested, 
and debates held--but these will be in a vacuum until the 
Administration makes concrete proposals. In the meantime, the 
Administration has important choices. Will Secretary Thompson engage in 
a meaningful review of Medicare+Choice regulations and clean them up, 
both in reality and symbolically? Will Clinton ``midnight regulations'' 
expanding burdensome Medicare procedures to Medicaid HMOs be rescinded? 
Will the current consumer information system for Medicare beneficiaries 
be put on a sensible track that actually provides consumers easy access 
to information needed to choose health plans? Will health care 
financing responsibilities be reorganized (former Secretary Joe 
Califano created HCFA by a stroke of the pen shortly after taking 
office)? Will political appointees in HCFA and the Office of the 
Secretary be consumer and market oriented?
    For both the Congress and the Administration, it seems to me that 
prescription drug coverage is the vital lubricant. It is popular, it is 
needed, and it is expensive. What reforms can be obtained with drug 
coverage as the sweetener? Can a package be devised that will not 
involve Kafkaesque price controls and discourage future research and 
innovation? Can some form of drug coverage be added to traditional 
Medicare so that it will have at least a partially competitive position 
as other health plans compete for business?
    The answers to these questions, and the Congressional initiatives 
and responses, will determine whether Medicare reform becomes a reality 
or an empty slogan.

                                


    Chairman Johnson. Mr. Lemieux.

STATEMENT OF JEFF LEMIEUX, SENIOR ECONOMIST, PROGRESSIVE POLICY 
                           INSTITUTE

    Mr. Lemieux. Thank you very much, Madam Chairman, Mr. Stark 
and Committee Members.
    I may be a little naive, but I think that, working on the 
technical details of some of these proposals and thinking them 
through, there may be a lot more movement toward political 
compromise and technical compromise and accommodation than you 
would have known from the rest of this hearing. I think that 
both sides are moving toward a stable, competitive approach 
that would fix the deep flaws in Medicare+Choice that we have 
heard so much about; and there seems to be a burgeoning 
political agreement to really do a good job in improving 
Medicare's benefits, mostly for prescription drugs but also for 
the other gaps in its benefits, especially the financial gaps, 
the biggest concern to me.
    Let me talk about my ideas for solutions in the context of 
Medicare's problems.
    We have heard the fee-for-service benefits are out of date 
and inflexible, and that is virtually a consensus opinion. Four 
out of five beneficiaries are in that program, and they face 
large out-of-pocket costs which they often try to insure by 
purchasing gap coverage, sometimes at great expense.
    We have also heard correctly that Medicare's system of HMO 
is a total mess, and I agree with that assessment 100 percent. 
Right now, what we fundamentally ask HMOs to do is to compete 
on the level of benefits they are going to offer and whether or 
not they are just going to play ball, whether or not they are 
going to enter a market or withdraw from a market. When they 
face competitive pressures, their response under the rules of 
Medicare+Choice is to adjust their benefits, which is very 
inconvenient to seniors or, even more problematic, to just 
leave the market altogether or come back if it looks like the 
profits will be there.
    It would make so much more sense to have them competing 
mostly on price instead of benefits, and staying in the market 
more permanently. That is the great beauty of a Federal 
employee's plan: there has been a trust built up between many 
of the plans and the agency running it. Sure, people have a 
choice. They can disenroll from a plan they do not like, but 
they have an even better choice, and that is they can stay with 
a plan that they like, because the plans can adjust to market 
competition through changes in their prices rather than just 
withdrawing from the market.
    I think that both of these two problems, Medicare's fee-
for-service benefit inadequacy and the problems with the HMO 
program, are fundamentally caused by the superstructure of 
Medicare: the fact that Congress dictates exactly how Medicare 
is to run and HCFA perceives its role as administering the law, 
often with very detailed regulations. HCFA does its best, but 
it is very difficult to keep up with the health sector and all 
of the laws being passed in Congress.
    As a result, fee-for-service benefits are really not very 
well integrated. I learned that firsthand when my grandmother 
was sick last fall. It is a hodgepodge of benefits that have 
been crafted over the years, and you would never have done it 
that way if you set out to remake it from scratch today. The 
same thing is true of the Medicare+Choice program. You would 
never have such a program if you sat down this year and 
decided, here is how we are going to try to encourage private 
plans to offer a choice to Medicare beneficiaries.
    Of course, the fourth problem is the cost problem. I have 
worked in the past at the bipartisan Medicare Commission at the 
Congressional Budget Office and at HCFA; and I have been 
involved, either directly or indirectly, with a great many of 
the erroneous forecasts that have been used over the years 
regarding the BBA, regarding health care spending, regarding 
the Medicare Commission's decision that the average government 
contribution was going to be 88 percent, and so on and so 
forth. All of those forecasts, I assure you, were extremely 
reasonable, highly sophisticated and well thought through; and 
they were vetted with the greatest minds in Washington and 
around the country; and most of them were wrong. So I encourage 
you to be very careful about the potential costs of this. It 
looks to me like the costs of all of these plans--Breaux-Frist 
II are going to go up, the House Republican plan are going to 
go up, so that will be an important consideration.
    Let me just run down very quickly how I view the progress 
on Medicare reform. First, there was the bipartisan Medicare 
Commission. The Commission set up a full ``level playing 
field'' competition between the fee-for-service plan and 
managed care plans. It offered subsidies for drugs only for the 
poor and near poor, and it would have saved a fair amount of 
money, I think. I think that some of the commentators who 
suggested that it was going to put fee-for-service out of 
business were exaggerating a little bit--I think the 
probability of that was very slight, but it was a true level 
playing field competition that would have probably saved a lot 
of money.
    President Clinton came back with a proposal that was a 
partial competition. In a sense, rather than having the 
taxpayers save money from competition in Medicare, the 
beneficiaries were going to essentially have the opportunity to 
save money by reducing their premiums. So it didn't save the 
taxpayers much.
    Then the President's plan had a pretty large subsidy for 
drugs. It was 50 percent of the package, and the overall cost 
over 10 years, rather than saving $100 billion like the 
Medicare Commission's plan, it probably would have cost about 
$300 billion.
    The Breaux-Frist I plan was full competition like the 
Medicare Commission proposed, but it took out some of the cost-
saving features like raising the eligibility age, and it also 
added subsidies for drug and other supplemental benefits to 
about 25 percent, even if you weren't poor or in that near poor 
range. I think that the cost of Breaux-Frist I--I thought at 
that time it would probably be about budget neutral. Now, it 
might be a little more than that.
    As the Senator said, the cost of Breaux-Frist II is about 
$200 billion now with the updated estimates. It raised the 
subsidies from 25 percent to approximately 35, a little closer 
to what the President had proposed last year; and it includes a 
partial competition or a beneficiary competition like the 
Clinton plan as an interim step, rather than the full level 
playing field envisioned by the Commission.
    Now, my take on where you go from here is that I think that 
getting the formulas for competition, coming to agreement on 
that, ought to be pretty easy. It seems to me like both sides 
have agreed to protect the fee-for-service program for a 
considerable period of time, and that means the taxpayers are 
not going to save much money, but it seems like we have reached 
an agreement on that sort of Breaux-Frist II approach to this. 
Regarding the amount of subsidies, whether it is 25 or 35 or 
50, it seems like there is a range there that Members of 
Congress can probably get together on reasonably quickly. The 
harder issues are issues of governance and issues of how to 
structure the drug benefit in fee-for-service. Solet me just 
make a couple of quick comments about that.
    On governance, I think that it is very important to create 
a new agency of some sort to oversee the competition and to 
create a new market for supplemental benefits for fee-for-
service beneficiaries. I think that we have had a political 
situation where many Democrats have said that we really want a 
drug benefit in Medicare; and many other people, Senator Breaux 
and many Republicans and others, have said what we really want 
is to work with market forces to the best of our ability and 
not have Congress dictate how the drug benefit is going to 
work. I think there is a way to bridge those two approaches.
    I think the only way to guarantee that drug benefits and 
other supplemental benefits are available to everybody is to 
empower the government in a very strong way to make that 
happen, but I think the way to get political agreement to do 
that is to create a new agency that is fundamentally 
knowledgeable about and experienced with competition, rather 
than the way that HCFA operates with regulations and fee-
setting.
    So, just to sum up, I think the right mix of Medicare 
benefit expansions and competitive reforms requires both strong 
government and flexible private markets. I think that 
conservatives have to agree to protect fee-for-service for a 
while and allow the Medicare agency or whatever this new 
administrator is going to be called a great deal of latitude in 
creating supplemental benefits. I think that the conservatives 
need to support pretty high subsidies and make room in budgets 
for such things to make the system work. Liberals, on the other 
hand, have to acknowledge, I believe, that HCFA isn't suited 
for competitive systems--it really never has been--that market 
approaches really should be the goal for drug benefits, that we 
ought to try to make that work, and that costs cannot get out 
of hand.
    One final comment. I think that, last year, the House-
passed plan was a little too narrow in the sense that it 
envisioned a drug-only benefit. I think it is really important 
and more convenient for seniors and more practical for health 
plans if we link a supplemental drug benefit with other 
benefits that seniors need like these financial protections 
against cost-sharing that they would otherwise have to face in 
fee-for-service. I think, by linking those two markets and 
subsidizing that, you create a much more viable market and give 
seniors a one-stop shop for their supplemental coverage if they 
are in fee-for-service.
    [The prepared statement of Mr. Lemieux follows:]
    Statement of Jeff Lemieux, Senior Economist, Progressive Policy 
                               Institute
    Thank you, Madam Chairman, Representative Stark, Committee members, 
for inviting me to offer ideas on how to take the final steps toward 
Medicare reform. My name is Jeff Lemieux, and I am the senior economist 
for the Progressive Policy Institute (PPI). Prior to this position I 
worked for the Bipartisan Medicare Commission chaired by Senator John 
Breaux (D-La.) and Representative Bill Thomas (R-Ca.), the 
Congressional Budget Office, the Health Care Financing Administration 
(HCFA), and an economic forecasting firm then known as DRI/McGraw-Hill.
    I believe most Democrats and Republicans in Washington could 
quickly come to agreement on a compromise approach to Medicare reform 
that remakes Medicare's competitive system for private health plans and 
expands the program's benefits, especially for prescription drugs and 
other items that form ``gaps'' in Medicare's current benefits. This 
year, I hope Congress will rise above the usual partisanship and close 
the deal for a durable, truly improved Medicare system.
    My statement touches on several areas: problems in Medicare, a 
vision for a reformed Medicare system, my recommendations for solutions 
to Medicare's problems, the legislative steps that have been taken 
toward Medicare reform, some difficult issues that must be dealt with, 
and a compromise idea or two. I have attached an outline at the end of 
the statement that lists those components.
Problems
    To launch the process of Medicare reform and improvement, I believe 
we must expand benefits and create a new, market-based approach to how 
Medicare actually delivers benefits. The solution should address the 
program's four big problems:
    1. LMedicare's fee-for-service benefits are inflexible and out-of-
date. Most seniors (about 5 of 6) face large out-of-pocket costs for 
prescription drugs and other items not covered by the traditional fee-
for-service program; many purchase additional insurance to fill in the 
gaps in Medicare's fee-for-service benefits, sometimes at great 
expense.
    2. LMedicare's system for HMOs is on the verge of collapse. About 1 
in 6 Medicare beneficiaries has joined an HMO to get better benefits 
and avoid high out-of-pocket costs. But Medicare's system for HMOs is 
similar to its administration of the fee-for-service program: a 
bewildering array of government-set prices and a dense thicket of 
regulations. Faced with lower reimbursements and higher costs, many 
HMOs are slashing benefits or dropping Medicare participation 
altogether.
    3. LMedicare's fee-setting and regulatory approaches are 
inefficient and stifle innovation. Medicare's inadequate fee-for-
service program and its dysfunctional system for HMOs are not the 
result of bureaucratic ineptitude or bad motives. They are the 
inevitable and direct result of how Medicare is structured. The way 
Medicare currently works, Congress is required to dictate virtually all 
of Medicare's fees and rules. Then the Health Care Financing 
Administration (HCFA) adds layer upon layer of regulations in an 
increasingly futile attempt to apply those fees and rules to a fluid, 
constantly-changing health sector.
    4. LMedicare's costs will mushroom when the baby boomers retire. 
The backdrop for any Medicare reforms, including adding needed (but 
expensive) new benefits, is the fact that as 70 million baby boomers 
retire, high Medicare spending is likely to crowd out other government 
initiatives, prompt a return to deficits, or force tax increases. 
Without reform, Medicare spending could easily jump from over 10 
percent of the federal budget today to 30 percent of the budget by 
2030. Combined with Social Security and Medicaid (a program for the 
poor, including many elderly people in nursing homes), the total cost 
of entitlement programs for the baby boomers could suffocate 
progressive government.
    The first two problems, inadequate benefits and insufficient 
choices, directly hurt seniors. Seniors are largely unaware of the 
third problem--Medicare's administrative inefficiency and structural 
obsolescence--but that problem is the root cause of the first two. 
Furthermore, Medicare's internal inefficiency contributes to its high 
costs, which should never be far from policymakers' minds.
    The bottom line is that Medicare's creaky internal workings are 
becoming politically unacceptable. Medicare was designed in the 1960s. 
Its benefits have not kept up with medical advances and seniors' needs 
precisely because of its top-down government controls and old-fashioned 
administration. Sen. Breaux likes to compare Medicare to an old car: 
powerful, but inefficient and always in need of maintenance or repair. 
Medicare was not designed for modern benefits or competitive 
approaches, and recently Congress has had to enact legislation fixing 
parts of its payment systems virtually every year.
A Vision of a Reformed Medicare
    In my opinion, a truly reformed, high value Medicare program will 
have two primary characteristics:
     LGood choices of comprehensive private health plans such 
as HMOs or PPOs for as many beneficiaries as possible. The system of 
competition should encourage private plans to stay in the Medicare 
program, adjusting their premiums as necessary to be competitive. That 
is in direct contrast to Medicare+Choice, which causes plans to compete 
by changing their benefits (often at great inconvenience to seniors) or 
by moving into or dropping out of Medicare altogether. Private plans' 
benefits should include currently covered items plus drug coverage and 
out-of-pocket protections. Health plans should be able to innovate 
broadly on benefit design, but they should be given the incentive to 
compete as much as possible on price, not benefits. Plans should feel 
as though they are long-term competitors for seniors' business, not 
come-or-go government contractors.
     LA fee-for-service plan that can improve itself, and 
requires considerably less Congressional micromanagement. HCFA should 
operate the fee-for-service plan in a more businesslike manner, under a 
much more transparent and planning-oriented process. Over time, 
Congress' role should shift from making laws concerning Medicare's 
every detail to oversight and quality assurance. Current fee-for-
service benefits should be continually improved and truly integrated, 
and beneficiaries in the fee-for-service program also need seamless 
drug and gap coverage, without hassle or needless complexity.
Possible Solutions
    Here is my list of the essential changes and reforms Congress could 
enact this year to get started toward that vision:
     LCompetition. I believe Medicare needs a new style of 
competition patterned after the federal employees' system both to 
expand and stabilize seniors' choices and to temper Medicare's future 
costs.
     LModern Benefits. We should add prescription drug benefits 
and new limits on seniors' out-of-pocket costs, and we should subsidize 
those new benefits sufficiently to encourage most seniors to enroll.
     LA New Attitude and Process. We should change the culture 
of Medicare first by establishing a new executive agency outside of 
HCFA that is familiar with competitive systems to oversee the new 
competitive approach. Second, we should hammer out a new process under 
which HCFA has the flexibility to make the traditional fee-for-service 
program more modern and accountable.
     LInnovation and Choice for Drug Benefits and Gap Coverage 
for Fee-For-Service Enrollees. The new executive Medicare Agency should 
have the power and financial flexibility to guarantee that seniors 
enrolled in Medicare's traditional fee-for-service program will have 
access to choices of affordable private coverage for prescription drugs 
and other out-of-pocket costs. I believe markets for private coverage 
will work well, and that in general the government should not dictate 
prices and detailed coverage rules for prescription drugs.
Almost There: The Path to Medicare Reform
    Comprehensive Medicare modernization is a relatively new idea. In 
1998 and 1999, the Medicare Commission formed a plan to remodel 
Medicare based on the federal employees' system of choices and 
competing health plans. In addition to the new competitive system, the 
plan added benefits for prescription drugs and it limited 
beneficiaries' out-of-pocket costs for hospital and physician services. 
To save money, however, the Commission's plan would have raised 
Medicare's eligibility age and added some new beneficiary co-payments. 
Furthermore, it subsidized prescription drug benefits only for 
beneficiaries under or just above the poverty line.
    The Medicare Commission didn't account for the rapidly improving 
budget outlook in Washington, and its plan did not spark the hoped-for 
political consensus. As budget deficits switched to surpluses in 1998 
and 1999, President Clinton and many in Congress refused to embrace 
such penny-pinching measures.
    In June of 1999, the Clinton Administration countered with its own 
reform proposal. Clinton's proposal also embraced the federal employees 
system as a model for competition, but it added measures to protect the 
traditional fee-for-service from the full force of market prices. In so 
doing, it allowed the new competitive system to save beneficiaries 
money, but limited the amount the government would save. The Clinton 
plan also dropped the plank raising the eligibility age. Finally, the 
Clinton plan generously subsidized prescription drug benefits for all 
seniors and formed the new drug benefit on the traditional fee-for-
service model, with the government poised to dictate payment policies 
and rates.
    Senator Breaux's first legislative proposal, cosponsored by Senator 
Bill Frist (R-TN), included the Medicare Commission's version of full 
competition, also dropped the increased eligibility age, and added a 
modest ($200) annual premium subsidy for beneficiaries above 150 
percent of poverty (beneficiaries with incomes below that level 
received larger or full subsidies).
    The second Breaux-Frist proposal, which was released last Summer, 
accepts Clinton's milder form of competition as an interim step, and 
raises the subsidies for drugs to almost three-quarters of Clinton's 
proposed level. Unlike Clinton's approach, however, both of the Breaux-
Frist proposals create a market for prescription drugs, so that 
Medicare beneficiaries in the fee-for-service program would have a 
choice of drug plans and so the Congress would be more removed from the 
setting of drug prices and fees.
Sticking Points
    Since both sides basically agreed to protect fee-for-service 
beneficiaries from the full force of competition and to subsidize the 
new benefits even for those above poverty, coming to final agreement on 
those issues should be straightforward. However, sticking points remain 
on how the new competition and benefits will be administered. Should 
the new competition be administered by HCFA, or a new executive agency? 
In my opinion, the only way to resolve the most crucial outstanding 
issue--ensuring that fee-for-service enrollees will have access to drug 
benefits--is to create a new executive Medicare Agency to oversee the 
new Medicare marketplace.
    Here's the problem: market solutions for drug benefits are a much 
better idea than the sort of price controls that have distorted and 
politicized the hospital industry and other sectors of the health 
economy. But how do we ensure that solid markets will spring into 
existence and that all seniors--including those in the fee-for-service 
program--will have good choices? By definition, free markets are 
impossible to predict.
    Many Democrats approve of market solutions for HMOs and other 
comprehensive health plans, but assume that markets couldn't be made to 
work for drug benefits in the fee-for-service program. That's why their 
proposals generally put HCFA in charge of the benefit. Government 
control is the only way to be sure the benefit will be there for all 
beneficiaries, under that assumption.
    Senator Breaux's plan relies on a new Medicare Agency to run the 
program's market systems, both for comprehensive plans and for extra 
benefits for fee-for-service beneficiaries. He would create a mini-
market of plans specializing in drug and other gap benefits, and 
seniors would be able to pick from those plans based on price and 
benefit levels. Markets are the only way to ensure continued 
innovation, efficiency, and dynamism in the health industry, Breaux 
argues.
    In last year's campaigns Democrats liked to say their drug benefit 
was ``in Medicare,'' meaning that it would operate just like the other 
parts of Medicare's fee-for-service program. The Breaux-Frist plan 
would add a drug benefit to Medicare, but only in the context of market 
competition and choice, not direct government management.
    Fortunately, there is a bridge between the two approaches. Senator 
Breaux is right to prefer competition to an HCFA-administered program, 
but other Democrats are right that full government authority is the 
only way to be absolutely sure a benefit will be there for all seniors.
    The essential compromise is clear: allow the government sweeping 
authority to ensure drug benefits are available under any circumstance, 
but give that authority to a new government agency that knows how to 
work with market systems and private companies, not to HCFA, which only 
knows price controls and regulations. Sen. Breaux's plan should be more 
explicit about exactly what tools the new Medicare Agency could use to 
ensure that drug benefits would be available even if markets were slow 
to form. The Medicare Agency should be given full authority to share 
risk with private companies to ensure that markets develop and choices 
are available to all beneficiaries, but it should be structured so that 
any significant government risk sharing would be temporary--a true last 
resort, not a first option. That way any government-private risk 
partnerships would be less likely to devolve into arrangements where 
the government became the regulator and micromanager and the private 
company was reduced to a contractor status, with no stake in benefit 
innovation or competitive outcomes.
    Finally, the House Republican bill from last year concentrated on 
creating a market for drug-only supplemental coverage. That was a 
mistake, I think. It would be much more convenient for seniors and more 
practical for health plans to offer a combination of drug and other gap 
coverage, such as protections against unlimited out-of-pocket costs. In 
essence, Congress should create a new market for comprehensive gap 
coverage for fee-for-service enrollees, and subsidize that market 
sufficiently to make it appealing both to health plans and seniors. 
Creating a new market for all-in-one drug and gap coverage would not 
interfere with current gap or retiree coverage that seniors have 
purchased or otherwise receive, but over time it would probably become 
an attractive option for many beneficiaries.
Conclusion
    The right mix of Medicare benefit expansions and competitive 
reforms requires the best of both strong government oversight and 
flexible private markets. Conservatives must agree to protect the fee-
for-service plan for a time, allow the new Medicare Agency a great deal 
of latitude in creating a market for drug benefits and gap coverage for 
fee-for-service enrollees, and support higher subsidies for those 
products. Liberals must acknowledge that HCFA is not suited to run 
competitive systems, that market approaches must be the goal for drug 
benefits, and that costs cannot be allowed to get out of hand.
    The political partnership for that sort of deal is shaky, but it 
does exist. By improving benefits, we can help America's seniors now. 
By using market forces and competition to shore up Medicare's creaky 
inner workings, we can assure seniors that we will be able to afford 
excellent health benefits in Medicare for their children and 
grandchildren as well.

                                


    Chairman Johnson. Thank you very much, panel. I welcome 
your ideas; and I would urge you, as we move through this, to 
try to be as tough with yourself as we are going to have to be. 
We all know this is going to cost more money, I do not care 
what anybody is saying. We all know fee-for-service is going to 
have to be there, because there are just lots of parts of the 
country where that may always be the only form.
    But we do have to find a much better way of doing a lot of 
things. If you read through Mr. Francis' testimony, it is just 
simply awesome what a bad job of just some very simple things 
that HCFA has done. Now, we are loading them up with things to 
do. If you had to do as many new things as they have had to do, 
you might not do such a good job either.
    So this is not about blame, but it is about reality, and it 
is about where we spend our new money. I want you all to think 
about the fact that neither the plan of the Republicans nor the 
plan of the Democrats delivered prescription drugs as an 
integral part of Medicare. It was a Part D. It had another 
premium. It was just like Part B. It was an entitlement, but it 
was an additional plan with an additional premium. A lot of the 
people, that one-third of seniors who have no prescription 
drugs, folks, they are the people, a lot of them, that are not 
going to be able to pay the premium in the Democrats' plan or 
to pay the premium in the Republicans' plan.
    So you have to be a little tougher now with us; you got to 
be a little tougher with yourselves. Where do we put the 
premium? Is it fair to pass a prescription drug bill with a 
$4,000 or a $6,000 catastrophic provision for people who will 
never spend $4,000 because they can't? Should we be putting our 
money into a more variable catastrophic level and relying on 
our market power to create discounts in the market, rather than 
a government-paid benefit for all those others? Remember how 
many of which are already getting prescription drugs, at least 
50 percent of whom have pretty good plans. So we are going to 
have to be more realistic, because this plan is going to carry 
extraordinary financial weight into the future, no matter what 
we do.
    Senator Breaux said his plan just simply slows the rate of 
growth in spending. That is all BBA did, remember? All BBA 97 
did was control the rate of growth for the future 6 years, so 
it would be the same as the rate of growth in the preceding 6 
years----
    And anyone who wants to go vote can. You got 3 minutes 
left. I am going to quit in just a second.
    I think we have to be serious about what BBA 97 did. What 
it did in fact and what it was intended to do are two different 
things, and that is what caused the havoc. But we do have a 
very important responsibility to fulfill, and it will not help 
if you are not tough on yourselves.
    Dr. Feder, I want to know exactly what you think ought to 
be in that benefit plan. I want you to be part of costing it 
out, and I want you to be a part of taking responsibility. I do 
not want to hear we have a little problem of solvency. You know 
we have a big problem of solvency. So I would really appreciate 
your continued thoughts.
    All of you had excellent comments in your testimony, and I 
thank you for working with the Committee today.
    The hearing is adjourned.
    [Whereupon, at 12:05 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
          Statement of Advanced Medical Technology Association
    AdvaMed represents over 800 of the world's leading medical 
technology innovators and manufacturers of medical devices, diagnostic 
products and medical information systems. Our members are devoted to 
the development of new technologies that allow patients to lead longer, 
healthier, and more productive lives. Together, our members manufacture 
nearly 90 percent of the $68 billion in life-enhancing health care 
technology products purchased annually in the United States, as well as 
50 percent of the $159 billion products purchased internationally.
    AdvaMed applauds the willingness of the Congress to review the 
current inadequacies of the Medicare program and to plan a future for 
Medicare that is more responsive to beneficiary needs. We believe it is 
essential to restructure Medicare to ensure that beneficiaries have 
access to high-quality health care, which includes lifesaving and life-
enhancing medical technologies.
    We support the creation of a system that would provide Medicare 
beneficiaries with a broader choice of competing health plans. HCFA's 
role in such a system should be to administer Medicare's fee-for-
service system, which should continue to be available to beneficiaries. 
The dynamic and creative forces of the marketplace and competition will 
lead to innovative alternatives and the individual options and choices 
that Medicare consumers need. Given clear choices, Medicare 
beneficiaries will choose the best quality and value offered in a 
competitive, patient-centered health care system. In addition, we 
believe that a competitive market system for Medicare will foster and 
reward innovations that improve outcomes, reduce costs, and enhance the 
quality of life for patients.
    Until such comprehensive reforms are fully implemented in Medicare, 
AdvaMed believes changes must be made to the existing fee-for-service 
program to make coverage, coding and payment decisions more predictable 
and improve beneficiaries' access to new medical technologies. 
Specifically, we support greater transparency in national and local 
Medicare coverage processes, more efficient and timely coding policies, 
and more frequent payment determination updates.
    With or without major reforms, Medicare should be encouraged to 
capitalize on advanced technologies, which have revolutionized the U.S. 
economy in many other sectors. Significant advances in health care 
technologies--from health information systems that monitor patient 
treatment data to innovative diagnostics tests that detect diseases 
early and lifesaving implantable devices--improve the productivity 
level of the health care delivery system itself and vastly improve the 
quality of the health care delivered. New technologies can reduce 
medical errors, make the system more efficient and effective by 
catching diseases earlier--when they are easier and less expensive to 
treat, allowing procedures to be done in less expensive settings, and 
reducing hospital lengths of stays and rehabilitation times.
    AdvaMed applauds Congress for the initial reforms it recently 
legislated to make the coverage, coding and payment systems more 
effective and efficient. HCFA has also recently taken some steps to 
modernize its coverage and payment systems. However, there is still 
more work that needs to be done. AdvaMed encourages additional measures 
to make the coverage process more transparent and predictable, the 
coding processes less complex, and the payment systems more timely and 
efficient.
    While the Medicare program faces the challenge of a rapidly growing 
aged population, it is presented with the opportunity of unprecedented 
advances in innovation. We look forward to participating in the 
Medicare reform debate and will review all plans carefully to ensure 
that they will foster, rather than impede, the delivery of innovative 
therapies for patients.

                                


               Statement of Alliance to Improve Medicare
Introduction
    The Alliance to Improve Medicare (AIM) is the only organization 
focused solely on fundamental, non-partisan modernization of the 
Medicare program to ensure more coverage choices, better benefits 
(including prescription drug benefits), and access to the latest in 
innovative medical practices, treatments and technologies through the 
Medicare system. AIM coalition members include organizations 
representing seniors, hospitals, small and large employers, insurance 
plans and providers, doctors, medical researchers and innovators, and 
others.
    The structure of the traditional Medicare program has changed 
little in more than three decades and, consequently, has not kept pace 
with many of the dramatic improvements in health care delivery. AIM is 
dedicated to achieving comprehensive modernization of the traditional 
Medicare program through policy research and educational programs for 
Members of Congress and their staff, the media, and the American 
public.
Key Principles for Medicare Modernization
    AIM has identified seven key principles to guide Medicare 
modernization efforts. These principles seek to improve both the 
administration of the Medicare program and the benefits provided to 
program beneficiaries.
    First, AIM supports improvement of health care coverage through 
better coordination of care including health promotion and disease 
prevention efforts. The traditional Medicare program has not kept pace 
with private sector benefits and plans offering preventive health care 
and screening measures such as annual physicals, hearing and vision 
tests, and dental care. Medicare beneficiaries, more so than other 
population age groups, can benefit from these preventive measures which 
can help reduce long-term costs and ensure appropriate, early treatment 
of health problems. Private sector Medicare providers should have the 
flexibility to incorporate these measures as part of basic health care 
services. Unfortunately, an act of Congress has previously been 
required to provide routine screening tests under the Medicare fee-for-
service program. For example, health management programs are offered by 
a variety of health plans (including HMOs) and pharmaceutical benefit 
managers (PBMs), companies who supply and manage prescription drug 
benefits for health care companies. Health management programs reduce 
overall health costs and improve the quality of life by helping 
beneficiaries better understand and manage conditions such as asthma 
and diabetes.
    Second, AIM supports improvement of health care coverage through 
increased consumer choice. Medicare beneficiaries should have the 
option to choose from a range of coverage options similar to those 
available to Members of Congress, federal employees and retirees, and 
millions of working Americans under 65 years of age who are covered by 
private plans. The Medicare managed care program, Medicare+Choice, 
seeks to provide these types of coverage options to seniors nationwide. 
Unfortunately, inadequate payments and excessive regulation of private 
sector providers participating in Medicare+Choice have seriously 
constrained the ability to expand coverage areas and have caused 
numerous plans to withdraw from coverage areas where reimbursement was 
inadequate to cover even the costs of basic care. Between 1998 and 
January 2001, these withdraws affected over 1.5 million beneficiaries. 
One Medicare+Choice program participant, Oschner Health Plan (OHP) of 
Louisiana, cited inadequate payments in July 2000 when announcing 
withdrawal from nearly 6,000 OHP Medicare+Choice beneficiaries or 16% 
of OHP's Medicare+Choice beneficiaries in Louisiana. OHP projected 2001 
losses of nearly $6.8 million as a result of inadequate payment rates 
for basic coverage for these beneficiaries.
    Third, AIM supports improving coverage through increased 
competition among all plans and providers in the Medicare program. 
Medicare's managed care option, the Medicare+Choice program, is an 
alternative to and competitor with traditional fee-for-service 
Medicare. The federal government, through the Health Care Financing 
Administration (HCFA), currently regulates Medicare+Choice plans while 
also acting as a participant itself through the traditional fee-for-
service program. AIM believes this dual role is anti-competitive. 
Medicare reform and modernization efforts must be evaluated based on 
success in increasing market competition and availability of basic, 
affordable coverage to Medicare beneficiaries, not on increasing HCFA's 
regulatory powers and oversight activities. The U.S. General Accounting 
Office (GAO) and former HCFA Administrators have identified several 
areas of conflict between HCFA's broad responsibilities and management 
structure including the dichotomy of the traditional fee-for-service 
program with the Medicare+Choice program. These conflicts include the 
lack of separate management offices and directors for each program.
    Fourth, AIM believes prescription drug coverage should be provided 
to all Medicare beneficiaries as part of comprehensive, market based 
Medicare modernization. The opportunity for reform and modernization is 
presented by the recognized need to cover prescription drug benefits 
for Medicare recipients. Congress should take this opportunity and not 
simply layer a new, stand-alone drug program onto the traditional 
Medicare program without addressing the program's outdated and 
inadequate financial and structural systems. The program in its current 
form cannot meet the coming challenges presented by the retirement of 
the baby boom generation which will more than double the number of 
Medicare beneficiaries. Any Medicare reform proposal must address the 
real structural and financial problems of the Medicare program. For 
example, Medicare currently does not cover simple screening tests to 
detect high cholesterol among beneficiaries. Without modernization, 
Medicare will pay for only the drugs to treat high cholesterol but will 
continue to deny payment for detection of high cholesterol problems in 
seniors. Under a drug benefit as part of modernization, Medicare would 
ensure early detection and treatment, including drug therapy, as part 
of a comprehensive disease management approach.
    Fifth, AIM urges Congress to continue to review and address the 
financial crisis facing health plans and providers. Adequate financing 
is necessary to establish a solid foundation upon which to build a 
better Medicare and ensure the long-term financial integrity and 
solvency of the Medicare program. Payment cuts in the Balanced Budget 
Act of 1997 (BBA '97) directly undermined patient care and progress 
toward a modernized program. These cuts were originally estimated to be 
$103 billion over five years but recent Treasury Department and 
Congressional Budget Office (CBO) reports project cuts of almost $300 
billion--nearly triple what was intended. Health plans, hospitals and 
doctors have been hit hard and patient care has been and will continue 
to be affected. Congress recognized the damage caused by BBA '97 and 
has provided over $30 billion in restorations over the next five years. 
These small repayments represent a good start at addressing the 
financial crisis caused by the cuts. AIM encourages Members to ensure 
appropriate and timely payments for these providers and plans to ensure 
appropriate care for Medicare beneficiaries.
    Sixth, AIM believes that the current rigid and outdated Medicare 
benefit structure and bureaucracy must be replaced. Program 
administrators must be provided with the flexibility to make new health 
care innovations and technologies more readily accessible to Medicare 
beneficiaries. Currently, Medicare beneficiaries wait a minimum of 15 
months after patients in private health plans, including 
Medicare+Choice plans, to gain access to new medical devices and 
technologies, and sometimes the wait is as long as five years. HCFA's 
approval, coding and reimbursement procedures are largely responsible 
for this delay. Quality health care for Medicare beneficiaries requires 
these new technologies to be available for all patients. For example, 
more than half the patients who could use cochlear implants, which 
restore hearing to the profoundly deaf, are Medicare age. 
Unfortunately, few Medicare patients have received the device because 
HCFA hasn't updated its inadequate payment rate in 14 years. Current 
payment rates for cochlear implants cover less than half of actual 
costs.
    Finally, AIM believes Medicare administrators must reduce excessive 
program complexity and bureaucracy caused by the more than 110,000 
pages of federal rules, regulations, guidelines and mandates. While AIM 
supports the elimination of real fraud and abuse in Medicare, our 
members believe this can be achieved without relying on unnecessarily 
complex and heavy-handed regulation. Providers and plans must not be 
forced to divert resources from patient care in order to respond to 
ever-changing regulations. For example, Medicare+Choice plans 
announcing withdrawals in July 2000 frequently cited the large volumes 
of Operational Policy Letters (OPLs) as one reason for withdrawal. 
These plans reported increasing needs to devote additional employees to 
regulatory issues instead of health care delivery and management, 
increasing costs to plans at the same time as health care costs 
increased but payment rates from HCFA remained stagnant.
Conclusion
    AIM urges the 107th Congress to consider sensible, long-
term solutions to the problems confronted by the Medicare program and 
by Medicare beneficiaries and we urge Members to work together on a 
bipartisan basis to achieve comprehensive Medicare reform. AIM 
appreciates the opportunity to submit this statement for the hearing 
record and we look forward to working with the Committee as they 
examine options for Medicare.

                                


             Statement of Citizens Against Government Waste
    Citizens Against Government Waste (CAGW) appreciates the 
opportunity to provide testimony to the House Ways and Means 
Subcommittee on Health on reforming Medicare. CAGW is a non-profit, 
non-partisan 501(c)3 organization that accepts no funds from the 
government. The organization has more than one million members 
nationwide. CAGW was founded in 1984 by J. Peter Grace and nationally 
syndicated columnist Jack Anderson to build public support for 
implementing the Grace Commission recommendations and other waste-
cutting proposals, and has long been interested in making Medicare more 
efficient and responsive to its beneficiaries.
    For several years, one of the major policy issues in Washington and 
across the country is how to provide Medicare beneficiaries with an 
outpatient prescription drug benefit. Prescription drugs have become a 
major component of modern health care and are routinely covered in 
private plans. Medicare, unfortunately for seniors, is not a modern 
healthcare plan. It is still based on how private health insurance was 
structured and delivered in the 1960's. At that time, there were few 
innovative drugs and health insurance focused mostly on hospital stays 
and expensive surgery. Simply put, Medicare has not kept pace with the 
advances in modern healthcare technology.
    Medicare must be placed on sound financial footing and seniors 
should have access to a prescription drug benefit. CAGW is not in favor 
of simply throwing additional money to Medicare Part A and adding a 
prescription drug benefit, such as creating a Part D as in Senator 
Daschle's plan (S. 10), to the current Medicare structure. Not only is 
Medicare in desperate need of modernization, it is financially 
unstable. It would be unwise to allow the Health Care Financing 
Administration (HCFA) to directly manage and control a drug benefit. 
CAGW agrees with the comments of Senator John Breaux (D-LA) at the last 
meeting of the Bipartisan Commission on the Future of Medicare:

          ``As I've said before, I think putting surplus dollars into 
        the Part A Trust Fund doesn't fix Medicare's underlying 
        program. I've likened it to putting more gas in an old car--it 
        still runs like an old car and doesn't have any of the features 
        of a new car.''

    Medicare must be converted into a modern healthcare system that can 
provide innovative and up-to-date healthcare for our seniors. CAGW 
believes that the solution to modernizing Medicare is what a majority 
of members on the Bipartisan Commission on the Future of Medicare 
recommended to fix the program. Medicare should be restructured to 
resemble the Federal Employees Health Benefit Program (FEHBP) that 
provides healthcare to members of Congress and nine million federal 
employees, including the president. FEHBP offers about 245 privately 
run healthcare plans nationwide. All the plans provide drug coverage 
and the program uses customer choice to keep prices down and quality 
up.
    Under this FEHBP-styled plan, seniors would be given the financial 
and institutional assistance necessary--better known as premium 
support--to buy government-approved private health insurance of their 
own choice. Seniors in economic need would be given more assistance to 
purchase a plan. If this is not what they want, they could choose to 
stay in the current government-run system.
    An FEHBP model for Medicare would provide a wide range of choices 
for our nation's seniors, from HMOs to PPOs to fee-for-service plans. 
Just as FEHBP allows federal employees to pick a new health plan each 
year, seniors would be allowed to pick a new one on an annual basis, as 
well.
    Contrarily, Medicare uses price controls and rationing to control 
costs. Seniors cannot shop for a new health plan each year and must 
accept HCFA's choice on what will be covered or not. As a result, 
Medicare effectively denies seniors access to the most innovative 
technology. If supporters of a HCFA-run Medicare drug benefit have 
their way, it will not be too long before Congress and the agency begin 
to ration and reduce payments to control pharmaceutical costs and 
usage, just as has been done in prior years for other benefits and 
medical procedures.
    If anyone doubts that Medicare would not deny coverage, ration or 
institute price controls for a pharmaceutical benefit, one only needs 
to look how HCFA covers medical devices.
    Medical devices can cover a wide range of technology used in 
healthcare. They range from a simple test strip that is used to find 
how much glucose is in blood, to a coronary angioplasty catheter, to a 
hip implant, to a Computerized Axial Tomography (CAT) scan that is used 
to view the inner workings of the human body. Each has various degrees 
of complexity and vastly different functions.
    Medical devices essentially go through two approval processes 
before they are marketed to seniors. First, they must receive approval 
from the Food and Drug Administration (FDA) before they can be marketed 
to the general public. Then they have to go through HCFA to win 
approval to be covered by Medicare.
    One of the most important things for a medical device company to do 
is to obtain a Medicare billing code for their product. When a medical 
device is used, the associated code will determine how much will be 
paid by HCFA and their contractors for the procedure. If there is no 
appropriate code, reimbursement can be delayed and doctors will be less 
likely to use the product.
    Unfortunately for seniors, the process of getting an innovative 
device covered and paid for is more complex and challenging in Medicare 
than in the private sector. It often takes months or even years to get 
a code for a FDA-approved product. Without a code, proper payments are 
either delayed or uncertain. When this happens, seniors often do not 
have access to the newest and best technologies.
    It literally takes an act of Congress to get Medicare to cover some 
innovative technologies that are already used in the private sector 
insurance market. For example, in 1997, there was a concerted 
bipartisan effort to pass a law to require Medicare to cover:
     Lan annual screening mammography for women over age 39;
     Ltriennial screening pap smear and screening pelvic exam 
for any woman (annually for a woman with cervical or vaginal cancer or 
other abnormality, or who is at high risk of developing such a cancer), 
while providing for a waiver or deductible;
     Lannual prostate cancer screening tests;
     Lcolorectal cancer screening tests, subject to prescribed 
frequency and payment limits; and
     Ldiabetes outpatient self-management training services, 
including blood-testing strips glucose monitors for individuals with 
diabetes.
    Fortunately, the bill was passed with bipartisan support, and 
signed into law by President Clinton in December 2000. Now seniors are 
provided coverage for these important diagnostic tools. But this should 
not be how Medicare is run or how seniors get access to important 
healthcare devices.
    It is already a matter of life and death in that seniors must wait 
for HCFA's approval so that Medicare provides access to a medical 
device. If this same protracted process occurs regarding prescription 
drugs, this untenable scenario will be compounded.
    According to the most recent report by the Medicare Trustees, the 
Medicare HI trust fund (Part A) is estimated to go bankrupt in 2025. 
While this is much improved from prior estimates, the forecast is 
entirely dependent on future economic trends and healthcare cost 
trends. Furthermore, by 2010, it is expected there will be 3.6 workers 
for each HI beneficiary, and this will swiftly decline to 2.3 workers 
for every HI beneficiary by 2030 when the last baby boomer reaches 65.
    The Bipartisan Commission found that their FEHBP model proposal for 
Medicare would be approximately budget neutral in its first five years 
(between 2000 and 2004 at the time the commission wrote the report.) 
Over the 10 years following, the proposal would save approximately $100 
billion. Over the longer term, the proposal would reduce the growth of 
Medicare spending by approximately 1 percent a year. The savings would 
accumulate slowly over time and by 2030 the annual budgetary savings 
would range from $500 to $700 billion.
    Prescription drug coverage for seniors must be made available, but 
simply adding such coverage to the current Medicare system won't work 
in the long run. First, more needs to be done to make Medicare more 
efficient, agile, responsive and financially sound. CAGW believes the 
best way to save Medicare for the future and to give control and choice 
back to our nation's seniors is to modernize Medicare and make it work 
like the plan that provides healthcare to our nation's federal 
employees. After all, if FEHBP is good enough for Congress, it should 
be good enough for our nation's seniors.

                                


               Statement of Healthcare Leadership Council
    The Healthcare Leadership Council applauds Chairwoman Nancy Johnson 
for her courageous efforts to maintain the goal of Medicare reform and 
bring the program into the 21st Century.
    The past couple of years have seen Medicare's precarious bankruptcy 
date extended and the immediate pressure to reform the program lifted 
from Congress. Chairwoman Johnson is to be applauded for continuing the 
dialogue on the issue of Medicare reform and working toward a long-term 
solution, despite opportunities for a short-term reprieve.
    Even more dire than Medicare's budgetary problems is Medicare's 
inability to keep up with private insurance coverage or with advances 
in health care technology. An explosion in research has made the 
control and prevention of disease more veritable than ever. Yet 
Medicare beneficiaries do not have access to prescription drugs, limits 
on catastrophic out-of-pocket spending, many preventive benefits, and a 
number of other health care products and services that are now 
enhancing and saving the lives of those with employer health insurance 
including those enrolled in the Federal Employees Health Benefits 
Program.
    The HLC believes it is unrealistic to expect the federal government 
to finance a comprehensive program with prescription drugs and other 
benefits under Medicare's currently flawed structure. Recent estimates 
of spending on prescription drugs by the Congressional Budget Office 
(CBO) have sharply increased, with spending on drugs by Medicare 
beneficiaries in 2001 7 percent higher than estimated last year and 23 
percent higher by 2010.
    Adding a costly drug benefit to today's Medicare while it is facing 
insolvency, even before peak enrollment by the baby boom generation, 
would further cripple the program. Instead, Medicare must embrace the 
innovations in health care delivery, benefit design, and cost 
management techniques that have occurred in the private sector in order 
to expand its benefit package and best serve its beneficiaries.
    The Healthcare Leadership Council urges Chairwoman Johnson to 
continue her efforts to work in a bipartisan manner and develop a plan 
for restructuring Medicare for the long term so that current and future 
beneficiaries can access the high quality care and benefits they 
deserve. A reformed Medicare program that includes a wide selection of 
private health plans competing for Medicare beneficiaries would offer 
the highest quality of care and services, including prescription drugs 
and preventive benefits, at the most affordable price.
    For the immediate future, HLC encourages Congress to begin 
incorporating elements of reform into the current Medicare program 
including a new streamlined regulatory process that is neither 
burdensome nor complex, an accelerated coverage process to ensure 
beneficiaries the latest medical technologies, a new independent 
administering entity to encourage the success of the Medicare+Choice 
program and any new benefits, a new method of measuring Medicare 
solvency for all Medicare spending, and an improved Medicare+Choice 
payment methodology to increase the availability of this program for 
Medicare beneficiaries.
    The members of the Healthcare Leadership Council stand ready to 
assist the Chairwoman and her subcommittee with their efforts to move 
Medicare toward assuring that, in the near future, its beneficiaries 
are able to take advantage of the full potential our health care system 
has to offer.

                                


  Statement of National Association of Chain Drug Stores, Alexandria, 
                                Virginia
Introduction
    Madam Chairman and Members of the Subcommittee. NACDS represents 
about 170 chain pharmacy companies that operate about 33,000 retail 
pharmacies all across the United States. Chain pharmacy is the single 
largest segment of pharmacy practice. We filled about 60 percent of the 
3.1 billion prescriptions provided across the nation last year.
    NACDS appreciates this opportunity to provide comments today to the 
subcommittee on important Medicare reform issues. We are particularly 
interested in sharing with the subcommittee our perspectives on 
providing prescription drug coverage to seniors. We believe that our 
experience in delivering and managing pharmacy benefits can be of value 
to the subcommittee as you begin your important work this year in 
determining what works, and doesn't work, for seniors in helping them 
obtain their vital prescription medication and pharmacy services.
Develop a Pharmacy Benefit, Not Only a ``Drug'' Benefit
    Today, when a patient arrives at their local community pharmacy, be 
it a chain pharmacy or an independent, they come into contact with one 
of the most accessible and trusted providers in the entire health care 
system. It is estimated that 95 percent of Americans live within five 
miles of a retail community pharmacy.
    Thus, the vast majority of Americans are never far from a highly 
trained health professional that can provide medications or advice on a 
wide range of health care issues. Convenient access to community 
pharmacies makes us a critical part of society's health care safety 
net.
    Prescription medications are the most widely used and cost-
effective health care interventions used by patients today. Modern 
prescription drugs have extended and improved the lives of millions of 
Americans and saved millions of dollars through shortened length of 
illnesses, increased productivity, and reductions in hospitalization 
and medical procedures. Community pharmacy is proud of the role we have 
in assuring the safe and effective use of these therapies.
    That is why we believe that any new program to expand prescription 
drug coverage to seniors should be a pharmacy benefit, not just a 
prescription drug benefit. Too often, we think of a prescription drug 
benefit as only providing a ``drug product'' to seniors. We believe 
that this is a serious mistake. Seniors take three times more 
prescription medications than younger individuals. For that reason, 
seniors need ready access to community-pharmacy-based education, 
counseling, and medication therapy management, in addition to the drug 
product, so they can take their medications appropriately to achieve 
the intended medical outcomes.
    We believe that insurers, payors, pharmaceutical manufacturers, and 
seniors themselves can agree that these important community-based 
pharmacy services help make better use of prescription products. To 
play off a popular catch-phrase, ``pharmacy doesn't make the drugs, but 
pharmacy does make the drugs work more effectively.''
    We applaud forward thinking members of this subcommittee who 
supported inclusion of medication therapy management services in 
various prescription drug proposals introduced last year. It is 
absolutely critical that any Medicare prescription drug benefit that 
Congress approves includes coverage for these services.
Don't Over Promise Seniors and Understand the Market
    Regardless of how seniors obtain their prescription drugs, whether 
through public or private prescription programs or by paying out of 
pocket, community retail pharmacies are in a good position to help 
evaluate for the subcommittee the effectiveness of various options for 
prescription drug coverage.
    When considering approaches to prescription drug coverage, we 
believe that two good principles for the subcommittee to keep in mind 
are: first, don't over promise seniors; and second, make sure that you 
understand how all the pieces fit together in the pharmacy marketplace.
    For example, many of you often receive mail from constituents 
asking the simple question: ``Why do my drugs costs so much?'' 
Currently, reimbursement for almost 85 to 90 percent of all 
prescriptions is set by third party plans, such as insurance companies, 
HMOs or PBMs. Third party plans keep squeezing down reimbursement rates 
in order to control exploding costs, but these policies do little to 
control escalating expenditures. Under these plans, most patients 
simply pay a copay for these prescriptions. Patient copays have been 
increasing over the last few years also because of the escalating costs 
of prescription benefit programs.
    Having said this, we are concerned about policy approaches, both at 
the Federal level and the state level, that would seek to target retail 
prescription prices as the solution to the high cost of prescription 
drugs for seniors. The subcommittee should be aware that almost 80 
percent of the cost of the average retail prescription price represents 
costs to the pharmacy over which we have absolutely no control. These 
are predominantly the costs of acquiring the drug product from the 
manufacturer, which is passed through to the consumer, and thus 
reflected in the retail price charged.
    The remaining 20 percent of the prescription price represents our 
operating costs, such as heat, light, rent, salaries, computers, 
counseling, and other overhead expenses. Currently, our salary budgets 
are experiencing significant upward pressures as a result of the 
critical pharmacist shortage. We look forward to working with you this 
year, Madame Chairman, on alleviating this shortage and assuring an 
adequate supply of pharmacists exists to serve all Americans, including 
Medicare beneficiaries.
    With this as background, we will now provide some of our 
perspectives and cautions on other approaches that you may consider 
this year.
Prescription Drug ``Cash Discount Cards'': Unfulfilled Promise
    Retail pharmacies have no upward negotiating leverage with brand 
name drug manufacturers, so any initiatives that seek to control or 
limit our retail charges do nothing to affect our cost of buying the 
drug. For example, so-called prescription ``cash discount'' card 
programs essentially require pharmacies to provide a discount on the 
retail prescription price, without lowering our cost of providing the 
product. In other words, the pain doesn't flow upstream.
    We also believe that these prescription cash discount cards create 
unfulfilled promises for seniors. If a senior cannot afford a drug at 
$100, it is very unlikely that the senior can afford it at $90. In 
addition, as stated above, many of our pharmacies already give senior 
citizen discounts, which reduce the retail price essentially to the 
price that the senior would pay under the cash discount card. Finally, 
many of these cash discount card programs also often use out-of-state 
mail order as an incentive to steer patients to certain drugs that may 
be inappropriate for the senior. Mail order also takes the senior out 
of the neighborhood pharmacy setting.
    On this topic, we'd like to draw your attention to a recent report 
from the Massachusetts Institute of Technology that said, ``the 
individuals who face the greatest burden lack insurance coverage for 
prescription drugs are in relatively poor health with severe chronic 
conditions, have relatively low income, and do not qualify for existing 
state prescription drug coverage programs. These individuals need 
benefits that far exceed the savings attainable from a pure discount 
card program.'' \1\
---------------------------------------------------------------------------
    \1\ Massachusetts Institute of Technology, The HOPE Plan and the 
Section 271 Discount Drug Purchase Program for Massachusetts: An 
Economic Analysis. December 21, 2000.
---------------------------------------------------------------------------
The Myth of Volume Pharmaceutical Purchasing
    Some may say that you can obtain better prescription prices for the 
elderly by ``pooling their purchasing power'' so that they can get the 
same volume discounts obtained by other pharmaceutical purchasers. Be 
wary of this line of argument, because the pharmaceutical marketplace 
doesn't work that way. Volume purchasing does not drive pharmaceutical 
manufacturers to give discounts--you have to move a manufacturer's 
``market share'' to obtain these discounts.
    If ``volume purchasing'' drove manufacturer discounts, then why do 
the largest pharmaceutical purchasers, such as large chain pharmacies, 
as well as many of the independent pharmacies that belong to large 
buying groups, pay higher prices for brand name drugs than smaller 
pharmaceutical purchasers who buy less volume?
    Here's what the proponents of ``volume purchasing'' for seniors 
don't and won't tell you. All this really amounts to is simply 
discounting the retail prescription price that seniors pay at their 
pharmacy, without affecting retail pharmacy's cost of buying the drug, 
or without requiring the insurance plan or PBM to ``pass through'' to 
the senior any and all of the financial incentives that are given to 
them by the manufacturer. If these plans were required to pass through 
all the discounts that they negotiate, both pharmacy discounts and 
manufacturer discounts, the senior would truly benefit from lower 
prescription drug prices. Without requiring full ``pass throughs,'' 
from the manufacturer, the entire burden of so-called ``volume 
purchasing'' falls squarely and unfairly on the shoulders of community 
pharmacies.
    We also believe that some of the estimates being made of the size 
of the discounts that volume pharmaceutical purchasing would attain for 
seniors are unrealistic and will create serious unfulfilled promises. 
For example, there were several numbers floating around last year that 
indicated that private sector entities, or PBMs, would be able to lower 
retail prescription prices paid by consumers by 25 percent, with some 
estimates as high as 30 to 39 percent.\2\
---------------------------------------------------------------------------
    \2\ Price Discounting Practices for Pharmaceuticals in the U.S. The 
Lewin Group, April 2000.
---------------------------------------------------------------------------
    We do not know where these numbers come from or how they are 
calculated. The only remotely conceivable way that this discount size 
could be attained is if the PBM is required to pass along to the 
consumer any and all financial incentives (e.g. rebates or discounts) 
that they negotiate with pharmaceutical manufacturers. This does not 
happen today in the marketplace and is creating false and unrealistic 
expectations.
``Drugs Only'' Plans and Insurance-Based Models
    We recognize that there is support among Members of Congress for 
creating ``drugs only'' insurance-based models to provide prescription 
drug coverage to seniors. Recent experience in the state of Nevada, 
however, should tell us that, just because you ``build it,'' doesn't 
mean that ``seniors will come.'' In a genuine effort to help seniors 
obtain prescription drugs, Nevada embarked upon establishing an 
insurance-based model to provide prescription drug coverage. After 
several attempts to finally find a company that wanted to administer 
the program, reports are that only a handful of seniors have signed up 
because of the high premiums and significant cost sharing in the 
program.
    We are concerned about a similar fate if such an approach is tried 
at the Federal level. In general, these programs are subject to 
significant ``risk selection,'' and tend only to attract those seniors 
that need protection against high prescription drug bills. Many seniors 
will not see the benefit in obtaining this coverage because of the 
significant deductibles and premiums that have to be paid before any 
benefit is derived from the coverage. Thus, because the cost will keep 
many seniors out of the ``risk pool,'' premiums will keep increasing 
for those remaining in the pool, making it less and less affordable for 
those that need the coverage.
    Moreover, the cost of these private-sector insurance plans can also 
be prohibitive, as was recently reported in the New York Times. The 
premiums for Medigap plans with prescription drug coverage, the model 
on which these insurance-based programs are based, will increase 31 
percent in New York, 26 percent in Illinois, 24 percent in Wisconsin, 
16 percent in Arizona, and 14 percent in Ohio.\3\
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    \3\ Insurers Push Rates Higher for Medicare Supplement. Milt 
Freudenheim, New York Times, February 8, 2001.
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    Finally, only one entity to date has indicated interest in creating 
an insurance product in the market that would operate by assuming risk 
for senior drug coverage. The insurance and PBM industry has 
demonstrated little enthusiasm for this concept. So, with only one 
competitor, it is difficult to see how competition would or could 
actually work under this model. Moreover, we all should be concerned 
that this one entity is a subsidiary of a drug manufacturer, which 
increases the likelihood that these manufacturers' drug products, 
rather than the one that is best for the patient, will be more 
frequently dispensed than others.
``Premium Support'' Models, Risk-Based Capitated Financing, and PBMs
    We also believe that the subcommittee should consider the 
implications for quality of care and cost of using a competition-based 
``premium support'' model for Medicare beneficiaries, financing the 
benefit through risk-based capitation, and delivering the benefit 
through pharmaceutical benefit managers, also known as PBMs.
    Almost all proposed models, to provide a prescription drug benefit 
to seniors, use a PBM in some way, shape, or form. For example, some 
proposals would require that an agency of the Federal government 
contract with one or more PBMs to provide a pharmacy benefit.
    Other proposals would establish ``prescription drugs only'' 
insurance policies for Medicare beneficiaries that could be voluntarily 
purchased in the private marketplace. Many of these proposed insurers 
would likely partner with PBMs to administer these plans. PBMs can 
serve several useful functions in the design and delivery of a new 
pharmacy benefit for seniors. However, NACDS believes that policymakers 
need to evaluate the implications for quality of care and cost of 
several management tools currently used by PBMs.
    PBMs Achieve Savings by Focusing on Squeezing Pharmacy 
Reimbursement: How effective are PBMs at reducing the cost of drug 
products? How do PBMs achieve most of their savings? Our experience is 
that they achieve the overwhelming majority of their savings by 
squeezing down on pharmacy reimbursement, not by aggressively 
negotiating rebates and discounts from drug manufacturers.
    Evidence suggests that PBMs are relatively ineffective at managing 
drug costs, and actually add expense to the system that could otherwise 
be passed along to the consumer. For example, a 1997 GAO study said: 
``Much of the savings that PBMs achieve appear to come from the lower 
prices paid to pharmacies rather than from the rebates offered by drug 
manufacturers.'' \4\ The study found that 50 percent to 70 percent of 
the drop in the plans' spending on prescription drugs resulted from 
lower retail prescription prices. Only 2 to 21 percent of the savings 
resulted from manufacturer rebates that the PBMs shared with the health 
insurance plans.
---------------------------------------------------------------------------
    \4\ Pharmacy Benefit Managers, GAO/HEHS-97-47, U.S. General 
Accounting Office, February 1997.
---------------------------------------------------------------------------
    This study reflected the experience of the three largest PBMs that 
manage the 9-million member Federal Employees Health Benefits Program 
(FEHBP). Members of Congress should be aware that this program, which 
is being talked about as the basis for a future Medicare ``premium 
support'' model, has been experiencing double-digit increases in 
prescription drug expenditures over the last several years, 22 percent 
for 1998 alone.
    We believe that the experience of FEHBP should be instructive to 
Members of Congress as they consider the ``premium support'' model for 
Medicare. Please note that these prescription drug cost increases are 
occurring in a population that is not representative of the Medicare 
population. FEHBP generally serves a younger population that uses fewer 
prescription drugs than the Medicare population. More significant 
increases are likely to occur in an older, Medicare-based population.
    Risk-Based Financing: Some proposals would finance a senior drug 
benefit by shifting ``full or partial financial risk'' to the private 
sector entity managing the benefit. Under these approaches, a plan 
would receive a fixed or ``capitated'' amount to provide all the 
beneficiaries' prescription drug needs, regardless of the cost of those 
drugs, or the number of drugs being taken. These ``full or partial 
financial risk'' capitation approaches have significant potential 
negative implications for quality of care.
    That is because providers are placed at risk for the cost of 
purchasing and dispensing drug products and providing pharmacy 
services, over which they have no control. For example, to stay below 
the reimbursement ``cap,'' drugs that are less expensive but less 
effective may be provided to the patient. Ironically, under this model, 
the drug manufacturers, who are driving the overwhelming majority of 
the increases in drug spending due to DTC advertising and higher drug 
prices,\5\ bear none of the risk.
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    \5\ Drug manufacturer direct to consumer advertising spending 
increased to $1.9 billion for the period January-September 2000.
---------------------------------------------------------------------------
    Because of the unpredictability in prescription drug utilization, 
there are very few private-sector prescription drug benefit programs 
that are fully or partially capitated, and there are none for older 
Americans that uses this type of approach. Past experiences in using 
capitation models for pharmacy benefits have been unsuccessful. There 
is no reason to believe that they would be any more successful today, 
given the impact that manufacturer direct-to-consumer advertising has 
had on fostering increased prescription drug use.
    Of further concern are recent reports that the Congressional Budget 
Office has sharply increased its estimates of prescription drug 
spending by the elderly, escalating the cost of potential new Medicare 
drug benefit by one-third. This phenomenal growth in drug spending by 
the elderly should give us more pause to really question the impact of 
a capitated drug benefit on seniors, and whether PBMs really have the 
ability to manage these exploding costs.
    Finally, providing ``drugs only'' capitated policies results in a 
serious ``disconnect'' in the integrated financing of health care. That 
is because under a capitated drug benefit approach, insurers or PBMs 
only have incentives to hold down their drug spending, without 
assessing how increasing (or decreasing) drug spending will impact 
overall health care spending for a patient. This leads to fragmented 
and disjointed health care for the patient, and thus could potentially 
compromise quality of care.
    Participation by Pharmacies as ``Eligible Entities'': It is 
important to note that many of the bills would allow ``networks of 
pharmacies'' or ``retail pharmacy delivery systems'' to contract 
directly with a Federal government agency or an insurance company to 
provide a capitated drug benefit to seniors. While we appreciate the 
interest in enabling pharmacies participating as ``eligible entities,'' 
it is highly unlikely that we will do so for two reasons.
    First, many retail pharmacies (or retail pharmacy networks or 
delivery systems) are not licensed in states as ``insurers,'' and would 
unlikely be willing to assume capitated ``risk'' for the delivery of a 
drug benefit. This is especially the case since pharmacies have little 
ability to control physician prescribing patterns or drug manufacturer 
advertising.
    Second, even though retail pharmacies purchase, at significantly 
larger volume, greater quantities of pharmaceuticals than most other 
pharmaceutical purchasers, drug manufacturers charge them much higher 
prices for the same prescription drugs than other smaller purchasers, 
such as Medicare+Choice plans. This will place community retail 
pharmacies at a competitive disadvantage to these other entities that 
may want to bid to offer a drug benefit.
    This market distortion is a fundamental inequity in the system, 
which belies the whole premise that ``competition'' actually exists or 
even works in the pharmaceutical marketplace. If retail pharmacies were 
given the same access to the discounts that drug manufacturers make 
available to other, smaller purchasers, the overall cost of the 
Medicare drug benefit would be reduced by billions of dollars. 
Prescription drugs would also be more affordable for other private 
prescription drug plans, as well as millions of uninsured non-elderly 
Americans.
    Medication Therapy Management: Almost all Medicare proposals would 
require that quality assurance, drug use review, and medication therapy 
management services be provided to Medicare beneficiaries under these 
plans. Medication therapy management services include disease state 
management, medication compliance programs, and drug use review. These 
programs have been documented to improve prescription use, reduce 
medication errors, and save money.
    Community retail pharmacy believes that the provision of medication 
therapy management services is an important part of a Medicare 
pharmaceutical benefit. As prescription medication therapy becomes more 
potent and complex, the need for these services will only increase. 
Pharmacists have been performing these functions for many years to 
improve quality patient care.
    However, most PBMs do not incorporate medication therapy management 
programs into their benefit packages. Pharmacists are usually paid for 
dispensing pharmaceuticals only, not for the important activities 
involved in helping to manage the appropriate use of pharmaceuticals by 
patients. While it is the local community pharmacist that provides 
these services, insurance companies and PBMs continue to squeeze down 
on the pharmacist reimbursement for prescriptions--so much so, that it 
is impossible for them to provide these important patient care 
services. We have to make sure that Medicare beneficiaries have access 
to these services, and that pharmacists are compensated for providing 
them.
So . . . What Works for Seniors?
    What works for seniors in terms of providing them a meaningful 
pharmacy benefit?
    For the short term, we believe that the best course that Congress 
can take is to provide Federal funds to states to help low income 
seniors obtain this pharmacy benefit. We know that there are many mixed 
feelings among Members of Congress about this approach. However, given 
that almost every state is now considering enacting or developing some 
form of prescription assistance program for seniors, we believe that 
states are in a good position, right now, to help those most in need.
    And data indicate that 60 percent of those seniors without 
prescription drug coverage, or about 7.2 million seniors, have incomes 
of less than 200 percent of poverty.\6\ We see many of these seniors in 
our pharmacies every day, struggling to pay their prescription bills. 
For them, they just want some help to get them their medications.
---------------------------------------------------------------------------
    \6\ Kaiser Family Foundation. ``The Medicare Program'' Issue Brief, 
October 2000.
---------------------------------------------------------------------------
    For the long term, we want to work with this Committee, the rest of 
the Congress, and the Administration to achieve long term reform of the 
Medicare program to provide the type of quality pharmacy benefit that 
seniors need and deserve.
    We believe that this benefit should:
     Lpromote the utilization of generic drugs when 
appropriate;
     Lprovide seniors with access to meaningful, community-
based medication therapy management services with appropriate 
compensation for pharmacies;
     Lnot be financed through risk-based capitation because of 
an inability to control prescription utilization, with a potential 
negative impact on seniors' quality of care;
     Lgive seniors access to the community-based pharmacy 
provider of their choice;
     Lnot economically coerce seniors to use other prescription 
delivery mechanisms, such as out-of-state mail order;
     Lnot include price controls on retail pharmacy prices, 
including prescription cash discount card programs; and,
     Lassure that community pharmacies are adequately 
compensated in providing services to meet the needs of our nation's 
seniors.
    We look forward to working with you and the Committee on these 
issues, and thank you for the opportunity to submit these comments 
today for the record.

                                


     Statement of TREA Senior Citizens League, Alexandria, Virginia
    Chairman Johnson and members of the Subcommittee, we thank you for 
holding this series of hearings to discuss Medicare reform and a 
prescription drug benefit. TREA Senior Citizens League (TSCL) is a 
national group of over 1.3 million politically active seniors concerned 
about the protection of their earned Social Security, Medicare, 
military, and other retirement benefits. Our supporters are among the 
poorest of the poor and the oldest of the old. Every day we receive 
letters and mail urging us to help these folks get by. A huge part of 
the problem they face is in covering prescription drug costs.
    Poverty in our country is defined as individuals having incomes 
below $8,350 and couples with incomes of $11,250 or below. Many of our 
members, who have no other financial resources except Social Security 
and Medicare, already live below, or are at risk of falling below, the 
poverty line.
    Think for a minute about how you would live on $8,350 a year.
Why We Need Medicare Reform Now
    The Medicare program has been responsible for a major reduction in 
poverty in our country and improvement in the health of American 
seniors, but the safety net is unraveling. The program needs 
modernization to cover prescription drug and catastrophic costs. In 
addition changing demographics pose tremendous future financial 
challenges.
    Forty million Americans receive Medicare benefits. Currently 
Medicare recipients are often forced to piece together a patchwork of 
stop-gap measures in order to afford health care. Currently, only one 
in four employers provides health care benefits for retirees, down from 
40% in 1994. Since 1998, more than 1.6 million Medicare recipients have 
been forced to find other health care plans when their private managed 
care plan raised premiums, cut benefits or withdrew from Medicare 
altogether.
    According to our studies of the insurance industry, Medigap health 
care premiums are expected to rise this year by an average 18%, 
following increases in 2000 of 10%-30%. Spending on prescription drug 
costs is expected to rise by about 21% in 2001 after an increase of 
about 18.4% in 2000. The average senior spends $3,142 a year in out-of-
pocket health care costs. Those in poor health and with no supplemental 
insurance must spend even more--$4,478.
    Nationally, about one third of all Medicare recipients have some 
prescription drug coverage, but approximately 44% of TSCL members 
report that they have no prescription drug coverage.
How We Should Proceed
    Currently, the debate over reforming Medicare and adding 
prescription drug coverage has centered on the following three 
approaches:
     LAdding a universal prescription drug benefit to 
traditional fee-for-service Medicare and Medicare+Choice plans now, and 
reform the program later.
     LProviding temporary block grants to the states for 
prescription drug assistance for low-income Medicare recipients until 
the program can be reformed.
     LOffering a universal prescription drug benefit within the 
context of an overall Medicare reform. This would include a Federal 
Employee Health Benefit Plan ``premium-support'' model in which a fee-
for-service Medicare program would compete for business, along with 
private plans.
    TSCL favors adding a voluntary universal prescription benefit now, 
with some modernization. More extensive reform could be implemented 
slowly and incrementally. TSCL feels temporary block-grants to the 
states are only a stop-gap measure that would take too much time to 
implement to be effective. To date, only 22 out of 50 states already 
have prescription drug plans. States without the programs would have to 
go through the legislative process of setting one up and by that time 
the four-year funding would be over. Statistics show that a large 
majority of seniors who are eligible for such programs do not receive 
the help to which they are entitled, some, because they don't know it 
exists--others because they don't want to feel they must accept 
welfare.
    On the other hand, Medicare reforms should not be rushed. In 1997 
Congress and President Clinton passed the most sweeping reforms since 
the Medicare program was enacted. Those reforms led to the unintended 
consequences of widespread nursing home bankruptcies, severe cut-backs 
in home health services, and more than 1,634,000 Medicare managed care 
patients being forced out of their Health Maintenance Organizations 
(HMOs)--all of which translated to higher out-of-pocket costs for 
beneficiaries.
    Regardless of what features a reformed Medicare takes, however, 
prescription drugs will be part of it. Therefore, adding the benefit 
now would be the critical first step. TSCL feels that the following 
criteria are essential to designing a prescription drug benefit. A 
prescription drug benefit should be:
    Universal--Medicare serves 40 million Americans. The benefit 
package is universal, and therefore any new benefits must also be 
universal, not just offered to one group, or in one region of the 
country.
    Voluntary--Medicare recipients who are happy with their current 
prescription drug coverage should not be forced to give up. In like 
manner, the government should not create perverse incentives for 
employers to REDUCE retiree health care and prescription drug benefits, 
but should give incentives for retention of benefit plans.
    Provides choice--Although much attention is given to reforming 
Medicare along the lines of private managed care and the Federal 
Employee Health Benefit Plan, it has not been proven that either model 
saves the government money. The majority of Medicare recipients 
continue to receive their care through traditional fee-for-service 
Medicare. Medicare recipients should have the freedom to remain in the 
type of health care plan of their choice.
    Affordable--Driven by rising prescription drug costs, many health 
plans are reducing prescription drug benefits. Prescription drug 
coverage is increasingly an option available only to higher income 
retirees or those on Medicaid. TSCL favors prescription drug plans that 
provide full support to seniors below 135 percent of the poverty line. 
In addition, TSCL supports plans priced so that middle income seniors, 
(individuals with incomes of $15,000 to $20,000) can afford to purchase 
coverage. A plan that is so expensive that no senior will purchase it 
is no protection at all.
    Guarantees a standard basic drug benefit--Seniors need a reliable 
basic benefit. Such coverage should include an affordable deductible, 
fair and reasonable cost-sharing arrangements, and catastrophic 
coverage for those with large drug costs. Medicare recipients should 
not be forced to comb through the fine print of marketing materials to 
ensure their plan actually covers their needs.
    Provides greater cost efficiencies--Modern drug coverage plans use 
private pharmacy benefit managers (PBMs) to negotiate lower prices and 
administer drug plans. In like manner, such PBMs can help Medicare 
contain costs either under a traditional or modernized program. TSCL 
also believes that greater use of generics, alternative treatments, and 
improved management of prescription drug therapies to reduce over-
medication and dangerous drug interactions would lead to better health 
care outcomes at lower cost.
How Will We Pay For A Prescription Drug Benefit?
    TSCL thanks President Bush and the members of Congress from both 
parties who have promised to provide prescription drug benefits and 
protect Medicare. While our nation still has the finances to do so, we 
urge Congress not only to set aside the $400 billion of surplus in the 
Medicare lock box, we also urge Congress to set aside an additional 
amount to finance a new prescription drug benefit.
    This is important because Medicare is financed to two parts. 
Hospital costs (Part A) are financed out of Medicare payroll taxes. 
This is the lock box surplus. Part B Medicare, however, is financed 75% 
from the general revenues (the non-trust fund surplus) and 25% from 
premiums paid by Medicare recipients. Part B currently represents about 
40% of total Medicare expenditures and is growing faster than Part A 
expenditures. A new prescription drug benefit will add new costs. TSCL 
therefore urges Congress to set aside a reasonable portion of the 
budget surplus from the general revenues PRIOR to enacting a tax cut in 
order to shore up Medicare Part B and to pay for a prescription drug 
benefit.
    TSCL further believes that Congress should consider that U.S. 
taxpayers, through taxpayer-subsidized research, are ``co-investors'' 
with the pharmaceutical companies that have profited financially from 
drug patents. We therefore feel it appropriate to consider measures 
that would more equitably ``share the profits'' of taxpayer-subsidized 
research with Americans most in need of the product--Medicare 
recipients.
    We are honored for this opportunity and thank you again for your 
leadership.
    TSCL appreciates all efforts of the Bush Administration and 
Congress. We look forward to working together to find solutions that 
would best benefit all older Americans.
    TSCL is registered as a 501(c)(4) citizens action organization. 
Open to anyone concerned about protecting earned benefits, TSCL is 
registered to conduct grass roots lobbying, public education, and 
fundraising activities in nearly every state. No government moneys are 
accepted or utilized by TSCL.

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