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



    MEDICARE REFORM: MODERNIZING MEDICARE AND MERGING PARTS A AND B

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 14, 2001

                               __________

                           Serial No. 107-40

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                   U.S. GOVERNMENT PRINTING OFFICE
73-734                     WASHINGTON : 2001


_______________________________________________________________________
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                    ------------------------------  

                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                         Subcommittee on Health

                  MICHAEL BILIRAKIS, Florida, Chairman

JOE BARTON, Texas                    SHERROD BROWN, Ohio
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     TED STRICKLAND, Ohio
NATHAN DEAL, Georgia                 THOMAS M. BARRETT, Wisconsin
RICHARD BURR, North Carolina         LOIS CAPPS, California
ED WHITFIELD, Kentucky               RALPH M. HALL, Texas
GREG GANSKE, Iowa                    EDOLPHUS TOWNS, New York
CHARLIE NORWOOD, Georgia             FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      PETER DEUTSCH, Florida
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES ``CHIP'' PICKERING,          ALBERT R. WYNN, Maryland
Mississippi                          GENE GREEN, Texas
ED BRYANT, Tennessee                 JOHN D. DINGELL, Michigan,
ROBERT L. EHRLICH, Jr., Maryland       (Ex Officio)
STEVE BUYER, Indiana
JOSEPH R. PITTS, Pennsylvania
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Means, Kathy, Senior Health Policy Advisor, Patton Boggs.....    41
    Moon, Marilyn, Senior Fellow, the Urban Institute............    35
    Scanlon, William, Director, Health Care Issues, U.S. General 
      Accounting Office..........................................    15
    Schulder, Dan, Legislative Director, Alliance for Retired 
      Americans..................................................    31
    Young, Donald, Chief Operating Officer and Medical Director, 
      Health Insurance Association of America....................    27
Material submitted for the record by:
    Scanlon, William, Director, Health Care Issues, U.S. General 
      Accounting Office, letter dated August 7, 2001, enclosing 
      response for the record....................................    64

                                 (iii)

  

 
    MEDICARE REFORM: MODERNIZING MEDICARE AND MERGING PARTS A AND B

                              ----------                              


                        THURSDAY, JUNE 14, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 2123, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Greenwood, 
Deal, Ganske, Wilson, Bryant, Ehrlich, Pitts, Tauzin (ex 
officio), Brown, Waxman, Strickland, Barrett, Capps, Pallone, 
Eshoo, Stupak, Wynn, and Green.
    Staff present: Patrick Morrisey, majority counsel; Erin 
Kuhls, majority counsel; Kristi Gillis, legislative clerk; 
Bridgett Taylor, minority professional staff, Amy Droskoski, 
minority professional staff; and Karen Folk, minority 
professional staff.
    Mr. Bilirakis. Good morning. I call this meeting to order. 
Our hearings this year have focused on ways to modernize the 
Medicare program and to provide an updated benefits package, 
including a prescription drug benefit. Today this subcommittee 
will examine Medicare's structure and organization with the 
goal of improving the financial health of the program and 
securing the efficient management and delivery of high quality 
services to its beneficiaries. Structural reform of Medicare is 
central to the broader goal of protecting and strengthening the 
Medicare program for the future.
    Many experts agree that if Medicare were being designed 
today, the two-part system that drives its payment policies 
would not be adopted. At the same time proposals to combine A 
and B have significant policy implications, particularly for 
beneficiaries, and we must proceed with caution in considering 
alternative approaches. Private health insurance formerly 
organized with separate policies for hospital and physicians 
services has also moved to a more comprehensive structure. As 
services once provided only in hospitals are provided routinely 
on an outpatient basis in physicians' offices and 
beneficiaries' homes, a reexamination of Medicare's design is 
warranted. Today we will assess the implications of redesigning 
Medicare and merging parts A and B of the program.
    I am pleased to welcome our panel of expert witnesses. 
Thank you all for joining us here today. Our first witness is 
Dr. Bill Scanlon with the General Accounting Office. Recognized 
for his Medicare expertise, Dr. Scanlon will report on the 
benefits and technical challenges of merging parts A and B of 
the program. I would also like to welcome Dr. Don Young, 
interim president of the Health Insurance Association of 
America. Mr. Young's testimony about the structure and 
organization of health insurance in the private sector will be 
a valuable contribution to our discussion today.
    Our third witness, Mr. Dan Schulder, the legislative 
director for the alliance of retired Americans, will be able to 
best explain how structural reform of the Medicare program will 
affect those the program serves--its beneficiaries.
    And finally, Ms. Marilyn Moon, Senior Fellow from the Urban 
Institute, and Ms. Kathy Means, Senior Public Policy Advisor 
for Patton Boggs and former Senior Health Advisor to Senator 
Roth and the Senate Finance Committee round out our panel of 
respected experts.
    Having enjoyed the opportunity to work closely with you in 
your previous capacity, Kathy, I am delighted to welcome you 
before the subcommittee today. I am committed to protecting the 
long-term solvency of the Medicare program and look forward to 
a productive hearing today which can shed light on some of the 
fundamental issues in this debate. The financial viability of 
this critical program, the cost-sharing liability of Medicare 
beneficiaries and the management and delivery of high quality 
services for beneficiaries are three of key issues that we will 
have a chance to explore.
    This subcommittee has a strong record of working on a 
bipartisan basis. We must continue to work together to find 
bipartisan solutions. This hearing is designed to bring us 
closer to accomplishing that goal as we evaluate the 
challenging issues inherent in any Medicare reform proposal.
    And in closing, I want to again thank our witnesses for 
their time and effort and joining us to share their views on 
the important issue of Medicare reform.
    And now I am pleased to recognize the ranking member, Mr. 
Brown.
    Mr. Brown. Thank you, Mr. Chairman. I commend and fully 
support your decision to hold this hearing. The Commerce 
Committee as a whole, and our subcommittee in particular, has a 
strong history of successfully addressing important, albeit 
politically volatile issues and doing so on a bipartisan basis. 
We do not always agree on the merits of different proposals. In 
fact, we often express very strong and polar opposite opinions 
on the merits of different proposals, but we are unified in our 
desire to give all credible Medicare options a fair hearing.
    I want to thank Marilyn Moon and Dr. Young and the other 
witnesses for joining us this morning. We were fortunate to 
have a distinguished panel to help us look at the implications 
of merging Medicares part A and B. It is a particularly complex 
issue. Not only does this proposal raise many issues, it raises 
many kinds of issues, policy issues, political issues, even 
jurisdictional issues. And overwhelming all of these issues is 
this one, we have not yet addressed the No. 1 issue in Medicare 
that is the Medicare benefits package lacks coverage of 
prescription drugs. How can we possibly justify diverting our 
attention toward changing the financing structure toward 
Medicare when we have not addressed the most pressing concern 
that we hear every day from our Medicare constituents?
    Merging A and B would not, in and of itself, take us closer 
to prescription drug coverage, but it would certainly require 
time and resources that could otherwise be devoted to 
establishing Medicare prescription drug coverage. Again, it is 
important to look at the full range of proposals that are 
currently under consideration by this Congress and the 
administration, but when it comes to taking action, we should 
put our priorities in order and tackle prescription drugs 
first.
    But this hearing is about merging A and B. And I want to 
get back to those issues. The impact of Medicare beneficiaries 
does not depend explicitly on whether we merge parts A and B. 
It depends on the objectives we are trying to fulfill by 
merging the two programs. If the objective is to create 
efficiencies in the administration of Medicare, that is a 
pretty tall order. Medicare fee for service spends less than 2 
percent of its budget on administration.
    Medicare+Choice spends as much as 30 percent of its budget 
on administration. If the objective is to rationalize Medicare 
cost sharing, that is a laudable goal, but tricky one to 
accomplish. Simply merging the two deductibles could reduce 
hospital costs for a few beneficiaries while increasing 
physician and other costs for virtually every beneficiary. A 
net increase in beneficiary liability probably translates in a 
net increase in Medigap premiums.
    It is also important to recognize we don't need to merge 
parts A and B to modify the cost-sharing requirements 
associated with Medicare. If the objective is to control 
Medicare spending by capping the general revenues going into 
the program, hiding behind a mechanical change and finance of 
accomplishing that goal does not make the goal more palatable. 
Unless the plan is to increase payroll taxes, is to compensate 
for general revenues capping general revenues means one of two 
things: either shifting more costs onto beneficiaries or 
starving the Medicare program. Neither option, at least to me, 
is acceptable.
    As I mentioned previously you must consider the cost of 
implementing this change and given the scarce budget dollars 
available, in large part because of the tax cut that Congress 
passed, we must consider how merging parts A and B stacks up 
against other proposed Medicare modernization priorities like 
adding prescription drug coverage, like bolstering preventive 
benefits like giving Medicare the tools and resources it needs 
to improve internal and contractor performance.
    Finally, we should consider the political implications. I 
don't mean the potential fallout with Medicare beneficiaries or 
providers, because the only political fallout that should be of 
concern to this subcommittee is that which reflects harm to the 
beneficiary or unfair treatment of providers or the misuse of 
taxpayers dollars.
    What I mean by political implications is this: The current 
administration has made absolutely no secret of the fact that 
it favors restructuring Medicare into an insurance voucher 
program, meaning the Federal Government would help pay for 
private health insurance rather than helping to pay for private 
health care. Many Democrats believe that privatization is 
basically a cop-out. It would give Congress and the 
administration cover to shirk their responsibility for access 
and for quality. It would give Congress and the administration 
a mechanism by which to shift more and more the financial 
burden for Medicare onto the shoulders of retirees and 
retirees' families. And ultimately, it would give Congress and 
the administration an out.
    It is far easier to abandon a program when it is firmly 
ensconced in the private insurance market than when it is still 
a federally administered program. If making Medicare fee for 
service financing system looked more like Medicare+Choice 
financing system would somehow help the administration or 
Chairman Thomas or any other proponent of privatization 
convinced Congress to make the traditional Medicare Program Act 
more like the Medicare+Choice program, we must be sure to make 
that possibility transparent to every beneficiary, and we must 
also carefully evaluate whether we are willing to be coaxed 
down the path of privatization.
    Mr. Chairman, if it is not clear from my comments, I admit 
to a bias in regards to merging A and B . That is due in part 
on the President's budget proposal which merged parts A and B 
for purposes that I consider to be detrimental, in its part due 
to the fact that I was around for the BBA debate in 1995 and 
participated then in the fight against merging parts A and B. 
At that time, merging the two programs, what that meant was 
clearly an attempt to starve the Medicare program and end the 
Medicare entitlement, thinking back to the comments of Speaker 
Gingrich and then-Senator Dole about privatizing Medicare.
    That said, I don't doubt the chairman's goal is to 
determining whether merged financing can be accomplished in a 
way that actually does improve the Medicare program. I share 
the chairman's goals in that way and will consider the 
testimony of our witnesses from that perspective. Thank you, 
Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman and I would suggest 
that the gentleman that I have always considered hearings to be 
informational. This is why we hold hearings so we can learn. If 
we have already predecided our position on a particular issue, 
I don't see the sense in holding a congressional hearing. This 
is the reason why we are having a hearing because I too want to 
learn about this particular subject. The chairman would yield 
to the chairman of the full committee, Mr. Tauzin, who honors 
us with his presence.
    Chairman Tauzin. Thank you, Mr. Chairman. I am honored to 
be here. I thank you for having this hearing particularly 
because it focuses on a question that the committee often 
faces, and that is whether structures that were designed in a 
different day and age in our Nation's history still make good 
sense for today's economy and environment and the method by 
which we deal with social issues. We often come to this point. 
We come to it in telecommunications. We are coming to it in 
energy, and we are certainly coming to it in health care.
    It is important, I think in an informational hearing, to 
look at the history of how we got where we are and whether or 
not it has relevance in today's world. And we should note that 
it was 36 years ago, a very historic moment that President 
Johnson signed the Medicare legislation into law. If we go back 
and look at those debates, we find there was significant 
controversy going on into that decisionmaking process. There 
are those who argue that Medicare should be limited to covering 
only hospital inpatient stays. In those days, that was the most 
significant and costly form of coverage. Others were trying to 
make sure that other physicians and other outpatient services 
would be covered in the package.
    Some argued that health care covered in the package should 
be paid for strictly through a dedicated payroll tax, and 
others wanted, obviously, a combination of general revenues and 
payroll taxes. Some wanted the system to be automatically an 
entitlement, and others wanted it to be made voluntarily. You 
know the cuts that were made, a lot of compromises. And in 
1965, the compromises that were made basically reflected the 
structure of hospital care and coverage of that age. In that 
day and age, private insurance very often separated hospital 
insurance and physician insurance. And that concept was adopted 
into the compromises and hospital insurance called part A and 
physician insurance called part B were separated in method of 
funding to reflect, again, the differences of opinion, whether 
it would be payroll taxes or voluntary contributions that 
structured each program.
    But as we sit here today, Mr. Chairman, and I think Mr. 
Brown has articulated it well in his closing comments, we ought 
to consider whether those decisions make sense today. Whether 
having a part A and a part B make sense in today's health care 
coverage. For example, private insurance today usually does not 
separate inpatient hospital coverage from physician services. 
Beneficiaries today usually do not have a separate deductible 
for the purpose of hospital inpatient and physician services in 
the private sector but we have them in Medicare A and B. And 
significantly, prescription drug coverage is no longer 
considered a luxury. I mean, it is an integral part today of a 
patient's treatment regimen. All of us know that.
    All of us, most of us, are on some form of medication. 
Medicare was still operating, in essence, in a 1960's model, 
and the question is does it work for the 21st century? Well, 
there are a number of oddities in the A-B structure that we 
ought to focus on. One is that part A deductible is $792, and 
this deductible increases every year. And by contrast, part B 
is $100 that has not been indexed for inflation for 10 years. 
Private insurance companies have a unified deductible. Should 
Medicare have a unified deductible, and what should it be? 
Tough question.
    The part A trust fund is expected to go insolvent in the 
year 2029. Part B does not go insolvent because an ever 
increasing amount of general revenues flows into the program. 
Is there anything more prudent to measure the long-term 
viability of Medicare part A and B together particularly when 
part B is growing as it is. Because of the distinctions between 
part A and B, it is extremely difficult for the program to 
implement comprehensive disease and case management strategies 
that focus on total services provided to a beneficiary. 
Shouldn't we have a system, for example, that effectively 
tracks when a patient leaves an inpatient hospital setting and 
moves to an outpatient setting? You think you would if you 
wanted to manage long-term treatment.
    Claims processing has to be performed by fiscal 
intermediaries for part A and it is performed by carriers for 
part B. Shouldn't A and B processing functions be combined and 
performed by a single contractor? By eliminating the 
distinction between fiscal intermediaries and characters, we 
probably could be able to reduce the number of contractors from 
the 50 or so today to 10. And that might be a good reform. 
Partially because of the separate program parts and the widely 
disparate cost-sharing structures, Medicare currently does not 
place a cap on beneficiary liability. And the question we 
should ask, Mr. Brown and all of us should ask who love our 
seniors and love those of our family who are covered by 
Medicare, shouldn't we have a system reform that Medicare 
beneficiaries are better protected from liability for the 
prolonged illnesses that unfortunately plague us now? These are 
some of the questions. Here is the most important one we should 
ask ourselves. If we were building Medicare today from scratch 
instead of having to deal with the decisions made in 1965, 
would we build this system the way it is currently constructed? 
You know that. And not a person in this room, I think, would 
build it the way it is currently constructed.
    I think we make better decisions based upon the way in 
which we provide health care services and coverage for seniors 
today. If that is true, then this committee owes it to every 
single beneficiary and patient care provider under this system 
to reform it. And this is a hearing that is going to lead us 
hopefully to some of those answers, and I thank you for having 
it, Mr. Chairman.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Thank you, Mr. Chairman for holding this important hearing. Our 
Committee has spent a great deal of time examining Medicare structural 
reform in recent months, so I am pleased that we are focusing attention 
on this critical issue of whether we should merge Parts A and B of the 
Medicare Program.
    Thirty six years ago--in a historic moment--President Johnson 
signed Medicare legislation into law. For the first time in our 
nation's history, we guaranteed seniors' access to basic health 
insurance.
    During the years leading up to the passage of Medicare, many ideas 
were debated about how this new Program should be designed. Some argued 
that Medicare be limited to covering hospital inpatient stays, since 
that was the most costly type of coverage. Others insisted that 
physician and other outpatient services be included in Medicare's basic 
benefit package. Some argued that all of the health services covered 
under Medicare be paid for through a dedicated payroll tax; still 
others, demanded that the system be funded through a combination of 
general revenues and beneficiary premiums. Some demanded that the 
Program be an automatic entitlement to seniors; others insisted that 
the Program remain voluntary.
    These were just a few of the issues in dispute when the Program was 
created back in 1965. Ultimately, however, these issues were resolved, 
and the basic structure of Medicare--that remains today--was created.
    As part of the legislative compromise in 1965, it was decided that 
Medicare should essentially reflect the private insurance model of that 
time. Consequently, since private insurance was often separated into 
hospital insurance and physician insurance, that concept was included 
in the legislation. Hospital insurance was called Part A and physician 
insurance, Part B. At the time, that idea, along with many others 
included in the Medicare law, made sense because they were reflective 
of how people believed health care services should be managed back in 
the 1960's.
    Today, our health care system is considerably different from that 
of 1965. So we need to ask ourselves: is there a better way to design 
this program so that it reflects a 21st Century model of managing 
health care services. How can we best change this design model--an 
essentially static one for 35 years' and modernize it for today's 
seniors?
    I don't have all of the answers to these questions.
    But one thing we can say with certainty: many of the assumptions 
that were used to design the Medicare Program in 1965 are no longer 
valid. For example, private insurance no longer separates inpatient 
hospital coverage from physician services; beneficiaries don't have 
separate deductibles for hospital inpatient and physician services in 
the private sector; and significantly, prescription drug coverage is no 
longer considered a luxury, it's an integral part of a patient's 
treatment regimen. Medicare may still be operating under a 1960's 
model, but we are now in the 21st Century.
    Today, we must begin to discard some of the relics of the 1960's, 
including many of the current distinctions between Medicare Parts A and 
B. This division no longer reflects the needs of Medicare 
beneficiaries, both in terms of financing and cost-sharing structures.
    Here are just a few oddities of the existing A/B structure:
    Medicare's Part A deductible is $792 per admission, and increases 
every year. By contrast, the Part B deductible is $100 and has not been 
indexed for inflation in ten years. Private insurance employs a unified 
deductible. Why shouldn't Medicare?
    The Medicare Part A Trust Fund is expected to go insolvent in 2029. 
Part B, on the other hand, will never go insolvent because an ever 
increasing amount of general revenue dollars will flow into the 
Program. Isn't it more prudent to measure the long term financial 
viability of the Program by looking at Parts A and B together?
    Because of the distinctions between Medicare Parts A and B, it is 
extremely difficult for the Program to implement comprehensive disease 
and case management strategies that focus on the total services 
provided to a beneficiary. Shouldn't we have a system that can 
effectively track when patients leave the inpatient hospital setting 
and move to an outpatient setting?
    Claims processing is currently performed by fiscal intermediaries 
for Part A services and carriers for Part B services. Why shouldn't A 
and B claims processing functions be combined and performed by one 
contractor? By eliminating the distinction between fiscal 
intermediaries and carriers, we will be better able to reduce the 
number of contractors from fifty to ten.
    Partially because of the separate program parts and the widely 
disparate cost-sharing structures, Medicare currently does not place a 
cap on beneficiary liability. Shouldn't the system be reformed so that 
Medicare beneficiaries are better protected from liability for 
prolonged illnesses?
    These are just some of the issues that our Committee has been 
thinking about on the important question of whether to merge Parts A 
and B. We may hear today from some opponents of structural change that 
many of these suggested reforms can be accomplished without merging the 
Program. In some cases, that may in fact be true.
    But ultimately, we at this Committee, should ask ourselves a more 
fundamental question. If we had the opportunity to design a new, more 
modern Medicare Program, would we maintain the existing distinctions 
between Parts A and B? Wouldn't we all want to create a more unified 
program reflective of how health care is managed in the 21st Century?
    I think most of us in this room know the answers to these 
questions.
    Mr. Chairman, thank you very much for bringing this important issue 
to our attention and focusing on some of the deficiencies in the 
existing system. I look forward to hearing from our distinguished 
witnesses today and yield back the balance of my time.

    Mr. Bilirakis. And I thank the gentleman. Mr. Pallone, to 
make an opening statement.
    Mr. Pallone. Thank you, Mr. Chairman and Mr. Brown for 
holding this hearing. I want to express my concern over the 
issue that we are discussing today, and that is merging part A 
and part B of the Medicare program into one benefit package. I 
understand that we will be hearing arguments in favor of 
merging the two trusts funds, the hospital insurance trust 
funds and the supplemental insurance trust funds, much like the 
arguments we hear when discussing the Breaux-Frist Medicare 
reform proposal.
    When we talk about Breaux-Frist, the argument is made that 
redefining solvency by measuring the combined status of trust 
funds will make Medicare's financial status more clear. The 
President's budget has already endorsed this policy because it 
would help lawmakers reduce the amount of general revenues 
allocated to the Medicare program. But I am opposed to these 
arguments in favor of Breaux-Frist, and I oppose merging the HI 
and SMI trust funds for several reasons. At a time when 
millions of our seniors and Medicare are financially strapped 
due to the rising cost of prescription drugs, any rise in the 
cost of the Medicare program would be financially detrimental 
to seniors nationwide.
    If both parts, A and B of Medicare are combined, it seems 
clear that seniors would face a higher deductible. This is only 
because of 15 percent of seniors utilize part A services and an 
overwhelming 85 percent of seniors use part B services in a 
given year. Combining these two parts will surely present 
beneficiaries with a higher deductible, placing an additional 
unnecessary burden on seniors who are already paying an average 
of about $3,000 out-of-pocket cost for health services. This 
would only be exacerbated further by the fact that most seniors 
would see a rise in premiums for their supplemental insurance 
policies. Many of these policies pay for part A and part B co-
insurance and deductibles, and if these costs increase for 
merging the two parts, it is likely that employers and 
beneficiaries will both have to makeup the difference in cost.
    Mr. Chairman, I just want to express my concern over asking 
beneficiaries to pay more out-of-pocket than they already do. 
We hear every day from our constituents about how they cannot 
pay for their prescription drug and we are working hard in this 
Congress to come up with a solution to this problem. The last 
thing we need at this point is to merge the HI and SMI trust 
fund, thereby increasing the cost of Medicare before we even 
add a prescription drug benefit. There are a lot of important 
questions we need to ask in this discussion of merging the two 
trust funds and how a combined program would be financed, but I 
just want to stress the cost to seniors and the solvency of the 
Medicare program should be the top priority. Thank you.
    Mr. Bilirakis. I thank the gentleman. Dr. Ganske for an 
opening statement.
    Mr. Ganske. Thank you, Mr. Chairman, I will be brief. I 
would like to read a section from the staff memo on this 
hearing. If parts A and B were combined, there may be increased 
pressure to use general revenues to cover shortfalls, 
particularly as the number of working contributors declines and 
the number of baby boomers begins to retire. Therefore, most 
proposals to merge parts A and B of the Medicare program 
include an overall limit on general revenue expenditures. Such 
a cap would be controversial. I would say, Mr. Chairman, that 
would be an understatement.
    It goes on to say opponents to merging parts A and B 
suggest that a cap on general revenues would restrict available 
services and increase beneficiary cost-sharing liability. And I 
think that very well may be the case. I think, Mr. Chairman, we 
need to face up to the fact that when the baby boomers were 
starting to go to school, the Nation decided to build more 
schools to cover the cost of their education. Baby boomers are 
retiring, and we are more and more going to be entering into 
the needs for health care. And to set some type of arbitrary 
number on the amount of expenditures for health care based on, 
say, a percent of GDP, I think, would be very problematic for 
this Congress, and we need to face up to the fact that because 
of demographics, we are going to be facing increased health 
costs in the not-too-distant future. In fact, in the year 2012, 
baby boomers will start to retire and we will see one new 
retiree every 8 seconds.
    I think it is important to look at how the Health Care 
Financing Administration is functioning to make sure it 
functions as efficiently as possible. I think we also need to 
be very careful when we are talking about some very, very 
significant changes in the structure of the Medicare program. 
With that I yield back.
    Mr. Bilirakis. I thank the gentleman and certainly concur 
in his statement. Ms. Capps for an opening statement.
    Mrs. Capps. I will yield my time to Mr. Waxman.
    Mr. Bilirakis. We will yield to Mr. Waxman.
    Mr. Waxman. I want to thank you for holding this hearing 
Mr. Chairman. I want to thank my two colleagues for being so 
courteous as to let me go ahead, because I have to go to 
another subcommittee of another committee, and others have to 
do it as well, but they have been very nice to defer to my 
seniority and age.
    As we approach this hearing today, there is a fundamental 
question that is bothering me. What is our goal here? What 
precisely are we trying to achieve? I make this point because 
the topic, combining parts A and B of Medicare, gives us little 
clue to what precisely is proposed, and indeed, depending on 
how that question is answered, what is the impact on the 
structure of the program, it's fiscal health and--most 
importantly--the millions of Medicare beneficiaries.
    I have puzzled over what precisely people mean when they 
talk about this merger. Yes, we could make Medicare follow the 
structure of more traditional insurance models. Clearly today, 
unlike when Medicare was established, private insurance would 
no longer be split into two separate products, one for hospital 
coverage, one for physicians and other outpatient services. But 
simply saying that has no bearing, really, on whether there are 
reasons to change Medicare. We have a program that currently 
has two separate financing structures--payroll deductions 
placed in the Medicare hospital insurance trust fund for part A 
and premiums and general revenues for part B. If we combine the 
parts of the program, would we use up the trust fund revenues 
and further destablize Medicare's financing? Is the goal to 
limit the general revenue contribution and shift more of the 
cost to the beneficiary?
    In the current program, we have automatic coverage for 
hospital services without additional payments for part A, but 
voluntary enrollment in part B does require the payment of a 
premium. Would we take away the automatic eligibility for 
hospital coverage if the premium wasn't paid? Would you require 
mandatory participation in part B, whether or not you have 
other coverage or whether or not you could afford the premiums?
    In the current program, we have separate deductibles in 
parts A and B. What would it mean if we combine the two 
programs? Would there be a single deductible? Is that the 
intention? Are we going to combine them and inevitably increase 
the out-of-pocket expenditures for the average Medicare 
beneficiary?
    In the current program, we have intermediaries who have 
developed great expertise in dealing with hospitals and 
carriers who traditionally deal with doctors and other 
outpatient service. Would combining them affect the services 
provided?
    Right now Medigap coverage is built around the system as it 
is. Do we have any idea what this change would mean for the 
cost and availability of Medigap?
    And finally, is there anything in the change that would 
address the major deficiency in Medicare, the lack of 
prescription drug coverage?
    To me, this looks like, this hearing, this idea of merging 
these two parts of the program, looks like a solution in search 
of a problem. So I hope as we approach this hearing, we will be 
keenly aware that what looks like a simple change on paper in 
the design of law would have many complex effects in the real 
world. To make these changes without certainty that the 
beneficiaries of this program would be better off seems to me 
to be the ultimate in folly. Thank you very much.
    Mr. Bilirakis. Mr. Pitts for an opening statement.
    Mr. Pitts. No opening statement.
    Mr. Bilirakis. Mr. Deal for an opening statement.
    Mr. Deal. Thank you, Mr. Chairman. Mr. Chairman, I share 
some of the concerns that have been expressed by colleagues on 
both sides of the aisle. But my primary concern relates to the 
overall programs and our ability to pay for them. One of the 
advantages we have had in having the part A and part B 
separated is at least into part A, we have had the fiscal 
discipline of a dedicated revenue stream of a portion of the 
FICA tax, because that is a dedicated revenue stream and is 
therefore finite, based on the number of people working and 
paying into the system and the potential bankruptcy of that 
revenue stream that led to such reforms as we found in the 1997 
Balanced Budget Act in order to keep the program solvent for a 
longer period of time. My concern is that if we lose an 
attachment to a paying source such as FICA tax and become more 
and more dependent on the general revenue of this country, it 
leads us in a very dangerous direction.
    For one thing, I think it lends itself to the argument that 
after all, total health care cost is the responsibility of the 
anonymous government, without realizing that the government is, 
in fact, us. It is very easy in this day and time of demanding 
more and better health care, that that is more and more 
expensive, that we expect someone else to pay for it. I am 
concerned that a merger might lead us further and further in 
the direction of saying that we need no link whatsoever to a 
dedicated revenue stream, and therefore look totally to the 
general revenues of this country to pay for it.
    That may sound good in many people's ears, but I think it 
is a direction that the originators of Medicare did not want us 
to go, because it more and more will place Medicare in the 
posture of a welfare program rather than a program that is 
dependent on a dedicated known quantity of a revenue stream.
    And if that revenue stream is not sufficient, then 
obviously the way to do a that is to raise the FICA tax to 
create a revenue stream. But quite honestly, I think all of us 
know that neither side of the aisle has advocated that as a 
solution to the problem. Nor do I expect that to be the 
advocated solution in the near future.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. And I want to thank you 
for holding our second hearing this week of the subcommittee. 
It is good to be on an active subcommittee. This hearing to 
discuss the feasibility of merging Medicare parts A and B. It 
is probably fair to say that no one on this panel, or maybe in 
this room, unless you are in Medicare, has one insurance policy 
for hospital stays and another insurance policy for doctors' 
visits. We probably all have one policy with one deductible. 
Our Medicare system, however, was formed in just this manner, 
two different plans for different types of health care. And 
under our staff memo, it was formed because of the opposition 
of physician groups in 1965. And I remember those notices in my 
doctor's office, even when I was 14, 15 years old, saying we 
are going to have socialized medicine under Medicare. But now, 
that physician really believes in Medicare. We wouldn't 
recreate this model 35 years later any more than we would 
create a Medicare system today that would not have a 
prescriptions drug benefit.
    However, merging the programs is harder and is not so 
simple. Issues surrounding financing, participation, cost 
sharing, and payment method all needs to be resolved before we 
can consider the merger of the two. And in this context, we 
must ask ourselves what are the goals for the Medicare program 
and would merging parts A and B achieve those goals?
    At a minimum, I believe the goals for the program should be 
to improve access to the program, and ensure that costs are 
controlled. So what would merging the two programs do to 
achieve these goals? We have held several hearings about the 
agency shortcoming with regard to making coverage decisions, 
its ability to educate providers about coding and payment 
procedure and its customer service operations.
    Merging the program would eliminate some of the confusion 
surrounding these issues and can make it easier for 
beneficiaries and providers to use the system. Merging payment 
and delivery services would also improve disease management 
services, coordination of care and other important qualities 
issues. However, merging these programs would create a whole 
new set of access questions for beneficiaries. For example, the 
current deductible for Medicare part A is $792 dollars. The 
current deductible for part B is $100. While most beneficiaries 
meet their part B deductible, only 15 percent meet their part A 
deductible.
    By combining these programs, we would raise the part B 
deductible, increase out-of-pocket costs for most 
beneficiaries, but not increase their benefits. As seniors who 
are already spending more than $3,000 in out-of-pocket costs, 
we should think carefully about increasing the burden. Also we 
must consider whether the merger of part A and B would improve 
the long-term health of the Medicare program or include some of 
the costs associated with the program. With only 2 percent of 
the program funds currently to be used for administration, it 
is unlikely that merging A and B would achieve any real 
significant administration savings.
    Most of our witnesses agree that merging the program would 
not significantly extend the program's solvency. Before we 
start making substantial changes in the Medicare system, it is 
imperative that we answer the questions. We should not change 
the program just for the sake of change, just like we shouldn't 
change a name without structural reform.
    Mr. Chairman, I don't have the answers to these issues, but 
I have lots of questions and I yield back my time and I look 
forward to the witnesses, thank you.
    Mr. Bilirakis. Thank you, Mr. Green.
    Let us see, Mr. Bryant to make an opening statement.
    Mr. Bryant. Mr. Chairman I took look forward to hearing 
from this panel of witnesses, and to that end I would yield 
back the balance of my time.
    Mr. Bilirakis. I thank the gentleman. Ms. Capps .
    Mrs. Capps. Thank you, Mr. Chairman. I am pleased that we 
are carefully examining the possibility of merging part A and 
part B of Medicare. This idea has been floating around out 
there for some time, but it is very complex and should not be 
easily accepted. If we do not adequately review it and its 
consequences before trying it out, we may do more harm than 
good. We want to keep in mind that Medicare is a sacred program 
to today's seniors. They count on it and we want to make sure 
they can count on it in the future. It is the most successful 
government health program in history. It has assured the 
availability of health care for millions of older Americans who 
previously had no options. We as a society have made a pledge 
to them that they will have health care so we need to follow 
through on this pledge.
    So it is absolutely essential that we not damage the 
program as we look to improve it. Any form of Medicare must 
meet certain requirements. It cannot cut benefits that seniors 
count on. It cannot increase the cost to our seniors, 
especially when they are still paying for their own 
prescription drugs. And it cannot jeopardize the existence of 
the program itself. Proponents of merging the two parts often 
see it as a miracle cure for the challenges Medicare faces, but 
there are too many variables for it to be any kind of miracle. 
For example, many supporters claim that merging the trust funds 
would give us a more accurate view of Medicare solvency. But 
they fail to mention that the two parts were designed to have 
different definitions of solvency. Part A was meant to be a 
program that remained solvent financing itself mostly with 
dedicated payroll taxes. But part B is a more traditional 
government program without a specific source of funding beyond 
the U.S. Treasury and premiums collected from beneficiaries. It 
was meant to be dependent on an annually fluctuating level of 
general revenues.
    So merging the trust funds would change the underlying 
assumptions about financing Medicare and could allow Medicare's 
opponents to handicap the program by capping or cutting off 
general revenue funds.
    Another questionable element of the merger is its effect on 
cost-sharing mechanisms. Right now, part A has a much larger 
deductible than part B, and part B requires 20 percent co-
insurance and has an annual premium. Merging them would 
probably lead to a deductible between the two and possibly more 
costs sharing for part A services, because in a given year most 
beneficiaries pay the part B deductible, but probably do not 
need to pay the part A deductible, this merger would mean a 
high cost for most of them.
    These are some of the many difficult policy implications 
that we need to really understand before we try to implement 
this proposal. Mr. Chairman, I hope that if this proposal is 
being seriously considered, that this will be the first of many 
hearings so that we can be assured that we understand all of 
the ramifications. So I look forward to working with you on 
this issue and am eager to hear what the panelist have to say. 
I yield back.
    Mr. Bilirakis. Thank you. Mr. Stupak for an opening 
statement.
    Mr. Stupak. Thank you, Mr. Chairman and thanks for holding 
this hearing on the implications of merging parts A and B of 
Medicare. I believe it is the duty of this subcommittee to 
monitor and take necessary action to improve our Nation's 
health care system of which Medicare plays a very large role. 
The most contentious issue is the combining of part A trust 
fund with part B trust fund and how this combination would 
affect the solvency of the program.
    Currently, Medicare solvency is measured by the status of 
the H-I, or part A trust fund. As of March, the Medicare 
trustees estimate that the H-I trust fund will be solvent until 
2029, the longest period of solvency in Medicare history. So 
the question must be asked, do we want to jeopardize the 
solvency that we in Congress have worked so hard to achieve? 
Combining the two trust funds would force the Medicare program 
into insolvency more quickly, although some have argued it 
would provide a more complete picture of Medicare's financial 
status.
    Another factor that must be considered in merging is the 
administrative angle. Is this merger designed to save money on 
administrative costs? HCFA's administrative budget has been 
slashed to keep their administrative costs running at below 2 
percent. What resources are left to implement these changes? 
Wouldn't this money be better spent improving the existing 
system and not in tearing it down and rebuilding it all over 
again? Who would this restructuring help? Certainly not the 
beneficiaries who Medicare was specifically set up to assist. 
Merging A and B would most certainly result in a higher 
deductible, and this for seniors who already spend an average 
of over $3,000 a year in out-of-pocket health care 
expenditures, including prescriptions drugs, make this proposal 
unaffordable.
    There are also so many policy questions tied up in 
restructuring that I simply do not see the point. For example, 
would there be a new combined deductible? This would be unfair 
to those seniors who do not participate or who do not use the 
part A inpatient hospital portion. And would enrollment in a 
new improved Medicare combined program be mandatory as part A 
participation is now? How would a premium be set? How would the 
part B cost sharing requirements be applied to the part A 
services?
    I am in favor of Medicare reform, Mr. Chairman, but let us 
make it meaningful reform and not a Band-Aid approach designed 
to make ourselves feel good that we have done something. If we 
are going to spend money on overhauling Medicare, let us 
concentrate our efforts on such things as catastrophic coverage 
or prescription drug coverage. These are real reforms, and real 
reforms actually touch people's lives and improve the quality 
of living. Let us improve the existing program but not create 
an entirely new monster.
    Thank you, Mr. Chairman I yield back my time I look forward 
to the testimony today.
    Mr. Bilirakis. Let the record show the gentlelady from New 
Mexico was here and has left for a vote. I believe that takes 
care of the opening--I am going to cutoff the opening statement 
at this point then. And without objection the opening 
statements of all the members of the subcommittee will be made 
a part of record.
    [Additional statements submitted for the record follow:]

Prepared Statement of Hon. Eliot L. Engel, a Representative in Congress 
                       from the State of new York

    Mr. Chairman, I want to thank you for having this hearing and 
continuing to examine different ways to improve Medicare for seniors. 
Today's hearing focuses on combining parts A and B of Medicare and the 
implications that it will have on the program's services, costs, and 
trust funds. However, we must consider this issue in a broader light of 
providing a prescription drug benefit under Medicare and possibly 
modifying the administrative process at the Health Care Financing 
Administration. These are all issues that this Committee has focused on 
earlier in the year. All of these considerations must be examined if 
there is to be a true Medicare reform bill. To do less would be an 
injustice to the millions of seniors who rely on Medicare.
    Medicare was created to provide seniors with affordable access to 
high quality health care. It was enacted to prevent seniors from losing 
their life savings when they become sick late in life. As President 
Johnson signed the Medicare legislation into law, he said ``No longer 
will illness crush and destroy the savings (seniors) have so carefully 
put away over a lifetime so they might enjoy dignity in their later 
life . . . No longer will this nation refuse the hand of justice to 
those who have given a lifetime of service and wisdom and labor to the 
progress of this progressive society.'' The 89th Congress had the 
pleasure of designing the Medicare program which has endured many 
changes over the years. However, this Congress may be faced with the 
most significant challenge since Medicare's inception. Not only do we 
intend to provide a prescription drug benefit but are also undertaking 
the enormous challenge of reforming and modernizing the Health Care 
Financing Administration and the Medicare program as a whole.
    As this and other Committees study different reform models that 
combine Parts A and B with new cost sharing and benefit structures, 
streamline the administrative process, and alter the current financing 
structure of the Trust Funds, we must keep in mind that this is a 
program designed for our elderly. It must remain affordable, it must 
maintain a high level of care, and it must allow seniors to live with 
dignity.
    I understand the complex changes that the delivery of health care 
has endured over the last 35 years and realize that we need to take a 
good hard look at the Medicare program. Seniors deserve high quality 
care and if changes are needed we need to make them. I look forward to 
today's testimony. I want to thank the witnesses for their time and 
effort in coming to this hearing. And I want to assure you Mr. Chairman 
that this is an issue of great importance to me. I have had personal 
experience with the complexities in dealing with Medicare. However, 
Medicare is essential to the health of our elderly population. I am 
pleased we are examining this issue and hope that we can use the 
information gathered today in a constructive manner.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan

    Chairman Bilirakis, I am pleased that the Health Subcommittee is 
conducting this hearing on Medicare reform. The Subcommittee will 
examine many important and complex questions today, such as how to 
reduce the coinsurance that seniors with lengthy hospital stays must 
pay and how to improve the administration of the Medicare program. I 
would caution my colleagues, however, not to jump to the conclusion 
that merging Parts A and B of the Medicare program is the only way to 
achieve these goals.
    We can improve Medicares coverage of catastrophic expenses without 
necessarily combining Parts A and B. We can give the Health Care 
Financing Administration (HCFA) the flexibility to contract with one 
entity that can process both Part A and Part B claims. We can reduce 
the complexity of the program for seniors by increasing the funding in 
beneficiary education programs. In fact, even if we were to merge Parts 
A and B of Medicare, it would do nothing to accomplish these objectives 
without a corresponding commitment from Congress to increase the 
resources that HCFA has to administer the Medicare program.
    When discussing whether to merge Medicare Parts A and B, the most 
important question is how will it affect the millions of Americans who 
depend on this program for their health care, most of whom are living 
on fixed incomes and are already spending a significant portion of 
their income on health care costs.
    For that reason, we should acknowledge that the most important 
thing we can do today to improve the Medicare program is to add a 
meaningful prescription drug benefit that is available and affordable 
for every beneficiary. Before we embark on a long and contentious 
debate about Medicare reform, Congress should show seniors that we hear 
their most immediate concerns, and respond by creating a universal 
prescription drug benefit in Medicare.
    I look forward to hearing today's witnesses, but I also eagerly 
await the opportunity to move forward on the reform that we all agree 
is most urgently needed: Medicare prescription drugs.

    Mr. Bilirakis. I ask the panelists to come forward and we 
will break because we have two votes on the floor. We have a 
vote on the previous question and a vote on the rule. So it 
should take us approximately a half an hour, I am guessing. 
Thank you very much.
    [Brief recess.]
    Mr. Bilirakis. Well, the hearing will come to order. Thank 
you for your indulgence. The witness list consists of Dr. 
William J. Scanlon, director of health care issues with GAO. 
Dr. Scanlon you have been here many times and we appreciate it, 
sir. Dr. Donald Young is chief operating officer and medical 
director of health insurance association of America. Doctor, 
welcome back. Mr. Don Schulder is an executive legislative 
director of the alliance for retired Americans. Ms. Marilyn 
Moon is the senior fellow with the Urban Institute, and Ms. 
Kathy Means, as I mentioned earlier, is senior health policy 
advisor to Patton Boggs located here in Washington, DC.
    I suppose all of you have submitted written statements. I 
have not had a chance to look at them all. But your written 
statement is a part of the record and we would hope that you 
would complement or supplement it, if you would. I am trying to 
decide here. We will set the clock at 5 minutes, but certainly 
not cut you off if you are going to go over a minute or two or 
whatever the case may be there. I know it is the only panel and 
we do want you to have an opportunity to present whatever 
statement it is you want us to hear. So we will just set it for 
the purposes of having something but not adhere to it too 
strictly.
    Dr. Scanlon please proceed, sir.

STATEMENTS OF WILLIAM J. SCANLON, DIRECTOR, HEALTH CARE ISSUES, 
    U.S. GENERAL ACCOUNTING OFFICE; DONALD A. YOUNG, CHIEF 
   OPERATING OFFICER AND MEDICAL DIRECTOR, HEALTH INSURANCE 
    ASSOCIATION OF AMERICA; DANIEL J. SCHULDER, LEGISLATIVE 
DIRECTOR, ALLIANCE FOR RETIRED AMERICANS; MARILYN MOON, SENIOR 
  FELLOW, THE URBAN INSTITUTE; AND KATHLEEN E. MEANS, SENIOR 
              HEALTH POLICY ADVISOR, PATTON BOGGS

    Mr. Scanlon. Thank you very much, Mr. Chairman, Mr. 
Chairman, Mr. Brown and members of the subcommittee. I am very 
pleased to be here today as you continue to consider how the 
Medicare program might be modified to better serve 
beneficiaries, providers and taxpayers. Medicare reform 
discussions have focused on how to modernize the program, as 
you have heard, that has been patterned after 1960's era 
private insurance. Back then, different policies for different 
services were the norm, and insurers were passive bill payers 
that did not try to influence how care was delivered. While 
private insurers have moved on, Medicare still has two distinct 
parts, parts A and B, and the traditional fee-for-service 
program remains primarily a passive bill payer.
    Viewing Medicare in its entirety could promote the use of a 
more comprehensive and accurate measure the programs fiscal 
health. The program's fiscal well-being has generally been 
gauged by the projected solvency of trust funds that are 
expected to grow as a share of total spending. A variety of 
alternative measures could provide a more complete picture. For 
example, the Medicare trustees already report total program 
spending as a share of gross domestic product. Having a more 
complete measure is a first step. Establishing a threshold to 
trigger action to rebalance revenues and spending when needed 
is an equally important consideration.
    The comptroller general has urged the adoption of 
comprehensive measures and associated triggers, but the need 
for them would be more acute if the trust funds were unified 
because a merger would remove the powerful signal that 
impending part A insolvency has provided. Unification of the 
trust funds would raise issues regarding the sources of 
financing and beneficiary eligibility, as you have heard. What 
mix of payroll taxes, general revenues and benefit premiums to 
use to pay for the program would have to be determined. A new 
formula for computing beneficiary premiums would need to be 
specified.
    And finally, whether eligible persons could only 
participate in the entire program by paying premiums or whether 
the entitlement to some services by virtue of having paid the 
payroll tax would be maintained would also need to be resolved. 
A more comprehensive view of the program could also facilitate 
development of better cost sharing requirements. Health 
insurers today commonly design deductibles, co-insurance and 
co-payments, to make beneficiaries aware of costs and to 
encourage prudent service use. Medicare's current cost sharing 
structure does not do that. For example, Medicare imposes a 
relatively high deductible for hospital admissions which are 
rarely optional but no cost sharing for home health services, 
which may be more discretionary. And unlike most private 
insurers, Medicare does not protect beneficiaries from high 
out-of-pocket costs, ignoring the effects of Medicare not 
covering an important service like prescription drugs.
    Today many Medicare beneficiaries face substantial out-of-
pocket costs on services Medicare does cover, 3.4 million spend 
more than $2,000, and 750,000 beneficiaries spent more than 
$5,000 on Medicare-covered services in 1997, the latest year 
for which such data are available. Trading less first-dollar 
coverage for better catastrophic protection has been suggested 
as a way to make Medicare provide more real insurance. While 
such a tradeoff might be generally acceptable, it would be 
important to consider appropriate protections for low income 
beneficiaries so that costs do not become a barrier to needed 
services or an undue burden. Restructuring a relationship 
between parts A and B will not solve problems HCFA faces in 
managing the traditional fee-for-service program more 
effectively by moving away from being a passive bill payer.
    HCFA needs the capacity to merge part B and part A data to 
support timely pertinent analyses of the program, whether or 
not the parts are actually combined. HCFA lacks that capacity 
today, not because of the separate parts, but because of its 
outdated and inadequate information systems. Private insurers 
are using data better today to try and promote more targeted 
use of services and better health. Their efforts include 
targeted beneficiary education, preferred provider networks, 
and coordination of services.
    Adopting some of these approaches could potentially improve 
Medicare, however consideration must be given to how to modify 
them for such a large public program, and they need to be 
tested adequately to understand their benefits and costs. HCFA 
has been taking some steps in this regard to better manage 
services beneficiaries receive. For example, it has been able 
to implement broad-based education efforts to try and increase 
the use of important preventative services, but private 
insurers go one step further and target education to individual 
beneficiaries, such as those who have not yet obtained a 
particular service.
    If HCFA did something like that, beneficiaries and others 
might have serious concerns about large government using 
personal medical information in such a way. HCFA has also 
tested a type of preferred provider arrangement making single 
global payments to hospitals for all services, both part A 
hospital and part B physician services related to bypass 
surgery. The results were lower cost, lower mortality and more 
satisfied beneficiaries. However, broad application of such 
preferred provider techniques could evoke concerns about 
selection of providers and beneficiary choice. Essentially, 
initiatives like these to better manage services may not 
require a formal unification of parts A and B, but they raise 
important questions for you about some of the basic principals 
originally incorporated into the program. Namely, beneficiary 
freedom of choice, any willing provider participation, and 
minimal influence over service use.
    The evolution of health care since 1965 makes it seem 
reasonable to ask whether changes at the margin in some of 
these areas would benefit beneficiaries and the program.
    Mr. Chairman, this concludes my statement. I would be happy 
to answer any questions you or the members of the subcommittee 
may have.
    Mr. Bilirakis. Thank you, Dr. Scanlon. We didn't hustle you 
along there, did we? I intended you to present whatever 
information you had.
    Mr. Scanlon. No, that is fine.
    [The prepared statement of William J. Scanlon follows:]

Prepared Statement of William J. Scanlon, Director, Health Care Issues, 
                United States General Accounting Office

    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today as you continue to consider how the Medicare program might 
be modified to better serve beneficiaries, providers, and taxpayers. 
Discussions about how to reform and modernize Medicare have, in part, 
focused on whether the structure that was adopted in 1965 remains 
optimal today. In that context, questions have been raised about the 
desirability of maintaining Medicare's division into two distinct 
parts, part A for hospital and other institutional care and part B for 
physician, outpatient, and other noninstitutional services. This 
bifurcated structure is no longer common among private insurance, as it 
was in the 1960s when insurers marketed separate policies for different 
services.
    Problems with financing beneficiary cost-sharing, and program 
management have been linked with the fragmented structure of the 
program. Yet merging parts A and B may not be the only way to make 
progress in addressing these problems. To assist the Subcommittee as it 
considers restructuring Medicare, my remarks today focus on how reforms 
based on a more unified view of the program might affect (1) program 
financing and assessment of the program's financial health, (2) cost 
sharing requirements, and (3) program management, including 
administration and promotion of quality care. These observations are 
based on previous and ongoing GAO work on Medicare and private sector 
insurance, as well as other published research.
    In summary, rethinking the relationship between parts A and B may 
encourage use of a more comprehensive measure of Medicare's financial 
health. The commonly used measure, part A trust fund solvency, does not 
include the growing share of program spending on part B services. While 
a more complete picture of Medicare's financial health can be obtained 
in a number of ways, the desire for a better picture of the program's 
financial prognosis is one argument for a single trust fund. 
Establishing a single trust fund would require agreement on how funds 
from payroll taxes, general revenues, and beneficiary premiums would 
flow to the program. It would require consensus on what measure would 
be used to track program finances and spur action to increase revenue 
or curb spending when needed. It also would require assessment of 
whether different beneficiary eligibility standards, similar to those 
currently specified for parts A and B, would be maintained.
    Rethinking the relationship between parts A and B also could 
facilitate development of better cost-sharing requirements. The current 
cost-sharing structure fails to promote prudent use of services and 
protect beneficiaries from high out-of-pocket costs. These concerns 
could be addressed under the current part A and B structure or a more 
unified structure. Unifying the program completely would require some 
beneficiaries who now have other coverage and are enrolled in only one 
part of the program to pay additional premiums for coverage they 
already have. It also would increase costs to the government for care 
that is now covered privately. Alternatively, partial benefits could be 
extended to those who chose not to fully participate in a unified 
program.
    Rethinking the relationship between parts A and B would not 
fundamentally address challenges the Health Care Financing 
Administration (HCFA) faces in, efficiently managing the disparate 
services Medicare covers. HCFA's outdated information technology (IT) 
systems have hindered its ability to develop data to improve payment 
methods and the quality of care beneficiaries receive. Further, as a 
large public program, Medicare is limited in its ability to incorporate 
innovations that private insurers have used to influence care delivery. 
These include targeted beneficiary education, preferred provider 
networks, and coordination of services. The National Academy of Social 
Insurance (NASI) has reviewed these private sector practices and 
concluded that they could potentially improve Medicare. However, they 
would need to be tested to determine their impacts and evaluated to 
ascertain how well they might be adapted to reflect the uniqueness of 
Medicare as both a public program and the largest single purchaser of 
health care. Full implementation of many of these innovations would 
require statutory changes to the program.

                               BACKGROUND

    At its inception, Medicare's design mimicked the structure of 
existing private insurance, which commonly included different policies 
for different sets of services. It also was designed, like private 
insurance at the time, as a passive bill payer that did not try to 
influence how care was delivered. In fact, because of concerns about 
the potential influence of such a large government program, the 
original Medicare statute requires that Medicare not influence 
providers' practice of medicine and gives beneficiaries access to all 
participating providers.
    Medicare is administered by the HCFA, and pays for some $200 
billion in health care benefits each year for about 40 million elderly 
and disabled Americans. Individuals who are eligible for Medicare 
automatically receive Hospital Insurance (HI), known as part A, which 
covers inpatient hospital, skilled nursing facilities (SNF), certain 
home health, and hospice care. Beneficiaries generally pay no premium 
for this coverage, having previously contributed payroll taxes from 
covered employment, but they are liable for required deductibles, 
coinsurance, and copayment amounts. (See tables 1 and 2.)
    Medicare-eligible beneficiaries may elect to purchase Supplementary 
Medical Insurance (SMI), known as part B, which covers physician, 
outpatient hospital, laboratory, and other services. Beneficiaries must 
pay a premium for part B coverage, currently $50 per month, and are 
also responsible for part B deductibles, coinsurance, and copayments.
    Most of Medicare's 40 million beneficiaries are enrolled in both 
parts A and B. However, approximately 2 million are enrolled only in 
part A. Another 400,000 are enrolled only in part B. Those enrolled in 
only one part of the program often have private insurance from an 
employer or other source to make up the difference.
    Approximately 14 percent of Medicare beneficiaries enroll in 
Medicare+Choice plans. These plans include health maintenance 
organizations and other private insurers who are paid a set amount each 
month to provide all Medicare-covered services. Beneficiaries must be 
enrolled in both parts A and B to join these plans, which typically 
offer lower cost-sharing requirements and additional benefits compared 
to Medicare's traditional fee-for-service program, in exchange for a 
restricted choice of providers.

 Table 1: Medicare Part A and Part B Coverage, Eligibility, and Funding
------------------------------------------------------------------------
                                        Part A              Part B
------------------------------------------------------------------------
Coverage........................  --Inpatient         --Physician
                                   hospital.           services
                                  --Skilled nursing   --Laboratory
                                   facility (SNF).     services
                                  --Home health.\1\.  --Outpatient
                                  --Hospice.........   hospital
                                                      --Home health.\1\
                                                      --Durable medical
                                                       equipment
Eligibility.....................  --Individuals and    --Individuals
                                   their spouses       over age 65,
                                   over 65 who paid    disabled, or with
                                   the Medicare        end-stage renal
                                   payroll tax for     disease who pay a
                                   10 years (40        monthly premium
                                   quarters).          ($50 in 2001)
                                  --Individuals over
                                   65 who paid the
                                   Medicare payroll
                                   tax for 30 to 39
                                   quarters and who
                                   pay a $165
                                   monthly premium.
                                  --Individuals over
                                   65 who paid the
                                   payroll tax for
                                   less than 30
                                   quarters and who
                                   pay a $300
                                   monthly premium.
                                  --Individuals
                                   eligible for
                                   Social Security
                                   disability
                                   benefits.
                                  --Individuals with
                                   end-stage renal
                                   disease.
Funding.........................  Medicare payroll    Premiums cover 25
                                   taxes.              percent and
                                                       general tax
                                                       revenue covers 75
                                                       percent
------------------------------------------------------------------------
\1\ Part A covers up to 100 home health visits following an inpatient
  hospital or SNF stay. Part B covers other home health visits.
Source: Medicare & You 2001, HCFA.


           Table 2: Medicare Beneficiary Cost-Sharing for 2001
------------------------------------------------------------------------
                                            Copayments, coinsurance, and
                                                    deductibles:
------------------------------------------------------------------------
Part A services:
Inpatient hospital........................  $792 deductible per
                                             admission \1\
                                            $198 copayment per day for
                                             days 61 through 90
                                            $396 copayment per day for
                                             days 91 through 150 \2\
                                            All costs beyond 150 days
Skilled nursing facility (SNF)............  No cost-sharing for first 20
                                             days
                                            $99 per day copayment for
                                             days 21 through 100
                                            All costs beyond 100 days
Home health...............................  No cost-sharing
                                            20 percent coinsurance for
                                             durable medical equipment
Hospice...................................  $5 copayment for outpatient
                                             drugs
                                            5 percent coinsurance for
                                             inpatient respite care
Part B services:\2\
Physician and medical.....................  $100 deductible each year
                                            20 percent coinsurance for
                                             most services
                                            50 percent coinsurance for
                                             mental health services
Clinical laboratory.......................  No cost-sharing
Home health...............................  No cost-sharing
                                            20 percent coinsurance for
                                             durable medical equipment
Outpatient hospital.......................  Coinsurance varies by
                                             service and may exceed 50
                                             percent
------------------------------------------------------------------------
\1\ No deductible is charged for second and subsequent hospital
  admissions if they occur within 60 days of the beneficiary's most
  recent covered inpatient stay.
\2\ After the first 90 days of inpatient care, Medicare may help pay for
  an additional 60 days of inpatient care (days 91 through 150). Each
  beneficiary is entitled to a lifetime reserve of 60 days of inpatient
  coverage. Each reserve day may be used only once in a beneficiary's
  lifetime.
\3\ No cost-sharing is required for certain preventive services-
  including specific screening tests for colon, cervical, and prostate
  cancer and flu and pneumonia vaccines.
Source: Medicare & You 2001, HCFA.

    Medicare pays for services out of two separate trust funds. Part A 
services are paid for out of the HI Trust Fund. It is primarily 
financed through the Medicare payroll tax that is exclusively dedicated 
to this trust fund. Part B services are paid for out of the SMI Trust 
Fund. This trust fund is financed in part through the part B premium, 
which is adjusted each year to equal 25 percent of expected part B 
spending. The remaining 75 percent is paid for out of general tax 
revenues.

  RESTRUCTURING RAISES FINANCING AND BENEFICIARY PARTICIPATION ISSUES

    Medicare's two parts have distinct financing and participation 
arrangements. Modifying these arrangements could promote the use of a 
more comprehensive measure of Medicare's financial health and help 
policymakers anticipate future fiscal imbalances. In addition to 
selecting such a measure or measures, Congress could also decide to 
establish thresholds that would trigger corrective actions designed to 
rebalance Medicare revenues and spending. Unification of the now 
separate HI and SMI trust funds would require consideration of these 
issues, but even without such a merger, comprehensive financial 
measures and associated triggers would be useful. Unification would 
also require Congress to determine how the current mix of payroll 
taxes, beneficiary premiums, and general revenues might be modified to 
fund the program, as well as whether beneficiaries would be obligated 
to participate in the full program or could obtain coverage for subsets 
of services.

Focus on HI Trust Fund Provides Misleading View of Medicare's Financial 
        Health
    In the past, Medicare's financial status has been generally gauged 
by the projected solvency of the HI trust fund. Looked at this way--and 
based on the latest annual report from the Medicare Trustees--Medicare 
is viewed as solvent through 2029. Solvency is a popular measure, in 
part because the consequences of insolvency are clear. If there is no 
money in the HI trust fund, the government cannot pay hospitals or 
other providers of part A services. Thus, the threat of insolvency can 
be a powerful driver for action. In 1997, the Medicare Trustees 
estimated that the HI trust fund would become insolvent in 2001. The HI 
trust fund had not been so close to a crisis since 1972. Following the 
Trustees' 1997 report, Congress enacted the Balanced Budget Act of 
1997, which contained substantial payment and other reforms designed to 
slow Medicare's cost growth. These reforms, coupled with a strong 
economy, helped to increase the life expectancy of the HI trust fund.
    However, HI trust fund solvency is an incomplete measure of 
Medicare's fiscal health. It does not reflect the cost of the part B 
component of Medicare, which covers outpatient services and is financed 
through general revenues and beneficiary premiums. Part B accounts for 
more than 40 percent of current Medicare spending and is expected to 
account for a growing share of future total program dollars. The 
concept of solvency does not apply to the trust fund for part B, SMI, 
because increases in expenditures are automatically matched with 
increases in general revenues and beneficiary premiums.
    In addition, HI trust fund solvency does not mean that Medicare's 
part A component is financially healthy. Although the trust fund is 
expected to remain solvent until 2029, HI outlays are projected to 
exceed HI revenues beginning in 2016. As the baby boom generation 
retires and the Medicare-eligible population swells, the imbalance 
between outlays and revenues will increase dramatically. Thus, in 15 
years the HI trust fund will begin to experience a growing annual cash 
deficit. At that point, the HI program must redeem Treasury securities 
acquired during years of cash surplus. The government will then need to 
increase taxes, increase borrowing (or retire less debt), impose 
spending cuts, or implement some combination of these actions.
    When part A expenditures outstrip payroll tax revenues, it may be 
tempting to reallocate some expenditures from part A to part B. This 
would extend the solvency of the HI trust fund, but would do little to 
improve Medicare's overall financial health. For example, BBA 
reallocated a portion of home health spending from part A to part B. 
Although that action--phased in over time--reduces HI expenditures and 
extends that trust fund's solvency, it also increases SMI expenditures. 
Consequently, the home health reallocation increases the proportion of 
Medicare funded by general revenues and beneficiary premiums.

Comprehensive Measures Could Better Indicate Program Sustainability
    Clearly, it is total program spending--both part A and part B--
which determines whether Medicare is sustainable over the long haul. 
Whether the program remains in its current configuration, or the 
relationship between parts A and B are restructured, a more 
comprehensive measure of Medicare's financial health could help 
Congress anticipate future fiscal imbalances. A variety of such 
measures exist now. For example, the Medicare Trustees report total 
Medicare spending as a share of gross domestic product (GDP). This 
measure clearly shows that total Medicare expenditures will likely 
consume an increasingly larger share of the national economy. 
Currently, combined HI and SMI expenditures account for 2.3 percent of 
GDP. This percentage is expected to rise to 4.5 percent in 2030 and 8.5 
percent in 2075. Another comprehensive indicator measures Medicare 
spending relative to the entire federal budget. We estimate that 
Medicare's share of the federal budget will increase from 10 percent in 
2000 to over 23 percent in 2030 if the program's spending growth 
continues unchecked.\1\
---------------------------------------------------------------------------
    \1\ Medicare: Higher Expected Spending and Call for New Benefit 
Underscore Need for Meaningful Reform (GAO-01-539T, Mar. 22, 2001).
---------------------------------------------------------------------------

Fiscal Measures Could Trigger Congressional Action
    The adoption of new financial health indicators for Medicare would 
be one step; the next would be to decide what should trigger 
congressional action. Congress could agree that it would take action to 
rebalance Medicare spending and revenues whenever a comprehensive 
measure reached a predetermined level. Possible actions could include 
increasing general revenue contributions, payroll taxes, or beneficiary 
premiums; reducing benefits; cutting provider payments; or introducing 
efficiencies to moderate spending. The 1999 Breaux-Frist Medicare 
reform proposal provides one example of a potential trigger. Under that 
proposal, the two trust funds would be unified and congressional action 
would be required in any year when general revenue contributions 
exceeded 40 percent of total Medicare expenditures.
    The need for measures of program sustainability and thresholds that 
would trigger congressional action would be most acute if the trust 
funds are unified. Such a reconfiguration could remove the powerful 
signal of the HI trust fund insolvency and reduce the apparent urgency 
of corrective actions. If the trust funds remain separate, 
comprehensive measures of Medicare's financial health and associated 
triggers could avoid the shortcomings that arise from a focus on the HI 
trust fund's solvency.
    Improved measures of Medicare sustainability and agreed-upon 
thresholds will not, however, alter the difficult decisions facing this 
and future Congresses. A growing Medicare population and advances in 
expensive medical technology will increase future demands for health 
care spending. Policymakers will need to find ways either to control 
Medicare's spending growth or obtain additional revenues to pay for it. 
Any solution to address the financial imbalance will affect 
beneficiaries, taxpayers, providers, or some combination of the three 
groups. Better measures of Medicare's financial health may help 
identify the need for action, but will not lessen the difficulty of 
implementing a solution.

Unification of Trust Funds Raises Questions About Financing, Premiums, 
        and Participation
    Creating a unified trust fund for Medicare parts A and B would 
raise several new issues Congress would need to address. One is program 
financing--Congress would have to specify Medicare's revenue sources 
and the share that each source would contribute. Under the current 
arrangement, revenues come from the Medicare payroll tax, general 
revenues, and beneficiary premiums. Broadly speaking, the amount 
financed from each revenue source depends upon the amount spent on 
Medicare services and the classification of services into parts A and 
B. The payroll tax supports part A services. The amount of general 
revenues devoted to Medicare is set equal to 75 percent of part B 
expenditures. Beneficiary premiums are collected to pay for the 
remaining 25 percent of part B spending. If the trust funds were 
unified, Congress would have to specify the funding mechanism. It 
could, for example, determine the share that general tax revenues, 
payroll tax revenues, and beneficiary premiums would each contribute to 
total Medicare spending. Alternatively, it could adopt an allocation 
formula similar to the present one by designating some services to be 
supported by the payroll tax and others to be supported by general 
revenues and beneficiary premiums.
    Beneficiary participation issues would also arise under a 
restructured program with a unified trust fund. Currently, about 2 
million individuals (5 percent of beneficiaries) are eligible for 
Medicare part B but do not participate in the voluntary program. A 
smaller number of individuals do not qualify for coverage under part A, 
although provisions allow certain individuals to buy into the program 
by paying a monthly premium. Under a restructured program, Congress 
would need to determine beneficiary participation and premium options. 
For example, should participation in the full program and payment of 
any associated premium be mandatory? If full participation is mandated, 
program costs could increase and some beneficiaries would receive 
Medicare coverage for services covered by existing private policies. If 
full participation is voluntary, what coverage should be provided to 
those individuals who choose less than full participation? Would 
individuals who had made payroll tax contributions but decline to pay 
the premium not receive coverage? Or would reduced benefits--for 
example, coverage only for current part A services--be available for 
such individuals?

               BENEFICIARY COST-SHARING COULD BE IMPROVED

    Rethinking the relationship between parts A and B could facilitate 
rationalization of cost-sharing requirements and help make Medicare 
more like private sector and Medicare+Choice plans. Medicare's benefit 
design has changed little since its inception 35 years ago, and in many 
ways has not kept pace with changing health care needs and private 
sector insurance practices. Medicare's current costsharing requirements 
in particular are not well structured to promote prudent use of 
discretionary services. At the same time, they can create financial 
barriers to care and leave beneficiaries with extensive health care 
needs liable for high out-of-pocket costs.\2\
---------------------------------------------------------------------------
    \2\ Medicare: Cost Sharing Policies Problematic for Beneficiaries 
and Program (GAO-01-713T, May 9, 2001.
---------------------------------------------------------------------------

Cost-Sharing Requirements Are Not Well Structured
    Health insurers today commonly design cost-sharing requirements--in 
the form of deductibles, coinsurance, and copayments--to ensure that 
beneficiaries are aware there is a cost associated with the provision 
of services and to encourage them to use services prudently. Ideally, 
cost-sharing should encourage beneficiaries to evaluate the need for 
discretionary care but not discourage necessary care. Optimally, cost-
sharing would generally require coinsurance or copayrnents for services 
that may be discretionary and could potentially be overused, and would 
also aim to steer patients to lower cost or better treatment options. 
Care must be taken, however, to avoid setting cost-sharing amounts so 
high as to create financial barriers to necessary care.
    The benefit packages of most Medicare+Choice plans illustrate cost-
sharing arrangements that have been designed to reinforce cost 
containment and treatment goals. Most Medicare+Choice plans charge a 
small copayment for physician visits ($10 or less) and emergency room 
services (less than $50). Relatively few Medi-care+Choice plans charge 
copayments for hospital admissions. Plans that offer prescription drug 
benefits typically design cost-sharing provisions that encourage 
beneficiaries to use cheaper generic drugs or brand name drugs for 
which the plan has negotiated a discount.
    Medicare fee-for-service cost-sharing rules diverge from these 
common insurance industry practices in important ways. For example, as 
indicated in table 2, Medicare imposes a relatively high deductible of 
$792 for hospital admissions, which are rarely optional. In contrast, 
Medicare requires no cost-sharing for home health care services, even 
though historically high utilization growth and wide geographic 
disparities in the use of such services have raised concerns about the 
potentially discretionary nature of some services.\3\ Medicare also has 
not increased the part B deductible since 1991. For the last 10 years 
the deductible has remained constant at $100 and has thus steadily 
decreased as a proportion of beneficiaries' real income.
---------------------------------------------------------------------------
    \3\ See Medicare Home Health Care: Prospective Payment System Will 
Need Refinement as Data Become Available (GAO/HEHS-00-9, Apr. 7, 2000).
---------------------------------------------------------------------------

Beneficiary Liability Is Unlimited
    Also unlike most employer-sponsored health plans for active 
workers, Medicare does not limit beneficiaries' cost-sharing liability. 
Employer-sponsored plans typically limit maximum annual out-of-pocket 
costs for covered services to less than $2,000 per year for single 
coverage.\4\ In Medicare, however, current estimates suggest that the 
combination of cost-sharing requirements on covered services and the 
cost of services not covered by Medicare leaves beneficiaries liable 
for about 45 percent of their health care costs. The average 
beneficiary is estimated to have incurred about $3, 100 in out-of-
pocket expenses for health care in 2000--an amount equal to about 22 
percent of the average beneficiary's income.\5\ Some beneficiaries face 
much greater financial burdens. For example, low-income single women 
over age 85 in poor health and not covered by Medicaid are estimated to 
have spent more than half (about 52 percent) of their incomes on health 
care services.\6\
---------------------------------------------------------------------------
    \4\ The Kaiser Family Foundation and Health Research and 
Educational Trust, Employer Health Benefits: 2000 Annual Survey.
    \5\ Stephanie Maxwell, Marilyn Moon, and Mesha Segal, Growth in 
Medicare and Out-Of-Pocket Spending: Impact on Vulnerable Beneficiaries 
(Urban Institute, Dec. 2000).
    \6\ Maxwell, Moon, and Segal.
---------------------------------------------------------------------------
    The average beneficiary who obtained services had a total liability 
for Medicare-covered services of $1,451, consisting of $925 in Medicare 
copayments and deductibles in addition to the $526 in annual part B 
premiums in 1997, the most recent year for which data are available on 
the distribution of these costs. The burden of Medicare cost-sharing 
can, again, be much higher for beneficiaries with extensive health care 
needs. In 1997 slightly more than 3.4 million beneficiaries (11.4 
percent of beneficiaries who obtained services) were liable for more 
than $2,000. Approximately 750,000 of these beneficiaries (2.5 percent) 
were liable for more than $5,000, and about 173,000 beneficiaries (0.6 
percent) were liable for more than $10,000.

Options for Addressing Cost-Sharing Concerns
    Different approaches could be taken to address concerns about 
current costsharing requirements. Cost-sharing for less discretionary 
services could be reduced or eliminated. Catastrophic protection could 
be added to the benefits package. In addition, the part B deductible 
could be raised, or the part A and B deductibles could be combined.
    Reducing or eliminating cost-sharing for less discretionary 
services, such as inpatient hospital care, could be done within the 
current program structure. Congress has already taken similar action by 
reducing and eliminating costsharing requirements for various cancer 
screening tests and vaccinations in order to ensure that affordability 
is not a barrier to these important services.
    Adding catastrophic protection by capping how much beneficiaries 
are required to pay out-of-pocket also could be done under current 
program structure. There would need to be agreement on how to allocate 
between parts A and B the added cost to the program and recognition of 
the time and resources needed to incorporate such a change into HCFA's 
information systems.
    Raising the part B deductible or creating a combined deductible for 
part A and part B services has been suggested to offset some of the 
additional cost of providing catastrophic protection. It would also 
offset some of the real-dollar decline in the part B deductible, which 
has not been adjusted for inflation or raised in any way since 1990. 
These changes could be done under current program structure as well, 
again with recognition of the time and resources needed to incorporate 
the change into HCFA's information systems. Most beneficiaries who 
incurred cost-sharing would likely meet a combined deductible through 
their use of what are now part B services. If the combined deductible 
is set higher than the current part B deductible, providing protection 
for low-income beneficiaries so that costs do not become a barrier to 
needed services or an undue burden would be an important consideration.
    Combining the deductible or providing catastrophic protection would 
again raise the issue of whether to maintain individuals' ability to 
participate independently in A or B or to require full participation by 
all beneficiaries in the entire program. Requiring full participation 
for beneficiaries who now participate in only one part of the program 
could result in additional costs for beneficiaries who have alternative 
coverage as well as additional program costs. It also raises the issue 
of the entitlement for persons who have paid the required payroll tax, 
but choose not to pay the premium.
    Partial benefits could be extended to those who do not fully 
participate in the program. Alternatively, some of the effects of 
mandatory participation could be muted by phasing in a unified program 
so that new beneficiaries would participate in the full program while 
those who now participate in only part of the program could continue to 
do so.

CHALLENGES FOR MANAGEMENT AND PROMOTING CARE QUALITY REMAIN REGARDLESS 
                            OF RESTRUCTURING

    As noted earlier, the original Medicare statute reflected 1960s 
private health insurance practices that often included separate 
policies for different services as well as a passive bill paying 
approach. In contrast to Medicare, which has not changed much since its 
inception, private insurance has evolved over the last 40 years and now 
offers comprehensive policies and employs management techniques 
designed to improve the quality and efficiency of services purchased. 
Private insurers are able to undertake these efforts because many have 
detailed data on service use across enrollees and providers, as well as 
wide latitude in how they run their businesses. Regardless of whether 
the relationship between parts A and B is restructured, HCFA faces 
challenges in seeking to more efficiently manage Medicare services due 
to its outdated and inadequate IT systems, statutory constraints, and 
the fundamental need for public accountability that accompanies a large 
public program. These limitations have hampered the agency's ability to 
administer the program and incorporate new innovations. Private 
insurers have taken steps to influence utilization and patterns of 
service delivery through efforts such as beneficiary education, 
preferred provider networks, and coordination of services. NASI has 
reviewed many of these private sector activities and concluded that 
they could have potential value for Medicare. However, they would need 
to be tested to determine their effects as well as how they might be 
adapted to reflect the uniqueness of Medicare as both a public program 
and the largest single purchaser of health care. In addition, HCFA 
would likely need new statutory authority to broadly implement many of 
these innovations.

Effective Program Management Depends on Comprehensive and Timely 
        Information
    To effectively oversee claims administration and assess the effects 
of innovative policies that private sector insurers have adopted, HCFA 
needs timely and comprehensive information on services and payments in 
the aggregate and for individual beneficiaries. HCFA lacks that 
capacity today, not because it has separate contractors for parts A and 
B, but because of deficiencies in its information systems. Some of the 
agency's vital information systems are decades old, with some operating 
software rarely used today by any entity other than HCFA, and lack the 
capacity and flexibility that newer technology can offer. Consequently, 
HCFA has had difficulty assembling timely and comprehensive information 
about provider billing patterns and beneficiary service use.
    Currently, data from parts A and B do flow to some common points--
both during claims processing and after. During claims processing, both 
part A and part B claims are checked through a prepayment validation 
and authorization system operated by HCFA--the Common Working File 
(CWF). Claims approved for payment are ultimately complied in the 
National Claims History (NCH) Me, which can be analyzed to look at 
broader payment trends within the program. The problem is that this 
compilation of information occurs long after services have been 
delivered and claims paid.
    These system limitations are unfortunate because changes in 
Medicare payment policy for one type of service can have reverberations 
in other areas. To understand these effects requires analysis across a 
range of services beneficiaries may be receiving. A clear example of 
this occurred after the implementation of a prospective payment system 
(PPS) for hospitals, which pays hospitals fixed, predetermined amounts 
for each hospital stay that vary according to patients' diagnoses. 
Prior to this innovation, hospitals were paid on the basis of their 
costs, with little incentive to limit patient stays or provide care 
efficiently. Paying a fixed amount for an episode of hospital care 
creates incentives for hospitals to reduce lengths of stay and to shift 
services that had been provided in the hospital to other settings. 
Understanding these modifications in care delivery led to payment 
changes to prevent Medicare from paying twice for the same service. 
More recent payment changes for home health and SNF services, and the 
soon to be implemented PPS for inpatient rehabilitation services, will 
likely cause similar kinds of care shifts. It is essential that HCFA 
has the ability to monitor changes in care delivery in a timely and 
objective manner to determine how these payment policies may need to be 
adjusted in the future.
    Recent experience has also demonstrated HCFA's difficulties in 
developing information to measure the effects of changing Medicare 
policies on beneficiaries and providers in a comprehensive and timely 
manner. The Balanced Budget Act of 1997 (BBA) payment reforms 
represented bold steps to control Medicare spending by changing the 
financial incentives for delivering care efficiently. Reforms affected 
hospitals, home health agencies, SNFS, and providers of other services. 
Affected providers presented anecdotal evidence asserting that the 
BBA's payment reforms caused them financial difficulties and would 
impair beneficiary access, urging Congress to undo some of the act's 
provisions. HCFA analysts were ill-equipped to assess the validity of 
these charges because the necessary program data were not readily 
available.
    Better and more timely information is a prerequisite to more 
effective program management. It is essential to the development and 
refinement of payment methods for different service providers. It can 
also help policymakers understand the desirable and undesirable 
consequences of changes on beneficiaries, providers, and the trust 
funds. Generating these data is not dependent on unifying part A and 
part B, but rather on merging part A and part B data in a modern 
information system capable of supporting timely, pertinent analyses.

Quality Promotion Efforts Could Reap Benefits But Face Many Obstacles
    An expert panel convened by NASI has suggested that Medicare may 
benefit from moving away from its passive bill paying approach by 
adopting some private insurers' practices designed to improve the 
quality and efficiency of care.\7\ The panel focused on provider and 
beneficiary education, preferred provider networks, and coordination of 
services as potential improvements in Medicare. Educating beneficiaries 
or providers could improve the use of important preventive and other 
services currently being under-used and minimize questionable use of 
services. Developing a system of preferred providers selected on the 
basis of quality as well as cost could improve care and help achieve 
savings. More actively coordinating care across provider settings for 
beneficiaries with chronic diseases like diabetes or who have recently 
experienced heart attacks might also help improve quality and 
efficiency. HCFA has begun to implement some innovations and experiment 
with others. Broadly implementing the experimental innovations that 
prove successful may require new statutory authority. Other private 
sector innovations, however, may be difficult to incorporate, given 
Medicare's size and the need for transparency in a public program.
---------------------------------------------------------------------------
    \7\ From a Generation Behind to a Generation Ahead: Transforming 
Traditional Medicare, Final Report of the Study Panel on Fee-for-
Service Medicare, National Academy of Social Insurance, Washington, 
D.C.: January 1998.
---------------------------------------------------------------------------
    HCFA has been able to implement broad-based education efforts but 
has been stymied in implementing approaches targeted to individual 
beneficiaries most likely to need the help. For example, it has an 
extensive effort underway to encourage colon cancer screening that 
includes dissemination of more than 23,000 innovative posters. The 
posters include tear-off sheets that beneficiaries can hand to 
physicians to facilitate discussions that otherwise might be avoided 
because of the unfamiliar words, sensitive issues, and unpleasant 
options that can be involved. HCFA is also involved in a multifaceted 
effort to increase flu vaccinations and mammography use among 
beneficiaries. However, HCFA may be less able to undertake more 
targeted education efforts that some private insurers are using, such 
as sending out reminders to identified enrollees about the need to 
obtain a certain service. Because of Medicare's size and status as a 
federal program, beneficiaries and others might have concerns about 
HCFA using personal medical information from claims data to target 
educational efforts. Providers might also object to a government 
insurance program advocating certain medical services for their 
patients.
    HCFA is providing more information to physicians about service use 
and typical practice patterns in an effort to educate them about how 
their practice patterns compare to the norm. For example, the Medicare 
peer review organizations encourage those who have unusual practice 
patterns to reconsider their service provision. However, private 
insurers can go one step further and terminate providers who continue 
to have aberrant practice patterns. HCFA's ability to terminate 
providers is much more limited because of statutory requirements 
intended to protect beneficiaries' choice of providers.
    HCFA's ability to encourage use of preferred providers is also 
limited. The Medicare statute generally allows any qualified provider 
to participate in the program. HCFA has experimented with bundling 
payments for certain expensive procedures performed by designated 
providers. For example, it tested the impact of making single 
``global'' payments to hospitals for all services--both hospital and 
physician--related to coronary artery bypass graft surgery. The 
hospitals chosen for the experiment were among those with the best 
outcomes for these surgeries.\8\ The experiment cut program costs by 10 
percent for the 10,000 coronary artery bypass surgeries performed, and 
saved money for beneficiaries through reduced part B coinsurance 
payments. More important, compared to a group of beneficiaries not 
receiving this bundled care, beneficiaries who were treated in one of 
the selected hospitals had lower mortality rates, were more satisfied 
with the quality of the nursing care, and appreciated the simplicity of 
a single coinsurance amount. HCFA has begun a similar experiment at 
selected acute care hospitals, which involves bundling payments for 
hospital, physician, and other health care professionals' services 
provided during a beneficiary's hospital stay for selected 
cardiovascular and orthopedic procedures.
---------------------------------------------------------------------------
    \8\ A number of studies prior to this experiment have found that 
hospitals with the greatest volume of these types of surgeries 
generally had better outcomes, in regard to mortality and 
complications.
---------------------------------------------------------------------------
    However, more wide scale Medicare implementation of such hospital 
and physician partnership arrangements may be difficult. Providers have 
raised concerns about a government program designating some providers 
as delivering higher quality care than others. In addition, bundling 
services for hospitals and doctors added administrative burdens to the 
hospitals and took control of payments away from doctors. In the end, 
it is not the separation of parts A and B that would impede efforts to 
promote such preferred provider arrangements. Rather, it may be more 
deep-seated concerns about government promotion of certain providers at 
the expense of others that serve as a barrier to this and other types 
of preferred provider arrangements.
    HCFA has also been conducting demonstrations to test how to better 
coordinate care for certain patients since the 1980s. In addition, BBA 
\9\ mandates that HCFA find budget neutral ways to test methods of 
coordinating a range of services for chronically ill beneficiaries in 
at least nine urban and rural sites. The law authorizes the Secretary 
of Health and Human Services to incorporate any components proven to be 
cost-effective into Medicare through regulations and to expand the 
number of demonstration sites.
---------------------------------------------------------------------------
    \9\ Section 4016.
---------------------------------------------------------------------------
    While there is increasing interest in efforts to coordinate care, 
it is not clear that they are always cost-effective. Some experience in 
both the private and public sectors suggests that such efforts can 
improve quality and achieve savings. For example, the Group Health 
Cooperative of Puget Sound and PacifiCare teamed with a senior citizens 
center to offer supervised health promotion and chronic illness self-
management interventions to chronically ill seniors. The intervention 
included meetings with geriatric nurse practitioners to develop 
individually tailored health promotion plans, medication reviews, 
classes, support groups, and volunteer mentors. Preliminary findings 
suggested that the case-managed group had fewer health problems and 
lower costs compared to a group that did not receive the services. 
However, other experiments, including those conducted by HCFA, have 
failed to demonstrate either quality improvements or cost savings. 
Furthermore, there would need to be statutory changes to implement 
different coordination approaches in Medicare if they involved coverage 
of new services, such as care coordinators, or involved control over 
the use of particular services or providers.

                        CONCLUDING OBSERVATIONS

    The Medicare program faces many challenges. Clearly, the 
overarching issue is how to ensure that Medicare remains sustainable 
for future generations of beneficiaries. Meeting that challenge will 
involve difficult decisions that will likely affect beneficiaries, 
providers, and taxpayers. However, the financing issue should not 
obscure other important Medicare challenges. Medicare's current cost-
sharing arrangements are not well designed to encourage the efficient 
use of services without discouraging necessary care. Moreover, the lack 
of catastrophic coverage can leave some beneficiaries liable for 
substantial Medicare expenses. Finally, some aspects of Medicare's 
program management are inefficient and lag behind modern private sector 
practices. Changes in Medicare's program management could improve both 
the delivery of health care to beneficiaries and the program's ability 
to pay providers appropriately.
    Some view restructuring of the relationship between parts A and B 
as an important element of overall Medicare reform. Fundamentally, 
assessing the program as a whole is an important first step in 
addressing Medicare's challenges. Solutions to many of these challenges 
could be crafted without restructuring. However, restructuring may 
provide opportunities to implement desired reforms--with or without 
unifying the HI and SMI trust funds-while undoubtedly raising issues 
that will have to be considered.
    Mr. Chairman, this concludes my statement. I would be happy to 
answer any questions that you or members of the Subcommittee may have.

    Mr. Bilirakis. Dr. Young, you obviously have quite a 
background in this subject, so we are eagerly awaiting to hear 
what you have to say.

                  STATEMENT OF DONALD A. YOUNG

    Mr. Young. Thank you, sir. Chairman Bilirakis, Mr. Brown, 
distinguished members of the committee, I am Dr. Donald Young, 
interim president of the Health Insurance Association of 
America. I am very pleased to be with you here today to discuss 
Medicare reform. I was previously executive director of the 
Federal Prospective Payment Assessment Commission, ProPAC, the 
predecessor to MEDPAC, and before that, deputy director of the 
policy bureau of the Health Care financing administration. 
Given this background, I am familiar with the world of private 
insurance as well as the Medicare program. Medicare is 
obviously a very popular program, something HIAA's own research 
has confirmed. However, I believe that lessons from the private 
insurance industry's long history may be useful as you consider 
how to make the program even stronger.
    When Medicare was enacted in the 1960's, it was patterned 
after existing private insurance programs. But while the 
private sector plans have changed to offer a variety of 
programs that improve the coordination and delivery of care, 
the Medicare fee-for-service program has remained in its 
original form. For example, today, many surgical procedures can 
be performed safely and effectively, both as part A inpatient 
hospital services, and as part B, ambulatory services, the same 
procedure. Medicare beneficiaries, however, face very different 
out-of-pocket costs, depending upon where the service is 
furnished. The resulting financial incentives may result in the 
beneficiary not receiving care in the appropriate setting, 
thereby adversely affecting quality of care.
    In contrast, private health insurance policies usually 
cover a comprehensive array of health services, both in and out 
of a hospital, subject to a single annual deductible. This 
arrangement is easier for insured people to understand and more 
efficient to administer. Under this private sector approach, 
claims for services flow to a single responsible organization 
and inquiries by insured individuals and their caregivers 
likewise could be made to one party.
    Among other things, this arrangement also facilitates 
disease management program. Disease management programs take a 
systematic approach to medicine that encourages patients to 
follow health promoting behaviors and promotes a strong 
patient-doctor relationship. These program not only enhance the 
quality of care, but they help reduce the need for 
hospitalization, emergency room department visits, and other 
services. While beneficiaries in the Medicare+Choice program 
have access to these programs, fee for service beneficiaries do 
not and Medicare's current structure would create major 
challenges in designing such programs. A single program with 
centralized records allows plans to efficiently update and 
maintain beneficiary coverage and claims files and to 
coordinate care.
    These efficiencies result in reductions in the cost for 
providing health care and help in treatment options and health 
outcomes. This can only be carried out through the links 
between various claims the beneficiary may have.
    Combining information about different types of service is 
also extremely important for fraud detection programs. For 
example, a claim for a physician's hospital inpatient visit can 
be compared to the dates on which a patient was hospitalized or 
a claim for laboratory work can be linked to the office visit 
at which the patient was seen and sent for tests.
    Recognizing the constraints of its current structure, 
Medicare has, through the years, attempted to break down the 
barriers between its separate parts. HCFA has conducted various 
pilot projects under its general demonstration authority or 
based on specific congressional mandates. Such programs have 
been very successful, demonstrating the flexibility and the 
design of care management and payment programs that is 
characteristic of private insurance programs. They have also 
been cost efficient for the Medicare program and its 
beneficiaries. But putting such programs in place now requires 
special legislative or regulatory authority, in part because of 
Medicare's outmoded design.
    The Medicare program is in need of substantial reform. 
Obviously, combining Medicare Parts A and B into a single 
program would not, by itself, improve care coordination, 
disease management, program administration or oversight. But 
many of these reforms to work effectively, a necessary first 
step is to eliminate the separation of the program into two 
parts as private insurers did many years ago.
    Thank you for providing me this opportunity to talk about 
Medicare reform from the perspective of the private health 
insurance sector. I would be happy to respond any questions you 
might have.
    [The prepared statement of Donald A. Young follows:]

   Prepared Statement of Donald A. Young, Interim President, Health 
                    Insurance Association of America

                              INTRODUCTION

    Chairman Bilirakis, distinguished members of the Committee, I am 
Dr. Donald A. Young, Interim President of the Health Insurance 
Association of America (HIAA). I am very pleased to be here today to 
discuss the issue of Medicare reform, especially as it relates to the 
program's current division into two separate parts, Part A, Hospital 
Insurance, and Part B, Supplementary Medical Insurance. My past work 
history includes stints as executive director of the federal 
Prospective Payment Assessment Commission and deputy director of the 
policy bureau at the Health Care Financing Administration. Given this 
varied background, I am not only familiar with the world of private 
insurance, but also with the Medicare program, and I hope that my 
contribution today will be of value to the committee.
    Medicare is obviously a very popular federal program, something 
that HIAA's own recent national survey confirmed. However, I believe 
that lessons from the private insurance industry's long history may be 
useful as you consider how to make the Medicare program even stronger.
    When the Medicare benefits package was originally developed in the 
1960s, it was patterned after existing private sector insurance 
programs. But, while private sector plans have changed to offer a 
variety of programs that are more efficient and consumer oriented, the 
Medicare program has remained in its original form. I will describe 
some of the improvements in chronic disease management that private 
insurers have put in place to improve quality. I will also describe 
increased efficiencies and cost savings that result from more effective 
use of patient care data and improved oversight for fraud and abuse. 
The introduction of similar improvements in the Medicare program is 
unnecessarily hampered by its current structure.
    Medicare Part A, the Hospital Insurance Program, helps pay for 
inpatient hospital, skilled nursing facility, and hospice care 
services. Medicare Part B, Supplementary Medical Insurance, pays for 
physician, outpatient hospital, and a range of other services, 
including ambulatory surgical services, physical, occupational and 
speech therapy services, and durable medical equipment. Home health 
services are covered under both parts. Medicare Parts A and B each have 
separate deductibles, separate coinsurance and cost sharing policies, 
separate claims processing entities and separate appeals processes. 
Frequently there are also different payment amounts for the same 
service furnished by Part A and Part B providers. There is certainly 
the potential for uncoordinated policy making and perverse incentives 
that can diminish quality of care and increase program costs and 
beneficiary spending.
    Claims for inpatient hospital services go to contractors known as 
fiscal intermediaries, while claims for outpatient hospital services 
and physicians' services, including those provided during an inpatient 
hospital stay, go to a separate contractor, known as a carrier. Thus, 
Medicare beneficiaries with questions about the handling of their 
claims must often contact two separate entities. Relatively poor 
communication between fiscal intermediaries and carriers undoubtedly 
allows many lost opportunities to coordinate patient care; make the 
Medicare program user-friendly for patients, providers and 
practitioners; and identify and address waste, fraud and abuse.

                        THE PRIVATE SECTOR MODEL

    In several important respects, Medicare's current structure has 
made it difficult for the program to keep pace with innovations 
implemented by private insurers--particularly those intended to improve 
the coordination and delivery of care. To put this in context, let me 
briefly trace the evolution of the private health insurance market.
    Private policies covering hospital and medical expenses date back 
to the 1930s. The earliest policies only provided daily benefits for 
hospitalization. Later, separate policies provided fixed reimbursement 
amounts for various kinds of surgeries. In those days, innovation meant 
developing stand-alone benefits for a widening array of different kinds 
of medical care. There was no coordination, many incidental expenses 
fell ``between the cracks,'' and there was no overall protection 
against catastrophic medical costs.
    Consumers soon realized that these ``basic'' policies were 
inadequate for prolonged illnesses or expensive procedures. In 1949, 
the first ``major medical'' policy was offered as a supplement to the 
existing basic policies. Supplemental major medical policies provided 
protection against catastrophic medical expenses, picking up where 
basic policies left off. Typically there was a modest deductible, often 
some level of coinsurance, and a relatively high maximum benefit limit.
    During the 1960s and 1970s, the industry moved towards offering 
``comprehensive'' major medical policies, which covered most serious 
medical expenses, without any underlying ``basic'' plan. This provided 
for consistent, more easily understood benefits that did not make 
artificial distinctions between types of medical services or providers. 
Since that time, innovations have focused on efforts to improve the 
quality, coordination and cost-effectiveness of care, rather than on 
the fundamental structure of the coverage--a single, coordinated policy 
that handles a wide array of medical expenses on a consistent basis.
    In many ways, Medicare reflects the times in which it was 
developed, resembling an old ``basic'' hospital/medical plan. Hospital 
and medical coverage are provided through separate programs, and 
benefit levels are closely tied to the type of service, type of 
provider and location of care. While this was not unusual when Medicare 
was first enacted, private insurers have found that there are a number 
of advantages to more coordinated programs.
    For example, today many surgical procedures can be safely and 
effectively provided to Medicare beneficiaries as a Part A inpatient 
hospital procedure or as a part B ambulatory service. Medicare 
beneficiaries, however, face very different out-of-pocket costs 
depending on where the service is furnished. The resulting financial 
incentives may result in the beneficiary not receiving care in the 
appropriate setting, thereby adversely affecting quality of care. In 
contrast, private health insurance policies usually cover a 
comprehensive array of health care services, both in and out of a 
hospital, subject to a single, annual deductible.
    This arrangement is easier for insured people to understand and 
more efficient to administer. Under this private sector approach, 
claims for services flow to a single responsible organization, and 
inquiries by insured individuals and their caregivers likewise can be 
made to one party. Among other things, this arrangement also 
facilitates disease management programs, through which insurers seek to 
apply the best practices to treatment of certain chronic diseases 
(e.g., asthma and diabetes mellitus), in order to control their 
progression.

                      DISEASE MANAGEMENT PROGRAMS

    Disease management programs involve a wide variety of interventions 
to address patient needs in a timely and cost-effective way and support 
treatment by health care providers. These programs include patient 
education, patient monitoring, and the provision of specialized 
services. They are currently experiencing a period of tremendous 
growth. The goal of these programs is to improve the quality of care 
and reduce costs by identifying patients with high risk conditions and 
contacting them and/or their physicians regarding compliance with best 
practice guidelines, patient non-compliance related to prescribed 
medications, tests ordered, and physician visits (e.g., physician use 
of beta blockers after a heart attack and patient taking medicine as 
prescribed). This concept aligns physicians and patients at the center 
of programs designed to reach all members of a disease population, not 
just the acutely ill. Some of the programs that have been developed 
include care management programs for asthma, heart disease, low-back 
pain and diabetes.
    Disease management programs take a systematic approach to medicine 
that encourages patients to follow health-promoting behaviors, support 
a strong patient-doctor relationship and include all members of a 
chronic disease population. Such programs are designed by doctors and 
nurses, and focus on proven standards of care. They rely on practice 
guidelines developed by the medical professional societies and from 
other leading organizations such as the National Heart, Lung, and Blood 
Institute; the Agency for Healthcare Research and Quality; and 
recommendations of disease-based associations such as American Diabetes 
Association and the American Cancer Society. The programs provide 
education and supportive services for patients and respond to consumer 
demand for more personalized care. They provide physicians with 
information about practice patterns, identifying potential 
opportunities for improvements. Employers who have been supportive of 
these programs have seen improvement in employees' health status that 
can lead to higher productivity. Clinical and financial outcomes 
indicate improved quality of care, high levels of participant 
satisfaction, and reduced overall health care costs. In short, these 
programs not only enhance the quality of care and patients' quality of 
life, but they also help reduce the need for hospitalization, emergency 
department visits, and other costly services.

                    IMPROVING PROGRAM ADMINISTRATION

    Some of the efficiencies achieved by the private sector are 
directly dependent on the consolidation of coverage under a single 
program--access to centralized records allows plans to more efficiently 
update and maintain beneficiary coverage and claims files and 
coordinate care. These efficiencies result in reductions in the costs 
of providing health care through such activities as utilization review 
(UR) and utilization management (UM) of health care claims. Both UR, to 
determine covered services, appropriate care, and establish fraud 
detection programs, and UM, to enhance efficiency and to improve and 
maintain quality of care, help link treatment options and health 
outcomes. This can only be carried out through links between all the 
various claims a beneficiary may have, which may be for a brief episode 
of care or for longer chronic disease states. This is particularly 
important for disease management programs mentioned above.
    Sharing information about different types of services is extremely 
important for fraud detection programs. Both public and private health 
care systems have achieved substantial savings through their fraud 
detection activities. However, many health plans have established 
centralized anti-fraud detection units to accommodate different benefit 
plans and services. Centralized units can more efficiently service 
different benefits with specialized personnel and programs. Even more 
important than centralized units is access to centralized information 
made possible through information links between various data files for 
providers, claims, and covered persons and services. For example, links 
between services performed by different providers, such as hospitals 
and physicians, can be compared for appropriate diagnoses and dates of 
service. In this way a claim for a physician's hospital in-patient 
visit can be compared to the dates on which a patient was hospitalized, 
or a claim for laboratory work can be linked to the office visit at 
which the patient was seen and sent for tests.
    A recent audit report by the Office of the Inspector General 
provides a good example of the hazards involved in having separate 
claims processing entities for Medicare Parts A and B. This report 
points out that Medicare has been paying twice for the same services--
once to a skilled nursing facility (SNF) under the Medicare Part A 
prospective payment system and again to an outside supplier under 
Medicare Part B. Under current law, a SNF is reimbursed a prospective 
payment for covered services rendered to its Medicare beneficiaries in 
a Part A stay, and consolidated billing is required for all covered 
services. Outside providers and suppliers must bill the SNF (not 
Medicare Part B) for most services and supplies provided. The potential 
improper payments to Part B providers and suppliers totaled $47.6 
million in 1999, and occurred because edits had not been established to 
detect and prevent supplier claims noncompliant with the consolidated 
billing provision.

              SIDESTEPPING MEDICARE'S STRUCTURAL PROBLEMS

    Recognizing the constraints of its current structure, Medicare has, 
through the years, attempted to break down the barriers between its 
separate parts. HCFA has conducted various pilot projects under its 
general demonstration authority or based on specific Congressional 
mandates. For example, under one demonstration project, a single 
combined payment was made for both inpatient hospital services and 
certain physicians' services provided to Medicare patients undergoing a 
coronary artery bypass graft (CABG) in selected hospitals participating 
in the demonstration. An independent evaluation of this experiment 
found that it was quite successful, and that the combined payment 
provided the incentive for hospital personnel and physicians to work 
together to identify the most effective and efficient means to care for 
the affected patients. In other words, rather than have hospitals and 
physicians responding to the different and often conflicting incentives 
of separate hospital and physician payment systems, this demonstration 
provided a single payment to an integrated system of care.
    Another example of Medicare experimentation is the On Lok/Program 
of All-Inclusive Care for the Elderly (PACE), under which monthly 
capitation payments from Medicare and Medicaid cover a comprehensive 
range of acute and long-term services provided to a very frail elderly 
population, all of whom are certified as needing nursing home level of 
care. In the PACE program, services are provided by a multi-
disciplinary care management team, which includes all caregivers having 
contact with the patients, such as physicians, nurses, social workers, 
nutritionists, and physical and occupational therapists.
    Both of these programs have been very successful, demonstrating the 
flexibility in the design of care management and payment programs that 
is characteristic of private insurance programs. But putting such 
programs in place requires special legislative or regulatory authority, 
in part because of Medicare's outmoded design.

               THE PROMISE OF A COMBINED MEDICARE PROGRAM

    The Medicare program is in need of substantial reform. Obviously, 
combining Medicare Parts A and B into a single program would not, by 
itself improve care coordination, disease management, and program 
administration and oversight. But, for many of these more substantial 
reforms to work effectively, a necessary first step is to eliminate the 
artificial and antiquated separation of the program into two parts as 
private insurers did many years ago. Thank you for providing me this 
opportunity to talk about Medicare reform from the perspective of the 
private health insurance sector. I would be happy to respond to any 
questions you might have.

    Mr. Bilirakis. Thank you very much, Doctor.
    Mr. Schulder, as soon as you get to the mike.

                 STATEMENT OF DANIEL J. SCHULDER

    Mr. Schulder. Thank you very much. My name is Dan Schulder. 
I am the Legislative Director of the Alliance for Retired 
Americans, and on behalf of the Alliance, I thank you and all 
members of this committee for this opportunity to speak on 
Medicare changes and Medicare issues.
    The Alliance, which was established on January 1 of this 
year, now has 2.6 million members across the Nation, retirees 
from affiliates of the AFL-CIO, community-based organizations 
and individual seniors have joined the Alliance to fight for 
social and economic justice and civil rights for all citizens.
    As you know, Mr. Chairman, Medicare is one of society's 
great accomplishments. It has opened access to quality health 
services to both older persons and persons with disabilities 
from every income level.
    Its pioneering role in restraining health care costs is one 
of its many unheralded successes. It has demonstrated that 
overhead costs can be kept low despite enormous volume and 
growing perplexity; and because of prudent management, the 
spending restraints of the Balanced Budget Act and revenues 
buoyed by the economy over the last decade, there is no 
financial crisis facing the system for years to come.
    At the same time, the Alliance and its members recognize 
systemic shortcomings in this system, including a lack of 
dental and vision care and routine preventive services such as 
checkups, limited nursing and home health care and mounting 
out-of-pocket costs. Seniors now spend $1 in $5 of their income 
for health care, and the older and poorer you get, the higher 
that proportion does go.
    Medigap policies with drug coverage are becoming 
unaffordable and employer-based retiree health benefits are 
declining rapidly. Over the past decade, Medicare coverage, 
compared to what most workers receive under company plans, has 
declined. And in the coming decades, millions of baby boomers 
will line up for their entitlement to quality health care; and 
the Alliance is dedicated to making sure that that health care 
will be there for them.
    In light of these needs and strengths, the Alliance stands 
for those who want to assure that Medicare will be modernized, 
expanded, receive adequate revenues and resources and will have 
the management capability to continue to deliver quality care 
to our citizens. There is no more important claim on the 
Nation's resources and energies over the coming years.
    For the Alliance, our prime legislative objective this year 
is the enactment of a universal and comprehensive Medicare 
prescription drug benefit, standing alone or as part of other 
changes to the Medicare program. That is the first on the list 
of our members in the surveys that we have given to them.
    You have asked us, in particular, to discuss the 
implications of merging Parts A and B in Medicare. There is no 
specific description in legislative proposals of exactly what 
such a merger might entail. A long history of separate trust 
funds, revenue streams, deductibles, cost-sharing differences, 
billings and contracting practices and solvency definitions all 
suggest there are no easy definitions of the desirability of 
such a merger. However, from the standpoint of beneficiaries, 
there are a number of questions that should be addressed.
    Will such restructuring enhance or retard work on enacting 
a universal, comprehensive and defined pharmaceutical benefit?
    What are the goals of restructuring?
    If there are savings to restructuring, who benefits and who 
may lose?
    Will restructuring help to establish an overall cap on out-
of-pocket costs to beneficiaries?
    Will the process enhance services to rural communities?
    Will the States be inspired to enroll more QMB and SLMB 
eligibles?
    Will preventive services be provided without deductibles 
and copayments?
    The Alliance believes that the central goal of 
modernization and restructuring activities must be the 
enhancement and expansion of quality services to beneficiaries 
and the overall strengthening of the Medicare system working in 
their behalf. If the goals, however, include covert attempts to 
cap annual expenditures, end the entitlement status of 
Medicare, create voucher systems and construct a multitiered 
system of health services, the Alliance will oppose them. It 
all depends, after all, on mechanics and motives.
    It is also a question of priorities, Mr. Chairman. The need 
for a prescription drug benefit presents a crisis for millions 
of Americans today. The escalating costs of drugs has created 
Medigap policies with premiums reaching $9,000 in annual costs 
for 75-year-old women in some States.
    Mr. Chairman, more than a million beneficiaries have lost 
HMO coverage and there are more to come. Medicare pays for a 
declining portion of health care costs and there is no limit on 
liability.
    The Alliance does believe that there are certain aspects of 
Medicare administration that should be addressed. The first 
issue is the adequacy of HCFA administrative resources. HCFA 
should examine better ways of contracting for services, create 
bundled payments for some services and use competition to 
select intermediaries and carriers. It should assess the 
benefits of creating a primary care case management system to 
better guide treatment in fee-for-service programs and look 
again at offering disease management services to enrollees, 
which could improve care while reducing costs.
    We also would call for an increase in SHIP programs, State 
health insurance programs. For a small investment, lots of 
people could get more information for more efficient use of the 
system. We would like to see less paperwork and more consumer 
education. We support these kinds of modernization directions 
because they are both good for the beneficiaries and the 
system.
    There is no question, Mr. Chairman, that the Medicare 
program will need greater resources even if every acceptable 
efficiency and cost-saving change is incorporated. A drug 
benefit will be expensive, as would an overall stop-loss cap. 
Millions of new persons will become eligible in a few years. 
That is why the Alliance supports the use of on-budget surplus 
funds to strengthen Medicare and extend solvency. We hope that 
the 2001 tax changes will not prevent such an allocation, and 
if so, we would expect the Congress to revisit its actions on 
taxes and reassess national priorities. We also foresee a 
review of the adequacy of current payroll taxes to support 
expanded benefits and increased numbers of beneficiaries.
    The Alliance does support your efforts, Mr. Chairman, to 
explore ways to assure a more efficient and effective Medicare 
program, and we trust that you agree with us and with millions 
of seniors, their families and the health care workers treating 
them that the focus of Medicare improvements in the short and 
the long term must be the guarantee of first-class care for all 
Medicare beneficiaries. And on that basis, you can count on us 
and our members to work with you and then with this committee.
    Thank you.
    [The prepared statement of Daniel J. Schulder follows:]

     Prepared Statement of Daniel J. Schulder, Assistant Director, 
    Department of Government Affairs, Alliance for Retired Americans

    On behalf of the Alliance for Retired Americans, its officers and 
members, I thank you Mr. Chairman for the opportunity to present 
testimony today on Medicare reform and modernization issues including 
the merging of Medicare Parts A and B.
    The Alliance, which was established on January 1 of this year, now 
has 2.6 million members across the nation. Retirees from affiliates of 
the AFL-CIO, community-based organizations and individual seniors have 
joined the Alliance to fight for social and economic justice and civil 
rights for all Americans. We believe that all older and retired persons 
have responsibility to strive to create a society which incorporates 
these goals and rights.
    As you know, Mr. Chairman, Medicare is one of this society's great 
accomplishments. It has opened access to quality health services to 
both older persons and persons with severe disabilities from every 
income level. Its pioneering role in restraining health care costs is 
one of its many unheralded successes. It has demonstrated that overhead 
costs can be kept low despite enormous volume and growing complexity. 
And, because of prudent management, the spending restraints of the 
Balanced Budget Act and revenues buoyed by the economy of the last 
decade, there is no financial crisis facing the system for years to 
come.
    At the same time, the Alliance and its members recognize systemic 
shortcomings including a lack of dental and vision care, routine 
preventive care such as check-ups, limited nursing and home-health care 
and mounting out-of-pocket costs. Seniors now spend one in five dollars 
of their income for health care and the older and the poorer you get, 
the higher that proportion grows. Medigap policies with drug coverage 
are becoming unaffordable and employer-provided retiree health benefits 
are declining rapidly. Over the past decades, Medicare coverage 
compared to what most workers have under company plans--has declined. 
And, in the coming decades, the millions of baby boomers will line up 
for their entitlement to quality health care. The Alliance is dedicated 
to making sure that Medicare will be there for them and for all of our 
children and grandchildren.
    In the light of these needs and strengths, the Alliance stands with 
those who want to assure that Medicare will be modernized, expanded, 
receive adequate revenues and resources and will have the management 
capacity to continue to deliver quality care to our citizens. There is 
no more important claim on the nation's resources and energies over the 
coming years.
    The Alliance's prime legislative objective this year is the 
enactment of a universal and comprehensive Medicare prescription drug 
benefit standing alone or as part of any changes to the Medicare 
program. Of all improvements to Medicare, this benefit is first on the 
list of Medicare improvements in surveys of our members.
    You have asked us, in particular, to discuss the implications of 
merging Parts A and B of Medicare. There is no specific description in 
legislative proposals of exactly what such a merger might entail. What 
we understand is that the long history of separate trust funds, revenue 
streams, deductibles, cost-sharing differences, billing and contracting 
practices and solvency definitions all suggest no easy definitions of 
the desirability of such a merger. However, from the standpoint of 
beneficiaries, a number of questions should be addressed:

 Will such restructuring enhance or retard work on enacting a 
        universal, comprehensive and defined pharmaceutical benefit?
 What are the goals of restructuring?
 If there are savings to restructuring, who benefits, who 
        loses?
 Will such restructuring help to establish a overall cap on 
        out-of-pocket costs to beneficiaries?
 Will the process enhance services to rural communities; will 
        the states be inspired to enroll more QMB and SLMB eligibles; 
        will preventive services be provided without deductibles and 
        copayments?
    The Alliance believes that the central goal of all modernization 
and restructuring activities must be the enhancement and expansion of 
quality services to beneficiaries and the overall strengthening of the 
Medicare system working in their behalf. If the goals, however, include 
covert attempts to cap annual expenditures, end the entitlement status 
of Medicare, create voucher systems and construct a multi-tiered system 
of health services, the Alliance will oppose them. It all depends on 
both mechanics and motives.
    It is also a question of priorities, Mr. Chairman. The need for a 
prescription drug benefit presents a crisis for millions of Americans. 
The escalating price of drugs has created Medigap policies with 
premiums reaching $9,000 in annual costs for 75-year-old women in some 
states. Mr. Chairman, more than a million beneficiaries have lost 
Medicare HMO coverage and there are more to come. Medicare pays for a 
declining portion of health care costs and there is no limit on 
liability.
    The Alliance does believe that there are aspects of Medicare 
administration that should be addressed. HCFA should examine better 
ways of contracting for services, create bundled payments for some 
services and use competition to select intermediaries and carriers. It 
should assess the benefits of creating a primary care case management 
system to better guide treatment in fee-for-service programs and look 
again at offering disease management services to enrollees which could 
improve care while reducing costs. We support such modernization 
directions because they can be good for both beneficiaries and the 
system.
    Mr. Chairman, there is no question that the Medicare program will 
need greater resources even if every acceptable efficiency and cost 
saving change is incorporated. A drug benefit will be expensive as 
would an overall stop-loss cap. Millions of persons will become 
eligible in a few years. That is why the Alliance supports the use of 
on-budget surplus funds to strengthen Medicare and extend solvency. We 
hope that the 2001 tax changes will not prevent such an allocation and 
if so, we would expect the Congress to revisit its action on taxes and 
reassess national priorities. We also foresee a review of the adequacy 
of current payroll taxes to support expanded benefits and increased 
numbers of beneficiaries.
    The Alliance does support your efforts, Mr. Chairman, to explore 
ways to assure a more efficient and effective Medicare program. And we 
trust that you agree with us and with millions of seniors, their 
families, and the health care workers treating them, that the focus of 
Medicare improvements, in the short and long term, must be the 
guarantee of first-class care for all Medicare beneficiaries. On that 
basis, you can count on us and our members to work with you and with 
this Committee.
    Thank you.

     Mr. Bilirakis. Thank you very much Mr. Schulder.
    You know, on the point of contractors, we are told by HCFA 
that the way the legislation now occurs, they really don't have 
the flexibility to be able to choose the proper contractor; or 
even if a contractor doesn't function as they well as they 
should, to be able to make changes and that sort of thing. It 
is something that we are looking at when we are talking in 
general in connection with the prescription drugs portion of 
modernization, as we call it, of HCFA. We, of course, think in 
terms of that as well as some of these other things. I just 
wanted you to know that.
    Mr. Schulder. Just giving me the authority to use the best 
contractors. Thank you.
    Mr. Bilirakis. Ms. Moon, please proceed.

                    STATEMENT OF MARILYN MOON

    Ms. Moon. Thank you for the opportunity to be here, Mr. 
Chairman, Mr. Brown and other members of the committee.
    My perspective on Medicare comes from more than 20 years 
researching this program, serving from 1995 through 2000 as a 
member of the public trustees of the Board of Medicare Trust 
Funds, and a long interest in beneficiary concerns in which now 
I have been working to considerable degree with the Medicare 
Rights Center in New York which counsels beneficiaries and 
discusses with them a number of their concerns.
    I believe, overall, that combining Parts A and B of 
Medicare would at best make only minor contributions to 
improvements needed in the program. In fact, it is possible 
that too much attention on such a combination will deflect 
attention from other important issues that need to be 
discussed. Consider the four goals that are mentioned in this 
today, about combining A and B, and I think that those are 
goals in general that are laudable goals to achieve, but go 
well beyond the A and B Trust Fund issue.
    No. 1, simplifying the program: Medicare beneficiaries are 
often confused about the Medicare program and Parts A and B, 
and HI and SMI sound confusing; but the needs go beyond 
understanding the two parts. The need is really for 
beneficiaries to have a single point of entry into the system 
where they can call and get information--get help, that is--
from people who are well informed about the program, who answer 
the phone and who provide the kinds of information and support 
that such beneficiaries need. This requires resources and a 
commitment to a single point of entry, and it doesn't really 
matter how many different complicated parts there are in the 
system as long as the individual sees that nice single point of 
entry.
    Improving cost-sharing: This is an area that people have 
talked about a lot and is of particular interest to me. The 
combination of deductibles and coinsurance for Medicare 
certainly does represent an ad hoc selection of things that 
were done for strange historical reason s, and it would be very 
nice to improve the cost-sharing structure of this program for 
a number of purposes. But combining A and B offers relatively 
few advantages for addressing these issues. It would make it 
easier, for example, to create a combined deductible, but that 
is hardly the problem with the benefit structure that we 
currently have.
    Moreover, many private insurance plans continue to have 
multiple deductibles. My own plan has two deductibles, and one 
that is different whether I am in or out of the preferred 
providers, as well as a hospital deductible; and when I look at 
the FEHBP, I see that some of have them have six deductibles, 
and they also have a deductible for prescription drugs, 
depending on whether you are in or out of the PPO.
    The problems with the cost-sharing structure, though, deal 
much more with, for example, issues of the high coinsurance 
that beneficiaries who have been in the hospital for a long 
period of time have to pay, disadvantaging sicker 
beneficiaries, and as Bill Scanlon pointed out, deductibles and 
coinsurance that do little to affect use because use is not 
discretionary for those individuals. So balancing that, the two 
different deductibles, might make good sense. But more 
important would be to make sure that the cost sharing does not 
put sicker beneficiaries at an enormous disadvantage.
    One of the concerns I have, for example, with home health 
copays is when we subject them to--for individuals who largely 
are very sick for other reasons, they place an enormous burden 
on the sickest of beneficiaries. Putting the home health under 
Part B of the program, for example, was a good compromise that 
effectively raised the premium on Part B and was asking people 
that get home health to pay something more.
    As other people have mentioned, catastrophic coverage would 
also be particularly helpful.
    The third goal I think of achieving greater efficiency in 
program management and coordination has also been discussed to 
some point. Again, providers probably deserve a single point of 
entry into the system and careful coordination. An A-B merger 
probably makes some sense in terms of doing the kinds of 
coordination of care that Dr. Young spoke about, but again the 
most important thing is to have the data and have one agency in 
charge of both parts of the program, which means that you need, 
again, additional resources to make data more timely, to try to 
do the kinds of care coordination that I think many people 
believe is important.
    Again, it is more a matter of resources than combinations.
    And finally, Medicare and financing issues are another area 
of particular attention for people who talk about an A-B 
contribution. As others have expressed on this panel, I am 
concerned about making financing decisions on the basis of a 
technical adjustment. The financing decisions are going to be 
tough ones. I think there are going to need to be new revenues 
put into this program, but that deserves a careful discussion 
of what is the right balance of payroll tax burdens on 
individuals who are in the program and general revenues, rather 
than setting up any kind of formula establishment.
    Part A and Part B actually do grow together, even though 
Part B has grown faster than A over time; and that is largely 
because of the shifting out of services from Part A in hospital 
care to outpatient services. That is a success of the program 
that it has actually been flexible enough to handle that 
change. It has not been flexible enough to handle the change of 
the greater reliance on prescription drugs because those have 
never been covered by the program. But--the Part B part of the 
program I don't believe is as troubled, but it certainly needs 
to be part of the financing discussion.
    As Bill Scanlon also mentioned, Parts A and B are listed in 
the Trustee's reports every year as a share of GDP. That is a 
good place to start. Perhaps some more attention to that, in 
understanding the implications, would help; but I think, again, 
that can be done without necessarily combining the two parts of 
the program.
    Thank you.
    [The prepared statement of Marilyn Moon follows:]

        Prepared Statement of Marilyn Moon, The Urban Institute

    Mr. Chairman and members of the Committee: I appreciate the 
opportunity to be here today to testify on issues of combining Parts A 
and B of Medicare. As you are well aware, there are many different 
reasons why people have advocated such a combination over the years. In 
my testimony, I examine a number of the goals that people have 
expressed, consider whether it is necessary to combine Parts A and B to 
achieve those goals, and suggest other remedies that are also important 
to consider for modernizing Medicare. I conclude with several cautions 
about problems that such a combination could create.

                  A BRIEF LOOK AT THE MEDICARE PROGRAM

    It is instructive to look briefly at the history of Medicare and 
consider why there are two parts of the program. Until very late in the 
legislative process, only Medicare Part A was under consideration. In 
the private sector, many people who had health insurance had it only 
for hospitalization. As the most expensive part of health care, it was 
considered the highest priority for an initial insurance program for 
the elderly. Thus, the separation occurred in part because of the last 
minute inclusion of Part B. In addition, by making this a voluntary 
program and requiring beneficiary premiums, it was thought to be more 
acceptable to physicians leery of participating in a government 
program. It appeared to be more like insurance and indeed was 
established with rules for a ``hands off'' approach to the practice of 
medicine.
    Ironically, in the beginning, the Part A deductible of $40 was less 
than the $50 deductible for Part B. But Part A was indexed to the 
growth in hospital spending while Part B has only been subject to two 
discreet increases. Today at $792, the Part A deductible is much higher 
than the $100 Part B deductible, even though many advocates of cost 
sharing would likely propose that the Part B deductible be the higher 
one. While many observers of Medicare have appropriately suggested that 
the benefit package is outmoded and inadequate, those criticisms are 
directed more at the lack of upper bound protections and prescription 
drug coverage in the basic package of benefits that Medicare covers.
    Medicare has always relied upon private entities to process claims 
and perform other insurance functions. Intermediaries serve Part A of 
Medicare, while Part B uses Carriers. But even beyond the titles, there 
are many aspects of Medicare contracting that can and should be 
considered in reform. But it is not just the A/B distinction that 
matters; restrictive rules on who can have these contracts, 
prohibitions against profits, and limitations on the Health Care 
Financing Administration's ability to seek improvements in performance 
are also major issues.
    Although Part B of Medicare is voluntary, nearly all those eligible 
pay the premium and participate in the program. The subsidy makes this 
coverage a good deal for the elderly and disabled. Four groups make up 
most of those who choose not to participate: those with very low 
incomes who cannot afford the Premium (and who do not get help from 
Medicaid or related programs), those just coming on to Medicare who 
have not yet enrolled, federal retirees who enroll in an HMO under 
FEHBP, and those whose current employer (or spouse's employer) provide 
health insurance that is primary to Medicare. This latter group almost 
always fares better by relying on that private insurance for Part B-
type services. And because their enrollment in the private sector saves 
money for the program, these individuals are not required to pay a 
penalty to enroll in Part B when they give up that private insurance.

                               THE GOALS

    Combining Parts A and B of the program has often been suggested as 
part of other reforms, at least implicitly suggesting that much of the 
confusion and complexity is due to this particular split. Further, even 
larger goals--such as financing of Medicare--have also been linked to 
the importance of making such a change.
    Four of the important goals mentioned are:

 Simplifying the program;
 Improving cost sharing and making it more rationale for 
        beneficiaries;
 Achieving greater efficiency in the management of the program;
 Treating the Medicare program as a whole in considering 
        financing issues.
    These are laudable goals and need to be part of reforms that seek 
to make Medicare work better for beneficiaries, providers and 
taxpayers. But in many ways they go well beyond what can be achieved 
with combining A and B. Indeed, there is a danger in seeing that change 
as a major contribution and ignoring other key issues necessary to meet 
these goals.
    Simplifying the program. Medicare beneficiaries are often confused 
about the Medicare program. They do not focus on the split between A 
and B; indeed, the terminology is confusing. But since most of them are 
in both parts of the program, this is not particularly a problem in and 
of itself. Further, the new Medicare+Choice option added a confusing 
Part C to Medicare.
    Confusion arising about contacting intermediaries or carriers might 
be reduced with a A/B merger. However, problems for beneficiaries in 
getting help for the Medicare program goes well beyond confusion over 
who to contact. A modern, consumer-friendly program needs substantial 
resources and a commitment to simplifying customer service from the 
perspective of the consumer. Even a very complicated program can 
establish a single point of contact with well-informed workers helping 
Medicare beneficiaries with problems. If that is the real goal, the A/B 
issue essentially becomes irrelevant. Instead, it is the resources and 
commitment to improvement that need to go into the development of such 
a framework that matter.
    Improving Cost Sharing. The purpose of cost sharing is presumably 
to make the user of health services more aware of costs and to 
discourage unnecessary use. For persons with employer-provided 
insurance this usually means an initial, modest deductible (or 
sometimes two) and then limited copays, usually for specific services. 
For example, some plans have high coinsurance for non-emergency use of 
hospital emergency rooms. Almost all have an upper bound on what their 
enrollees must pay out of pocket (called a ``stop loss''). These cost 
sharing conventions have changed and evolved over time, but Medicare 
has retained essentially the same structure since 1965.
    The combination of deductibles and coinsurance for Medicare 
represents an ad hoc collection of payments with little defensible 
justification as points of control for the use of health care services. 
As mentioned above, cost sharing under Medicare is essentially a 
historical artifact. And since its inception, little careful attention 
has been devoted to updating it to reflect cost sharing structures 
found in other health plans. It is not the fact that there are two 
deductibles that makes Medicare unusual, but rather that the Part A 
deductible is so much larger than that for Part B. Elsewhere, insurers 
often recognize that physician services tend to be more subject to 
discretion than hospital care and hence establish a higher deductible 
for physician services.
    Another way in which cost sharing is unusual in Medicare is the 
linkage of the hospital deductible and coinsurance to a ``spell of 
illness'' and imposition of the coinsurance only after 60 days. This 
sets cost sharing highest for those who are sickest. The same problem 
arises with skilled nursing facility coinsurance. In addition, totally 
missing from Medicare is any upper bound limit on cost-sharing 
liabilities. Most private plans offer such ``stop loss'' protection so 
that once patients have spent a certain amount out of pocket, they no 
longer have to continue paying cost sharing. But Medicare has no such 
provision. Beneficiaries with complicated illnesses (and no Medigap 
protection) can end up owing tens of thousands of dollars towards the 
costs of Medicare covered services. This is particularly the case under 
Part B of the program where the 20 percent coinsurance can become quite 
large for those with extensive medical bills. Part B cost sharing 
constitutes about two-thirds of all Medicare cost sharing liabilities.
    But combining A and B offers relatively few advantages for 
addressing these issues. It would make it easier, for example, to 
create a combined deductible. But that is not the main problem and in 
fact, many private insurance plans also have two deductibles. Moreover, 
that approach is problematic: To get a combined deductible that raises 
the same amount of contribution from beneficiaries would require a 
deductible of about $400. For those who are hospitalized in a given 
year, this would lower their cost sharing liability. But for the nearly 
80 percent who do not go into the hospital, they would only see a rise 
in the deductible from $100 to $400. Such a large increase could be 
very unpopular with beneficiaries.
    A better approach would be to lower the Part A deductible and 
eliminate both the spell of illness concept and the coinsurance for 
hospital stays. A relatively modest increase in the Part B deductible 
could offset much of those costs. Another important need is for a 
general upper bound on cost sharing, allowing at least some 
beneficiaries to forego purchasing private supplemental insurance.
    Finally, one impact of a combined A/B Medicare program might reduce 
costs to beneficiaries. That is, if the Part B premium were to become a 
combined premium and linked as the Part B premium is now to the growth 
in costs of the benefits, the new premium would grow more slowly than 
under current law. This is because Part B is expected to grow more 
rapidly than Part A over time. For example, the Part B premium is 
expected to rise over time to about 11 percent of total Medicare 
spending, up from about 9 percent at present.
    Making Medicare's cost sharing structure more rational and 
protecting those with the highest costs are important goals for 
Medicare reform. But it makes most sense to do this in the context of a 
broad range of changes rather than focusing just on a combined 
deductible.
    Achieving Greater Efficiency in Program Management and 
Coordination. One need not look very far to find critics of the Health 
Care Financing Administration and its management of Medicare. But the 
greatest problem here is lack of resources. Medicare's administrative 
costs of less than 2 percent are so low that any entity seeking to 
manage the program would be severely constrained. Even efficient 
private sector plans require a budget of three times that level--or 
more--in order to effectively oversee the complicated world of 
insurance. Only when there are sufficient resources will management 
improvements be possible. A considerable amount of flexibility and 
authority needs to be given to the management team to allow them to 
improve service both for beneficiaries and for providers of care.
    Contractor reform is an essential piece of the changes that need to 
be made in Medicare. Medicare needs to contract with companies that are 
most skilled at claims processing, medical review and data collection 
and management. This may require a number of different contractors; 
consolidation is less important than competence and accountability. 
Again, a well managed organization can tolerate having a number of 
different entities as long as the lines of responsibility are clear and 
those contracted to do the job are skilled. The current system is a 
long way from there, but not because of carriers versus intermediaries. 
Rather the problem is that the government allows Blue Cross to nominate 
the intermediaries, restricts what HCFA can do in controlling these 
intermediaries, limits what types of organizations can contract to 
provide services both as carriers and intermediaries, and disallows 
contracts allowing for profits (hence excluding a number of potential 
participants). Efforts to achieve greater efficiency need to focus on 
these issues first, and the A/B split is only a small part of that 
issue.
    Another important need for a well-functioning Medicare program is 
good coordination across different types of care for those who are 
still in traditional Medicare. Fee-for-service arrangements are 
inherently weak in providing incentives for coordination, but the track 
record of many HMOs where such coordination is supposed to be central 
leaves much to be desired as well. Consequently, the oversight of 
Medicare needs to focus on developing creative ways to bring 
coordination into the traditional program. This might be through 
disease management or case management models, for example. In those 
cases, a combined A/B structure makes sense, although this could be 
achieved via a de facto approach as well. That is, good data combining 
patient level information so that high cost cases can be identified and 
tracked can be done without a formal merger of the two parts of 
Medicare. HCFA already produces such data files, although more needs to 
be done in a timely way.
    Medicare and Financing Issues. Critics of the current organization 
of Medicare often point out that much of the focus of attention is on 
Part A of the program. Its trust fund provides insights into the 
balance between the dedicated revenues from payroll taxes and elsewhere 
and spending on Part A services. That trust fund thus serves as an 
early warning signal of problems ahead and as a reminder that taxpayers 
have contributed over time more than enough to meet the needs of Part 
A. In the future, when Part A needs to draw on the trust fund balance 
to pay benefits, it will essentially be calling on the resources made 
available earlier. Any combination of A and B should keep these 
advantages.
    The biggest danger with a combined approach is that a technical 
adjustment may be used as a back door means for dramatically changing 
the financing of the program. Both Parts A and B of Medicare need to be 
part of any consideration of financing issues. But formally combining A 
and B raises a number of complicated issues about how to view the 
financing of the program and how to think meaningfully about a trust 
fund structure. Financing issues are much broader than an A/B 
combination discussion; that discussion is essential to Medicare's 
future but ought to look broadly at where the resources should come 
from to support this important program.
    The Bush Administration's efforts in this regard offer a troubling 
example of casually combining A and B. That is, the initial budget 
blueprint document submitted by the Administration treated Part B as if 
it were in deficit because it relies on general revenue financing. That 
is, it examined both A and B spending, but only part of the financing 
of the program when looking at Medicare's financial status. General 
revenues have been a major funding source for Medicare since its 
passage in 1965 and that obligation is spelled out in statute. It makes 
no sense to treat Part B as in ``deficit'' and thereby imply that 
payroll taxes should support both Parts A and B. This is implicitly 
scaling back the funding for Medicare below its current level. Such an 
argument makes no more sense than assuming that spending on Medicaid, 
Veteran's benefits or even defense should be covered by the Part A 
Trust Fund. All of these other sources of spending have no more legal 
claim on general revenues than does Part B.
    Part of the case made in the Bush document for combining A and B in 
examining Medicare was a criticism of the shift of some home health 
benefits from Part A to Part B in the Balanced Budget Act of 1997. This 
change, which returned home health closer to how it was treated in 
1966, did make Part A look better and to that extent it could also be 
misinterpreted as improving financing. But it is incorrect to argue 
that it ``had no economic consequences.'' By shifting a majority of 
home health care to Part B, beneficiaries costs rise since their Part B 
premium is 25 percent of the costs of Part B services. Thus, this was 
an indirect, but intended, increase in beneficiary contributions. In 
fact, beneficiaries' share of combined A and B spending will rise from 
about 9 percent prior to the BBA to nearly 11 percent when the phase in 
of home health is completed in 2004. Over the ten year period, that 
translates into a per capita premium increase of nearly $1200. Most 
beneficiaries would not consider this a meaningless change; indeed they 
would likely welcome having home health returned to Part A.
    Another claim that is often made about Medicare is that the growth 
in Part B, which has historically been higher than that for Part A, 
reflects problems with health care spending in Medicare. The growth 
over time between the two parts, however, represents a natural shift 
that has been occurring in health care for everyone. Surgery is more 
often done on an outpatient than an inpatient basis today, for example. 
More procedures are undertaken in physicians' offices. The improvements 
in health care delivery that have allowed such changes reflect 
improvements that speed recovery and enhance the quality of life of 
beneficiaries. Without such a shift, Part A spending would have had to 
be much higher than it is today. Part B growth, thus, does not 
represent a failure in health care.
    Both parts of Medicare should be considered with regard both to 
their spending and sources of income. In the Trustees' report each 
year, information on the combined share of GDP that Parts A and B are 
projected to need over time are provided. This is a reasonable starting 
place to examine the combined impact, although it understates 
Medicare's possible financing by showing costs on a pay-as-you-go 
basis. This allows no ability to build a reserve to smooth the impacts 
of the Baby Boomers' retirement or other demands, for example, as is 
the intent of the trust fund for Part A.
    Should there be limits or constraints on general revenue 
contributions to Medicare? Even those who have implicitly argued for 
such a limit usually do not propose reducing general revenue 
contributions to zero. In a recent article, colleagues and I created an 
artificial trust fund for Parts A and B in which we examined the 
effects of one potential limit for general revenues. We assumed that 
the GDP share of general revenue going to Part B would remain constant. 
That provides one way to look at both A and B in a combined framework, 
again with no formal combination of the two. Interestingly, that 
approach indicated that, using the 2000 Trustees' report numbers, the 
date of exhaustion of the trust fund moves earlier by five years, but 
still well into the future. But even this analysis can miss the point: 
Medicare will need additional resources over the future to handle a 
doubling of the population served and a near doubling of the share of 
the U.S. population served by this program. Efficiency improvements and 
other changes in Medicare can help, but will not be sufficient to pay 
for another 36 million participants.
    Both Parts A and B will need support. More willingness to raise 
revenues is needed to assure Medicare's future. And a direct discussion 
of how the shares should be broken out among payroll taxes, general 
revenues and beneficiary premiums needs to get underway. For example, 
it may be reasonable to obtain a disproportionate share of additional 
dollars from general revenues, which require people of all ages to pay 
and in a progressive manner.

                    PROBLEMS WITH COMBINING A AND B

    One of the chief concerns with combining Parts A and B of the 
program is how to treat those who enroll only in Part A and not B. When 
beneficiaries do so because they prefer their HMOs (in the case of 
FEHBP enrollees) or because they are still working, the federal 
government saves money by their choice to decline or defer the Part B 
subsidy. Special attention would need to be placed on how to treat 
these beneficiaries. As the number of older workers increase over time, 
this may become even more of an issue.
    The other major problem has already been mentioned and that is the 
potential for effectively decreasing the funding for Medicare if proper 
attention to a stable base of support for Part B is not addressed in 
such a combination. Financing decision should not implicitly be made 
via technical adjustments.
    In sum, Medicare's concerns go well beyond the issue of a program 
with multiple parts; the real concern needs to be ensuring that those 
parts are well coordinated, however organized, that resources are 
devoted to improving the way the program interacts with both 
beneficiaries and providers of care, and that the program is 
sufficiently financed to cover the care essential to this beneficiary 
population.

    Mr. Bilirakis. Thank you, Ms. Moon.
    Ms. Means, please proceed.

                 STATEMENT OF KATHLEEN E. MEANS

    Ms. Means. Thank you, Mr. Chairman and Mr. Brown and other 
members of the subcommittee, for inviting me to testify today.
    I did want to mention to the members that I have worked in 
Medicare for 32 years now. I started working in 1969 in The 
Bureau of Health Insurance, just a few years after Medicare was 
enacted; and so I have seen enormous changes in the design and 
evolution of the program. I also bring to this discussion some 
private sector experience, having worked as Director of Health 
Benefits in Chicago for the national Blue Cross and Blue Shield 
Association.
    One of the first things I would like to say to you as a 
subcommittee is that I think using the terminology merging of 
Part A and Part B is quite misleading. I am not here to talk 
about merging Part A and Part B. I am here to talk about good 
benefit design for both A and B benefits. And the kind of ideas 
that I would like to offer up to you do not require joining the 
financing or changing the underlying structure, the financing 
structure of the program.
    I think it is important in the context of adding an 
outpatient prescription drug benefit, of which I am a strong 
proponent, that it is equally important to modernize the Part A 
and Part B benefits together with doing the drug benefit.
    I think it is important to consider improving protection 
against catastrophic cost, especially on the hospital side.
    I think it is important to improve efficiencies for 
incentives in economy overall in the program, and that 
includes, particularly, attention to Part B.
    I also think it is important to minimize dislocation for 
beneficiaries entering the program and coming off of private 
health insurance policies, as they age into the program or as 
they enter through disability. There are very significant 
differences between what has become typical in the private 
insurance market, particularly through employer group health 
plans and the Medicare benefit design we have today.
    Although this is outside of the scope of this testimony, I 
do support improving the business model for the Medicare+Choice 
program and I think one building block toward doing that is to 
establish a better benefit foundation for the Medicare+Choice 
program. And you can do that both by adding a drug benefit and 
by making some modernization to Part A and Part B.
    And I would like to put a practical reason on the table for 
members as to why it might be useful to do some of these Part A 
and Part B changes. That is that it actually contributes--
potentially contributes financing that you could capture to 
offset the cost of adding the drug benefit. The resulting 
package, A-B reforms plus a drug benefit, would be much richer 
in actuarial value than the current law package, and the 
changes I would like to speak to you about on the cost-sharing 
side would be much less so than the increased value of the 
benefits.
    I am not going to spend the time identifying the 
deficiencies because I think the other witnesses have done that 
very well with respect to Part A and Part B. So I would like to 
immediately draw your attention, if I could, to a chart that I 
included in the written testimony--it is on page 8--and to 
share with you the details of a proposal that was put forward 
last year in the Senate Finance Committee that generated a 
great deal of bipartisan interest. That's not to say that every 
member of the Finance Committee supported it; that is certainly 
not the case. I would have considered it a miracle had it been 
the case. But I would like you to see some of the ideas that 
were considered on the Senate side and that are being actively 
considered by some in this session as well. And I recognize 
now, listening to some of this discussion, some of our own 
language might be a little bit misleading, but I will just hit 
some of the highlights.
    What you will see is the proposal exactly as it was 
considered last year in the committee. So it is describing key 
Medicare benefits in the year 2000. To the right are some of 
the proposals that we put in front of the members of the 
committee.
    Basically, it recommended combining the deductible for Part 
A and Part B. That does not mean you are literally combining 
with the deductible, but if you come up with a common 
deductible--we propose $500--you are in effect reducing the 
Part A hospital deductible, you are raising Part B. This does 
not have to happen all at once. These kinds of changes could 
occur over, say, a 3-to-5-year phase-in period to meet in the 
middle.
    There are a lot of good reasons for doing that. I have 
elaborated on them in the written testimony.
    One of the things that we proposed, that a lot of the 
members supported, was going back and restoring some of the 
changes that members had supported in 1988 as part of the 
Medicare Catastrophic Act. That was primarily to enhance the 
hospital benefits, no separate inpatient deductible, eliminate 
the spell-of-illness concept.
    I don't recall whether any of the members, witnesses here 
have mentioned that. Under the spell-of-illness concept, some 
small numbers of beneficiaries can be hospitalized multiple 
times during the year, depending on where their admissions 
occur. They can experience multiple inpatient deductibles; if 
you had three, you could experience basically $2,400 in 
outpatient cost for that reason alone.
    In addition, we also recommend just going to straight 365 
days of covered inpatient care. This is, in fact, typical of 
private insurance and it affects a very small number of people, 
but it's very valuable insurance protection to people who are 
catastrophically sick.
    We also proposed modified cost sharing on certain Part B 
benefits that have no cost sharing today. That basically was to 
reflect the principle that there is no benefit in the package 
that ought to be entirely a free good to beneficiaries, and--
however, we were sensitive to some of the issues that I think 
Dr. Moon just referred to.
    For instance, on the home health, we did not propose going 
to a straight Part B 20 percent coinsurance rate. Instead, we 
proposed a modest $5-per-visit cap at $100 per year.
    So there are various options that you could consider to 
structure modest levels of cost sharing for beneficiaries that 
I think most people would find reasonable in today's setting.
    As I understand current law, any selected--any preventive 
benefits would not be subject to these deductibles; and in the 
Finance Committee proposal, we recognize that some of the ideas 
changed cost-sharing relationships and slightly increased 
obligations for all beneficiaries, on average. That meant that 
we also restructured the low-income subsidies to make sure that 
low-income beneficiaries maintained their protection and access 
to benefits.
    I just wanted to emphasize that these kinds of changes do 
not require merging of the underlying health insurance and 
supplementary medical insurance trust funds or any change in 
the sources of revenues to those trust funds.
    I would like to address the question of how this could 
benefit you in the larger prescription drug debate. In the 
Senate Finance Committee draft proposal that we examined last 
year, these changes were paired with a fairly comprehensive 
prescription drug benefit.
    For reasons that I will be pleased to explain, these kinds 
of changes offer potentially offsetting savings, depending on 
how you structure the changes and recognizing that the baseline 
has changed and that some of CBO's scoring procedures have 
changed and certain assumptions about things have changed this 
year.
    I think there is still an opportunity to explore some of 
the practical legislative scoring benefits of doing these 
things together; and just to give you an example, last year we 
did a comprehensive drug benefit with a $250 deductible, 
declining cost sharing with a full continuum of drug coverage--
no hole, so to speak, or donut in the coverage. We tested the 
premium of an additional drug premium of $40 per month. We 
paired that with these Part A and Part B changes. That drug 
benefit scored at $240 billion over 10 years.
    The kinds of Part A and Part B changes that you see 
detailed on the chart resulted in about $70 billion in net 
savings, reducing the cost of the drug benefit to $170 billion. 
So as you are looking for ways to finance the benefit and also 
achieve other important program goals, you might want to 
consider these kinds of modifications to the overall package.
    And finally, Mr. Chairman, I would like to close by 
introducing one more concept. It goes a little bit beyond the 
discussion of just modifying Part A and Part B benefits, but it 
is an idea that I have not heard openly discussed on the House 
side, but which is being discussed by some on the Senate side. 
And that is--it is the concept of a replacement plan strategy 
for accomplishing all of the reforms that members would like to 
accomplish in Medicare over the next decade.
    This concept is well understood in private health 
insurance. It is basically a technique that employers follow in 
large group health plans when they want to introduce a new 
benefit package to employees and they already have a long-
existing plan that employees are enrolled in. What they 
basically do is offer a second comprehensive benefit package to 
their employees in the expectation that over time the new 
package will gradually replace the old package.
    This has one major advantage. It does not require any 
beneficiary to change or lose the coverage that they currently 
have in the current law package, if it is working for them. 
This replacement plan concept allows you to--allows people to 
enroll and accept the new benefits and the new changes in a 
different framework and allows the other program to be phased 
out for as long a period of time as members would like to do 
politically. It could literally be phased out over a 30-year 
period if that was your preference.
    Adapted to Medicare, this replacement plan strategy would 
bundle all of the reforms that you would propose to accomplish 
into the new plan. One other major advantage of doing this is 
that it minimizes disruption to the Medigap market. I heard 
several of the members in their opening statements express 
concern about what changes to A-B benefits might mean for the 
supplemental market.
    If you pursue the replacement plan approach, you could 
leave the Medigap market essentially intact for those 
beneficiaries that remain in the current law package. For those 
beneficiaries who choose to enroll in the new package, you 
would create new Medigap offerings designed around that 
particular benefit plan. And I think that is a significant 
advantage for members to think about.
    The analogy that we used in discussing this on the Finance 
Committee last year was the very program that a lot of Federal 
employees are familiar with, but it was the introduction of the 
FERS pension plan compared to the Civil Service Retirement 
System. For those of us who were working in the Civil Service 
Retirement System in 1983, we remember well when our pension 
plan was going to be changed.
    If you think Medicare beneficiaries care about their health 
insurance, I can tell you Federal employees care equally 
strongly about their pension benefits. And so it is a very 
major change to introduce to people with long-term 
ramifications for their economic security. It was done in a 
very methodical way with a very intensive education campaign, 
and people were given the choice of which system to stay in for 
the future.
    I would just mention from former Chairman Bill Roth's 
standpoint on the Finance Committee, he had worked on 
Government Affairs, he had seen a very successful transition of 
FERS in lieu of the Civil Service Retirement System and felt 
that was a very interesting model for members to consider with 
respect to Medicare.
    I want to thank you, Mr. Chairman, for this opportunity to 
testify. I will be happy to answer any questions. Thank you.
    [The prepared statement of Kathleen E. Means follows:]

Prepared Statement of Kathleen E. Means, Senior Public Policy Advisor, 
                           Patton Boggs, LLP

                              INTRODUCTION

    Mr. Chairman, thank you for the opportunity to appear before the 
Committee today to discuss my views on the modernization of the 
Medicare program, with special attention to the current law benefits 
under Part A and Part B of Medicare. In the context of the larger 
public debate over Medicare reform, including the addition of an 
outpatient prescription drug benefit, fresh attention has been focused 
on the current law package, independently of expanding coverage for 
drugs. In my view, the current law package needs to be modernized for 
reasons I will describe below.
    By way of background, immediately prior to joining Patton Boggs, I 
directed the healthcare staff for the Chairman of the Senate Finance 
Committee in the 105th and 106th sessions of the Congress. I have also 
served on the majority staff for the Health Subcommittee on Ways and 
Means and in the Senior Executive Service in the Health Care Financing 
Administration (HCFA). My private sector experience includes working 
for the Healthcare Leadership Council, as a Director of Health Benefits 
in the Blue Cross and Blue Shield system, and in private consulting. 
The testimony is organized to discuss the following matters:

1. Broader reform context for Medicare benefits modernization
2. Identification of major Parts A and B benefit design problems
3. Review of a comprehensive set of draft policies proposed last year 
        by the former Chairman of the Senate Finance Committee
4. Major fiscal and other implications of modernizing Medicare benefits

Section I. Broader Reform Context for Medicare Benefits Modernization
    Social Security and Medicare hold a highly valued position in our 
society due to the enormous contributions both programs have made to 
income security for millions of elderly and disabled Americans. Over 
time, Medicare has played a growing role in protecting retired and 
disabled individuals from the high costs of health care, in part 
because health care costs continue to grow at rates considerably in 
excess of general inflation and in excess of the value of pension and 
cash benefits.
    This widespread public support argues for the Congress to move in a 
thoughtful fashion to reform the Medicare program, taking the time and 
steps necessary to achieve significant reforms while also informing and 
educating the American public.
    However, this Committee has received compelling testimony from the 
Congressional Budget Office and other experts about the demographic and 
fiscal challenges facing Medicare over the next decade and beyond. I 
will not repeat those projections and concerns. I will state that to be 
sustainable over the next fifteen to twenty-five years, the hard work 
to modernize Medicare must begin now. The Congress, in consultation and 
partnership with the Administration, should begin this year.
    It is highly likely that significant federal investments in 
Medicare will need to be made as part of the modernization process. In 
this context, I recommend that the Congress not incur major new benefit 
expansion costs without also putting into place a framework for broader 
program reforms that promises to maintain the longer-term financial 
viability of the Medicare program. The areas I most recommend action in 
include:

 Establish a Consumer-Choice Model--Create a viable consumer-
        choice health plan model for Medicare that could be fully in 
        effect by the period 2007-2010. Such a model must address the 
        financial access needs of lower-income beneficiaries and the 
        program service requirements of beneficiaries incapacitated by 
        severe mental or physical impairments.
 Modernize Current Law Benefits--Modernize the entire range of 
        Part A and Part B benefits, including reconfiguration of 
        beneficiary premium and cost-sharing liabilities, paired with 
        selected benefit improvements, such as improved hospitalization 
        and added drug coverage. In so doing, improve long-term fiscal 
        stability of the Medicare program by building-in design 
        features that promise to improve incentives for efficiency and 
        economy in the utilization of health benefits, without impeding 
        access to medically necessary services.
 Add Outpatient Drug Benefits--Add outpatient prescription drug 
        coverage in both the fee-for-service plan and in the 
        Medicare+Choice program.
 Improve Federal Management of Medicare--Take steps to ensure 
        that the structures and processes of the Health Care Financing 
        Administration (HCFA) and other entities within the Department 
        of Health and Human Services support effective oversight and 
        management of Medicare. Also ensure that HCFA, in particular, 
        receives the financial resources it needs to properly carry out 
        the responsibilities it has been given.

Section II. Identification of Major Design Shortcomings in Medicare's 
        Current Law Benefits
    Modernizing the current law Part A and Part B standard benefit 
package to address arcane benefit and cost sharing relationships is 
essential to creating a strong platform for launching new premium and 
health plan competition concepts over the next decade. Current Medicare 
benefits are outdated and poorly structured relative to what is typical 
of health insurance benefits available to most Americans prior to 
becoming eligible for Medicare. Indeed, certain features are relatively 
unchanged since they first went into effect in the 1965--1966 period.

Summary of Major Deficiencies in Current Part A and Part B Benefits
    The Medicare benefit package has not kept pace with changes and 
improvements that have occurred in health insurance benefit design in 
the private sector. Not only does it omit significant benefits, such as 
outpatient prescription drug coverage, but the premium, deductible and 
other cost-sharing aspects of the benefit could be designed to better 
promote appropriate utilization of services, and to bring the Medicare 
benefit package more closely into alignment with what is customary in 
other major insurance programs in government and in the private sector. 
Some payment obligations, such as the inpatient hospital deductible, 
are viewed as very high relative to what is customary in private health 
plans, where annual deductibles of $500 or less applicable to all 
services are more customary. Alternatively, the Part B deductible has 
risen to only $100 from its initial level of $40 in 1966, although Part 
B spending has increased many, many times over during the same period.
    Medicare has an arcane spell-of-illness concept for inpatient 
hospital services that can lead to payment of the inpatient hospital 
deductible multiple times in a given year depending on the timing of 
repeat hospitalizations. Further, Medicare does not cover catastrophic 
hospital stays, compared to most private health insurance that covers 
365 days of inpatient care, where medically necessary. Coinsurance and 
copayment amounts for a variety of other current benefits have not been 
reassessed and recalibrated in accordance with the latest information 
on levels and use of services for many years. Also, private health 
plans typically contain annual limits on total out-of-pocket spending 
to protect enrollees from excessive costs due to a catastrophic 
illness. Medicare's current package does not contain such protections.
    In addition, private insurance carriers marketing supplemental 
(i.e., Medigap) policies are permitted to sell policies that permit 
existing deductibles and cost sharing obligations to be insured against 
for a premium cost to the beneficiary. While it is widely held that 
individuals should be free to purchase insurance against risks of any 
cost they prefer not to incur, this is a practice that the 
Congressional Budget Office estimates significantly increases costs in 
the underlying Medicare program and in some instances, may not be cost-
effective for beneficiaries.

Major Benefit Improvement Options
    To summarize, the following options merit the most consideration:

 Hospital benefits--Elimination of inpatient hospital spell-of-
        illness concept and addition of catastrophic coverage of 365 
        days of inpatient care.
 Single deductible--Creation of a single, shared deductible 
        applicable to spending under both Part A and Part B--this 
        effectively requires a reduction of the inpatient hospital 
        deductible and an increase of the Part B deductible.
 Cost-sharing--Reassessment of cost-sharing to require at least 
        a modest level of beneficiary cost-sharing for all benefits, 
        with the possible exception of preventative benefits such as 
        mammograms or colorectal screenings.
 Out-of-pocket maximum limit--Creation of a limit on maximum 
        out-of-pocket liabilities for beneficiaries to provide 
        protection against the costs of catastrophic illnesses.
 Low-income subsidies--Restructuring of low-income subsidies 
        around reconfigured deductible and cost-sharing obligations to 
        ensure continued financial protection and access to services
 Medigap adjustment--Elimination of Medigap coverage of the 
        unified deductible.
 Addition of outpatient drug coverage--Please refer to section 
        IV discussion of implications of modernizing the current law 
        package.

Section III. Consideration of an Illustrative Package of Medicare 
        Benefit Changes
    In July of last year, the former Chairman of the Senate Finance 
Committee, Senator Bill Roth, proposed consideration of the following 
changes to bring Medicare's benefit package more into line with 
mainstream health insurance coverage (see chart below). Under those 
recommendations, significant benefit enhancements were paired with 
increased beneficiary cost sharing in selected areas. The resulting 
package improved areas where beneficiaries face the highest risk of 
catastrophic expenses, while expecting beneficiaries to contribute 
modestly more towards lower-end, more routine expenses. Subsidies for 
lower-income beneficiaries were restructured to ensure access to all 
benefits.
    To summarize, Parts A and B of Medicare were treated as a unified, 
comprehensive benefit package without regard to either the underlying 
sources of revenue or the current voluntary enrollment characteristic 
of Part B. In the following illustration, the separate Part A inpatient 
hospital and Part B deductibles were unified in favor of a single 
deductible that applies to all benefits. A deductible of $500.00 per 
year was proposed as generally consistent with private sector health 
benefits. To minimize out-of-pocket liability adjustments for those 
beneficiaries that in the short-term are primarily users of Part B 
services, it might be desirable to phase-up the current Part B 
deductible, coupled with a phase-down of the inpatient hospital 
deductible over about a three-year period.
    Further, the inpatient hospital spell-of-illness concept, daily 
hospital coinsurance and lifetime reserve days were all eliminated and 
replaced by 365 days of inpatient coverage. Note that other 
combinations of policies are equally possible. However, this is 
consistent with private sector policies and comports with the earlier 
policies adopted by the Congress in the 1988 Medicare Catastrophic 
Benefits Act, which was subsequently repealed. Beneficiary cost sharing 
on all existing benefits was reevaluated. The lessons from the RAND 
Health Insurance Experiment of the 1980's taught us that, in general, 
it is sound benefit design to consider modest cost-sharing on virtually 
all medical services to promote appropriate utilization and better 
control program costs, while not impairing medical outcomes. Again, one 
possible exception is preventative benefits.
    Finally, this draft proposal did not include an overall aggregate 
stop-loss coverage on total beneficiary cost-sharing liabilities on 
either an annual or lifetime basis. While highly desirable from an 
insurance protection standpoint, it is potentially very costly to the 
program, and was foregone in this proposal, in part, because this 
proposal was paired with a drug benefit that was felt to be a higher 
overall priority for beneficiaries.

 Illustrative A/B Benefits Proposal: Senate Finance Committee; July 2000
------------------------------------------------------------------------
                                   Medicare Plan in
       Major Benefit Areas               2000            Proposed Plan
------------------------------------------------------------------------
Plan Deductible.................  $776 Part A         $500 deductible
                                   deductible (per     for all Part A
                                   hospital            and Part B
                                   admission).         services
                                  $100 Part B          (separate rules
                                   deductible (for     for a drug
                                   most Part B         benefit)
                                   services).
Maximum Out-of-Pocket...........  None..............  None
Inpatient Hospitalization.......  After deductible,   365 days with no
                                   $194 copayment      coinsurance,
                                   for days 61 to      after deductible
                                   90; $388            is met
                                   copayment for
                                   days 91 to 150.
                                  No coverage for
                                   days beyond 150
                                   for regular
                                   inpatient
                                   hospitalization,
                                   and the 60
                                   reserve days may
                                   be used only once.
Skilled Nursing.................  0-20 days = 0 cost- 0 - 10 days = 10%
  (100 day limit on coverage)      sharing.            of national
                                  21-100 days = $97    average per diem
                                   per day for 2000    Medicare payment
                                   (1/8 the hospital   ($25 for 2000)
                                   inpatient          11-30 days = 20%
                                   deductible).        ($50)
                                                      31-100 days = $97
                                                       for 2000
Home Health Services............  0% for home health  $5 copayment per
                                   and 20% for         visit, with
                                   durable medical     annual maximum of
                                   equipment (DME).    $100 per
                                                       beneficiary. 20%
                                                       for durable
                                                       medical
                                                       equipment.
Outpatient Hospitalization and    20% after $100      20% coinsurance of
 Doctor Visits.                    deductible.         allowed charge,
                                                       after deductible
                                                       is met
Outpatient Mental Health........  50% coinsurance     50% coinsurance,
                                   after $100          after deductible
                                   deductible.         is met
Imaging/Clinical Laboratory       0% for clinical     20% coinsurance of
 Services.                         lab services        claims costing
                                   (also not subject   $50 or more,
                                   to Part B           after deductible
                                   deductible).        is met
                                  Imaging and x-ray--
                                   20% after $100
                                   deductible.
Prescription Drugs..............  Not covered with    See section IV.
                                   limited
                                   exceptions.
------------------------------------------------------------------------

Section IV. Considerations in modernizing Medicare Benefits and in the 
        Context of Adding a Drug benefit
    Following are some of the key questions and considerations for 
Members to evaluate:
1) Does treating the Medicare Part A and Part B package as if it were a 
        unified package require changes to the underlying financing 
        structure of the Part A Health Insurance (HI) and Part B 
        Supplementary Health Insurance (SMI) Trust Funds?
    The simple answer is not necessarily, unless members choose to 
undertake larger underlying financing reforms. The benefit 
reconfigurations can be adopted in each part without changing the 
underlying sources of revenues (e.g. payroll taxes, premiums and 
general revenues) that currently apply. What would require legislative 
and administrative attention is the accounting for Part A and Part B 
expenses so that they are properly captured and credited to the unified 
deductible. Similar processes would be needed if the Congress adopted a 
maximum out-of-pocket limit, whether applied on an annual or lifetime 
basis. Additionally, and especially if these or similar changes are 
paired with the offering of a costly new drug benefit, any savings 
should be captured and channeled into offsetting the cost of the new 
benefit.
2) What are the major concerns of ``stakeholders'' likely to be?
    The reconfiguration of Part A and Part B benefits potentially 
affects a variety of stakeholders, including beneficiaries, providers, 
State Medicaid programs and private insurers offering Medigap coverage. 
Beneficiaries would face tradeoffs between selected new cost sharing on 
benefits that have no or minimal cost sharing now, coupled with 
significant new protections in high-cost areas, such as lengthy or 
repeated hospitalizations. Selected providers would face new 
requirements and administrative costs to collect beneficiary cost 
sharing, with some possible exposure to bad debt. Medigap carriers 
could be faced with the logistics of offering restructured Medigap plan 
offerings tailored to the reconfigured Medicare package. In fact, the 
Congress would need to consider obtaining independent assistance on 
this latter issue of redesigning Medigap packages, as it has done in 
the past, from entities such as the National Association of Insurance 
Commissioners. Finally, States will have a strong interest in the 
structure of low-income subsidies and their interactions with the 
Medicaid dually-eligible and other programs designed to assist low-
income beneficiaries today.
    3) Is there an option for minimizing the effects of changes that 
Parts A and B benefit modernization would require in the approved 
Medigap plans, or with respect to other ``stakeholders'', including 
beneficiaries and selected providers? In particular, how might one 
address some beneficiaries' reluctance to accept changes in Medicare, 
perhaps even positive changes?
    One option to address this question was offered last year in the 
draft Chairman's mark in the Senate Finance Committee, and I would draw 
the Committee's attention to it. Simply, the proposal was to bundle all 
of the benefit modernization reforms, including a drug benefit, into 
one comprehensive and new benefit offering to Medicare beneficiaries. 
Last year, this was referred to as the ``Expanded Option Plan (EOP).'' 
A key element was that the current law package would remain completely 
unchanged and continue for the foreseeable future to be available to 
beneficiaries.
    Under that approach, all of the major benefit design reforms (e.g., 
single A/B deductible, revised coinsurance, new catastrophic 
hospitalization expansion and outpatient drug coverage) would be 
``bundled'' into the EOP. The EOP would be offered to currently 
eligible Medicare beneficiaries and to individuals within five years of 
Medicare eligibility, on a one-time enrollment choice basis. After the 
5-year look-back window, all new enrollees into Medicare would be 
enrolled into the EOP, which over an indefinite number of years would 
gradually replace the current law package.
    Replacement Plan Concept: This approach is analogous to the phase-
in model followed by the federal government when it introduced major 
pension plan reforms to federal employees in the early 1980's, as steps 
were initiated to gradually replace the Civil Service Retirement System 
(CSRS) with the Federal Employees Retirement System (FERS). In that 
model, CSRS-participating employees were given a time-limited 
opportunity to choose whether to remain in CSRS or to switch to FERS. 
These were binding elections upon the employee. After a specified 
effective date, all new federal employees were permitted to only enroll 
in FERS. Such an approach, adapted to Medicare, has the major advantage 
of reassuring Medicare beneficiaries that ``their Medicare'' will 
remain for them if they choose to retain it.
    Such an approach is also conceptually similar to what private 
employers do in their employee health benefit plans when they offer 
their employees a ``replacement'' plan that they intend over time to 
replace current coverage or benefit designs. Generally, employers are 
motivated to minimize disruption in their employees existing coverage 
by offering a new option that better meets the employer's long-term 
objectives in benefit offerings, and that permits employees to choose 
between existing coverage and new coverage for some period of time. The 
rate at which the older plan is phased out and the circumstances for 
doing so are important political and administrative decisions.
Key Characteristics of the Expanded Option Plan
 Combined (single) deductible for Parts A and B services
 Enhanced inpatient hospital benefits (No separate inpatient 
        deductible; eliminate spell-of-illness concept that can require 
        beneficiaries to pay more than one inpatient deductible if they 
        have more than one hospital admission in a given year; provide 
        365 days of covered care)
 Modified cost sharing on certain Part B benefits that have 
        minimal or no cost sharing today
 As under current law, selected preventive benefits not subject 
        to the Part B deductible would also be exempt of the combined 
        deductible under the Expanded Option Plan.
 Addition of outpatient prescription drug benefit (see below)
 Separate drug deductible
 Continuous coverage above the drug deductible with increasing 
        federal payments as beneficiaries' prescription drug costs 
        increase.
 The Secretary of the Department of Health and Human Services 
        would be required to conduct a major beneficiary education 
        program and open enrollment season in the year prior to 
        implementation of the Expanded Option Plan to assist 
        beneficiaries in making an informed enrollment selection.
 Medigap would remain unchanged for beneficiaries who elected 
        the current law package. Beneficiaries enrolling in the 
        expanded option plan would not have available to them Medigap 
        coverage for the combined A/B deductible or the drug 
        deductible. Medigap would be permitted to fill-in all other 
        beneficiary cost-sharing obligations.
 Low-income subsidies would be substantially improved.
    In closing, it is important to restate that any benefit changes can 
be adopted directly into the current law structure without pursuing the 
replacement plan approach. However, there is a growing appreciation 
that the replacement plan approach may help Members solve certain 
political and policy issues in a constructive way.
4) Can an outpatient drug benefit be offered as a stand-alone option 
        (such as through a new Medicare Part D option), or could it be 
        fully integrated (now or in the future) into a modernized A/B 
        benefit package?
    Medicare spends approximately $4 billion a year currently on drugs 
provided to Medicare beneficiaries under very circumscribed 
circumstances spelled out in the law. However, the most glaring 
omission in the Medicare benefit package is the lack of an outpatient 
prescription drug benefit. Medical and health insurance experts have 
indicated consistently that if the Medicare program were designed 
today, drug coverage would no more be excluded from the standard 
benefit package than would any other major component of medical care, 
such as coverage for hospitalization or physician services.
    Under the Parts A and B modernizations discussed above, including 
the EOP option, a new outpatient drug benefit can be offered either as 
a stand-alone benefit or integrated into the overall plan. The full 
integration approach implies a single premium around the entire plan 
and other changes that could require a significant revamping of the 
underlying financing structure of Medicare. This may be desirable in 
the long-term, but it may not be desirable or necessary for Members to 
address now. As a stand-alone benefit, the drug benefit could have 
separate premiums, deductibles and cost-sharing obligations tailored 
specifically to that benefit.
5) Are there any fiscal advantages to pairing the offering of a drug 
        benefit with Parts A and B benefit modernizations?
    There is one major consideration, aside from the intrinsic merits 
of improving current law benefit design. That is, even with 
significant, catastrophic hospital benefit improvements, which add new 
costs, the net effect of all the other changes taken together could 
generate significant long-term savings that could be captured to help 
underwrite the costs of adding the drug benefit. These savings occur 
due to a variety of factors.
    Under last year's Senate Finance Committee proposal, the EOP 
options shown in the chart above were paired with a comprehensive 
outpatient drug benefit. Preliminary Congressional Budget Office scores 
indicated savings in the range of $65 billion over ten years could have 
accrued from the Parts A and B changes, offsetting the cost of a drug 
benefit that had a gross score of about $240 billion over 10 years and 
a net score of about $170 billion due to those offsetting savings. I 
must emphasize that all scores are subject to significant re-estimation 
issues under the latest baselines and models, but the underlying 
concept and potential interactions are worth your consideration.

                               CONCLUSION

    Medicare at thirty+years is at a major crossroads. The Congress and 
the Administration have an historic opportunity to simultaneously begin 
redirecting the future shape of the program, while also firmly 
maintaining commitment to the Medicare program's central role in the 
fabric of the Social Security system. The issues have been widely 
vetted and consensus is growing around specific directions for change. 
Any major change to a social program that is as embedded in our society 
as is Medicare requires significant bipartisan support. In that spirit, 
I thank you Mr. Chairman for this opportunity to testify, and I stand 
ready to help you and other Members in any way to advance your work in 
this important undertaking.

    Mr. Bilirakis. Thank you very much, Ms. Means.
    I know this is a very complicated subject, but you referred 
to approximately $70 billion worth of savings over 10 years by 
combining Parts A and B.
    How much of that would result from the change in the 
deductible, the flat $500 deductible; or would most of that 
result from other changes made as a result of combining the two 
efficiencies?
    Ms. Means. It actually comes, Mr. Chairman, from three 
broad concepts. One is partly the change in the deductible. It 
does generate savings on the Part B side. We would have gone 
immediately to the $500 deductible. If you do a phase-in, you 
will reduce some of the savings from that particular change.
    Mr. Bilirakis. So if we are talking about a savings in that 
regard, we are talking about money coming out of the 
beneficiaries' pockets, additional money coming out of their 
pockets for a period of time?
    Ms. Means. That is correct.
    On the other hand, we were also offering that with an 
expanded hospital benefit and a reduced inpatient hospital 
deductible.
    It is absolutely correct, what I heard a couple of members 
say earlier, that in any given year more beneficiaries touch 
the Part B program than touch the Part A program or have an 
inpatient hospital admission. However, an insurance concept, 
you don't want to look at just 1 year in isolation; you really 
want to look over multiple periods of years for providing 
insurance; and the reduction on the inpatient hospital side is 
very--the deductible is a very important insurance benefit to 
beneficiaries.
    So it is a tradeoff. You are paying more for more routine, 
discretionary cost and less for catastrophic illness.
    Mr. Bilirakis. But over a period of 5 years or 10 years, 
you are saying that it probably would even out because of the 
smaller deductible for Part A, or for hospitalization?
    Ms. Means. Yes.
    Mr. Bilirakis. However, in marketing the plan to 
beneficiaries out there I don't know that they would think: ``I 
may go into the hospital 3 years from now or 5 years from now 
and I would save money, it would cost me less money out of my 
pocket in that particular year; but in the meantime, it is 
going to be costing me more.''
    Ms. Means. You had also asked, Mr. Chairman--some of the 
other sources were, CBO assumed some improvement in utilization 
ratings across services where we added cost sharing. So it was 
actually a change in the underlying utilization assumptions.
    In addition, we would not have permitted Medigap to fill in 
the deductible as is the case under current law. That 
generates--you probably heard separate testimony, I believe 
from Mr. Crippen, that allowing Medigap to fill in that basic 
deductible generates fairly significant underlying costs in the 
underlying benefit package over time.
    Mr. Bilirakis. Well, thank you.
    I don't have that much time left. Depending on how many 
people we have here, we might be able to do a short second 
round.
    Dr. Scanlon, in your written testimony you express a 
certain hesitancy, I think, in adopting policies and practices 
implemented by the private health insurance industry. Now, 
recognizing Medicare's special status--and we must do that--one 
of the questions is, how can these private sector practices be 
adapted for Medicare?
    This is actually a bottom-line question for me: How can 
Medicare use its special status as the largest single purchaser 
of health care to improve the services it provides to 
beneficiaries, to enhance the operation of the program and to 
include prescription drug coverage?
    Now, that is going to take some time, so let's just say 
that I will use an additional 5 minutes and give everybody 10 
minutes to inquire.
    All right, go ahead, sir.
    Mr. Scanlon. Yes, Mr. Chairman. You did perceive our 
hesitancy in our written statement in this regard, and it is 
because Medicare is such a large program. While it provides 
some advantages in some dimensions, it creates responsibilities 
in others.
    Medicare is the single largest payer of all services; 
therefore, it is critical to the well-being of individual 
providers. It is also critical to the system. Medicare is 
deciding how it is going to cover services; which services it 
is going to cover, and what it is going to pay for them. This 
influences the services that are available not just for 
Medicare beneficiaries, but for other individuals as well.
    In that regard, I think what we need to focus on is for 
Medicare to, in some respects, operate with restraint, to 
consider some of the processes and procedures that are being 
employed in the private sector to better manage care, to 
encourage better use of services, but not necessarily apply 
them as strongly, because it cannot apply them with the same 
kind of discretion that is used in the private sector.
    In a private sector arrangement, there will often be 
individual negotiations going on between plans and providers 
that can lead to sounder relationships that benefit the 
beneficiaries. Medicare's a national program. It can not engage 
in those kinds of individual negotiations. It is going to have 
to establish a set of rules and we are going to have to live 
with those rules. We have to make those rules ones that are 
protective of both beneficiaries and providers, and it will 
mean that we, I think, hold back, so to speak, in terms of some 
of these provisions.
    An example in the testimony that we provided was the global 
fee that was being used for bypass surgery where a single fee 
was being paid to hospitals and physicians. This is a form of 
preferred provider arrangement; it is a rather mild form of a 
preferred provider arrangement since beneficiaries are free to 
go to other providers and receive their traditional Medicare 
benefits. So that's one aspect.
    The other thing I think that is important is, though in 
some ways--I don't know how we accomplish this--we have to 
overcome our fear of Medicare; and this would relate to the 
idea of allowing Medicare to inform beneficiaries about the 
value of services and to remind them about services on an 
individual basis may actually have some very positive benefits.
    You have added in the recent past important services to the 
Medicare program in the form of screening for cancers. Yet 
Medicare beneficiaries have made very limited use of those 
benefits. If there was a more aggressive effort to encourage 
the use of those benefits, there would be value accruing to 
both the beneficiaries and to the program.
    Right now, those efforts are relatively timid. They may be 
timid in part because the administrative resources that HCFA 
has constrains their activities, but they are also timid in 
part because Medicare identifying individuals and telling them 
specifically: you have not gotten a mammogram; you have not 
taken advantage of any of the colon cancer screening services 
that we cover; that is something that we are not ready for at 
this point in time.
    Mr. Bilirakis. You say we are not ready for it?
    Mr. Scanlon. We are not ready for it in the sense of being 
comfortable with the idea of getting a letter from Medicare 
saying that we have looked at your records and we know that you 
haven't used certain services and we encourage you to use them; 
there could be some very significant concerns raised about 
that. It is my sense of the possible response by individuals, 
being ``what is the government doing looking at my health 
care?''
    Mr. Bilirakis. My question went to prescription drugs also.
    You have become quite an expert. I know you have appeared 
before this committee many, many times. Can we afford to 
include prescription drugs within the scope of Medicare, 
basically the way Medicare functions now?
    Mr. Scanlon. In terms of the administration of Medicare, 
looking at the affordability question, I think is a question of 
the resources that you feel can be devoted to the program. I 
think earlier, in one of the opening statements--several of the 
opening statements--the issue was characterized in terms of 
priorities; and I think that is the critical issue in terms of 
prescription drug coverage.
    Administration of a prescription drug benefit is not a 
trivial task. We estimated last year that there could be as 
many as a billion claims a year for prescription drugs, which 
is more than the total number of fee-for-service claims that 
are coming in now. Therefore, we really need to focus on 
building the capacity to be able to process those kinds of 
claims. It is going to be purchased capacity, just as we 
purchase the capacity to process claims today through the 
fiscal intermediaries and the carriers. At issue, I think, is, 
do we give HCFA resources to purchase that capacity, as well as 
to see oversee it, effectively? One of the key things we have 
reported on over the years is the ineffective oversight of 
contractors and the fact that this puts the program at risk for 
inappropriate payments, which far outweigh the shortsighted 
savings we may have gotten on the administrative side. So we 
need to give HCFA the resources to be able to do oversight 
effectively.
    The second issue for you is the issue of, under what terms 
are we going to buy that administrative capacity; and options 
have been discussed of buying simply a third-party 
administrator to pay these claims versus putting the entity 
doing this, such as the pharmacy benefit manager at some risk, 
so that they do the job even better and apply the techniques 
that they have for more effective management to the program's 
benefit.
    Mr. Bilirakis. Well, thank you, Doctor. I know it is a 
subject you could probably spend an entire day on. In lieu of a 
second round, I will allow every member to use 10 minutes for 
inquiring; and the Chair now yields to Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. My guess is I won't go 
the full 10 minutes.
    Ms. Moon, I want to ask you about Breaux-Frist 1, as you 
recall, suggested combining of A and B, and adding a new 
solvency test to the Medicare program. My understanding is that 
if in any given year general fund contributions exceeded 40 
percent, or were projected to exceed 40 percent outlays, 
Medicare would be determined to be ``programmatically 
insolvent,'' I believe. The bill actually prohibits general 
revenue transfers to exceed that 40 percent of Medicare, 
Medicare outlays.
    Explain to me this solvency test and what, in fact, it 
would mean for Medicare.
    Ms. Moon. I believe--let me start and say, I believe that 
trust funds were established, particularly the Part A Trust 
Fund, as with Social Security, to be a protection for 
beneficiaries; to say, here's a dedicated source of revenue to 
make sure that there is enough, far enough ahead, that there is 
not a problem.
    From that perspective, then putting--establishing a Trust 
Fund in which you then put specific limits on the contribution 
from general revenues, I think is contrary to that notion to a 
certain degree. It also says that you--the limit will be based 
upon what is happening to the economy as well as what is 
happening to health care spending. So it's adding a whole range 
of additional concerns in terms of thinking about what that 
trust fund means.
    I am sympathetic to the notion that one wants to be prudent 
in terms of the dollars that are devoted to a program of this 
sort, but the whole goal of having an entitlement type of 
program is to allow it to grow as necessary over time, and only 
then be controlled by the rules that manage the program.
    So I find it hard to conceive of exactly what that 40 
percent means, because it is going to vary for reasons that 
don't have anything to do with whether the program is serving 
its beneficiaries well or meeting other national goals in terms 
of the Medicare program.
    Mr. Brown. What would have happened if it exceeded 40 
percent and Congress had either failed to act or chose not to 
act? What would happen there?
    Ms. Moon. That is an interesting question, and like the 
statute for Medicare, I think it is a little unclear.
    Technically speaking, my understanding is that if there is 
not enough money in the trust fund to pay benefits, you delay 
payment for a while. You can only do that for a while; and then 
it is rather unclear what happens, because you have, really, 
two conflicting things. You have something that says you can't 
pay benefits and you have another part of the law that says 
people are entitled to these benefits. So it really puts kind 
of Catch-22 on the system in terms of requiring some change or 
to be a violation of part of the statute.
    Mr. Brown. Okay.
    Dr. Scanlon, Dr. Young in his testimony mentioned that 
combining A and B would allow HCFA to keep track of both 
inpatient and outpatient services that seniors receive, and he 
went on to say that, among other benefits, HCFA would be better 
able to fight fraud under a merged Medicare program because the 
Office of Inspector General had said, in some cases, Medicare 
pays twice for the same set of services, once to a Part B 
provider, once to a Part A provider.
    Is that the problem? My understanding is, the real problem 
is HCFA's information technology systems. Could we deal with 
the fraud issue equally as well without the merger of A and B?
    Mr. Scanlon. Certainly without the merger of the trust 
funds. In some ways, you can deal with the problem by what I 
might characterize as a virtual merger of the program through 
the information systems. The key here is that HCFA needs the 
capacity to be able to look at services being used by a 
beneficiary in toto. It actually has some of that capacity 
already. In the fact that claims do flow through a common 
point, coming from both Part A and Part B.
    The reality, though, is that the information systems they 
flow to are not capable of doing the kind of sophisticated 
screening that would need to be done to make sure that we 
minimize inappropriate payments.
    From our perspective, the administrative side of this issue 
is that many things can be done keeping a separate Part A and a 
separate Part B Trust Fund by looking at the program as a 
whole. And that is critical. HCFA has been doing that to some 
extent; it needs to be able to do it more.
    Mr. Brown. HCFA's information technology system is, it is a 
question of funding in large part?
    Mr. Scanlon. It is, in part, a question of funding. They 
have had difficulty in modernizing that system, as you probably 
are aware. There was a bad experience in the mid-90's with the 
Medicare transaction system, and then having to turn, when that 
failed, immediately to the problem of dealing with Y2K and 
trying to correct all of these old systems.
    The final thing that I think has been a significant barrier 
to modernizing the systems, frankly, has been the BBA and the 
refinements since the BBA. HCFA has really, in many respects, 
done an admirable job in terms of implementing the system 
changes required to implement all of those provisions of the 
law. But in doing that they have had to modify a set of systems 
that they know someday are going to be scrapped, but today it 
is critical they be modified. So payments are made in accord 
with the new policies that have been enacted in the last 5 
years.
    Mr. Brown. Well--and HCFA, as we have discussed here, has 
over the last--well, when we had the four administrators here, 
the four previous administrators, and the new one was at the 
back of the room. And just the budget for HCFA has stayed 
pretty constant, even somewhat fewer dollars; and I am 
concerned that while all of them said that the increase for 
HCFA's budget should be--as HCFA's administrative costs are 
much less than Medicare+Choice or any other insurance program 
we know of, that--they all called for at least a 15 percent 
increase. Some called for 50 percent over a couple of years.
    But I am concerned that with this Congress and the 
President passing a tax cut where benefits went--tax cut 
dollars went overwhelmingly to the richest people in the 
country that we are not going to be able to do the things that 
we need to do to make HCFA run better. To give it the kind of 
resources that we need and to deal with the fraud issue that 
Dr. Young talked about and that you talked about, it is clearly 
going to need some more resource s. And while the HCFA 
administrators have called for more money, I don't know if this 
Congress will get its act together to be able to do it in light 
of scarcity of resources again.
    So I yield back the balance of my time. Thank you, Mr. 
Chairman.
    Mr. Deal. Thank you, Mr. Ehrlich.
    Mr. Ehrlich. One specific question and one general 
question.
    Dr. Scanlon, I was interested in your comment with regard 
to the failure to communicate, I guess, with regard to the 
reforms that have passed the Congress over the term or, two, 
regarding new benefits, new services, new therapies and the 
like. I share your concern with regard to your example that if 
one of my constituents would receive such a letter, I would 
certainly hear about it.
    What to do? Is a general communications plan better than 
specificity with regard to individual beneficiaries? How to 
make people healthier, make the system run better, create a 
more knowledgeable health care consumer in light of reforms 
that have passed in recent years?
    Mr. Scanlon. Certainly, general education is the first 
step, and HCFA has engaged in some activities in that regard. 
Whether they are going to have a payoff in terms of improving 
over time the use of these services is still not clear. But it 
is likely to be an insufficient step, and the dilemma is, how 
do you move from something that's general education to 
something as specific as I have characterized.
    If we could find some trusted intermediary in the context 
of some agent that could be the source of the specific 
education, we would be able to potentially bridge the gap 
between the trust for government and the need for this service.
    Mr. Ehrlich. Would physician providers fit the bill?
    Mr. Scanlon. Physician providers may fit the bill, but at 
this point in time, because of freedom of choice and the fact 
that there isn't a primary physician concept within Medicare, 
we have no ability to identify which physician we might want to 
involve in the process of informing beneficiaries about the 
need for services.
    In terms of people, a model that might be expanded but 
would require a significant amount of thinking to determine how 
to expand it would be what we try to do on occasion with 
individuals with chronic illnesses; in other words, to provide 
them some assistance in the form of someone to do coordination, 
to inform them about need for services, to inform them about 
how to access services.
    These can be positive in terms of encouraging the right use 
of services, but we don't have a framework, we don't have a 
mechanism for that at this point in time.
    Mr. Ehrlich. As a cost saving and better health care 
delivery issue, it is certainly intriguing here.
    General question, anybody and everybody; we are just about 
to complete here, so I only have a few minutes.
    I was not here, but I am familiar with the comments the 
chairman of the full committee, Mr. Tauzin, made with regard 
to, if he had a magic wand and we were 36 years ago and we were 
able to begin a new system, literally anew--let me ask the 
specific question:
    If you all had the opportunity to create a new Medicare 
program, would you combine A and B? Why and why not, which is, 
I guess, the bottom line question in today's hearing.
    So, Doctor, I will start with you.
    Mr. Scanlon. There are an incredible number of elements to 
that question, which are not my province to respond to, that 
are really your choices. They do involve issues of priority.
    There were points that came up in some of the discussion 
earlier about what should be the financing sources for this 
program? What would be the relative importance of each of those 
financing sources? How would we determine what beneficiaries 
should pay? What would we do in terms of moving from--if we are 
starting in 1965, we wouldn't have this issue, but we have it 
today. What would we do in terms of people that have paid their 
payroll tax their entire working lives and be saying to them, 
we now have a unified program, but in order to get it, you have 
to pay a premium.
    These are all choices that you would have to make.
    From my perspective, I think it is critical that we would 
look at this program from a unified perspective in terms of the 
management kinds of issues they have raised, and this comes 
back to a choice for you.
    We would also want to look at this program from the 
perspective of, how good is the insurance that it provides? On 
the Part A side, you have the high deductible and you have very 
high risk for very sick people at the upper end in terms of 
hospital stays; and also on the Part B side that if you are 
very, very sick and you have a very large amount of physicians' 
bills, there's no limit.
    With that, one would say, this is not good insurance and we 
want to do something better. So we want to take into account 
what beneficiaries' total liability might be and we want to 
provide protection against that.
    Mr. Ehrlich. Does anyone else want to comment, particularly 
with regard not just to, clearly, No. 1, policy being quality 
of delivery of health care services, but also complexity?
    Mr. Young. I think, without a doubt, we wouldn't even 
consider the issue of separate A and B unless the issue of 
financing was raised, and there is a possibility that one can 
draw a line between the financing.
    But in terms of care delivery coordination, disease 
management, with what we know today--deductibles, out-of-pocket 
spending, program administration, fraud and abuse, one single 
program is a state-of-the-art, not two programs. The private 
insurance sector 20 years ago, 30 years ago, and even going 
back to the mid-1900's, as I briefly summarized in my 
testimony, did have different pieces; and they got rid of that 
for very good reasons.
    But I also agree, you have got some problems you are going 
to have to deal with on the financing side in how you want to 
structure and deal with the financing side.
    Ms. Moon. I would just like to add that there is a big 
difference between if we started with the combined program and 
today, because today what you need to do is spend time on 
getting all of that, the complexities, right that people have 
talked about here; and I would rather see the time and effort 
go into getting some other things right, improving consumer 
education and information and coordination of data.
    You can use, for example, I do in my research use combined 
A and B data; you have to go through some hoops to do that, but 
you certainly can link those data. That is not a difficult 
thing to do; it just takes the resources and the will to do 
that. And as I mentioned in my testimony, the complexity of the 
cost sharing certainly needs to be reassessed, but the A-B 
deductible is not the big part of that. It is the spell-of-
illness issue. It is the very high cost on the Part A side, for 
example, and the lack of stop loss.
    Mr. Schulder. Hindsight is wonderful, but I was beginning 
to be active near the Congress on getting the Medicare program 
passed in 1965, 1962--1961, 1962, 1963, 1964, and you just have 
to again recognize that we had Wilbur Mills in this building--
well, not this building, but next door. We had an enormous 
amount of politics going into the passage of Medicare and often 
large amounts of interest being explored, both the physicians' 
side and the hospital side. So there could have been no way, it 
seems to me, to project, outside of using a Blue Cross-Blue 
Shield model that this could work and sharing the costs from 
premiums and payroll taxes, that came up with something that 
worked and has worked reasonably well over the last, you know, 
whatever it is, 40 years; and the framers of the Constitution 
had to come back and look at it and make changes over the 
years, over the centuries.
    So there is no way to really speculate what you would have 
done differently in 1965, if you had a chance to redo it, 
except to say that we have to keep saying again, the purpose is 
to make sure that good health services, using the best 
technology, the best findings of pharmacology, of the health 
profession, the medical profession, gets to the users in an 
efficient and affordable way quickly; and I can't quite 
describe what that would look like, but that is the goal.
    Mr. Ehrlich. Thank you.
    Mr. Deal. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. I apologize for being 
in and out, but we have an E-911 hearing upstairs and that is 
also part of the importance of what is going on here in 
Congress. But I appreciate that our panel--and as I didn't 
listen to your testimony, but as I read the testimony, I notice 
that each of you has different goals for the Medicare program.
    For example, Ms. Moon, your goals for the Medicare program 
were simply simplifying the program, improving cost sharing and 
making it more rational for beneficiaries, achieving greater 
efficiency in the management of the program and treating the 
Medicare program as a whole in considering the financial 
issues.
    Mr. Schulder, you state that we should enhance expanded 
quality of the service to beneficiaries and strengthen the 
overall program.
    Ms. Means, your statement reflects vastly different goals 
which are to establish a consumer choice model, modernize 
current benefits, add outpatient drug benefits and improve 
Federal management of Medicare.
    And, Dr. Young, your statement reflects the desire to make 
the program more reflective of the private sector model and to 
include disease management programs, improve program 
administration, eliminate the program's structural problems and 
other substantial reforms.
    These are all--some of the common goals in your testimony, 
that for example, we need greater disease management, 
coordination of the care and improved customer service. Are 
there ways to achieve the more immediate success in these areas 
on which we agree without introducing some of the more 
complicated factors such as changes in deductibles, program 
financing or benefits, and still achieve what all of you seem 
to have in common?
    Ms. Moon. I think one first step you could take, if you 
don't want to talk about additional resources is--or only 
modest additional resources is devoting the time to providing a 
better set of goals and some modest increase in resources to 
improve the kinds of coordination of care and beneficiary 
education that we are talking about. Those are very important 
to having the program work well.
    They don't achieve some of the desires to expand or improve 
benefits, which I think are also there, but at the very least 
it seems to me that the dollars that would be necessary to 
improve this program substantially and keep it at a reasonable 
level of expenditures, while being cognizant of fraud and by 
finding ways to better coordinate and sometimes achieve 
savings, would be certainly worth some initial investment.
    Mr. Green. We can again do that without fighting the battle 
of the changing deductibles or how we finance it in the 
benefits. Can we do some of the commonality that would benefit 
the providers, but also the beneficiaries?
    Dr. Young.
    Mr. Young.  There are a lot of things that can be done that 
are unrelated to the A/B division and split, of course. I 
would, though, encourage you to seriously consider adding to 
that list the deductible issue, because is it does have a lot 
of very perverse incentives as I talked about in terms of 
quality of care and site of care. And I think Mr. Scanlon 
referred to it as the virtual A/B merger. As I said earlier, 
you might want to separate the issue of financing, but there is 
an awful lot in the system that could benefit by a virtual or 
real combination and elimination of some of the incentives that 
can be very perverse to high-quality care.
    Ms. Means. Congressman, I would echo that. I think even 
without adding resources in a budget-neutral fashion. You can 
restructure some of the A/B benefits in a way that would result 
in an overall better package for beneficiaries from an 
insurance protection standpoint and also gain some savings and 
use it to offset some of the improvements that you would make 
even within the A/B benefit structure. And I would just 
emphasize what I said earlier in my testimony, that these kinds 
of changes are possible without in any way entering into 
changing the underlying financing structure of the trust funds 
today.
    Mr. Green. Mr. Schulder.
    Mr. Schulder. On the questions of combined deductible, I 
just want to make it clear to this committee that to increase 
the deductibles for Part B services to $500, $400 is to put a 
dollar bar to access the services for average and lower-income 
seniors, and we will oppose that. The $100 deductible is 
doable, it is rational, but to increase that to a substantial 
level such as 4- or $500 we think is going to prevent services. 
People don't for the most part shoot their way into the 
doctor's office or into hospital beds. They are there because 
they need the service.
    Mr. Green. Obviously I agree, and because I have seniors 
who say, I have to come up with $792 before I can go to the 
hospital, even if they need it.
    Mr. Schulder, some people believe that Congress should not 
add a universal prescription drug benefit before substantially 
reforming the entire Medicare program. It seems there is a lot 
of disagreement about reforming Medicare, but a near universal 
agreement on finding some type of drug benefit. What is your 
view and Alliance's view on that matter?
    Mr. Schulder. I don't think beneficiaries or the Nation as 
a whole can wait until we solve all the structural problems. We 
need this benefit now. We need it as a part of the Medicare 
system, a defined benefit, a universal benefit, a voluntary 
benefit, and a benefit that is going to use the pharmacological 
findings rapidly so that people can find relief for their ills 
and their needs. We need it now, and we don't need it as part 
of an overall Medicare so-called reform program. We need it 
first and foremost, and we would hope to see this Congress this 
session do it.
    Mr. Green. I don't think I could say it better. I yield 
back my time, Mr. Chairman.
    Mr. Deal. Thank you.
    I want to follow up on a question Mr. Ehrlich asked you 
perhaps to make it a little easier, without perhaps going into 
great discourse about it. Putting aside the decisions that were 
made in 1965, putting an aside the issue of trust fund and the 
financing mechanisms that differentiate between the two 
programs, A and B, and assuming that you are a panel assembled 
by Congress as advisors for Congress's consideration of a 
Medicare program, as a matter of first impression, would any of 
you advise that we bifurcate into the two sections A and B if 
we were for the first time adopting such a program?
    Mr. Young.  No.
    Ms. Means. No.
    Mr. Deal. Anyone?
    I believe I see universal agreement that you would not 
endorse such a concept. That being the case, then, let's, in 
the nature of reform which we are considering today, consider 
those things that happened some 35 years ago or so and see why 
they should be an impediment to us reaching this decision now. 
The first one, I suppose, is a philosophical question, and I 
think it is one that we haven't maybe as a Nation come to grips 
with. So I would put it to each of you.
    Philosophically is it the primary responsibility to pay for 
health care--should that responsibility rest on the individual 
or their generation, or should that be a primary responsibility 
of the generation that follows them?
    I don't see any takers.
    Mr. Schulder. Yes, it is the responsibility of society. If 
this society decides that the provision of health care services 
is a primary citizenship right and a responsibility of the 
government for the good of the whole community, it is a 
responsibility carried from generation to generation, from 
generation to generation--the microphone is gone--and now it is 
back.
    Mr. Deal. You have to give the right answer for it to work.
    Mr. Schulder. It is pay as you go. You are suggesting maybe 
this generation pays for it or the next generation. My parents 
use Medicare, my children will use Medicare, I will be using 
Medicare as soon as I leave employment. It is a societal 
responsibility, it seems to me. It is not a simple generations 
thing.
    Mr. Deal. So it is a shared responsibility.
    Mr. Schulder. It is shared. It depends on how we want to 
use our resources. Do we want to include health care as one of 
basic citizenship rights and responsibilities of government? At 
least that is the way I look at it. You can cut it any way you 
want. Once you create the system in terms of private market 
involvement or all the rest, but it is the decision of this 
society do we want to make health care services for older 
people, disabled persons or everyone a basic part of 
citizenship rights.
    Mr. Deal. Dissecting the question a little bit further, and 
you may elaborate on this, which of the funding mechanisms that 
we currently have A or B in your opinion most appropriately 
represents where that responsibility for paying for health care 
costs should be placed? Is it under the A formula, or is it 
under the B formula?
    Ms. Moon. I believe that the combination that we have of 
payroll taxes, of individuals' premium contributions, and of 
general revenues is a reasonable combination. The question is 
what is exactly the right balance, and that is much more 
difficult to answer.
    But general revenues have the advantage that they ask 
people of all ages to pay on the basis of ability to pay so 
that high-income seniors, for example, contribute to the 
Medicare program.
    Payroll taxes are desirable from the standpoint of many 
beneficiaries and individuals because they have relatively 
painless tax that comes out of your payroll. Americans like it 
much better than economists like myself do. But they see it as 
a fair system to have a basic small amount come out of their 
payroll to provide for the future, and I believe that having 
beneficiaries pay a contribution is also important to make them 
understand and appreciate the program.
    So I believe that whether it is by accident or design, the 
notion of having all three of these sources of revenues has 
been a very good idea. The question to go forward into the 
future is what is the fairest way to do the combination that is 
going to be necessary to fund this program?
    Mr. Deal. So, in other words, if we are going to reform, 
then we do not necessarily need to look at a different approach 
to funding. It is the very question of where the additional 
cost--and I think everybody agrees there are going to be 
additional costs, especially if we add a pharmaceutical 
benefit. The question is from which of those sources, those 
combination of sources, do we ask this extra burden to come 
from. Would everybody generally agree with that proposition?
    All right. Mr. Schulder and Ms. Moon, at least in your 
written testimony both of you allude to the fact that we may 
need to revisit the payroll tax portion of the funding formula. 
Have either of your organizations taken a firm position on that 
issue?
    Mr. Schulder. Speaking for the Alliance, no, we do not have 
a firm position on that. We are a new organization, and we were 
building a catalog of policy positions. We haven't looked at 
that quite yet. But it would seem to us and to me that all of 
us face increased out-of-pocket costs to pay for our health 
care. Employees are paying higher premiums.
    It is not unreasonable to think that the payroll tax can be 
looked at any point in time to see whether or not it is 
providing a fair share, if that is the right word, to the 
overall costs of the program. The trustees tell us we are about 
1.97 percent of payroll that we need to add to the system so it 
is in balance for 75 years. That is about $300 a year and 1 
percent for the workers' side. One percent for $30,000-a-year 
worker would amount to approximate $300 a year in additional 
taxes, as well as for the employer the same amount. That would 
bring the program into solvency for the full 75 years.
    I am the not sure that 75 years means anything to any of us 
given the nature of life and changes in medicine, but some 
small increase in the payroll tax, it seems to me, should be 
considered. Nobody likes to talk about it, but it is part of 
the basic financing, and American workers with their 
productivity can afford to have people take a look at that and 
consider an increase in the payroll tax.
    Ms. Moon. I don't represent an organization. The Urban 
Institute doesn't take positions on these things, so I 
represent me. I am a baby boomer, and I am very cognizant of 
the fact that baby boomers are going to be a drain on the 
system. I think, then, that considering changes in financing 
that ask me as a baby boomer to contribute over time are a good 
idea. The only way we now have to try to establish a way to 
have me pay for some of my benefits in the future is through a 
higher payroll tax contribution that would go into the trust 
fund. General revenues can be asked of me when I get to be 65 
and 66 and I am on the program and to help contribute as well.
    So I think both of those have a role, but I think the 
payroll tax because it is a dedicated tax, goes into a trust 
fund, and it is supposed to be there to smooth out some of 
these things, and it should be looked at that way.
    Mr. Deal. That is consistent with your testimony that you 
believe that combining the programs may pose some jeopardy to 
the trust fund portion of the surplus that has accumulated in 
that trust fund over a period of years.
    Let me shift to another issue, Ms. Means, and I will ask 
you the question, so if you want to respond to that one, you 
may do so at the same time. One of concerns raised by Ms. Moon 
is the issue of combining the programs having an undue burden 
by raising the deductible issue. Would you address that, 
please, and also the other previous question if you would like?
    Ms. Means. When we were looking at this issue last year on 
the Senate Finance Committee, the issue of raising the 
deductible on the Part B side, clearly that is something that 
members have a great deal of concern about, addressing their 
constituents' issues about that.
    I think, first of all, the Part B deductible has stayed 
way, way out of whack relative to the increase in spending. I 
think most of the members understand very clearly the extent to 
which it has not kept pace with its original design and 
purpose, which was to rise over time in a way much more in step 
with the increase in spending, as the inpatient hospital 
deductible has done on the Part A side. So there is a huge 
disparity in relative responsibility for those deductibles 
toward affecting the total cost of the program.
    When we were looking at this issue last year, we thought it 
was very important to deal with the concerns of low-income 
beneficiaries. So in the context of proposing to raise the Part 
B deductible, we also proposed considerably more generous 
subsidies than exist today under current law for low-income 
beneficiaries. We raised the subsidies up to 150 percent of 
poverty, and they were fully federally financed up to a certain 
level. So we did not put that burden on States. Even with that 
increased cost, you can still gain some overall savings because 
effectively more middle- and upper-income beneficiaries are 
contributing more to the Part B benefit through the deductible.
    Mr. Deal. So you can achieve a favorable result.
    Ms. Means. Yes. And as I mentioned earlier, you are getting 
improved insurance on the changes in Part A, and that should be 
looked at not just in 1-year pieces, but over the life of the 
benefit.
    Mr. Deal. Thank you, Mr. Schulder.
    Mr. Schulder. There are some people who would suggest that 
the payroll taxes are relatively regressive, and there is some 
truth to that.
    Mr. Deal. I believe the average individual pays more in 
payroll tax than they do in income tax. So to raise it, as you 
had previously indicated might be a suggestion, would be very 
politically difficult.
    Mr. Schulder. I realize that, but overall we want 
progressive financing for this program. I would think that a 
significantly high deductible for all services of, say, 500 is 
a very, very regressive sickness tax, if you will, and we will 
oppose that. We do not think that, again, raising the financial 
bar to seeking services is the way to assure a healthy 
population of any age.
    Mr. Deal. Dr. Young, I am going to get you to comment maybe 
on this sort of as a part of an answer, but you have alluded to 
the fact that the merger of the two programs would be 
consistent with the evolution that has occurred in the private 
insurance industry, and you have made reference to that, and 
one of the things you have said is that it would allow service 
to be rendered at the most appropriate point of service. Would 
you expand on that a little bit, and also this issue of the 
deductible as to whether or not that could be accommodated to 
solve the problems that Mr. Schulder and Ms. Moon have alluded 
to?
    Mr. Young.  From the time the Medicare program was enacted 
in 1965 to the present, where care is furnished has changed 
dramatically. Today care can be furnished in multiple sites, 
some of which are Part A and Part B. I mentioned a surgical 
procedure that could be a Part A hospital or an ambulatory Part 
B service. Some acute care can be in a nursing home. It can be 
in a hospital.
    The kind of services, where they are provided, and who 
provides them has changed. So the Medicare structure and 
particularly the out-of-pocket costs can penalize somebody from 
the appropriate side of care or the side of care that happens 
to be local to where they live based on their structuring. In 
the private sector having the single deductible allows you to 
deal with that, and having the contracting flexibility to 
negotiate fee schedules for different packages of services that 
the Medicare program does not have except under waiver or 
special authority gives you a lot of flexibility to put 
together the bundle of care that an individual really needs, by 
the provider they need, without being constrained by Medicare's 
payment policies based on the type of facility or out-of-pocket 
spending or deductible policies.
    Mr. Deal. Well, I want to thank all of you. I believe we 
have exhausted the members, if not their questions. We, too, 
thank all of you. This has been a very good panel. We 
appreciate your time in coming and being with us today, and we 
invite you to come back again. Thank you very much.
    [Whereupon, at 12:47 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

            United States General Accounting Office
                                       Washington, DC 20548
                                                     August 7, 2001
The Honorable Michael Bilirakis
Chairman, Subcommittee on Health
Committee on Energy and Commerce
House of Representatives

Subject: Medicare Reform: Post-Hearing Questions Related to Modernizing 
Medicare and Merging Parts A and B
    Dear Mr. Chairman: On June 14, 2001, I testified before the 
Subcommittee on issues related to modernizing the Medicare program.\1\ 
Specifically, I discussed how reforms based on a more unified view of 
the program might affect (1) program financing and assessments of the 
program's financial health, (2) cost-sharing requirements, and (3) 
program management, including administration and promotion of quality 
care.
---------------------------------------------------------------------------
    \1\ Medicare Reform: Modernization Requires Comprehensive Program 
View (GAO-01-862T, June 14, 2001).
---------------------------------------------------------------------------
    This letter responds to your July 17, 2001, request that GAO 
provide answers to questions related to the June 14 testimony. Your 
questions, along with our responses, follow.
    Question 1. How would you design a protection for low-income 
beneficiaries so that the cost of a combined deductible set higher than 
the current Part B deductible does not become a barrier to needed 
services?
    Some have suggested establishing a single deductible to replace 
Medicare's current $792 deductible for part A hospitalizations and the 
annual $100 deductible for part B services. A combined deductible, 
lower than the current part A deductible but higher than the current 
part B deductible, could reduce financial barriers for beneficiaries 
who need to be hospitalized. However, many beneficiaries who use 
Medicare services are not hospitalized and would thus be responsible 
for higher out-of-pocket costs.
    Whether a combined deductible would prevent some beneficiaries from 
obtaining necessary care would depend upon the details of the proposed 
deductible change as well as other beneficiary cost-sharing reforms 
that might be adopted. Discussions about specific actions designed to 
protect beneficiaries and avoid the creation of financial barriers 
should consider this larger context.
    One way to help beneficiaries overcome financial barriers to care 
may be to better promote existing programs, such as Medicaid, that 
assist qualified beneficiaries with health care costs. Many eligible 
individuals do not participate in these programs, in part because some 
are unaware that these programs exist and the requirements for 
demonstrating eligibility are complex.\2\ The Congress could also 
consider whether to adjust the current eligibility thresholds for 
Qualified Medicare Beneficiaries for whom Medicaid pays Medicare cost-
sharing obligation. Alternatively, the Congress could consider other 
targeted options, such as establishing an income-related sliding scale 
for the deductible, if existing programs did not adequately address any 
negative implications resulting from a combined deductible.
---------------------------------------------------------------------------
    \2\ See Low-Income Medicare Beneficiaries: Further Outreach and 
Administrative Simplification Could Increase Enrollment (GAO/HEHS-99-
61, April 9, 1999).
---------------------------------------------------------------------------
    Question 2. In your testimony, you state that Medicare's current 
cost-sharing requirements are not well-structured to promote prudent 
use of discretionary services. How can a merger of Parts A and B 
improve Medicare's cost-sharing requirements and serve as a tool to 
curb excessive utilization of services?
    Private insurers generally establish cost-sharing arrangements that 
require coinsurance or copayments for services that may be 
discretionary and could potentially be overused, to encourage 
beneficiaries to consider their need for services and steer patients to 
lower cost or better treatment options. Medicare's current cost-sharing 
structure fails to promote prudent use of services and to protect 
beneficiaries from high out-of-pocket costs. Consequently, proposals 
have been introduced to reform Medicare's cost-sharing requirements.
    Rethinking the relationship between parts A and B could facilitate 
the development of better cost-sharing requirements. It may be easier 
to revise Medicare's cost-sharing requirements if these changes are 
made in conjunction with other revisions to the part A and B structure. 
However, cost sharing could be revised under Medicare's current 
structure without merging parts A and B. For example, the Congress 
recently eliminated cost-sharing requirements for various cancer 
screening tests and vaccinations to help ensure that affordability is 
not a barrier to these important services.
    Question 3. You mentioned in your written testimony that 
incorporating cost-sharing changes into Medicare's information systems 
would take time and resources. Do you have an estimate as to the time 
and resources needed to make these system changes?
    The adoption of cost-sharing reforms, such as implementing a single 
deductible or an out-of-pocket spending cap, would require significant 
improvements in the Centers' for Medicare and Medicaid Services (CMS) 
ability to track service use by beneficiary. CMS is limited in that 
capacity today, not because Medicare is split into parts A and B, but 
because of deficiencies in the agency's information systems. Currently, 
Medicare's systems focus on processing and paying claims submitted by 
providers. As one step in that processing, both part A and part B 
claims are sent to a single program, the Common Working File, where 
spending by an individual beneficiary can be tracked. However, this 
software program, like some other software CMS uses, does not always 
perform adequately and is difficult to modify or improve because it is 
so antiquated. Many changes have been made to CMS' systems in recent 
years because of the Balanced Budget Act and subsequent legislated 
revisions. Similar shorter-term fixes might be made to track 
beneficiary cost sharing. We do not have an estimate of the resources 
or time that would be needed. However, it would be critical that enough 
resources and time be devoted to ensure the changes perform correctly 
from the outset to avoid confusing and troubling significant numbers of 
beneficiaries.
    Question 4. In your written testimony, you mentioned a phase-in to 
a unified program. How would you design such a phase-in? How would it 
soften some of the impact of a merged program?
    Approximately 2 million individuals (5 percent of beneficiaries) 
are eligible for Medicare but do not participate in the voluntary part 
B program and pay its separate monthly premium ($50 for 2001). A much 
smaller number, 400,000, are enrolled only in part B but not part A. 
Those enrolled in only one part of the program often have private 
insurance from a previous employer or other source to make up the 
difference. If Medicare parts A and B are combined and beneficiaries 
are required to participate fully in the unified program, beneficiaries 
who are now enrolled in only one part of the program would have to pay 
additional premiums for coverage they may already have from another 
source. Requiring full participation in a unified program would also 
increase costs to the government for care that is now covered 
privately.
    If Medicare is unified, providing for a phase-in period is one 
approach that might reduce any unintended negative effects resulting 
from the reform. The Congress could, for example, require new 
beneficiaries to participate in the unified program while allowing 
existing beneficiaries the option of remaining in the current program 
with its separate part A and part B structure. Other approaches could 
also be explored. For example, reform provisions might include all 
beneficiaries in a unified Medicare program but allow those individuals 
who choose not to participate fully to receive partial benefits.
    Question 5. In your written testimony, you discussed various pilot 
projects that CMS has conducted to break down the barriers between 
Medicare's Part A and Part B. What lessons can be learned from these 
demonstration projects that can be applied to improve the care provided 
to all Medicare beneficiaries?
    Private insurers employ management techniques designed to improve 
the quality and efficiency of services purchased, such as targeted 
beneficiary education, preferred provider networks, and coordination of 
services. The National Academy of Social Insurance (NASI) reviewed such 
private sector practices. NASI concluded that private sector practices 
could potentially improve Medicare but would need to be tested to 
determine how well they could be adapted to reflect the uniqueness of 
Medicare both as a public program and as the single largest purchaser 
of health care.
    Medicare has experimented with innovations that bridge part A and 
part B services. For example, it tested the impact of making single 
``global'' payments to selected hospitals for all services both 
hospital and physician related to coronary artery bypass surgery. Based 
on the results of this and other experiments, such innovative 
approaches may have the potential to cut program costs, save money for 
beneficiaries, improve health outcomes, and increase beneficiary 
satisfaction with the quality of care.
    However, wide-scale implementation of some innovations may be 
difficult in a large, public program such as Medicare. Private insurers 
typically have wide latitude in how they run their business. The 
adoption of some private sector approaches may require new statutory 
authority for CMS. For example, CMS' ability to encourage the use of 
preferred providers is limited, in part because the Medicare statute 
generally allows any qualified provider to participate in the program. 
However, it is important that CMS continue to test private sector 
innovations to determine their effects and whether they can be adapted 
to Medicare. The Congress can then decide, based on the test results, 
whether Medicare should permanently adopt the innovations.
    Question 6. One of the key shortcomings of the Medicare program is 
its lack of an overall cap on out-of-pocket costs for beneficiaries. If 
such a cap were put in place, how could the additional costs to the 
program be balanced? How would a merged program help facilitate 
Medicare's adoption of a catastrophic cap?
    The average beneficiary who obtained services in 1997 had a total 
liability for Medicare-covered services of $1,451, consisting of $925 
in Medicare copayments and deductibles in addition to the $526 in 
annual part B premiums. Total Medicare cost sharing can be much higher 
for beneficiaries with extensive health care needs. For example, in 
1997 approximately 750,000 beneficiaries (2.5 percent) were liable for 
more than $5,000.
    Some have suggested imposing a cap on beneficiary out-of-pocket 
costs to protect those who require extensive health care services. The 
additional cost of providing this catastrophic coverage could be offset 
by raising the part B deductible or creating a combined deductible for 
part A and part B services. This would increase out-of-pocket costs for 
a share of beneficiaries. However, in return, they would receive 
additional insurance in the form of protection from catastrophic costs. 
If such an approach were adopted, it would be important consider how 
the entire package of cost-sharing reforms might affect beneficiaries' 
out-of-pocket expenses.
    Capping beneficiaries' out-of-pocket expenses may be more easily 
accomplished in conjunction with other program reforms that could 
include the creation of a more unified program. However, such 
protection could be added within the current program structure. In 
either case, the Congress would need to decide on how to allocate the 
cost of such coverage among beneficiaries and taxpayers.
    Question 7. It has been argued that many of the benefits to be 
achieved through consolidating Parts A and B of the Medicare program 
could be achieved through administrative action. It's obvious that 
administrative action hasn't been taken in many years. Why is that the 
case? Is there something inherently difficult in implementing such 
changes by administrative fiat? How would you suggest that we 
facilitate the timely implementation of these improvements?
    Rethinking the relationship between parts A and B has many 
potential benefits. Some of the changes discussed to modernize 
Medicare, such as restructuring cost sharing, instituting a single 
deductible, and adding a cap on beneficiaries' out-of-pocket costs do 
require statutory changes. However, adopting a more global perspective 
regarding parts A and B in administering and assessing the program can 
have benefits. Currently, the financial health of Medicare is largely 
judged by the solvency of the part A trust fund. A more comprehensive 
view of the program can lead to a better understanding of the financial 
challenges Medicare faces. It is not essential that policymakers 
combine the trust funds or take legislative action to obtain this 
perspective. In fact, the Medicare Trustees currently report one 
comprehensive indicator of the program's financial status: estimated 
total Medicare spending as a percentage of the Gross Domestic Product. 
What is important is that both the public and policy makers recognize 
that more comprehensive measures can better inform the debate over 
necessary Medicare reforms.
    Accomplishing more administratively is handicapped by not being 
able to view the entire program's impact on beneficiaries and providers 
on a more timely basis. Our previous work shows that the Health Care 
Financing Administration (HCFA) operated Medicare with outdated 
information technology systems unsuited to meet requests for basic 
management information within reasonable time periods. For example, the 
agency could not readily track payment and service-use data at the 
beneficiary level. It will be important for the Congress to ensure that 
CMS has the capacity to carry out its mission in the 21stcentury. Such 
capacity is critical to implement desired reforms, make administrative 
changes, or inform Congressional debate when course corrections seem 
necessary.
    If you or your staff have any questions regarding this letter, 
please contact me or Laura Dummit at (202) 512-7114.
            Sincerely yours,
                                         William J. Scanlon
                                       Director, Health Care Issues
