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




FIFTH IN SERIES ON MEDICARE REFORM: STRENGTHENING MEDICARE: MODERNIZING 
                        BENEFICIARY COST SHARING

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 9, 2001

                               __________

                           Serial No. 107-21

                               __________

         Printed for the use of the Committee on Ways and Means



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                    U.S. GOVERNMENT PRINTING OFFICE
74-223                      WASHINGTON : 2001




                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

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

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                NANCY L. JOHNSON, Connecticut, Chairman

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

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





                            C O N T E N T S

                               __________
                                                                   Page
Advisory of May 2, 2001, announcing the hearing..................     2

                               WITNESSES

Library of Congress, Jennifer O'Sullivan, Specialist in Social 
  Legislation, Congressional Research Service....................    10
U.S. General Accounting Office, William J. Scanlon, Ph.D., 
  Director, Health Care Issues...................................    16

                                 ______

Commonwealth Fund, Karen Davis...................................    31
Direct Research, LLC, Christopher Hogan..........................    25

                       SUBMISSION FOR THE RECORD

United Healthcare Insurance Company, statement...................    68

 
FIFTH IN SERIES ON MEDICARE REFORM: STRENGTHENING MEDICARE: MODERNIZING 
                        BENEFICIARY COST SHARING

                              ----------                              


                         WEDNESDAY, MAY 9, 2001

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:11 p.m., in 
room 1100 Longworth House Office Building, Hon. Nancy Johnson 
(Chairwoman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
May 2, 2001
HL-7

Johnson Announces Fifth Subcommittee Hearing in Series on Strengthening 
             Medicare: Modernizing Beneficiary Cost Sharing

    Congresswoman Nancy L. Johnson (R-CT), Chairwoman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on beneficiary cost sharing. The 
hearing will take place on Wednesday, May 9, 2001, in the main 
Committee hearing room, 1100 Longworth House Office Building, beginning 
at 2:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include program experts on beneficiary cost sharing 
under the Medicare benefit and Medigap insurance coverage. However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.

BACKGROUND:

    The structure of Medicare beneficiary cost sharing in the fee-for-
service program reflects the insurance practices at the inception of 
the Medicare program in 1965. As such, more than 35 years later, 
beneficiaries are confronted with irrational and confusing cost-sharing 
which does not reflect the current delivery of health care.
      
    For example, the program has two different deductibles--a $792 
deductible for Part A and a $100 deductible for Part B. This means that 
when a beneficiary is hospitalized for an in-patient procedure and less 
likely to be sensitive to pricing issues, the beneficiary is faced with 
a significant deductible. In addition, after a beneficiary has been 
hospitalized for 60 days, the beneficiary must then pay $198 
coinsurance per day for days 61 through 90. There is a separate $100 
Part B deductible for out-patient procedures, which is arguably more 
discretionary, never having been indexed to inflation.
      
    Unlike 97 percent of private health policies, the Medicare fee-for-
service program still lacks catastrophic insurance protection for those 
with serious health conditions. Medicare Part B, which is financed 25 
percent from beneficiary premiums--about $50 per month--and 75 percent 
from the General Fund, has unlimited beneficiary cost-sharing. Part B 
has different coinsurance depending on the service--none for lab or 
home health, 20 percent for physician services and supplies, and close 
to 50 percent for hospital outpatient services.
      
    In total, due to cost-sharing obligations and Medicare's limited 
benefit package, nearly half of seniors' health care costs are not 
covered by Medicare. As a result, 90 percent of beneficiaries have some 
type of supplemental coverage. Those with retiree coverage from their 
former employers generally receive generous benefits, including 
catastrophic protection and good prescription drug coverage. The 
poorest beneficiaries receive wrap-around coverage through Medicaid.
      
    Medicare's confusing and irrational cost-sharing has also induced 
29 percent of beneficiaries to purchase Medigap insurance. In 1990, 
Congress created 10 standardized Medigap policies. Nine out of 10 of 
those policies, which comprise more than 90 percent of the Medigap 
market, are required to cover the Part A deductible, and the most 
popular Medigap policy covers both deductibles. Numerous studies have 
demonstrated that covering the deductibles has led to markedly higher 
Medicare spending because beneficiaries become insensitive to costs. In 
addition, only the three most expensive Medigap plans cover 
prescription drugs, and that coverage is limited. Yet, eight of the 10 
plans are required to cover foreign travel insurance, while most 
beneficiaries never leave the country.
      
    In announcing the hearing, Chairwoman Johnson stated: ``A critical 
element of strengthening Medicare is modernizing the fee-for-service 
program's byzantine cost-sharing structure. No one designing a seniors' 
health program today would construct such a convoluted and irrational 
cost-sharing structure for beneficiaries. The system is a patchwork of 
outdated policies that fail to protect beneficiaries or taxpayers. We 
must learn from our experience and work to ensure a more consistent and 
understandable system for the future.''

FOCUS OF THE HEARING:

    The hearing's panel will include private and public experts on the 
Medicare fee-for-service program's beneficiary cost sharing. They will 
describe in detail the current structure of beneficiary cost-sharing 
and the incentives that have arisen from the benefit design. In 
addition, there will be a focus on the structure and policy 
implications of Medigap.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Tuesday, 
May 23, 2001, to Allison Giles, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, by close of business the day before the hearing.

FORMATTING REQUIREMENTS:

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

    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://waysandmeans.house.gov''.

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

                                


    Chairwoman Johnson. The hearing will come to order.
    Today will be the fifth Subcommittee hearing on modernizing 
the Medicare program. In earlier hearings, we examined new 
ideas on Medicare reform. We solicited proposals to reduce the 
regulatory burden on providers and beneficiaries. We examined 
the adequacy and the usefulness of the current definition of 
Medicare solvency. We brought forth new information to lay the 
groundwork for a prescription drug benefit, and we heard about 
the importance of the Medicare Plus Choice program to 
beneficiaries and evaluated ideas to strengthen that program.
    Today, we turn to modernizing the fee-for-service Medicare 
Program's beneficiary cost sharing. The structure of Medicare 
beneficiary cost sharing in the fee-for-service program 
reflects the insurance practices at the inception of the 
Medicare Program in 1965. As such, more than 35 years later, 
beneficiaries are confronted with irrational and confusing 
cost-sharing requirements which do not reflect the current 
delivery of health care.
    For example, the program has two different deductibles, a 
$792 deductible for Part A and $100 deductible for Part B. This 
means that when a beneficiary is hospitalized for an inpatient 
procedure and least likely to be sensitive to pricing issues, 
the beneficiary is faced with a significant deductible.
    In addition, after a beneficiary has been hospitalized for 
2 months, the beneficiary must then pay $198 coinsurance per 
day for day 61 through 90. This simply makes no sense.
    At the same time, the $100 Part B deductible for outpatient 
procedures, which are arguably more discretionary, has never 
been indexed to inflation. Unlike 97 percent of private health 
policies, the Medicare fee-for-service program still lacks 
catastrophic insurance protection for those with serious health 
conditions. Medicare Part B has unlimited beneficiary cost 
sharing. Part B has different coinsurance depending on the 
service, none for lab or home health, 20 percent for physician 
services and supplies, and close to 50 percent for hospital 
outpatient services and mental health services.
    This Committee has made progress in three consecutive 
Medicare bills to substantially reduce beneficiary cost sharing 
for outpatient hospital services, but more needs to be done. In 
total, due to cost-sharing obligations and Medicare's limited 
benefit package, nearly half of seniors health care costs are 
not covered by Medicare. As a result, 90 percent of 
beneficiaries have some type of supplemental coverage. Those 
with retiree coverage from their former employers generally 
receive generous benefits, including catastrophic protection 
and good prescription drug coverage. The poorest beneficiaries 
receive wrap-around coverage through Medicaid. Medicare's 
confusing and irrational cost sharing has also induced 29 
percent of beneficiaries to purchase Medigap insurance.
    In 1990, Congress created 10 standardized Medigap policies. 
Nine out of the 10 of those policies, which comprise more than 
90 percent of the Medigap market, are required to cover the 
Part A deductible, and the most popular Medigap policy covers 
both deductibles. Numerous studies have demonstrated that 
covering the deductibles has led to markedly higher Medicare 
spending because beneficiaries become insensitive to costs.
    In addition, only the three most expensive Medigap plans 
cover prescription drugs, and that coverage is limited. Yet, 8 
of the 10 plans are required to cover foreign travel insurance 
while most beneficiaries never leave the country. Between 1998 
and 2000, Medigap premiums have escalated by 15.5 percent for 
plans without drug coverage and 37 percent forthose with drug 
coverage. Modernizing beneficiary cost sharing must include appropriate 
changes in Medigap.
    A critical element of strengthening Medicare is modernizing 
the fee-for-service programs' byzantine cost-sharing structure. 
No one designing a senior's health program today would 
construct such a convoluted and irrational cost-sharing 
structure for beneficiaries. The system is a patchwork of 
outdated policies that fail to protect beneficiaries or 
taxpayers. We must learn from our experience and work to ensure 
a more consistent, understandable, and affordable system for 
the future.
    Mr. Stark.
    [The opening statement of Chairwoman Johnson follows:]
  Opening Statement of the Hon. Nancy L. Johnson, a Representative in 
Congress from the State of Connecticut, and Chairwoman, Subcommittee on 
                                 Health
    Today will be the fifth subcommittee hearing on modernizing the 
Medicare program. In earlier hearings we examined new ideas on Medicare 
reform, we solicited proposals to reduce the regulatory burden on 
providers and beneficiaries, we examined the adequacy and usefulness of 
the current definition of Medicare solvency, we brought forth new 
information to lay the ground work for a prescription drug benefit, and 
we heard about the importance of the Medicare+Choice program to 
beneficiaries and evaluated ideas to strengthen that program. Today, we 
turn to modernizing the fee-for-service program's beneficiary cost-
sharing.
    The structure of Medicare beneficiary cost sharing in the fee-for-
service program reflects the insurance practices at the inception of 
the Medicare program in 1965. As such, more than 35 years later, 
beneficiaries are confronted with irrational and confusing cost-sharing 
which does not reflect the current delivery of health care.
    For example, the program has two different deductibles--a $792 
deductible for Part A and a $100 deductible for Part B. This means that 
when a beneficiary is hospitalized for an in-patient procedure and 
least likely to be sensitive to pricing issues, the beneficiary is 
faced with a significant deductible. In addition, after a beneficiary 
has been hospitalized for two months, the beneficiary must then pay 
$198 coinsurance per day for days 61 through 90. This simply makes no 
sense. At the same time, the $100 Part B deductible for out-patient 
procedures, which are arguably more discretionary, has never been 
indexed to inflation.
    Unlike 97 percent of private health policies, the Medicare fee-for-
service program still lacks catastrophic insurance protection for those 
with serious health conditions. Medicare Part B has unlimited 
beneficiary cost-sharing. Part B has different coinsurance depending on 
the service--none for lab or home health, 20 percent for physician 
services and supplies, and close to 50 percent for hospital outpatient 
services. This Committee has made progress in three consecutive 
Medicare bills to substantially reduce beneficiary cost-sharing for 
outpatient hospital services. But more needs to be done.
    In total, due to cost-sharing obligations and Medicare's limited 
benefit package, nearly half of seniors' health care costs are not 
covered by Medicare. As a result, 90 percent of beneficiaries have some 
type of supplemental coverage. Those with retiree coverage from their 
former employers generally receive generous benefits, including 
catastrophic protection and good prescription drug coverage. The 
poorest beneficiaries receive wrap-around coverage through Medicaid.
    Medicare's confusing and irrational cost-sharing has also induced 
29 percent of beneficiaries to purchase Medigap insurance. In 1990, 
Congress created 10 standardized Medigap policies. Nine out of 10 of 
those policies, which comprise more than 90 percent of the Medigap 
market, are required to cover the Part A deductible, and the most 
popular Medigap policy covers both deductibles. Numerous studies have 
demonstrated that covering the deductibles has led to markedly higher 
Medicare spending because beneficiaries become insensitive to costs. In 
addition, only the three most expensive Medigap plans cover 
prescription drugs, and that coverage is limited. Yet, eight of the 10 
plans are required to cover foreign travel insurance, while most 
beneficiaries never leave the country. Between 1998 and 2000 Medigap 
premiums have escalated by 15.5 percent for plans without drug coverage 
and 37.2 percent for those with drug coverage. Modernizing beneficiary 
cost-sharing must include appropriate changes to Medigap.
    A critical element of strengthening Medicare is modernizing the 
fee-for-service program's byzantine cost-sharing structure. No one 
designing a seniors' health program today would construct such a 
convoluted and irrational cost-sharing structure for beneficiaries. The 
system is a patchwork of outdated policies that fail to protect 
beneficiaries or taxpayers. We must learn for our experience and work 
to ensure a more consistent and understandable system for the future.

                                


    Mr. Stark. Thank you, Madam Chair.
    I agree that Medicare cost sharing can benefit from a fresh 
look. The fact is that Medicare currently covers only about 
half of the beneficiary health costs, and the beneficiaries 
spend a disproportionate share of their income on health 
expenses.
    Now, much of the gap is due to the lack of coverage of 
prescription drugs, but it is also clear that the current cost-
sharing arrangement continues to force too many beneficiaries 
to pay too much.
    We have made some modest progress to correct the 
coinsurance quirk that forces beneficiaries to pay far more 
than we intended for hospital outpatient services, but we have 
got a long way to go on that one. Beneficiaries do shoulder an 
unfair percentage of the cost for mental health services, and 
we have not corrected that.
    I do not oppose efforts to develop or examine options in 
this area, but I think we must keep foremost in our mind the 
effects that these changes have on all Medicare beneficiaries.
    For example, there are good reasons to slower the hospital 
deductible, but that is often considered in the context of 
raising the Part B deductible. Given only that 90 percent of 
the beneficiaries use Part B and only about less than 20 
percent use the hospital benefit, we could end up reducing 
expenses for a few, the 20 percent that use hospitals, and then 
kick all the Part B costs up, and I am not sure if that is what 
we want to do.
    While cost sharing can increase the cost awareness of 
beneficiaries, I see it as a sickness tax, and I have never 
been convinced that beyond the nuisance value of a minimal $5, 
$10 copay that people will overutilize medical care.
    I think, mostly, we do not like going. We like doctors. 
Some of us are married to them. Some of us have them as 
colleagues.
    Chairwoman Johnson. Some of us lucky folks are married to 
them.
    Mr. Stark. Professionally, we do not like to visit them so 
much.
    I have often said if I arranged with the George Washington 
Hospital for each one of these Subcommittee Members this 
afternoon to go over to George Washington Hospital and for $10, 
you could have a Pap smear or a proctoscopic examination, I do 
not think any of you would go. This is not the kind of thing 
that we want to do on a nice, sunny afternoon, and I do not 
think the Medicare beneficiaries are much different. I do not 
think they are out there saying, ``Gosh, I do not have anything 
else to do. There is no ball game. There is nothing on 
television. I think I will go and have an examination.''
    Yes, I can see that there are some hypochondriac types that 
abuse it, but you have got to make the case to me that we will 
not prevent people from getting needed medical care if we raise 
that barrier too high.
    I think that it is tempting to look at CBO's (Congressional 
Budget Office) projected savings from various options in this 
area, but the dollars come from increasing or changing 
beneficiary cost-sharing responsibilities that might have 
unintended consequences. As I say, we assume that utilization 
is bad, and maybe it is not.
    I find it hard to believe that Medicare beneficiaries, as I 
said, go out of their way to just get extra cost. That may not 
be true of the providers or their advisors, but it certainly, I 
think, is true to the beneficiaries.
    Benefit packages under the OBRA '90 rules could be tweaked, 
but I would say we should be careful not to upset a precarious 
market, unless you choose to eliminate Medigap. Given the 
strong desire of beneficiaries to purchase this insurance, my 
personal belief is that that would be politically unwise or, if 
you wanted to replace it with a HCFA-sponsored (Health Care 
Financing Administration) Medigap, I think politically 
unsellable at this time.
    So I am just saying right now Medigap is the best we have 
got, and unless we are ready to step up to the plate and think 
about making it part of the Federal program, we should be very 
careful that we do not destroy the private providers who are in 
the business.
    I agree that regardless of what we do with first-dollar 
coverage, Medigap needs improvements, and we have got 
beneficiaries who missed the open enrollment and they are 
locked out forever. We have got a problem with Medicare Plus 
Choice cancels. They are limited in their options to go back 
into Medigap. None of them have drug coverage. Maybe that will 
change if we have a drug benefit.
    Disabled younger beneficiaries cannot get into the initial 
open enrollment until they are 65. I think we should look at 
that.
    Why? I guess the insurance industry basically does not want 
to insure these folks, and I think we have to keep in mind 
their aversion to risk when we consider changes that we would 
ask the private insurance industry to take up.
    So, while I am anxious to review what we are doing and 
improve it, I hope we can be cautious because we could perhaps 
do more harm. It is a program that is tenuous. We see people 
dropping out of the Medigap. I mean we see insurers dropping 
out of the Medigap market every year. We see it becoming more 
expensive, and I hope this hearing will lead us toward some of 
the answers that we might do to improve the Medicare Program 
for all of the beneficiaries.
    Thank you very much.
    [The opening statements of Mr. Stark and Mr. Ramstad 
follow:]
 Opening Statement of the Hon. Fortney Pete Stark, a Representative in 
                 Congress from the State of California
    Thank you, Madam Chairwoman, for holding this hearing. This is an 
impressive, balanced panel, and I look forward to the discussion.
    Medicare cost-sharing could benefit from a fresh look. Medicare 
currently covers only approximately half of beneficiary health costs, 
and beneficiaries spend a disproportionate share of their income on 
health expenses. While much of the gap is due to the lack of coverage 
under Medicare for prescription drugs and other important items or 
services, it is also clear that the current cost-sharing arrangement 
continues to force too many beneficiaries to pay too much.
    We have made modest progress in our effort to correct the co-
insurance quirk that forces beneficiaries to pay far more than we 
intended for hospital outpatient services. But we have a long way to 
go. Beneficiaries also shoulder an unfair percentage of the cost for 
mental health services.
    For these and other reasons, it may initially seem attractive to 
rearrange cost-sharing obligations. I am not averse to developing or 
examining options in this area, but we must keep in mind the effects of 
these changes on all Medicare beneficiaries. For example, there are 
good reasons to lower the hospital deductible, but that is often 
considered in the context of raising the Part B deductible. However, it 
is important to remember that 90 percent of beneficiaries use Part B 
services, while only approximately 18 percent use the inpatient 
hospital benefit. Any policy that lowers the hospital deductible while 
raising the Part B deductible reduces expenses for a few at the expense 
of many. While cost-sharing can be used as a tool to heighten ``cost 
consciousness'' of beneficiaries, it can also be used as a sickness tax 
on those who need health services the most.
    I am sure that some of today's discussion will center around the 
so-called ``first dollar coverage'' under Medigap and its effect on 
Medicare spending. Some people think that we should prohibit Medigap 
and other insurance from providing coverage that essentially insulates 
beneficiaries from Medicare's patchwork quilt of co-insurance and co-
payment obligations. I know it is intriguing to look at the options 
book produced by CBO and see the potential for enormous savings in some 
proposals, but I think a few words of caution are in order before 
anyone heads down that particular road.
    Too often, it is assumed that utilization is bad. While we 
certainly want to curtail unnecessary utilization, cost-sharing is a 
blunt tool with which to accomplish that goal. Too often, it results in 
decreased use of both necessary and unnecessary services. Certainly, 
steps can be taken to minimize or direct the effects of cost-sharing, 
but we must keep in mind that cost-sharing requirements in a vulnerable 
lower-income population may result in adverse health effects. With very 
few exceptions, I find it hard to believe that Medicare beneficiaries 
seek unnecessary services. Most people are reluctant, not eager, to go 
to the doctor or be subject to procedures. Also, except for showing up 
at a doctor's office, most of us are unable to direct our care, and 
cost-sharing has little impact on our choices, except to discourage 
compliance with treatment regimens. After all, we can't order our own 
tests or procedures or prescribe other treatments.
    In addition, the OBRA 1990 Medigap standardization legislation was 
desperately needed to address rampant abuses in the Medigap market. And 
it has largely served its purpose. Among other problems, there were 
reports of beneficiaries having dozens of policies, thanks to 
unscrupulous sales agents who preyed on unsuspecting senior citizens. 
Not so anymore. I admit that the benefit packages may be in need of 
some tweaking, but I remind my colleagues that they were designed 
through painful, lengthy negotiated rule-making process that involved 
all relevant parties. In addition, as we will hear from GAO, one-third 
of current Medigap policies have been in force since before 1992 and 
have non-standardized benefits. If Congress decides to dramatically 
change the benefit packages, care must be taken to avoid further 
segmenting the market and risk pools. Unless, of course, Congress 
wishes to force beneficiaries to give up the Medigap insurance they 
currently have. However, given the strong desire of beneficiaries to 
purchase this insurance, my personal belief is that it would be 
politically unwise to force change. On the other hand, if it is clearly 
a better deal, many may well be willing to voluntarily leave their 
current policies.
    We might also consider creating a HCFA-sponsored Medigap option to 
compete with the private insurers. After all, given that Medigap's 
administrative costs and insurer profits total more than 20 percent of 
the premium, a HCFA option could offer equivalent coverage at a much 
lower price.
    Finally, I would be remiss if I didn't advocate for some long-
overdue Medigap improvements--regardless of what happens with respect 
to first-dollar coverage. Medicare beneficiaries essentially get one 
chance at purchasing Medigap when they first turn 65 and enroll in Part 
B. If they fail to take advantage of the one-time open enrollment 
period at that time, they may find themselves forever locked out of 
supplemental coverage. In addition, there are virtually no federal 
restrictions on underwriting or rating practices. That means that even 
if an insurer agrees to offer you coverage, they can charge you 
whatever they want. Or they can entice you in at age 65 with an 
attractive premium, while raising it as your age and needs increase. 
That's one reason why enrollment in the Medigap drug packages is so 
low. Their value is questionable, and most beneficiaries with any 
indication of need are priced out of the plans. When Congress finally 
acted to allow beneficiaries whose circumstances change beyond their 
control (e.g., M+C plan cancels, employer benefits drop, etc.) to get 
another chance at enrollment, we limited their ability to enroll or re-
enroll to just four options--none with drug coverage. Disabled younger 
beneficiaries are still waiting to get an initial open enrollment 
period upon first becoming eligible for Medicare. Right now, they have 
to wait until they are 65 to be guaranteed an opportunity to purchase 
Medigap. Why are these things so? Because the insurance industry 
doesn't want to insure these folks. Keep this aversion to risk in mind 
as we consider other changes to Medicare that would increase the role 
of the private insurance industry.
    Caution is the watchword as we work in this important area. There 
is an opportunity for improvement, but also for destruction. I look 
forward to today's testimony and discussion.

                                


Opening Statement of the Hon. Jim Ramstad, a Representative in Congress 
                      from the State of Minnesota
    Madam Chairwoman, thank you for calling this important hearing 
today to continue exploring Medicare reform.
    I strongly believe that Medicare needs comprehensive reform. We 
cannot focus on tinkering around the edges, and we must not take the 
easy road of simply adding a prescription drug benefit to an already 
overburdened program.
    I am particularly concerned about the costs that Medicare 
beneficiaries must pay when they get sick and the plans they must 
purchase to cover their needs because of Medicare's copays and lack of 
catastrophic coverage.
    For example, the program has a $792 deductible for Part A when the 
patient is least sensitive to price; after 60 days in the hospital, a 
beneficiary must pay $198 coinsurance per day for days 61 through 90. 
In Part B, a beneficiary must pay a $100 which has never been adjusted 
for inflation.
    This problem is exacerbated by the fact that Medicare lacks 
catastrophic protection. This compares with 97% of private health 
policies which have this protection.
    In total, Medicare's limited benefits package, high copays and 
complete absence of catastrophic coverage means that nearly half of our 
seniors' health care costs are not covered by Medicare.
    This means that Medicare seniors must bear the cost themselves. In 
fact, 90% of beneficiaries have some type of supplemental coverage 
which ranges from quite good to very limited.
    In my view, Madam Chairwoman, this is just another example of why 
we must bring the Medicare program into the 21st century, and do it 
this year. I believe that together, in a bipartisan way, we can design 
an effective and efficient way to comprehensively improve the system 
and preserve it for tomorrow's seniors.
    Madam Chairwoman, thanks again for your leadership. I look forward 
to learning more from today's witnesses on how we can best address this 
critical issue.

                                


    Chairwoman Johnson. Thank you, Mr. Stark.
    The panel that we are going to hear from today will start 
with Jennifer O'Sullivan who is the specialist in Social 
Legislation, Domestic Social Policy Division of the 
Congressional Research Service; Dr. William Scanlon who is the 
director of Health Care Issues at the United States General 
Accounting Office; Dr. Christopher Hogan, president of Direct 
Research of Vienna, Virginia; and Dr. Karen Davis, president of 
The Commonwealth Fund of New York, New York.
    Ms. O'Sullivan, if you would start, please.

    STATEMENT OF JENNIFER O'SULLIVAN, SPECIALIST IN SOCIAL 
    LEGISLATION, CONGRESSIONAL RESEARCH SERVICE, LIBRARY OF 
                            CONGRESS

    Ms. O'Sullivan. Thank you, Madam Chairman and Members of 
the Subcommittee. My name is Jennifer O'Sullivan.
    Today, you have asked me to outline Medicare's cost-sharing 
structure, specifically what out-of-pocket expenses 
beneficiaries are liable for when they use covered services. My 
testimony will highlight three points: first, Medicare's cost-
sharing requirements are complex; second, the cost-sharing 
requirements differ in significant ways from those applicable 
in the private market; and, third, Medicare's requirements 
remain relatively unchanged since 1966.
    There are very significant differences between the cost-
sharing requirements under Medicare Part A and Medicare Part B. 
Medicare Part A uses a spell-of-illness concept. A spell of 
illness, also known as a benefit period, starts when a 
beneficiary enters a hospital and ends when he or she has not 
been in a hospital or skilled nursing facility for 60 days. In 
each benefit period, the beneficiary pays a $792 deductible for 
hospital stays up to 60 days. Longer stays are subject to 
coinsurance charges. Days 60 to 90 are subject to a daily 
charge of $198, and persons in the hospital over 90 days may 
draw on 60 lifetime reserve days subject to a daily coinsurance 
charge of $396. There is no coverage after 150 days.
    The spell-of-illness concept gets even more complex when 
you consider that an individual can have more than one benefit 
period in a calendar year and, therefore, have to pay more than 
one deductible in a calendar year.
    A person requiring post-hospital skilled nursing facility 
services may get up to 100 days of care in a benefit period. 
There is a daily coinsurance charge of $99 for days 21 to 100.
    In general, cost sharing under Medicare Part B is somewhat 
simpler. In each calendar year, beneficiaries must first meet 
the $100 Part B deductible. Beneficiaries then generally pay 20 
percent in coinsurance. However, certain Part B services such 
as home health services, lab services, and some preventive 
services are exempt from either the deductible and/or 
coinsurance requirements. On the other hand, mental health 
services are subject to 50-percent cost sharing. Beneficiaries 
using hospital outpatient services pay a fixed amount which 
varies by the service category, and thisamount is often 
considerably above 20 percent of the approved Medicare payment amount.
    There are significant differences between Medicare's cost-
sharing structure and that available to the under-age-65 
population under employer-based plans. Perhaps the most 
significant difference is that private plans typically have an 
annual limit on out-of-pocket expenses, sometimes referred to 
as a catastrophic cap. In contrast, Medicare has on upper limit 
on cost-sharing charges.
    Another key feature of the private insurance market is that 
over 95 percent of the under-65 population is enrolled in a 
managed-care arrangement compared to only about 15 percent of 
the Medicare population. These managed-care arrangements 
typically have simpler cost-sharing structures. Many of the 
under-65 population are enrolled in preferred provider plans. 
Individuals in these plans have lower cost sharing when they 
use in-network providers and somewhat higher cost sharing when 
they use out-of-network providers. These preferred provider 
arrangements are not available to the Medicare fee-for-service 
population.
    Several other observations can be made about Medicare's 
cost sharing. While the dollar amounts have changed, the 
structure is virtually unchanged from that which was in effect 
when the program started in 1966. The Congress did enact 
legislation in 1988, the Medicare Catastrophic Act, which would 
have significantly modified the requirements, and one of the 
key features of that legislation was an annual out-of-pocket 
limit on Part B cost-sharing. However, as you know, Congress 
repealed that legislation in the following year.
    I should note that the preceding discussion has focused on 
beneficiary liability in connection with their use of Medicare 
services. Unlike the under-age-65 population, most 
beneficiaries have a second source of health insurance 
coverage. This supplementary coverage typically covers some or 
all of Medicare's cost-sharing charges. As a result, 
beneficiaries may not actually incur out-of-pocket costs at the 
time they use covered services.
    This discussion only focuses on cost sharing for Medicare-
covered services. It does not address expenses beneficiaries 
may have for non-covered services. As you know, Medicare does 
not cover certain items such as hearing aids and dentures. It 
also provides very limited coverage for some other services 
such as outpatient prescription drugs and long-term care. As a 
result, Medicare only covers about half of the beneficiary's 
total health care bill.
    Thank you.
    [The prepared statement of Ms. O'Sullivan follows:]
  Statement of Jennifer O'Sullivan, Specialist in Social Legislation, 
          Congressional Research Service, Library of Congress
    Madam Chairman and Members of the Subcommittee. My name is Jennifer 
O'Sullivan. I am a Specialist in Social Legislation at the 
Congressional Research Service. Today you have asked me to outline 
Medicare's cost-sharing structure-specifically what out-of-pocket 
expenses beneficiaries are liable for when they use covered services. I 
will briefly summarize Medicare's requirements under the traditional 
fee-for-service program; more details are provided in the table 
included as part of my written testimony. My testimony will highlight 
three points:
           First, Medicare's cost-sharing requirements are 
        complex;
           Second, the cost-sharing requirements differ in 
        significant ways from those applicable in the private market;
           Third, Medicare's requirements have remained 
        relatively unchanged from 1966.
    There are significant differences between the cost sharing 
requirements for Medicare Part A and Medicare Part B. Part A uses the 
``spell of illness'' concept. A spell of illness, also known as a 
``benefit period'' starts when a person enters a hospital and ends when 
he or she has not been in a hospital or skilled nursing facility for 60 
days. In each benefit period, the beneficiary pays a $792 (in 2001) 
deductible for hospital stays of 1--60 days. Hospital stays beyond 60 
days are subject to coinsurance charges. Days 60--90 are subject to a 
daily charge of $198 (in 2001). Persons in the hospital over 90 days 
may draw on 60 lifetime reserve days subject to a daily coinsurance 
charge of $396 (in 2001). Hospital stays in excess of 150 days in a 
benefit period are not covered.
    The spell of illness concept gets even more complex when you 
consider that an individual can have more than one benefit period in a 
year and therefore have to pay more than one deductible in a year. 
Potentially, an individual could even have to pay coinsurance charges 
for more than one inpatient stay.
    A person requiring post-hospital skilled nursing facility (SNF) 
services may get up to 100 days of care in a benefit period. There is a 
daily coinsurance charge for days 21--100 ($99 in 2001). There is no 
cost sharing for home health services and nominal cost-sharing for 
hospice care.
    In general, cost-sharing under Medicare Part B is somewhat simpler. 
In each calendar year, beneficiaries must first meet the $100 Part B 
deductible before the program will begin making payments. Beneficiaries 
are then subject to coinsurance which equals 20% of Medicare's approved 
amount. Certain Part B services, such as home health care and some 
preventive services, are exempt from the deductible and/or coinsurance 
requirements. On the other hand, mental health services are subject to 
50% cost sharing. Beneficiaries using hospital outpatient services pay 
a fixed amount which varies by service category; this fixed amount is 
often substantially more than 20% of the approved payment for the 
service under the new outpatient prospective payment system.
    There are a number of differences between Medicare's cost-sharing 
structure and that available to the under-65 population under private 
employer-based plans. Perhaps the most significant difference is that 
private plans typically have an annual limit on out-of-pocket 
expenses--sometimes referred to as a catastrophic cap. In contrast, 
Medicare has no upper limit on cost-sharing charges.
    Another key feature of the private insurance market is that over 
90% of the under 65 population is enrolled in a managed care 
arrangement compared to only 15% of the Medicare population. These 
managed care arrangements typically have simpler cost-sharing 
structures. Many of the under-65 population are enrolled in preferred 
provider plans. Individuals in these plans have lower cost-sharing 
charges when they use specific network providers and higher cost-
sharing when they use out-of-network providers. These preferred 
provider arrangements are not available to the fee-for-service Medicare 
population.
    Several other observations can be made about Medicare's cost-
sharing. While the dollar amounts have changed, the structure is 
virtually unchanged from that in effect when the program went into 
effect in 1966. For example, the concept of a spell of illness was part 
of the original legislation. The Congress did enact legislation in 
1988, the Medicare Catastrophic Coverage Act, which would have 
significantly modified current requirements. One of the key features of 
that legislation was the addition of an annual limit on Part B out-of-
pocket spending. However, as you know, this legislation was repealed 
the following year.
    Medicare Part B cost-sharing applies to a broader range of services 
than when the program first went into effect. This istrue for two 
reasons. Medicare Part B now covers a number of additional services. It 
also pays directly for some practitioner services previously covered 
indirectly under other service categories.
    I should note that the preceding discussion has focused on 
beneficiary liability in connection with their use of Medicare 
services. Unlike the under-age 65 population, most Medicare 
beneficiaries have a second source of health insurance coverage. This 
supplementary coverage typically covers some or all of Medicare's cost 
sharing charges, thus further complicating the picture. As a result of 
supplementary insurance, beneficiaries may not actually incur out-of-
pocket costs at the time they use covered services.
    I should also note that this discussion only focuses on cost-
sharing charges for Medicare-covered services. It does not address 
expenses beneficiaries may have for non-covered services. As you know 
Medicare does not cover certain items such as hearing aids and 
dentures. It also provides very limited coverage for some other 
services such as outpatient prescription drugs and long-term care. As a 
result, Medicare covers only about half of a beneficiary's health care 
bill.

     COMPARISON OF MEDICARE COST-SHARING AND BENEFITS--1966 AND 2001
------------------------------------------------------------------------
                                         1966                2001
------------------------------------------------------------------------
Part A

Inpatient Hospital Services.....  Coverage up to 90   Same except:
                                   days in each       --2001 deductible
                                   spell of illness:.  is $792 and daily
                                  --Days 1-60:         coinsurance is
                                   deductible ($40     $198.
                                   in 1966).          60 lifetime
                                  --Days 61-90:        reserve days:
                                   daily coinsurance   daily coinsurance
                                   equal to \1/4\ of   equal to \1/2\ of
                                   deductible ($10     hospital
                                   in 1966).           deductible ($396
                                  No lifetime          in 2001).
                                   reserve days.      [Deductible set at
                                  [Deductible based    $520 in 1987. It
                                   on average per      is updated each
                                   diem rate for       year based on the
                                   inpatient           applicable
                                   services.].         percentage
                                                       increase used for
                                                       Medicare's
                                                       prospective
                                                       payment rates,
                                                       adjusted to
                                                       reflect changes
                                                       in real case
                                                       mix.]

Inpatient psychiatric hospital    Maximum 190 days    Same.
 services.                         per lifetime
                                   (covered as part
                                   of inpatient
                                   hospital benefit).

Skilled Nursing Facility (SNF)    Maximum of 100      Same except daily
 Services.                         post-hospital       coinsurance is
                                   days per spell of   $99 in 2001.
                                   illness:.
                                  --Days 1-20: No
                                   coinsurance.
                                  --Days 21-100:
                                   daily coinsurance
                                   equal to \1/8\
                                   hospital
                                   deductible ($5 in
                                   1967--first year
                                   benefit in
                                   effect).

Hospice Services................  Not covered.......  Covered for
                                                       terminally ill
                                                       beneficiaries
                                                       with life
                                                       expectancy of 6
                                                       months or less.
                                                       Limited cost-
                                                       sharing for drugs
                                                       and respite care.

Blood deductible................  Covered all but     Same, except
                                   cost of first       waived if blood
                                   three pints in      replaced. [Any
                                   spell of illness.   deductible
                                                       required under
                                                       Part A or B
                                                       offsets
                                                       requirements
                                                       under other
                                                       Part.]

Part B

In General

Part B Premium..................  Set in law to       Set in law to
                                   cover 50% of        cover 25% of
                                   program costs       program costs
                                   ($3.00/month        ($50 a month in
                                   1966).              2001).

Deductible......................  $50...............  $100.

Blood deductible................  No provision......  Medicare covers
                                                       80% of approved
                                                       amount after
                                                       beneficiary pays
                                                       (or replaces)
                                                       first 3 pints per
                                                       year. [Any
                                                       deductible
                                                       required under
                                                       Part A or B
                                                       offsets
                                                       requirements
                                                       under other
                                                       Part.]

Services

Physicians......................  Services provided   Services provided
                                   by doctors of       by doctors of
                                   medicine and        medicine and
                                   osteopathy, and,    osteopathy, and,
                                   under limited       under limited
                                   circumstances,      circumstances,
                                   dentists. Covered   dentists. Also
                                   for 80% of          specific services
                                   reasonable          provided by
                                   charges;            doctors of
                                   beneficiary pays    optometry,
                                   20%.                podiatry, and
                                                       chiropractic.
                                                       Covered for 80%
                                                       of fee schedule;
                                                       beneficiary pays
                                                       20%.

Non-physician Practitioners.....  Not paid directly.  Services provided
                                                       by physician
                                                       assistants, nurse
                                                       practitioners,
                                                       clinical nurse
                                                       specialists,
                                                       clinical social
                                                       workers,
                                                       psychologists,
                                                       certified
                                                       registered nurse
                                                       anesthetists, and
                                                       certified nurse
                                                       midwives. Covered
                                                       for 80% of
                                                       approved amount;
                                                       beneficiary pays
                                                       20%.

Physical Therapists, and          Not paid directly.  Services provided
 Occupational Therapists.                              by therapists in
                                                       independent
                                                       practice. Covered
                                                       for 80% of
                                                       approved amount;
                                                       beneficiary pays
                                                       20%.

Durable Medical Equipment.......  Rentals covered     Rental or purchase
                                   for 80% of          covered for 80%
                                   approved amount;    of approved fee
                                   beneficiary pays    schedule amount;
                                   20%.                beneficiary pays
                                                       20%.

Prosthetic devices..............  Covered for 80% of  Same, except
                                   approved amount;    coverage for
                                   beneficiary pays    orthotics added.
                                   20%.                Covered for 80%
                                                       of approved fee
                                                       schedule amount;
                                                       beneficiary pays
                                                       20%.

Outpatient Mental Health          Limited to the      Limited to 50% of
 Treatment.                        lesser of $250 or   fee schedule
                                   50% of approved     amount;
                                   amount;             beneficiary pays
                                   beneficiary pays    50%.
                                   remainder.

Partial Hospitalization Services  Not covered.......  Covered for 80% of
 for Mental Illness.                                   approved amount;
                                                       beneficiary pays
                                                       20%.

Outpatient Hospital Services      Covered for 80% of  Covered under Part
 (excludes services which are      approved amount;    B. Beneficiary
 paid under another service        beneficiary         pays fixed amount
 category).                        liable for 20% of   which varies by
                                   charges.            service category;
                                  Diagnostic           Medicare pays the
                                   services covered    remainder.
                                   for 80% of
                                   approved amount
                                   under Part A
                                   after beneficiary
                                   met deductible
                                   equal to \1/2\ of
                                   Part A deductible
                                   ($20 in 1966).

Clinical Laboratory Services....  Covered for 80% of  Covered for 100%
                                   approved amount;    of fee schedule
                                   beneficiary pays    amount. No cost-
                                   20%.                sharing.

Comprehensive Outpatient          No provision......  Covered for 80% of
 Rehabilitation Facility (CORF)                        approved amount;
 Services.                                             beneficiary pays
                                                       20%.

Ambulatory Surgical Center (ASC)  No provision......  Covered for 80% of
 Services.                                             approved amount;
                                                       beneficiary pays
                                                       20%.

Ambulance Services..............  Covered for 80% of  Same.
                                   approved amount;
                                   beneficiary pays
                                   20%.

Benefit Category
Outpatient Prescription Drugs...  Coverage limited    Same, except
                                   to drugs and        coverage also
                                   biologicals which   provided for:
                                   are not self-      --immunosuppressiv
                                   administered and    e drugs following
                                   are incident to     a covered organ
                                   physicians          transplant;
                                   services. Covered  --erythropoietin
                                   for 80% of          for treatment of
                                   approved amounts;   anemia for
                                   beneficiary pays    persons with
                                   20%.                chronic renal
                                                       failure;
                                                      --oral anti-cancer
                                                       drugs comparable
                                                       to chemotherapy
                                                       drugs which would
                                                       be covered if
                                                       they were not
                                                       self-
                                                       administered; and
                                                      --hemophilia
                                                       clotting factors.

Immunizations...................  Not covered.......  Vaccine coverage
                                                       for influenza,
                                                       pneumococcal
                                                       pneumonia, and
                                                       Hepatitis B. No
                                                       cost-sharing for
                                                       influenza and
                                                       pneumococcal
                                                       pneumonia.

Screening mammography...........  Not covered.......  Pays up to limit
                                                       ($69.23 in 2001)
                                                       for exam.
                                                       Beginning 1/1/
                                                       2002 paid under
                                                       physician fee
                                                       schedule.
                                                       Beneficiary pays
                                                       20%. Deductible
                                                       waived.

Screening pap smear.............  Not covered.......  Covered, generally
                                                       at 3-year
                                                       intervals (2-year
                                                       intervals
                                                       beginning 7/1/
                                                       2001), for 100%
                                                       of approved
                                                       amount.

Colorectal screening............  Not covered.......  Covered for 80% of
                                                       approved amounts
                                                       according to
                                                       periodicity
                                                       schedule;
                                                       beneficiary pays
                                                       20%. (No
                                                       coinsurance for
                                                       fecal occult
                                                       blood test.
                                                       Coinsurance is
                                                       25% if service
                                                       performed in
                                                       ambulatory
                                                       surgical center
                                                       or hospital
                                                       outpatient
                                                       department.)

Diabetes self-management          Not covered.......  Covered for 80% of
 training services.                                    approved amounts;
                                                       beneficiary pays
                                                       20%.

Bone Mass measurement...........  Not covered.......  Covered for 80% of
                                                       approved amounts
                                                       for high risk
                                                       persons;
                                                       beneficiary pays
                                                       20%.

Prostate screening exam.........  Not covered.......  Covered for 80% of
                                                       approved amounts
                                                       for digital
                                                       rectal exam;
                                                       beneficiary pays
                                                       20%. No cost-
                                                       sharing for
                                                       prostate specific
                                                       antigen test.

Parts A and B

Home Health Services............  Part A: Maximum of  Covered for those
                                   100 post-hospital   who need it on an
                                   visits. Covered     intermittent
                                   for 100% of         basis without
                                   approved amount.    visit
                                  Part B: Maximum of   limitations,
                                   100 visits per      coinsurance, or
                                   year (with no       deductibles. Over
                                   prior               1998-2003 period,
                                   hospitalization     home health
                                   requirement)--cov   visits that are
                                   ered for 80% of     not part of the
                                   approved amount.    first 100 visits
                                                       following a
                                                       hospital or SNF
                                                       stay are being
                                                       transferred from
                                                       Part A to Part B.

End Stage Renal Disease (ESRD)..  Not covered.......  Services for ESRD
                                                       patients are
                                                       covered under
                                                       Part A and B, as
                                                       appropriate. For
                                                       example,
                                                       transplants are
                                                       covered as Part A
                                                       inpatient
                                                       hospital services
                                                       and Part B
                                                       physicians
                                                       services.
                                                       Dialysis is
                                                       generally covered
                                                       under Part B.
------------------------------------------------------------------------

                                


    Chairwoman Johnson. Thank you.
    Dr. Scanlon.

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

    Dr. Scanlon. Thank you very much, Madam Chairwoman and Mr. 
Stark and Subcommittee members.
    I am very pleased to be here today as you continue to 
consider the need to modernize and strengthen Medicare and 
particularly as you look into the area of beneficiary cost 
sharing.
    Medicare provides valuable and extensive coverage, but it 
has not kept pace with the changing health care needs and 
private insurance practices of today. Essentially, there are 
two issues with cost sharing for Medicare beneficiaries. First, 
Medicare does not provide genuine insurance; that is, 
protection from catastrophe. Gaps in Medicare's benefit 
package, such as the lack of prescription drug coverage as well 
as required copayments for covered services, can contribute to 
substantial financial burdens for beneficiaries.
    Second, how that deficiency has been addressed, namely 
through most beneficiaries having some form of supplemental 
insurance, creates additional issues. Of particular concern are 
Medigap policies which can be expensive, not offer 
comprehensive protection, and increase use of potentially 
discretionary services.
    I would like to summarize some of the information on those 
two points from my written statement before you today. Health 
insurers commonly include cost-sharing provisions in their 
policies to make beneficiaries aware of cost. The goal is to 
encourage prudent use of services that may be discretionary and 
at the same time avoid creating financial barriers to necessary 
care.
    Medicare cost-sharing rules diverge from these practices in 
important ways. While Medicare's cost-sharing requirements can 
be substantial, they are not designed well to discourage 
unnecessary use of services. Given the example that you gave, 
Madam Chairman, Medicare imposes a relatively high deductible 
for hospital stays and nocoverage for extremely long stays, 
which are rarely optional. In contrast, it requires no cost sharing for 
home health care where utilization has been seen to vary widely raising 
concerns about the appropriateness of use.
    Meanwhile, the lack of a cost-sharing limit on Medicare-
covered services can leave beneficiaries with extensive health 
care needs liable for very large expenses. Employer-sponsored 
plans, as Ms. O'Sullivan indicated, typically limit out-of-
pocket costs to less than $2,000 per year, but many Medicare 
beneficiaries pay much more than that. In 1997, more than 3.4 
million were liable for more than $2,000 on covered services, 
and approximately 750,000 were liable for more than $5,000.
    In addition, uncovered services like prescription drugs add 
to Medicare's beneficiaries' financial risk. On average, 
beneficiaries were estimated to spend about $3,100, or 22 
percent of their incomes, on total out-of-pocket expenses, and 
this is excluding long-term care in the year 2000. Those in 
poor health without Medicaid or supplemental coverage spent 44 
percent of their incomes.
    Most beneficiaries do have supplemental coverage, however. 
Some get it from former employers, Medicare Plus Choice plans, 
or State Medicaid programs. However, Medigap is the only 
supplemental coverage available to all elderly Medicare 
beneficiaries, and more than one-fourth have purchased a 
Medigap policy.
    Medigap itself, though, is problematic. These policies can 
be expensive. Annual premiums average more than $1,300. 
Premiums for plans offering drug coverage are about $400 more 
and are rising rapidly.
    In the last year alone, these premiums increased 17 to 34 
percent for the three types of plan that offer drug coverage. 
Premiums vary widely also across geographic areas and insurers. 
For example, in Massachusetts, premiums average 45 percent more 
than the national average.
    Many policies have premiums that rise with the purchaser's 
age. In addition, individuals in poor health can find policies 
difficult to obtain or expensive as many insurers screen 
purchasers' for poor health status. Guaranteed access is only 
assured for that short period that generally follows initial 
enrollment into Part B.
    Despite their high costs, Medigap policies do not fully 
protect beneficiaries. Medigap prescription drug coverage, in 
particular, can be inadequate because policies have relatively 
low caps on how much is covered and require beneficiaries to 
pay most of the cost of their drugs.
    In addition, there is concern about Medigap's so-called 
first dollar coverage that eliminates beneficiary liability for 
deductibles, copayments, and coinsurance. Employer-sponsored 
supplemental policies in Medicare Plus Choice plans typically 
reduce such liabilities, but do not offer first dollar 
coverage. First dollar coverage undermines the objective of 
Medicare's cost-sharing requirements to promote prudent use of 
services. As a result, some services may be overused, 
ultimately increasing cost for both the beneficiary and the 
program.
    I would end by saying as you continue to consider how to 
modernize and to reform Medicare, focusing on beneficiaries' 
financial liabilities and risks is very important. 
Reconsideration of coverage in cost-sharing policies, while 
difficult, both within the Medicare program and with any 
supplemental options that may be available could improve 
coverage for beneficiaries and the financial health of the 
program.
    Thank you very much, Madam Chairwoman. I would be happy to 
answer any questions you or members of the Subcommittee may 
have.
    [The prepared statement of Dr. Scanlon follows:]
 Statement of William J. Scanlon, Ph.D., Director, Health Care Issues, 
                     U.S. General Accounting Office
    I am pleased to be here today as you consider the need to modernize 
and strengthen the Medicare program and review the role of supplemental 
``Medigap'' policies that many seniors buy to help improve their 
Medicare coverage. Medicare provides valuable and extensive coverage 
for beneficiaries' health care needs. Nevertheless, recent discussions 
have underscored the significant gaps that leave some beneficiaries 
vulnerable to sizeable financial burdens from out-of-pocket costs. Most 
beneficiaries have additional supplemental coverage that helps to fill 
Medicare's coverage gaps and pay some out-of-pocket expenses. Privately 
purchased Medigap is an important source of this supplemental coverage 
because it is widely available to beneficiaries. The other sources--
employer-sponsored policies, Medicare+Choice plans, and Medicaid 
programs--are not available to all beneficiaries. However, concerns 
exist that supplemental coverage can be expensive and may undermine the 
legitimate role of cost sharing in a health insurance plan--to 
encourage cost-effective use of services.
    To assist the Subcommittee as it considers proposals to improve 
coverage for beneficiaries and the financial health of the Medicare 
program, my remarks today focus on the design of Medicare's benefit 
package and the role of private supplemental coverage. Specifically, I 
will discuss (1) beneficiaries' potential financial liability under 
Medicare's current benefit structure and cost-sharing requirements, (2) 
the cost of Medigap policies and the extent to which they provide 
additional coverage, and (3) concerns that Medigap's so-called ``first 
dollar'' coverage undermines the cost control incentives of Medicare's 
cost-sharing requirements. My comments are based on our prior and 
ongoing work \1\ on Medicare and Medigap as well as other published 
research.
---------------------------------------------------------------------------
    \1\ The Consolidated Appropriations Act of 2000 mandated that we 
report to the Congress by July 2001 on various aspects of Medigap 
coverage.
---------------------------------------------------------------------------
    In summary, Medicare's benefits package and cost-sharing 
requirements leave beneficiaries liable for high out-of-pocket costs. 
As currently structured, Medicare provides no limit on out-of-pocket 
spending and no coverage for most outpatient prescription drugs--a 
component of medical care that is of growing importance in treatment 
and rapidly increasing in cost. At the same time, Medicare's cost-
sharing requirements are poorly targeted and fail to promote prudent 
use of services.
    Medigap policies that many Medicare beneficiaries purchase help to 
fill in some of Medicare's gaps but are themselves problematic. 
Premiums paid for Medigap policies averaged $1,300 in 1999, with 20 
percent going to administrative costs. While these policies pay for 
some or all Medicare cost-sharing requirements, they do not fully 
protect beneficiaries from potentially significant out-of-pocket costs. 
In particular, some Medigap policies offer prescription drug coverage, 
however, this coverage can be inadequate because beneficiaries still 
pay most of the cost and the maximum Medigap benefit is capped. In 
addition, Medigap first-dollar coverage eliminates the effect 
Medicare's cost-sharing requirements could have to promote prudent use 
of services. The danger is that some services may be overused--
ultimately increasing costs for beneficiaries and the Medicare program.
BACKGROUND
    Individuals who are eligible for Medicare automatically receive 
Hospital Insurance (HI), known as Part A, which helps pay for inpatient 
hospital, skilled nursing facility, hospice, and certain home health 
care services. Beneficiaries pay no premium for this coverage but are 
liable for required deductibles, coinsurance, and copayment amounts. 
(See table 1.) Medicare eligible beneficiaries may elect to purchase 
Supplementary Medical Insurance (SMI), known as Part B, which helps pay 
for selected physician, outpatient hospital, laboratory, and other 
services. Beneficiaries must pay a premium for Part B coverage, 
currently $50 per month.\2\ Beneficiaries are also responsible for Part 
B deductibles, coinsurance, and copayments.
---------------------------------------------------------------------------
    \2\ The premium amount is adjusted each year so that expected 
premium revenues equal 25 percent of expected Part B spending.

    Table 1: Medicare Coverage and Beneficiary Cost-Sharing for 2001
------------------------------------------------------------------------
                                               Beneficiary copayments,
                                                  coinsurance, and
                                                    deductibles:
------------------------------------------------------------------------
Part A Coverage:
Inpatient hospital........................  $792 deductible per
                                             admission.a
                                            $198 copayment per day for
                                             days 61-90.
                                            $396 copayment per day for
                                             days 91-150.
                                            All costs beyond 150 days.
Skilled nursing facility..................  No cost sharing for first 20
                                             days.
                                            $99 copayment or less for
                                             days 21-100.
                                            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.
Blood.....................................  Cost of first 3 pints.
Part B Coverage: b
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.
Blood.....................................  Cost of first 3 pints.
                                            20 percent coinsurance for
                                             additional pints.
------------------------------------------------------------------------
a 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.
b 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, Health Care Financing Administration. Most
  Medicare beneficiaries have some type of supplemental coverage to help
  pay for Medicare cost-sharing requirements as well as some benefits
  not covered by Medicare. They obtain this coverage either through
  employers, Medicare+Choice plans, state Medicaid programs, or Medigap
  policies sold by private insurers.

    About one-third of Medicare's 39 million beneficiaries have 
employer-sponsored supplemental coverage. These benefits typically pay 
for some or all of the costs not covered by Medicare, such as 
coinsurance, deductibles, and prescription drugs. However, many 
beneficiaries do not have access to employer-sponsored coverage. A 
recent survey found that more than 70 percent of large employers with 
at least 500 employees did not offer these health benefits to Medicare-
eligible retirees.\3\ Small employers are even less likely to offer 
retiree health benefits.
---------------------------------------------------------------------------
    \3\ Mercer/Foster Higgins National Survey of Employer-sponsored 
Health Plans 2000 William M. Mercer, Incorporated (New York, New York).
---------------------------------------------------------------------------
    Approximately 15 percent of Medicare beneficiaries enroll in 
Medicare+Choice plans, which include healthmaintenance organizations 
and other private insurers who are paid a set amount each month to 
provide all Medicare-covered services. These plans 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. However, Medicare+Choice plans are not 
available in all parts of the country. As of February 2001, about a 
third of all beneficiaries lived in counties where no Medicare+Choice 
plans were offered.
    About 17 percent of Medicare beneficiaries receive assistance from 
Medicaid, the federal-state health financing program for low-income 
aged and disabled individuals. All Medicare beneficiaries with incomes 
below the federal poverty level can have their Medicare premiums and 
cost sharing paid for by Medicaid. Beneficiaries with incomes slightly 
above the poverty level may have all or part of their Medicare premium 
paid for by Medicaid. Also, some low-income individuals may be entitled 
to full Medicaid benefits (so called ``dual eligibles''), which include 
coverage for certain services not available through Medicare, such as 
outpatient prescription drugs. However, the income level at which 
beneficiaries qualify for full Medicaid benefits varies, as determined 
by each state, and many Medicare beneficiaries with low incomes may not 
qualify.\4\
---------------------------------------------------------------------------
    \4\ In addition, many low-income beneficiaries who are eligible for 
Medicaid and other federal/state programs to provide assistance with 
premiums and cost-sharing requirements may not enroll, in part due to 
limited awareness of these programs and the administrative complexity 
of demonstrating eligibility. See Low-Income Medicare Beneficiaries: 
Further Outreach and Administrative Simplification Could Increase 
Enrollment (GAO/HEHS-99-61, April 9, 1999). Aiming to increase 
awareness and enrollment in these programs, the Medicare, Medicaid, and 
SCHIP Benefits Improvement and Protection Act of 2000 directed the 
Social Security Administration to identify and notify potentially 
eligible individuals and the Department of Health and Human Services to 
develop and distribute to states a simplified uniform enrollment 
application.
---------------------------------------------------------------------------
    Medigap is the only supplemental coverage option available to all 
beneficiaries when the initially enroll in Medicare at age 65 or older. 
Medigap policies are offered by private insurance companies in 
accordance with state and federal insurance regulations. In 1999, more 
than 10 million individuals--more than one-fourth of all 
beneficiaries--were covered by Medigap policies.\5\ The Omnibus Budget 
Reconciliation Act (OBRA) of 1990 \6\ required that Medigap policies be 
standardized and allowed a maximum of 10 different benefit packages 
offering varying levels of supplemental coverage to be provided. All 
policies sold since July 31, 1992 have offered one of the 10 
standardized packages, known as plans A through J. (See table 2.) 
Policies sold prior to August 1992 were not required to comply with the 
standard benefit package requirements.
---------------------------------------------------------------------------
    \5\ The National Association of Insurance Commissioners reports 
that Medigap enrollment has declined from about 14 million in 1994.
    \6\P. L. 101-508, Nov. 5, 1990.

                                               Table 2: Benefits Covered by Standardized Medigap Policies
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      Benefits                         Plan A    Plan B    Plan C    Plan D    Plan E   Plan F a   Plan G    Plan H    Plan I   Plan J a
--------------------------------------------------------------------------------------------------------------------------------------------------------
Coverage for........................................        X         X         X         X         X         X         X         X         X         X
     Part A coinsurance
     365 additional hospital days during
     lifetime
     Part B coinsurance
     Blood products
Skilled nursing facility coinsurance................                            X         X         X         X         X         X         X         X
Part A deductible...................................                  X         X         X         X         X         X         X         X         X
Part B deductible...................................                            X                             X                                       X
Part B balance billing b............................                                                          X         X                   X         X
Foreign travel emergency............................                            X         X         X         X         X         X         X         X
Home health care....................................                                      X                             X                   X         X
Prescription drugs..................................                                                                            X c       X c       X d
Preventive medical care.............................                                                X                                                 X
--------------------------------------------------------------------------------------------------------------------------------------------------------
a Plans F and J also have a high deductible option of $1,580, under which beneficiaries also pay deductibles for prescriptions ($250 per year for Plan
  J) and foreign travel emergency ($250 per year for Plans F and J).
b Some providers do not accept the Medicare rate as payment in full and ``balance bill'' beneficiaries for additional amounts that can be no more than
  15 percent higher than the Medicare payment rate. Plan G pays 80 percent of balance billing; Plans F, I, and J cover 100 percent of these charges.
c Plans H and I pay 50 percent of drug charges up to $1,250 per year and have a $250 annual deductible.
d Plan J pays 50 percent of drug charges up to $3,000 per year and has a $250 annual deductible.
Source: HCFA 2001 Guide to Health Insurance for People with Medicare. Note: This chart does not apply in Massachusetts, Minnesota, and Wisconsin, where
  alternative standards exist.

    Under OBRA 1990, Medicare beneficiaries are guaranteed access to 
Medigap policies within 6 months of enrolling in Part B regardless of 
their health status. Subsequent laws have added guarantees for certain 
other beneficiaries. Beneficiaries who either terminated their Medigap 
policy to join a Medicare+Choice plan or enrolled in a Medicare+Choice 
plan when first becoming eligible for Medicare and then leave the plan 
within one year are also guaranteed access to any Medigap policy. Also, 
individuals whose employers eliminate retiree benefits or whose 
Medicare+Choice plans leave the program or stop serving their areas are 
guaranteed access to 4 of the 10 standardized Medigap policies (plans 
A, B, C, and F) but none of the policies that include prescription drug 
coverage.\7\ Otherwise, insurers can either deny coverage or charge 
higher premiums to beneficiaries who are older or in poorer health.
---------------------------------------------------------------------------
    \7\ These protections were added by section 4003 of the Balanced 
Budget Act of 1997 (P.L. 105-33, 111 Stat. 330). In addition to these 
federal protections, 21 states provide for additional Medigap 
protections.
---------------------------------------------------------------------------
MEDICARE COST-SHARING REQUIREMENTS AND BENEFIT DESIGN ARE OUT OF STEP 
        WITH CURRENT PRIVATE SECTOR PRACTICES
    Medicare's 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 cost-sharing 
requirements are not well designed to discourage unnecessary use of 
services. At the same time, they can create financial barriers to care. 
In addition, the lack of a cost-sharing limit can leave some 
beneficiaries with extensive health care needs liable for very large 
Medicare expenses. Moreover, gaps in Medicare's benefit package can 
contribute to substantial financial burdens on beneficiaries who lack 
supplemental insurance or Medicaid coverage.
Medicare's Cost-Sharing Requirements Not Well Structured
    Health insurers commonly design cost-sharing provisions--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. Optimal cost-
sharing designs would generally require coinsurance or copayments 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 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 Medicare+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 1, Medicare imposes a relatively high deductible 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.\8\ 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.
---------------------------------------------------------------------------
    \8\ See Medicare Home Health Care: Prospective Payment System Will 
Need Refinement as Data Become Available (GAO/HEHS-00-9, Apr. 2000).
---------------------------------------------------------------------------
Medicare Does Not Limit Beneficiaries' Cost-Sharing Liability
    Also unlike most employer-sponsored plans for active workers, 
Medicare does not limit beneficiaries' cost-sharing liability, which 
can represent a significant share of their personal resources. 
Premiums, deductibles, coinsurance, and copayments that beneficiaries 
are required to pay for services that Medicare covers equaled an 
estimated 23 percent of total Medicare expenditures in 2000. The 
average beneficiary who obtained services in 1997 had a total liability 
of $1,451, consisting of $925 in Medicare copayments and deductibles in 
addition to the $526 in annual Part B premiums required that year.
    The burden of Medicare cost sharing can be much higher, however, 
for beneficiaries with extensive health care needs. In 1997, the most 
current year of available data on the distribution of these costs, 
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. In contrast, private employer-
sponsored health plans typically limit maximum annual out-of-pocket 
costs for covered services to less than $2,000 per year for single 
coverage.\9\
---------------------------------------------------------------------------
    \9\ The Kaiser Family Foundation and Health Research and 
Educational Trust, Employer Health Benefits: 2000 Annual Survey.
---------------------------------------------------------------------------
Cost of Uncovered Services Adds to Beneficiaries' Financial Burden
    Medicare does not cover some services that are commonly included in 
private insurers' benefit packages. The most notable omission in 
Medicare's benefit package is coverage for outpatient prescription 
drugs. This benefit is available to most active workers enrolled in 
employer-sponsored plans. More than 95 percent of private employer-
sponsored health plans for active workers cover prescription drugs, 
typically providing comprehensive coverage with relatively low cost-
sharing requirements.
    Current estimates suggest that the combination of Medicare's cost-
sharing requirements and limited benefits leaves about 45 percent of 
beneficiaries' health care costs uncovered. The average beneficiary in 
2000 is estimated to have incurred about $3,100 in out-of-pocket 
expenses for health care--an amount equal to about 22 percent of the 
average beneficiary's income.\10\
---------------------------------------------------------------------------
    \10\ Stephanie Maxwell, Marilyn Moon, and Mesha Segal, Growth in 
Medicare and Out-Of-Pocket Spending: Impact on Vulnerable 
Beneficiaries, (Urban Institute, Dec. 2000).
---------------------------------------------------------------------------
    Some beneficiaries potentially face much greater financial burdens 
for health care expenses. For example, elderly beneficiaries in poor 
health and with no Medicaid or supplemental insurance coverage are 
estimated to have spent 44 percent of their incomes on health care in 
2000. 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.\11\ These 
percentages are expected to increase over time as Medicare premiums and 
costs for prescription drugs and other health care goods and services 
rise faster than incomes.
---------------------------------------------------------------------------
    \11\ Maxwell, Moon, and Segal.
---------------------------------------------------------------------------
MEDIGAP POLICIES ADDRESS SOME MEDICARE SHORTCOMINGS BUT ARE EXPENSIVE
    While more than one-fourth of beneficiaries have Medigap policies 
to fill Medicare coverage gaps, these policies can be expensive and 
provide only limited protection from catastrophic expenses. Medigap 
drug coverage in particular offers only limited protection because of 
high cost sharing and low coverage caps.
Medigap Fills Some Needs
    More than 10 million Medicare beneficiaries have Medigap policies 
to cover some potentially high costs that Medicare does not pay, 
including cost-sharing requirements, extended hospitalizations, and 
some prescription drug expenses. By offering a choice among 
standardized plans, beneficiaries can match their coverage needs and 
financial resources with plan coverage. Medigap policies are widely 
available to beneficiaries including those who are not eligible for or 
do not have access to other insurance to supplement Medicare, such as 
Medicaid or employer-sponsored retiree benefits. In fact, most Medicare 
beneficiaries who do not otherwise have employer-sponsored supplemental 
coverage, Medicaid, or Medicare+Choice plans purchase a Medigap policy, 
demonstrating the value of this coverage to the Medicare population.
Medigap Policies Can Have High Cost
    Medigap policies can be expensive. The average annual Medigap 
premium was more than $1,300 in 1999. Premiums varied widely based on 
the level of coverage purchased. Plan A, which provides the fewest 
benefits, was the least expensive with average premiums paid of nearly 
$900 per year. The most popular plans--C and F--had average premiums 
paid of about $1,200. The most comprehensive plans--I and J--were the 
most expensive, with average premiums paid around $1,700. (See table 
3.)

 Table 3: Distribution of Medigap Plans and Annual Premiums Per Covered
                               Life, 1999
------------------------------------------------------------------------
                                                               Average
                                                                annual
                                                  Covered      premium
                 Medigap plan                      lives      earned per
                                               (percentage)    covered
                                                                 life
------------------------------------------------------------------------
A............................................  ............         $877
B............................................           8.0       $1,093
C............................................          15.9       $1,151
D............................................           3.8       $1,032
E............................................           1.5       $1,067
F............................................          23.4       $1,217
G............................................           1.5         $980
H............................................           1.5       $1,379
I............................................           1.5       $1,704
J............................................           2.7       $1,669
Pre-standard (policies originally sold before          32.9       $1,573
 July 1992)..................................
Plans in states exempt from plan standardsa..           4.5       $1,405
Total b......................................         100.0       $1,322
------------------------------------------------------------------------
a Massachusetts, Minnesota, and Wisconsin have alternative plans in
  effect and waivers that exempt them from selling the national standard
  Medigap plans.
b Data reported by insurers to the National Association of Insurance
  Commissioners (NAIC) do not include plan type for policies
  representing less than 9 percent of Medigap policy covered lives, with
  an average paid premium of $1,016. These plans are not included in the
  plan distribution or average premiums reported in the table.
Source: GAO analysis of data collected by the NAIC from the 1999
  Medicare Supplement Insurance Experience Exhibit.

    Premiums also vary widely across geographic areas and insurers. For 
example, average annual premiums in Massachusetts ($1,915) were 45 
percent higher than the national average. While varying average 
premiums may reflectgeographic differences in terms of use of Medicare 
and supplemental services and costs, beneficiaries in the same state 
may face widely varying premiums for a given plan type offered by 
different insurers. For example, in Nevada, plan A premiums for a 65-
year-old ranged from $446 to as much as $1,004, depending on the 
insurer. Similarly, in Florida, plan F premiums for a 65-year-old male 
ranged from $1,548 to $2,123; and in Maine, plan J premiums ranged from 
$2,697 to $3,612.\12\
---------------------------------------------------------------------------
    \12\ Premium quotes for policies available in 2000 and 2001 from 
most recently available state guides for consumers on Medigap policies.
---------------------------------------------------------------------------
    Medigap policies are becoming more expensive. One recent study 
reports that premiums for the three Medigap plan types offering 
prescription drug coverage (H, I, and J) have increased the most 
rapidly--by 17 to 34 percent in 2000. Medigap plans without 
prescription drug coverage rose by 4 to 10 percent in 2000.\13\
---------------------------------------------------------------------------
    \13\ Weiss Ratings, ``Prescription Drug Costs Boost Medigap 
Premiums Dramatically,'' March 26, 2001, at http://
www.weissratings.com/NewsReleases/Ins--Medigap/20010326Medigap.htm.
---------------------------------------------------------------------------
    A major reason premiums are high is that a large share of premium 
dollars are used for administrative costs rather than benefits. More 
than 20 cents from each Medigap premium dollar is spent for costs other 
than medical expenses, including administration. Administrative costs 
are high, in part, because nearly three-quarters of policies are sold 
to individuals rather than groups.\14\ The share of premiums spent on 
benefits varies significantly among carriers. The 15 largest sellers of 
Medigap policies spent between 64 and 88 percent of premiums on 
benefits in 1999. The share of premiums spent on benefits is lower for 
Medigap plans than either typical Medicare+Choice plans or health 
benefits for employees of large employers. Also, 98 percent of Medicare 
fee-for-service funds are used for benefits.
---------------------------------------------------------------------------
    \14\ Federal law requires Medigap plans to spend at least 65 
percent of premiums on benefits for policies sold to individuals, and 
75 percent for policies sold to groups.
---------------------------------------------------------------------------
Remaining Gaps Leave Beneficiaries at Significant Risk
    While Medigap policies cover some costs beneficiaries would 
otherwise pay out of pocket, Medigap policies have limits and can still 
leave beneficiaries exposed to significant out-of-pocket costs. Medigap 
prescription drug coverage in particular leaves beneficiaries exposed 
to substantial financial liability. Prescription drugs are of growing 
importance in medical treatment and one of the fastest growing 
components of health care costs. Medigap policies with a drug benefit 
are the most expensive yet the benefit offered can be of limited value 
to many beneficiaries. For example,
           Medigap policies offering drug coverage typically 
        cost much more than policies without drug coverage--the most 
        popular plan with prescription drug coverage (plan J) costs on 
        average $450 more than the most popular plan without drug 
        coverage (plan F)--although the benefit is at most $1,250 or 
        $3,000, depending on plan type, and
           under the Medigap plan with the most comprehensive 
        drug coverage, type J, a beneficiary would have to incur $6,250 
        in prescription drug costs to get the full $3,000 benefit, 
        because of the plan's deductible and coinsurance requirements.
    That may explain why more than 90 percent of beneficiaries with one 
of the standardized Medigap plans purchased standard Medigap plans that 
do not include drug benefits.\15\ Further, Medicare beneficiaries who 
do not purchase Medigap policies when they initially enroll in Part B 
at age 65 or older are not guaranteed access to the Medigap policies 
with prescription drug coverage in most states. Insurers may then 
either deny coverage or charge higher premiums, especially to Medicare 
beneficiaries with any adverse health conditions.
---------------------------------------------------------------------------
    \15\ While less is known about the benefits offered by 
prestandardized plans that were sold prior to 1992--representing about 
30 percent of Medigap enrollment in 1999--one expert estimated that 
most are likely to have some coverage for prescription drugs but that 
this coverage is even more limited than that offered by the 
standardized plans. See Deborah J. Chollet, Mathematica Policy Research 
Inc., ``Medigap Coverage for Prescription Drugs,'' Testimony before the 
U.S. Senate Committee on Finance, April 24, 2001.
---------------------------------------------------------------------------
    The Medigap standard prescription drug benefit differs greatly from 
that typically offered by employer-sponsored plans for active employees 
or Medicare-eligible retirees. The Medigap prescription drug benefit 
has a $250 deductible, requires 50 percent coinsurance, and is limited 
to $1,250 or $3,000 depending on the plan purchased. In contrast, 
employer-sponsored plans typically require small copayments of $8 to 
$20 or coinsurance of about 20 to 25 percent, depending on whether the 
enrollees purchase generic brands, those for which the plan has 
negotiated a price discount, or other drugs. Further, few employer-
sponsored health plans have separate deductibles or maximum annual 
benefits for prescription drugs. These plans may also offer enrollees 
access to discounted prices the plans have negotiated even when the 
beneficiary is paying the entire cost.
FIRST-DOLLAR COVERAGE THROUGH MEDIGAP DISTORTS MEDICARE'S COST CONTROL 
        FEATURES
    Even though Medicare's original design has been criticized as 
outmoded, it included various cost-sharing requirements intended to 
encourage prudent use of services. These requirements have also 
traditionally been features of private insurance. However, Medigap's 
first-dollar coverage--the elimination of any deductibles or 
coinsurance associated with the use of specific services--undermines 
this objective. All standard Medigap plans cover hospital and physician 
coinsurance, while nearly all beneficiaries with standardized Medigap 
plans purchase plans covering the full hospital deductible, and most 
purchase plans covering the full skilled nursing home coinsurance and 
Part B deductible. First-dollar coverage reduces financial barriers to 
health care, but it also diminishes beneficiaries' sensitivity to costs 
and could thus increase unnecessary service utilization and total 
Medicare program costs.
    A substantial body of research clearly indicates that Medicare 
spends more on beneficiaries with supplemental insurance relative to 
beneficiaries who have Medicare coverage only. For example, an analysis 
of 1993 and 1995 data found that Medicare per capita expenditures for 
beneficiaries with Medigap insurance were from $1,000 to $1,400 higher 
than for beneficiaries with Medicare only. Medicare per capita spending 
on beneficiaries with employer-sponsored plans was $700 to $900 higher 
than for beneficiaries with Medicare only.
    Some evidence suggests that first-dollar, or near first-dollar, 
coverage may partially be responsible for the higher spending. For 
example, one study found that beneficiaries with Medigap insurance use 
28 percent more medical services (outpatient visits and inpatient 
hospital days) relative to beneficiaries who did not have supplemental 
insurance, but were otherwise similar in terms of age, sex, income, 
education, and health status.\16\ Service use among beneficiaries with 
employer-sponsored supplemental insurance (which often reduces, but 
does not eliminate, cost sharing) was approximately 17 percent higher 
than the service use of beneficiaries with Medicare coverage only.
---------------------------------------------------------------------------
    \16\ ``Effects of Supplemental Coverage on Use of Services by 
Medicare Enrollees,'' Christensen and Shinogle, Health Care Financing 
Review, Fall 1997.
---------------------------------------------------------------------------
    Unlike Medigap policies, employer-sponsored supplemental insurance 
policies and Medicare+Choice plans typically reduce beneficiaries' 
financial liabilities but do not offer first-dollar coverage. Although 
there is a wide variety in design of employer-sponsored insurance 
plans, many retain cost-sharing provisions. Medicare+Choice plans also 
typically require copayments for most services. Moreover, unlike the 
traditional fee-for-service program, Medicare+Choice plans require 
referrals or prior authorization for certain services to minimize 
unnecessary utilization.
CONCLUDING OBSERVATIONS
    As Congress continues to consider proposals to reform Medicare, it 
is important to examine all facets of the program and how they relate 
to other coverage that beneficiaries may have. Current Medicare cost-
sharing provisions do not reflect common insurance practices that have 
evolved over time to promote prudent use and protect beneficiaries from 
catastrophic care costs. Medigap policies also fail to provide the 
comprehensive coverage needed by some beneficiaries. In addition, by 
offering first-dollar coverage, they may undermine incentives for 
prudent use of Medicare services. In light of how prevailing private 
sector coverage and practice have evolved, reconsideration of coverage 
and cost-sharing policies, both within the Medicare program and within 
any supplemental options that may be available, would be valuable to 
improve both coverage for beneficiaries and the financial health of the 
Medicare program.
    Madam Chairwoman, this concludes my statement. I would be happy to 
answer any questions that you or Members of the Subcommittee may have.
GAO CONTACTS AND STAFF ACKNOWLEDGMENTS
    For more information, regarding this testimony, please contact me 
or Laura Dummit at (202) 512-7114. Rashmi Agarwal, Susan Anthony, James 
Cosgrove, Paul Cotton, John Dicken, and Carmen Rivera-Lowitt also made 
key contributions to this statement.

                                


    Chairwoman Johnson. Thank you very much, Dr. Scanlon.
    Dr. Hogan.

   STATEMENT OF CHRISTOPHER HOGAN, PH.D., PRESIDENT, DIRECT 
                RESEARCH, LLC, VIENNA, VIRGINIA

    Dr. Hogan. Madam Chairwoman, Members of the Subcommittee, I 
am Christopher Hogan. I am an economist. I am an independent 
consultant in the area of health services research.
    I was invited here to deliver this message: Secondary 
insurance raises Medicare's cost substantially. For Medicare--
and I mean the tax-funded portion of Medicare--I estimate that 
the beneficiaries who have secondary insurance, such as Medigap 
or employer-sponsored insurance, cost the taxpayers about 
$1,000 a year more than those who do not, and that is after 
adjusting for their age and their income and their health 
status. That is my estimate. It is clearly a round number, but 
it is consistent with many other estimates of that impact, 
including estimates by the staff of your own Congressional 
Budget Office.
    In addition to raising the cost of the program, secondary 
insurance has another impact that is often overlooked in 
discussions of reforming the Medicare program. Coinsurance and 
deductibles no longer matter for determining service use for 
the 90 percent of beneficiaries who have secondary insurance. 
Let me say that again. Medicare's copayment and deductible 
structure is essentially irrelevant from an economic 
standpoint. It helps to determine beneficiaries' Medigap 
premiums, but it does not really affect them in any other way.
    From the beneficiary standpoint, you have to keep three 
things in mind. First, the people who do not have secondary 
coverage are poor. Second, those without secondary coverage use 
less of everything, including preventive care. Third, 
beneficiaries who have the money and have the opportunity seem 
to express a strong desire for first dollar coverage. At least 
that is my reading of the Medigap market. If you look at what 
they buy, there is little demand for catastrophic-only policies 
substantial willingness to pay top dollar for that first dollar 
coverage and strong evidence of little price-shopping on the 
part of beneficiaries.
    Let me sum it up. Secondary insurance costs the program a 
lot of money, but beneficiaries like it an awful lot. What are 
you going to do?
    Let me give you two thoughts that you may not hear from 
other sources. First, it would be completely actuarially fair 
to charge a lower Part B premium to the beneficiaries who do 
not have secondary coverage. They cost you $1,000 a head less. 
You charge them the same amount of money. That is kind of 
regressive considering these are poor people. It would be 
actuarially fair. It is probably a little bit difficult to 
administer, but it would be fair, as I say.
    Second, I wanted to bring an idea in front of you that was 
floated by, of all people, the American Medical Association 
back in the nineties, as a way of reintroducing economically 
effective copays and deductibles in the Medicare program, if 
you wanted to do that.
    What the AMA had suggested was essentially a prepaid 
refundable deductible for the Medicare Program. It is not 
insurance. It is not a subsidy. I will just give you the bare 
bones of it.
    You could ask beneficiaries to pay an additional amount 
every month. For the purposes of illustration, I have put forth 
a rather hefty amount, $80 a month; 80 times 12 is 960 bucks, 
you would be asking beneficiaries to pay to HCFA. Medicare 
would then pay the first $960 of copays and deductibles, no 
muss, no fuss, no secondary insurers, no paperwork. They would 
simply pay them. If a beneficiary did not use 960 bucks, 
Medicare would give them their money back, maybe with a nice 
note thanking them for the use of money over the year. 
Beneficiaries that used more than 960 bucks, those costs would 
be covered by the secondary insurers or not, as they are now. 
This was the only feasible way that I saw to introduce 
economically rational coinsurance in the Medicare Program, but 
not put the secondary insurers out of business. In effect, it 
would work like a little miniature medical savings account, not 
for all health care, not even for all the copays and 
deductibles, but for whatever portion of the copays and 
deductibles that you thought might be reasonable to ask 
beneficiaries to prepay.
    Let me summarize. Secondary insurance raises the program's 
costs substantially. It disconnects those financial levers that 
you call copay and deductible and makes them absolutely 
irrelevant to the typical beneficiary, but beneficiaries like 
to be fully insured and they will pay top dollar to become 
fully insured if they have the money to do it. Those who cannot 
afford to pay, well, they are poor, they are disadvantaged, and 
they use less of everything, including good services like 
preventive care.
    If you wanted to reintroduce economically important copays 
and deductibles, economically active copays and deductibles 
back into Medicare, the only thing I saw that would do that was 
this prepaid deductible notion. It is very difficult otherwise 
because whatever you do, secondary insurers fill in the copays 
and deductibles and make care free.
    If you want to consider this, that is great. If you do not 
and you want to have copays and deductibles that matter, you 
are going to have to restructure the secondary insurance market 
because your copayments and deductibles do not matter. They 
control that now.
    Thank you very much.
    [The prepared statement of Dr. Hogan follows:]
Statement of Christopher Hogan, Ph.D., President, Direct Research, LLC, 
                            Vienna, Virginia
    Madam Chairwoman and members of the subcommittee, my name is 
Christopher Hogan. I'm an economist familiar with the issues of 
coverage and cost in the Medicare program, having worked almost 10 
years on the staff of the Medicare Payment Advisory Commission and the 
Physician Payment Review Commission. Currently, I am an independent 
consultant in the area of health services research.
    I was asked to talk about the impact of secondary insurance on 
Medicare beneficiaries' use and cost of services. In the next five 
minutes, I'd like to make a few points about this, then sketch some 
possible policies you might pursue. First, I'd like to talk about the 
impact that secondary insurance has on Medicare program costs. Second, 
I'd like to talk about some of the beneficiary-oriented aspects of 
secondary insurance, including impact on use of care. Finally, I'd like 
to sketch out some potential policy directions you might consider in 
this area.
    The first fact for this discussion is that almost no one actually 
pays fee-for-service Medicare's copayment and deductible amounts in 
full. Analysts may quibble about the exact fraction of the Medicare 
population that has only fee-for-service Medicare and no secondary 
insurance, but everyone will agree that this fraction is small, on the 
order of 10 to 15 percent of all non-institutionalized Medicare 
beneficiaries. The rest have employer-sponsored coverage, individual 
purchase Medigap, Medicaid, Medicare+Choice, some other coverage or 
some combination of the above.
    Medigap plans by design typically provide first-dollar or very 
nearly first-dollar coverage, filling in those copayment amounts 
completely. Employer-sponsored coverage is more of a mixed bag and can 
be coordinated with Medicare in a variety of ways, but it is 
increasingly typical for employer-sponsored coverage to fill in only 
part of Medicare's copayment and deductible amounts. For example, 
beneficiary financial liability might be limited to the amounts that 
the employers' policy specifies for active workers.
    The second major point I would like to stress is that by filling in 
Medicare's copayments and deductibles, secondary insurance raises the 
costs of the Medicare program substantially. Common sense suggests that 
individuals are more likely to use care if it is free (although ``pre-
paid'' is a better description than ``free''). The empirical evidence 
of this effect is very solid. Numerous researchers using a variety of 
data sources, methods, populations, and time periods have all shown 
that removing deductibles and copayments from an unrestricted fee-for-
service health plan substantially increases health care use.
    This is not news. In addition to research stretching back at least 
as far as 1972, the impact of secondary insurance on Medicare program 
costs has been reported by legislative-branch agencies including the 
Congressional Budget Office and the Physician Payment Review 
Commission. In fact, the last few years of CBO Budget Options books 
have included options for restructuring Medicare's copayments and 
deductibles and for reducing the impact of secondary insurance on 
Medicare program costs.
    Even though there is no particular account or line-item labeled 
``additional Medicare spending due to secondary insurance'', the 
evidence is so strong that it is not really worth discussing whether or 
not secondary insurance raises Medicare's costs. Ask any actuary.
    We could have some reasonable disagreement on exactly how much the 
presence of secondary insurance adds to Medicare's costs. The estimates 
of impact are all based on statistical analyses, and I'm sure that some 
of you agree with Mark Twain's assessment of statisticians. On a more 
serious note, we can question whether the statistical analysis 
adequately controls for factors affecting spending, such as age, health 
status, income, education and the like. Most analyses of this issue 
suggest that beneficiaries with secondary insurance cost anywhere 
between 15 and 30 percent more than beneficiaries with no secondary 
insurance, after accounting for the factors listed above.
    In round numbers, an additional $1,000 per beneficiary per year is 
a good figure to use when discussing the magnitude of the effect of 
secondary insurance on the costs of the Medicare program. That's not 
very precise but it is about the right size, which I think correctly 
characterizes the literature on the effect of secondary insurance on 
Medicare costs.
    Most analyses also find that Medigap coverage raises Medicare costs 
somewhat more than does employer-sponsored coverage. The assumption is 
that this is a result of the copayment structure: Medigap coverage 
tends to be first-dollar coverage, but some substantial portion of 
employer sponsored coverage requires some (reduced) beneficiary 
copayments. That is a plausible explanation but there is not enough 
detail in available data sources to provide an easy, direct test of 
this assumption.

 Estimated Impact of Secondary Insurance on Medicare Per-Capita Spending
------------------------------------------------------------------------
          Insurance Status                      Medicare Cost
------------------------------------------------------------------------
Medicare+Medigap...................                              $5,400
Medicare+Employer-sponsored........                              $4,900
Medicare only......................                              $4,000
Memo: Assumed Medicare cost per                                  $5,000
 capita............................
------------------------------------------------------------------------
Notes: For ease of presentation, this analysis was based on an assumed
  Medicare average cost of $5,000 per beneficiary per year. Estimates
  were adjusted for numerous sociodemographic characteristics, including
  age, gender, income, education, and health status.
Source: Calculated from PPRC 1997 Annual Report to the Congress, Chapter
  15.

    Beyond the issue of costs, filling in the deductibles and 
copayments of fee-for-service Medicare also affects the ability to 
modernize and improve the traditional Medicare program. Private 
insurance in many market areas evolved via the PPO model, where 
individuals are offered modest financial incentives to use preferred 
providers. Currently, this is the most popular approach for health 
insurance for the working population. Properly done, modestly higher 
copayments for out-of-network use are not coercive or hugely 
restrictive. Instead, subscribers who have no strong preferences about 
using any particular provider are channeled toward the plan's preferred 
providers.
    Traditional Medicare, by contrast, cannot evolve via that PPO 
model. Modestly lower copayments for use of preferred providers simply 
will not work in Medicare because almost no beneficiaries actually pay 
those copayments in the first place. Medigap plans themselves can adopt 
this approach (as in Medicare Select), but the Medicare program does 
not have these financial levers in its control. This tends to put the 
traditional Medicare program into an evolutionary dead end. It is, to 
some approximation, an unrestricted fee-for-service program with no 
copayments or deductibles and no easy path for moving toward 
alternative approaches to financing care.
    Turning now to the beneficiaries, the first fact to absorb is that 
beneficiaries without secondary insurance are, on average, poorer, more 
likely to be minority race, and in worse health than the rest of the 
Medicare population. They can reasonably be characterized as not poor 
enough for Medicaid, not having had a good enough job to get employer-
sponsored coverage, and not well-enough off to want to purchase 
Medigap. Roughly speaking, the lack of coverage appears driven more by 
wealth than by health. The disabled (under-65) are also 
disproportionately represented in this group.
    It is worth noting that the cost-increasing effects of secondary 
insurance are therefore substantially regressive. Medicare costs (and 
hence the Part B premium) are inflated by better-off beneficiaries who 
have some secondary insurance. Those without secondary insurance have 
far lower use of service, but pay a Part B premium that largely 
reflects the high use of those with complete insurance coverage. In 
effect, they pay a share of the high costs incurred by better-off, 
fully-insured beneficiaries.
    The second fact to consider is that beneficiaries without secondary 
insurance consume less of all types of health care services. This 
includes things that are generally viewed as ``good'' care, such as 
preventive services. For five preventive services that can easily be 
tracked in the 1997 Medicare Current Beneficiary Survey (some physician 
visit during the year, flu shot, pneumonia shot, mammogram, pap smear), 
beneficiaries with no secondary insurance had lower use of every 
service, with use rates ranging from 13 to 30 percent lower than 
beneficiaries with employer-sponsored or Medigap coverage. (Those use 
rates were adjusted for differences in age, gender, race, income, 
health status, and self-reported presence of diseases.)
    It is inherently difficult to demonstrate whether or not this has 
an impact on beneficiaries' health. The definitive study of this issue 
for the under-65 population was the RAND National Health Insurance 
Experiment. The conclusion from that research (summarized in the book 
Free for All by Joseph Newhouse and colleagues) was that modest 
copayments did not noticeably reduce health status, with the 
substantial exception of low income individuals with mental health 
problems. For the Medicare population, the research is less clear-cut. 
One study found that individuals without secondary insurance were more 
likely to move from no disability to some disability (limitation on 
activity of daily living) over a two-year period, but that the progress 
to higher levels of disability beyond that occurred at the same rate 
regardless of secondary insurance coverage. In other studies, some have 
found no differences in outcomes for specific diseases such as cancers, 
others have found differences in treatment and outcome.
    The third relevant fact about beneficiaries and secondary insurance 
is the strong desire for complete (first-dollar) coverage, to the point 
of behavior that economists would label irrational or inefficient. 
Beneficiaries will indeed pay more than $100 to insure the cost of the 
Part B deductible. Prior to 1990, in the rare instances when 
beneficiaries were offered inexpensive catastrophic-only Medigap or 
expensive first-dollar Medigap, few individuals opted for the 
catastrophic-only plans. After 1990, faced with standardized Medigap 
products with wildly varying prices, almost no beneficiaries shopped 
and switched insurers. In a 1996 report, the GAO estimated that, of 
individuals owning Medigap policies in 1991 and alive in 1994, only 
about 1 percent had switched insurers over that three-year period. I do 
not know whether shopping for policies remains as rare in the Medigap 
market now as it was then.
    The point here is that if you expect beneficiaries to engage in 
what economists would like to think of as reasonable, rational, 
efficient behavior toward Medigap coverage, you will be sorely 
disappointed. Behavior in the Medigap market does not suggest that 
beneficiaries typically act as cost-minimizing rational shoppers. 
Instead, behavior far more strongly suggests that beneficiaries want 
first-dollar coverage regardless, and that once they have it they do 
not want to change coverage.
    Allow me to summarize the points in the presentation so far, then 
to describe some potential directions for policy.
           Only 10 to 15 percent of beneficiaries have fee-for-
        service Medicare with no secondary insurance.
           Secondary insurance fills in Medicare's deductible 
        and copayment liabilities, increases use of services, and 
        raises Medicare's costs substantially. A reasonable round 
        number for discussion is that secondary insurance raises 
        Medicare outlays by around $1,000 per beneficiary per year.
           Those without secondary insurance tend to be poorer, 
        in worse health, and are more likely to be minorities.
           Individuals without secondary insurance use less of 
        all types of care, including ``good'' preventive services. It 
        is difficult to say empirically whether their health does or 
        does not suffer as a consequence of that.
           Behavior in the market for Medigap insurance reveals 
        a strong apparent preference for first-dollar insurance 
        coverage and little evidence of price-shopping.
    Given these observations on the Medicare beneficiaries' secondary 
insurance, what types of policy options could you reasonably consider? 
Several years ago I engaged in discussions of fairly radical approaches 
in this area, both at the Physician Payment Review Commission and in 
testimony to the National Bipartisan Commission on the Future of 
Medicare. These proposals included banning or taxing Medigap, or 
requiring Medigap insurers to become full-risk plans under 
Medicare+Choice. My impression from that earlier experience was that 
even if the potential cost and cost savings are as exactly as stated 
above, few would be willing to risk the disruptions that such radical 
changes might create. Based on my earlier experience, I will limit my 
suggestions in this testimony to more incremental approachesthat would 
not eliminate Medigap insurance.
    Discussion of the issues centers around which concerns you are 
trying to address. Is your interest on the cost-increasing effects of 
secondary insurance? Is your concern with the well-being of the 10 to 
15 percent who have no secondary coverage? Or is concern on the high 
prices that beneficiaries and employers must pay to obtain that 
secondary insurance coverage?
    First, I would like to draw your attention to the February 2001 CBO 
Budget Options book, where there is a short discussion of budget-
neutral restructuring of Medicare's copayment and deductible 
liabilities. In particular, they show a restructuring that would 
provide maximum out-of-pocket protection for Medicare beneficiaries and 
generate some small cost savings for Medicare. Nothing is free: in 
order to provide a stop-loss provision of $2,000, the CBO option would 
require a combined A/B deductible of $1,000 and a 20 percent copayment 
for all care above the deductible. So, discussion can start from that 
basis. It is absolutely feasible to limit beneficiaries' total out-of-
pocket costs for Medicare-covered services to $2,000 annually, in 
exchange for higher payments for care below that catastrophic cap.
    A second option would be to try to offer some sort of advantage to 
that 10 to 15 percent of beneficiaries who have no secondary insurance 
coverage. It would certainly be fair to offer them a lower Part B 
premium, since their spending is substantially below that of other 
beneficiaries. From an actuarial standpoint, that's reasonable. From an 
operational standpoint, having beneficiaries sign up for this, certify 
that they don't have secondary insurance, and receive a reduced or zero 
Part B premium in response is likely to be a difficult system. Hence, 
this option probably has more theoretical than practical merit.
    A third option focusing on those without secondary insurance would 
be to eliminate Medicare copayment liabilities on selected preventive 
services. For example, if good health care requires that beneficiaries 
see a doctor at least once a year, then Medicare could make that first 
office visit free. This type of approach is likely to have a very high 
cost per net new preventive service delivered. Not only would it make 
services free for the vast majority of beneficiaries who have secondary 
insurance, research shows that most beneficiaries will not obtain 
preventive care at the recommended rates even when it is free. Thus, 
the likely cost per additional preventive service actually delivered to 
those without secondary insurance is likely to be high.
    A fourth option would be to take a new benefit design and impose it 
on the Medigap industry, either for existing policies or, more likely, 
for all newly-issued policies. For example, first dollar coverage could 
be replaced by a low and simple copayment structure (e.g., $10 per 
office visit), while again certain key items of preventive care might 
be covered in full. This would not achieve the technical efficiencies 
potentially available in a federally-run alternative (such as paperwork 
reduction and elimination of overhead costs), but would not displace 
the current private-sector providers of such insurance. Applying the 
restructured benefits only to newly issued policies would avoid 
disrupting Medigap insurers' ongoing lines of business.
    In any revised Medigap benefit structure, there has to be some 
caution about paperwork burden relative to amounts collected. The cost 
of the paperwork for small copayment amounts may exceed the cost of the 
copayments. The current first-dollar Medigap system typically results 
in two financial transactions per service when the Medigap insurer's 
systems are coordinated with Medicare's. There is a large payment from 
Medicare to the provider, and a smaller payment from the Medigap 
insurer to the provider, with the Medicare carrier passing along the 
bill for the copayment directly to the Medigap insurer. Adding yet a 
third, even smaller payment directly from the beneficiary to the 
provider may increase the overall administrative burden of the system 
unless that payment is very simply structured and is routinely handled 
at the time of the service, such as a flat $10 copayment per visit.
    Finally, I would like to mention an option that was developed in 
the mid-1990s by the American Medical Association. They proposed a plan 
that amounted to a prepaid, refundable deductible for Medicare, in 
effect creating a small Medical Savings Account (MSA) within Medicare 
for each beneficiary. Beneficiaries would pay an additional monthly 
premium of (say) $80 to Medicare. All Medicare copayment and deductible 
liabilities for the year below $960 (80 x 12) would be paid from this 
pre-funded amount, with no paperwork burden involved. Beneficiaries 
with under $960 in copayment/deductible liabilities would receive a 
refund at year-end (similar to an MSA). Those with copayment/deductible 
liabilities in excess of this amount would pay them as in the current 
Medicare program. Secondary insurers would be free to cover copayment/
deductible liabilities in excess of this $960 limit, but would never 
see anything below the $960 limit. Employers or others would be free to 
pay the beneficiary's $80 monthly premium. In effect, this proposal 
would take the first $960 of current copayment and deductible 
liabilities and simply make them off-limits to secondary insurers, 
handling them internally within Medicare instead.
    This proposal provides a potential efficiency-versus-equity 
tradeoff. On the efficiency side, it reduces but does not eliminate the 
role of secondary insurers and the paperwork burdens from copayment/
deductible liabilities. The potential for a rebate provides incentive 
to constrain use of care (as in an MSA). (If third parties paid the 
monthly premium and collected any year-end rebate, that would nullify 
incentives for reduced use of care.) But like the MSA proposal, this 
approach reduces pooling of risks. Healthy beneficiaries would pay the 
least and those with high use of care would face an effective $960 
deductible, plus any copayment liabilities incurred excess of that (if 
any). The overall tolerance for this efficiency-versus-equity tradeoff 
could be fine-tuned by lowering or raising the amount of the prepaid, 
refundable deductible.
    In conclusion, there are few obvious alternatives for restructuring 
Medicare copayments, liabilities, and secondary insurance. First-dollar 
coverage from secondary insurance raises Medicare costs and is probably 
not the most efficient way to structure payment. Yet, beneficiaries' 
demand for Medigap reveals a strong desire for such coverage. Reworking 
Medigap to require small copayments for each service would likely be 
unpopular and might increase paperwork burden disproportionate to the 
amounts of money involved. As CBO has demonstrated, we could 
restructure Medicare rather than restructure Medigap, protecting 
beneficiaries from catastrophic costs at the expense of higher payments 
from non-catastrophic users. A final alternative that seems plausible 
is to create, in effect, a mini-MSA for the first few hundred dollars 
of Medicare copayment/deductible liabilities. This might allow some 
reductions in overhead and paperwork burdens (and possibly some 
reduction in service use) without eliminating the private provision of 
secondary insurance.

                                


    Chairwoman Johnson. Thank you, Dr. Hogan.
    Dr. Davis.

STATEMENT OF KAREN DAVIS, PH.D., PRESIDENT, COMMONWEALTH FUND, 
                       NEW YORK, NEW YORK

    Dr. Davis. Thank you, Madam Chairman, Mr. Stark, Members of 
the Subcommittee for this invitation to testify on Medicare's 
cost sharing.
    I think it is important to remember that Medicare was 
created in 1965 to ensure financial protection for older 
Americans against the cost of medical expenses and to ensure 
access to quality health care. Modernizing Medicare's benefit 
should involve adding prescription drugs and reducing the 
burdensome deductibles and cost sharing that we have heard 
about this afternoon.
    Remember that Medicare beneficiaries already spend a high 
proportion of their income on health care. Last year, the 
average elderly Medicare beneficiary spent over $3,000 per 
person on health care expenses, or 22 percent of income. By 
2025, that figure will increase to 30 percent of income.
    We should also remember that Medicare beneficiaries are 
sick or poor. Two out of three either have serious health 
problems or incomes below twice the poverty level. In fact, 
one-third of Medicare beneficiaries are cognitively impaired or 
have serious physical limitations, and those third account for 
60 percent of all Medicare outlays.
    Cost sharing has risen more rapidly than both inflation and 
the incomes of beneficiaries, eroding the protection that the 
program was designed to provide. If Medicare's 1966 cost 
sharing had only risen with general inflation, today's Part A 
deductible would be $218, not almost $800, and the Part B 
annual premium would be $196, not $600.
    The sickest beneficiaries or those without good 
supplemental insurance bear the heaviest brunt of out-of-pocket 
spending. Medicare cost sharing contributes to beneficiary 
access and bill problems, especially for lower income 
beneficiaries. Two out of five beneficiaries who are most at 
risk report either problems obtaining needed services or 
problems paying their medical bills. Cost sharing and the 
absence of supplemental insurance contribute significantly to 
failure to obtain preventive services and proper management of 
chronic conditions.
    Medicare cost sharing is higher than typical employer 
plans. Non-elderly Americans spend 9 percent of their incomes 
on health care, compared with 22 percent for elderly 
beneficiaries. Deductibles and premiums under employer plans 
are lower than they are in Medicare, and as we have heard 
today, they typically include catastrophic ceilings. They also 
cover physical exams and prescription drugs, which Medicare 
does not.
    Despite this, in fact, Medicare beneficiaries report higher 
satisfaction with Medicare than working families do with 
employer coverage.
    Medicare beneficiaries need supplemental insurance 
coverage, but it is increasingly unaffordable or unavailable. 
As we have heard, 9 out of 10 have supplemental coverage, but 
Medigap premiums are expensive, over $100 a month, and for some 
plans in some geographic areas as high as $3,000 a year. 
Employers are cutting back on retiree coverage, and Medicare 
Plus Choice enrollment is dropping.
    There are a number of options for improving Medicare 
benefits and reducing cost sharing. In a report being released 
today by my organization, The Commonwealth Fund, Marilyn Moon 
and colleagues and the Urban Institute simulate the impact on 
beneficiaries of improving Medicare benefits and cost sharing. 
Under all four of the options simulated, both the elderly and 
the disabled would experience a reduction in total out-of-
pocket expenses, including private insurance premiums. Savings 
would be greatest for beneficiaries with serious health 
problems. It would reduce the percent of income from 22 percent 
to 20 percent or, in one option, down to 16 percent. By 
eliminating or reducing the need for private supplemental 
insurance, efficiency and coverage would be improved. State 
Medicaid programs would also be expected to benefit because 
they now pick up many of these costs for low-income 
beneficiaries.
    Finally, Medicare beneficiaries have a claim on a portion 
of the budget surplus. As you know well, the Balanced Budget 
Act achieved major savings largely from the Medicare Program. 
Together, the slowdown in Medicare and Medicaid outlays in the 
late nineties account for $1 trillion out of the $5.6-trillion 
10-year budget surplus. More than $50 billion of the 10-year 
budget surplus is attributable to the higher premiums that were 
part of the 1997 Balanced Budget Act. Returning this 
contribution to beneficiaries in the form of the improved 
benefits and reduced cost sharing is worthy of consideration.
    Thank you.
    [The prepared statement of Dr. Davis follows:]
  Statement of Karen Davis, Ph.D., President, Commonwealth Fund, New 
                             York, New York
    Thank you, Madam Chairman, Mr. Stark, and members of the committee, 
for this invitation to testify on Medicare's cost-sharing. Medicare 
provides health insurance for 40 million elderly and disabled 
beneficiaries. The program was created in 1965 to provide older 
Americans with financial protection against the cost of medical 
expenses and to ensure access to quality health care. At the time, half 
of the elderly were uninsured, since few had retiree coverage through 
work or could afford private coverage on their own. Today, nearly all 
of the elderly have basic coverage through Medicare.
    However, Medicare's cost-sharing has risen more rapidly than 
inflation and the incomes of beneficiaries, eroding the protection 
Medicare was designed to provide. In 2000, the average elderly Medicare 
beneficiary spent $3,142 on their own health care expenses, or nearly 
22 percent of income.\1\ By 2025, that will increase to $5,248 (in 
constant 2000 dollars)--almost 30 percent of income. Financial burdens 
on beneficiaries need to be reduced, not increased.
---------------------------------------------------------------------------
    \1\ Stephanie Maxwell, Marilyn Moon, and Misha Segal, Growth in 
Medicare and Out-of-Pocket Spending: Impact on Vulnerable 
Beneficiaries, The Commonwealth Fund, January 2001.
---------------------------------------------------------------------------
Medicare Beneficiaries are Disproportionately Poor and Sick
    Some argue that Medicare cost-sharing is necessary to encourage 
beneficiaries to be cost-conscious when making choices about their 
health care. Any discussion of restructuring Medicare cost-sharing 
should be firmly rooted in an understanding of the characteristics of 
beneficiaries, their financial contributions to their care, and the 
difficulties they have obtaining access to care and paying medical 
bills.
    Two of three Medicare beneficiaries are either sick or poor.\2\ Of 
all groups in society, they are perhaps the least able to ``help the 
market work'' by making cost-conscious choices. Eleven million 
beneficiaries have less than a high school education. One-third of 
Medicare beneficiaries are cognitively impaired or have serious 
physical limitations; \3\ these beneficiaries account for 60 percent of 
all Medicare outlays. Included in this figure are over 9 million 
beneficiaries who are cognitively impaired, accounting for 42 percent 
of Medicare outlays. One and a half million Medicare beneficiaries are 
in nursing homes.\4\ Terminal illness strikes 2.4 million beneficiaries 
each year. The majority of beneficiaries suffer from a chronic 
condition such as diabetes, arthritis, heart disease, cancer, or 
recurrent stroke. Three-fourths must regularly take prescription 
drugs.\5\
---------------------------------------------------------------------------
    \2\ Patricia Neuman, Cathy Schoen, Diane Rowland, Karen Davis, 
Michelle Kitchman, Elaine Puleo, and Drew Altman, ``Understanding the 
Diverse Needs of the Medicare Population: Implications for Medicare 
Reform,'' Journal of Aging and Social Policy, 10(4), pp. 25-30, 1999.
    \3\ Marilyn Moon and Matthew Storeygard, One-Third at Risk: The 
Special Circumstances of Medicare Beneficiaries with Health Problems, 
The Commonwealth Fund, May 2001.
    \4\ National Center for Health Statistics, Health, United States, 
2000, HHS/CDC/NCHS, July 2000.
    \5\ Cathy Schoen, Patricia Neuman, Michelle Kitchman, Karen Davis, 
and Diane Rowland, Medicare Beneficiaries: A Population at Risk--
Findings from the Kaiser/Commonwealth 1997 Survey of Medicare 
Beneficiaries, Henry J. Kaiser Family Foundation and The Commonwealth 
Fund, December 1998.
---------------------------------------------------------------------------
    Beneficiaries with the lowest incomes are also the sickest. Over 
half of those with incomes below the poverty level ($8,259 for a single 
elderly person in 2000, $10,409 for a couple) are in fair or poor 
health. One-fourth of the poor need assistance with at least one 
activity of daily living, such as eating or bathing.
Medicare Beneficiary Cost-Sharing is High
    When Medicare began in 1966, the major expenses for which 
beneficiaries were responsible were the average cost of the first day 
of hospital care under Part A, a deductible for Part B physician and 
other ambulatory services, 20 percent coinsurance for Part B services 
(plus any physician charges over the allowed fees), and a Part B 
premium. Even adjusting for inflation, today's Part A hospital 
deductible and Part B premium are three to four times higher than they 
were in 1966. The rapid growth in the Part A deductible reflects 
changes in health care technology that have led to shorter but more 
intensive hospital stays, driving up the average daily cost. Only the 
Part B deductible is lower today in real terms than it was in 1966. If 
these cost-sharing amounts had remained constant, adjusted for 
inflation, today's Part A deductible would be $218, not $792; the Part 
B deductible would be $272, not $100; and the Part B annual premium 
would be $196 ($16 a month), not $600.\6\
---------------------------------------------------------------------------
    \6\ Author's calculations based on average inflation rates applied 
to the original deductibles and premium.
---------------------------------------------------------------------------
    These cost-sharing amounts or the supplemental insurance premiums 
required to cover them represent significant financial burdens on 
Medicare beneficiaries. In 2000, elderly Medicare beneficiaries spent, 
on average, $3,142 out-of-pocket on health care. About half of this 
amount came from cost-sharing for covered services or private 
supplementalinsurance premiums to pick up costs not covered by 
Medicare. About one-fifth is Part B premiums, and the remaining 30 
percent is for services not covered by Medicare, primarily prescription 
drugs.
    Despite Medicaid and other programs to subsidize Medicare cost-
sharing and premiums for low-income beneficiaries, burdens on low-
income beneficiaries are particularly heavy. The poorest beneficiaries 
spend 30 percent of income on health care. Only 40 percent of low-
income beneficiaries eligible for Medicaid and other programs 
(Qualified Medicare Beneficiaries (QMB), Supplemental Low Income 
Medicare Beneficiaries (SLMB), Qualified Individuals) participate.\7\ 
Outreach efforts to inform and enroll eligible beneficiaries have been 
limited.
---------------------------------------------------------------------------
    \7\ Stephanie Maxwell, Marilyn Moon, and Matthew Storeygard, 
Reforming Medicare's Benefit Package: Impact on Beneficiary 
Expenditures, The Commonwealth Fund, May 2001.
---------------------------------------------------------------------------
    A study by Marilyn Moon and colleagues at the Urban Institute 
supported by The Commonwealth Fund modeled average out-of-pocket costs 
for six cohorts of beneficiaries to illustrate how widely costs vary 
depending on health and income. For each group, the estimates provide 
averages given the groups' likely health expenses. The six groups 
include:
           All elderly
           Elderly with physical or cognitive health problems 
        with no supplemental coverage
           Disabled beneficiaries ages 45 to 64
           Beneficiaries ages 65 to 74 with incomes above 
        $50,000 and employer-sponsored supplemental coverage
           Women with QMB coverage
           Women age 85 and older with physical or cognitive 
        health problems and incomes between $5,000 and $20,000.\8\
---------------------------------------------------------------------------
    \8\ Stephanie Maxwell, Marilyn Moon, and Misha Segal, Growth in 
Medicare and Out-of-Pocket Spending: Impact on Vulnerable 
Beneficiaries, The Commonwealth Fund, January 2001.
---------------------------------------------------------------------------
    Out-of-pocket spending as a percent of income ranges from 6 percent 
for younger, higher-income beneficiaries with employer supplemental 
coverage to 52 percent for older women in poor health with limited 
incomes. It averages 22 percent for all elderly, and 29 percent for 
disabled ages 45 to 64. On a per capita basis, expenses average $3,142 
for all elderly beneficiaries, and $3,870 for disabled beneficiaries 
ages 45 to 64. They reach as high as $4,815 for those elderly in poor 
health with no supplemental coverage, and $5,969 for older, low-income 
women in poor health. These are staggering amounts for a retired 
population with little income and limited savings.
Medicare Cost-Sharing Contributes to Beneficiary Access and Bill 
        Problems
    Not surprisingly, Medicare's cost-sharing affects access to care. 
This is particularly true for lower-income beneficiaries and for those 
with serious health problems. The Kaiser/Commonwealth 1997 Survey of 
Medicare Beneficiaries found that about 15 percent of Medicare 
beneficiaries experience difficulty obtaining needed care.\9\ Almost 
one-fourth of those with incomes below the poverty level have access 
problems, as do one-third of the disabled under age 65. Problems paying 
medical bills were reported by 14 percent of all beneficiaries, by one-
fourth of those below poverty, and by nearly one-third of the disabled 
under age 65.
---------------------------------------------------------------------------
    \9\ Cathy Schoen, Patricia Neuman, Michelle Kitchman, Karen Davis, 
and Diane Rowland, Medicare Beneficiaries: A Population at Risk, The 
Commonwealth Fund, December 1998.
---------------------------------------------------------------------------
    About two of five of the most at-risk beneficiaries reported either 
difficulties obtaining needed services or problems paying medical 
bills. This includes 41 percent of those with incomes below the poverty 
level, 39 percent of those in fair or poor health, 47 percent of the 
disabled under age 65, and 40 percent of those needing help with one or 
more activities of daily living.
    Financial barriers to health care particularly affect use of 
preventive care. A 1995 study supported by The Commonwealth Fund found 
that elderly women were less likely to receive a mammogram if they did 
not have supplemental health insurance coverage.\10\ Medicare has since 
covered mammograms without subjecting services to the Part B 
deductible.
---------------------------------------------------------------------------
    \10\ Janice Blustein, ``Medicare Coverage, Supplemental Insurance, 
and the Use of Mammography by Older Women,'' New England Journal of 
Medicine 332:1138-1143, April 27, 1995.
---------------------------------------------------------------------------
    The absence of coverage for prescription drugs, however, continues 
to lead to underutilization of services and inadequate maintenance of 
chronic conditions. A 2000 study supported by The Commonwealth Fund 
found that absence of supplemental coverage for prescription drugs was 
a major reason why many Medicare beneficiaries with hypertension fail 
to receive appropriate medication.\11\
---------------------------------------------------------------------------
    \11\ Jan Blustein, ``Drug Coverage and Drug Purchases by Medicare 
Beneficiaries with Hypertension,'' Health Affairs 19 (March/April 
2000):219-230.
---------------------------------------------------------------------------
    Rates of hospital admissions that could have been prevented with 
better preventive or primary care are particularly high for poor and 
minority elderly--indicating inadequate access to primary care. In sum, 
poor and near-poor elderly are more likely to experience health 
problems that require medical services than elderly people who are 
economically better off. Yet they are less able to afford needed care 
because of their lower incomes.
Medicare Cost-Sharing is Higher than Typical Employer Plans
    Nonelderly Americans spend about 9 percent of their income on 
health care--much less than what the elderly spend.\12\ In large part, 
this reflects extensive employer-sponsored health insurance with lower 
cost-sharing, and better benefits. Most employer plans include a 
ceiling on out-of-pocket expenses; Medicare does not. In the generosity 
of its benefit package, Medicare ranks in the bottom decile of 
insurance plans.
---------------------------------------------------------------------------
    \12\ Agency for Healthcare Research and Quality, Center for Cost 
and Financing Studies, Medical Expenditure Panel Survey, 1996.
---------------------------------------------------------------------------
    The average deductible for all services--including hospital, 
physician, and other services--is $239 in conventional fee-for-service 
plans offered by employers.\13\ Deductibles are even lower in managed 
care plans including preferred provider option (PPO) plans and point-
of-service (POS) plans, and are virtually nonexistent in health 
maintenance organizations (HMOs). The typical ceiling on out-of-pocket 
expenses in conventional employer plans is $1,500. Benefits are 
substantially more comprehensive: 71 percent of firms cover adult 
physical exams, which Medicare does not; 87 percent cover prescription 
drugs; and 25 percent cover dental care. Employers pick up, on average, 
86 percent of the premium for single coverage for workers, leaving the 
worker with a monthly premium share of $28. In contrast, a Medicare 
beneficiary's monthly premium share is $50 (on top of Medigap premiums 
that average over $100 a month).
---------------------------------------------------------------------------
    \13\ Henry J. Kaiser Family Foundation/Health Research and 
Educational Trust, Employer Health Benefits, 2000 Annual Survey.
---------------------------------------------------------------------------
    Over an individual's lifetime, health care expenses are greatest 
after reaching retirement, when incomes are lower and savings are being 
drawn down. Improving Medicare benefits--even if financed by greater 
contributions during the working years--would smooth lifetime health 
spending patterns and afford greater economic security in older age.
    Despite the fact that Medicare's benefits do not compare favorably 
with employer coverage, it is noteworthy that Medicare beneficiaries 
report higher satisfaction with Medicare than do working families with 
their own coverage. Fifty-seven percent of Medicare beneficiaries say 
they are very satisfied with Medicare, compared with 46 percent of 
working families covered by employer health insurance.\14\
---------------------------------------------------------------------------
    \14\ Henry J. Kaiser Family Foundation and The Commonwealth Fund, 
Working Families at Risk: Coverage, Access, Costs, and Worries, Kaiser/
Commonwealth 1997 National Survey of Health Insurance, December 1997.
---------------------------------------------------------------------------
    A Commonwealth Fund survey of 50-to-70-year-old adults finds strong 
support for Medicare.\15\ Older adults trust Medicare and value its 
reliability. Nearly two-thirds of all adults 50 to 64 would like the 
option of buying into Medicare early, while 86 percent of uninsured 
older adults would like that option. Preference for Medicare may 
reflect the predominance of the program's fee-for-service option; most 
employer plans are limited to one or more managed care plans. But it 
may also reflect an appreciation for the fact that Medicare will be 
there for them over time, as well as a concern that private coverage 
may be unavailable or unaffordable when serious illness or disability 
strikes or when older adults are no longer able to work.
---------------------------------------------------------------------------
    \15\ Cathy Schoen, Elisabeth Simantov, Lisa Duchon, and Karen 
Davis, Counting on Medicare: Perspectives and Concerns of Americans 
Ages 50 to 70, The Commonwealth Fund, July 2000.
---------------------------------------------------------------------------
Supplemental Coverage Needed by Medicare Beneficiaries
    While workers with employer health insurance rarely purchase 
supplemental coverage, nine of 10 Medicare beneficiaries obtain 
supplemental coverage to augment Medicare's benefits. About 38 percent 
of Medicare beneficiaries have supplemental coverage from a current or 
former employer.\16\ About 23 percent are covered by individually 
purchased private supplemental insurance (Medigap), 15 percent are 
enrolled in Medicare+Choice plans, and 13 percent are covered in part 
or in full by Medicaid. About one of 10 Medicare beneficiaries are 
covered by traditional Medicare only. The ability of Medicare 
beneficiaries to supplement Medicare's benefit with additional coverage 
is undoubtedly a factor in the high satisfaction with Medicare reported 
by beneficiaries. On the other hand, the widespread need for 
supplemental coverage attests to the perceived inadequacy of the 
Medicare benefit package.
---------------------------------------------------------------------------
    \16\ Stephanie Maxwell, Marilyn Moon, and Matthew Storeygard, 
Reforming Medicare's Benefit Package: Impact on Beneficiary 
Expenditures, The Commonwealth Fund, May 2001.
---------------------------------------------------------------------------
    Not all Medicare beneficiaries are able to afford supplemental 
coverage, nor is coverage with prescription drug benefits available to 
those with serious health problems. A recent study by a team of 
investigators at the University of California, Los Angeles, that was 
supported by The Commonwealth Fund reported that 17 percent of 
beneficiaries with incomes below $10,000 had no supplemental coverage, 
compared with 5 percent of those with incomes above $25,000.\17\ 
Similarly, employer-sponsored supplemental coverage is much lower as is 
Medigap coverage for lower-income beneficiaries.
---------------------------------------------------------------------------
    \17\ Nadereh Pourat, Thomas Rice, Gerald Kominsky, and Rani E. 
Synder, ``Socioeconomic Differences in Medicare Supplemental 
Coverage,'' Health Affairs 19 (September/October 2000).
---------------------------------------------------------------------------
    Nor does supplemental coverage always include prescription drug 
benefits. Only half of Medicare beneficiaries have year-long 
supplemental prescription drug coverage.\18\ Prescription drug coverage 
is quite expensive, and Medigap plans that cover drugs (Plans H-J) are 
subject to underwriting and exclude beneficiaries who are deemed poor 
health risks. In 2000, Medigap annual premiums for Plan J, including 
prescription drugs, averaged $3,252 for a 65-year-old woman.\19\ Even 
Plan E plans that exclude prescription drugs average annual premiums of 
$1,320 ($110 a month)--an amount on top of Medicare Part B premiums 
that are now $600 a year. While standardization of Medigap policies has 
reduced confusion, not all plans are in compliance with federal 
standards on the ratio of benefits to premiums and many plans offer 
poor value at high cost.\20\
---------------------------------------------------------------------------
    \18\ Bruce Stuart, Dennis Shea, and Becky Briesacher, Prescription 
Drug Costs for Medicare Beneficiaries: Coverage and Health Status 
Matter, The Commonwealth Fund, January 2000.
    \19\ Quotesmith.com, as cited in Marilyn Moon, Assessing the 
President's Proposal to Modernize and Strengthen Medicare, The 
Commonwealth Fund, January 2000.
    \20\ General Accounting Office, Medigap Insurance: Insurers' 
Compliance with Federal Minimum Loss Ratio Standards, 1988-93, August 
12, 1995; and Lutzky, Alecxih, Pankaj, Laud, and Schaab, Restricting 
Underwriting and Premium Rating Practices in the Medigap Market: The 
Experience of Three States, AARP Public Policy Institute, January 2001.
---------------------------------------------------------------------------
    Most disturbing is the trend in future coverage. Eighty-one percent 
of employers report that they are planning to increase retiree health 
premiums and/or cost-sharing in the future, and 40 percent are cutting 
back on prescription drugs.\21\ Thirty percent are planning to 
terminate coverage for future retirees.
---------------------------------------------------------------------------
    \21\ McArdle, Coppock, Yamamoto, and Zebrak, Retiree Health 
Coverage: Recent Trends and Employer Perspectives on Future Benefits, 
Hewitt Associates, October 1999.
---------------------------------------------------------------------------
    Medicare+Choice plans have enrolled about 6 million beneficiaries. 
Better benefits and lower cost-sharing are major reasons why 
beneficiaries choose managed care plans. But instability in the managed 
care market and the withdrawal of plans either nationally or from 
selected geographic areas raise questions about the long-term future of 
this option. Medicare+Choice plans are increasing monthly premiums and 
reducing benefits, especially prescription drug benefits.\22\ As a 
result, the number of beneficiaries enrolled in Medicare+Choice peaked 
in 1999 at 6.3 million; such plans now cover 5.6 million people.
---------------------------------------------------------------------------
    \22\ Marsha Gold and Lori Achman, Trends in Premiums, Cost-Sharing, 
and Benefits in Medicare+Choice Health Plans, 1999-2001, The 
Commonwealth Fund, April 2001.
---------------------------------------------------------------------------
    If private market trends continue, Medicare beneficiaries will be 
increasingly reliant on the individual, Medigap market to supplement 
Medicare's basic benefits. There are now signs that premiums in this 
market--where costs cannot be pooled through employer groups or managed 
care health plans--are beginning to spiral upward for policies that 
include prescription drug coverage (and that already feature high 
administrative costs). Further increases may well expand the proportion 
of beneficiaries who can afford only basic Medicare benefits.
Options to Improve Medicare Benefits and Reduce Cost-Sharing
    Given the increasing unreliability of supplemental coverage and the 
serious financial burdens and barriers to needed care that Medicare 
beneficiaries face, consideration should be given to improving 
Medicare's benefits. In a Commonwealth Fund-supported study by Marilyn 
Moon and colleagues at the Urban Institute being released today,\23\ 
four options for improving Medicare's benefit package are simulated:
---------------------------------------------------------------------------
    \23\ Stephanie Maxwell, Marilyn Moon, and Matthew Storeygard, 
Reforming Medicare's Benefit Package: Impact on Beneficiary 
Expenditures, The Commonwealth Fund, May 2001.
---------------------------------------------------------------------------
           Option 1 combines Part A and Part B, replaces the 
        current deductibles with a single combined annual deductible of 
        $400, and introduces a $3,000 annual beneficiary limit on cost-
        sharing and deductible expenses. It would increase Medicare 
        outlays by an estimated $3.2 billion in 2000.
           Option 2 reduces the Part A deductible to $200 per 
        spell of illness and increases the Part B deductible to $200. 
        Part B coinsurance is reduced to 10 percent, a new 10 percent 
        coinsurance on home health services is introduced, and all 
        cost-sharing and deductible expenses are subject to a $2,000 
        annual beneficiary limit. This option would increase Medicare 
        outlays by an estimated $16.4 billion in 2000.
           Option 3 eliminates the Part A deductible and all 
        Part A cost-sharing. While increasing the Part B deductible to 
        $200, it eliminates Part B coinsurance. This improved coverage 
        is financed by increasing the Part B premium to $105 per month, 
        achieving virtual budget-neutrality.
           Option 4 adds a prescription drug benefit with 50 
        percent coinsurance, a $2,500 limit on beneficiary cost-
        sharing, and a $26 monthly premium. This option would increase 
        Medicare spending by $13.9 billion in 2000.
    The first three options reduce out-of-pocket spending by improving 
covered Medicare benefits and/or reducing or eliminating the need to 
purchase costly Medigap coverage. The fourth option introduces coverage 
for a currently uncovered benefit, prescription drugs, and could be 
combined with any one of the first three options.
    Under all four options, both the elderly and the disabled would 
experience a reduction in total out-of-pocket expenses, including 
private insurance premiums, cost-sharing for covered services, and 
expenses of noncovered services. The elderly would save $27 per capita 
under Option 1, $240 under Option 2, and $763 under Option 3. Disabled 
beneficiaries ages 45 to 64 would save $103, $280, and $408, 
respectively, under Options 1, 2, and 3. The disabled would 
particularly benefit from a prescription drug benefit: Option 4 would 
save the elderly $181 per person, while the disabled ages 45 to 64 
would save $824 per person.
    Savings would be greater for beneficiaries with serious health 
problems. The Urban Institute team estimates that elderly beneficiaries 
in poor health without supplemental coverage would save $285, $587, and 
$1,591 per person, respectively, under Options 1, 2, and 3. For low-
income women over age 85 and in poor health, savings would be even 
greater--$495, $753, and $2,092.
    On average, out-of-pocket spending for elderly beneficiaries would 
decline from the current rate of 21.7 percent of income to 21.5 percent 
under Option 1, 20.0 percent under Option 2, and 16.4 percent under 
Option 3. Option 4, if enacted alone, would reduce spending to 20.4 
percent of income.
    Option 3, by eliminating the need for private supplemental 
insurance, represents an important way to improve efficiency in 
coverage for Medicare beneficiaries. Consolidating coverage under 
Medicare produces savings through reduced administrative costs by 
eliminating the need to coordinate two sources of coverage. Medicare 
administrative costs are also lower than private insurance plans. 
Medicare does not need to maintain reserves to protect against adverse 
risk selection, nor are marketing or sales commissions needed.
    Some beneficiaries, however, could face higher costs. About 20 
percent of Medicare beneficiaries are hospitalized in a given year.\24\ 
Under Option 1, replacing the current Medicare Part B $100 deductible 
with a combined A/B deductible of $400 would result in higher costs for 
the 80 percent of beneficiaries without a hospital episode during the 
year. For beneficiaries lacking supplemental coverage, the immediate 
effect would be a substantially higher overall deductible.
---------------------------------------------------------------------------
    \24\ U.S. House of Representatives, Committee on Ways and Means, 
2000 Green Book, October 6, 2000.
---------------------------------------------------------------------------
    Similarly, for retirees with employer-sponsored coverage, much 
depends on how employers respond to improved Medicare benefits. If 
employers pick up the higher Part B premiums under Option 3, most 
beneficiaries with retireecoverage would gain. If any savings to 
employers were devoted to improving other benefits (such as 
prescription drugs), beneficiaries would gain further. But employers 
could use the improvement in Medicare benefits as an opportunity to 
drop retiree coverage even more rapidly than is currently anticipated.
    State Medicaid programs would also be expected to benefit from an 
improvement in Medicare benefits. This is particularly true under 
Option 4 with the addition of prescription drugs to Medicare, a benefit 
now covered by most Medicaid programs. But the reduced cost-sharing 
under Options 1, 2, and 3 would also provide fiscal relief to state 
governments. Improved Medicare benefits might be coupled with increased 
state responsibility for coverage of low-income families under Medicaid 
or the Children's Health Insurance Plan.
Conclusion
    For more than 35 years, the Medicare program has assured health and 
economic security for older and disabled Americans. Understanding the 
strengths of the program and its contributions to improving health 
outcomes and access to health services is an important foundation on 
which to build.
    Medicare beneficiaries are heterogeneous. Some fit the stereotype 
of vigorous and well-to-do seniors. But others are older widows living 
alone, some are in nursing homes, some are terminally ill, and some 
live on quite modest incomes. These are the faces of Medicare, and they 
should be kept foremost in mind as new ideas for modernizing Medicare's 
benefits are developed and considered. Improving Medicare's benefits--
not just looking for savings or shifting costs to beneficiaries--should 
be an important priority.
    Reducing the financial burden beneficiaries already bear, as well 
as the increasing burden they are expected to face over the next 25 
years, should be a priority for use of federal budget outlays. We 
should remember that a considerable portion of the federal budget 
surplus was generated by the Balanced Budget Act (BBA). An estimated $1 
trillion of the $5.6 trillion 10-year surplus was derived from a slow-
down in Medicare outlays, in large part as a result of BBA, and from 
the slow-down in Medicaid outlays, an unintended consequence of welfare 
reform.\25\
---------------------------------------------------------------------------
    \25\ Karen Davis, Cathy Schoen, and Stephen C. Schoenbaum, ``A 2020 
Vision for American Health Care,'' Archives of Internal Medicine, 260, 
December 11/25, 2000.
---------------------------------------------------------------------------
    Ten percent of the Medicare BBA savings came from increased 
beneficiary premiums, as home health services were moved from Part A to 
Part B and subjected to 25 percent beneficiary premium 
contributions.\26\ For example, the Part B premium in 2006 was raised 
more than 50 percent by the BBA. As a result of the BBA, over $50 
billion of the 10-year budget surplus was from higher premiums charged 
to Medicare beneficiaries. Returning this contribution to beneficiaries 
in the form of improved benefits and reduced cost-sharing is worthy of 
consideration.
---------------------------------------------------------------------------
    \26\ Marilyn Moon, Barbara Gage, and Alison Evans, An Examination 
of Key Medicare Provisions in the Balanced Budget Act of 1997, The 
Commonwealth Fund, September 1997.
---------------------------------------------------------------------------
    Thank you for this opportunity to testify. I would be pleased to 
answer any questions.
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    Chairwoman Johnson. I thank the panel for their 
contribution.
    Dr. Davis, you make the point that Medicare needs to be 
modernized both in terms of benefits, and you point to 
prescription drug benefits, and in terms of cost sharing. While 
I appreciate your comments about what we have saved from 
Medicare, it is true that Medicare costs will double in 10 
years. It is a very big program, and it is growing very 
rapidly. That is without prescription drugs or annual physicals 
or any of the other things that we ought to be doing to 
modernize the benefit package.
    If this is your recommendation, how would you control 
costs? In the private sector, we just heard that 90 percent are 
in some form of managed care, but in Medicare, only 15 percent. 
What would you do to control costs if you are going to expand 
the benefit package and reduce cost sharing?
    Dr. Davis. You are certainly correct, Madam Chairman, that 
Medicare outlays will increase as costs go up and as there are 
more baby-boomers retiring, but costs will also go up for 
beneficiaries so that the average amount beneficiaries will pay 
will go up from $3,000 to over $5,000 a person, and that is 
holding constant for inflation.
    Chairwoman Johnson. Right. That is holding constant for 
inflation and no new benefits. So that has got to be ofconcern 
to us, but if that is a concern to us under the current program, what 
is it that you propose that might control costs so that this would be 
affordable, so that beneficiaries would not be harmed?
    Dr. Davis. Right. The first thing I am saying is that we do 
not want to just shift more costs onto beneficiaries to protect 
the Federal budget. That will make the beneficiary situation 
worse.
    We are all looking for the magic bullet that would achieve 
savings.
    Chairwoman Johnson. We did use a few good ones.
    Dr. Davis. The one that is proposed in this testimony is 
eliminating dual coverage by integrating that into one source 
of coverage.
    Certainly, right now, Medicare's administrative costs run 2 
percent a year. As we have heard from the General Accounting 
Office, Medigap administrative costs run 20 percent a year. One 
way to achieve savings is to cover those benefits under 
Medicare at a 2-percent administrative cost instead of a 20-
percent administrative cost add-on. That would mean 
beneficiaries would be paying a premium, an additional premium 
to Medicare, but they would achieve savings by having no or 
lower Medigap coverage premiums.
    So one source of efficiency is instead of having two plans 
covering the same benefits, having one plan integrated, under 
Medicare, a single premium being paid to Medicare, and 
realizing those administrative savings.
    Chairwoman Johnson. All of that would actually increase 
costs significantly since Medigap covers new benefits. So, if 
you were going to merge those premiums, you would have to also 
merge the benefits.
    So you really are obliged to give us some ways to control 
costs. The private sector has controlled costs by adopting a 
managed care protocol that, while it has some failings, has 
both better integrated care and, in many instances, responsibly 
controlled costs.
    So I hear what you are saying about improving benefits and 
reducing the beneficiary burden, but without better research 
and recommendations in terms of overall cost control, we cannot 
be blind by the fact that the program is growing by leaps and 
bounds. In only 10 years--that is before the baby-boomers will 
retire--the program will double, with no improvements.
    Dr. Scanlon and anyone else who wants to pitch in on this, 
what is the research that demonstrates that deductibles have an 
impact on usage, utilization, and, therefore, cost? How much 
does that research tell us about that personal discipline over 
utilization? Does it eliminate needed care as well as unneeded 
care? What do we know about deductibles and cost control? Dr. 
Scanlon?
    Dr. Scanlon. Madam Chairwoman, what we do know is that the 
absence of cost sharing does lead to a significant increase in 
cost. I think as Dr. Hogan's testimony points out in detail, 
studies have indicated that costs may increase as much as 25 
percent when there is first dollar coverage because one has a 
Medigap plan.
    When one has employer-based insurance, which still has 
reduced deductible, there is an increase in utilization 
compared to those without any supplement coverage at all, but 
it is less than having first dollar coverage. So we do know 
that there is a very positive increase in terms of utilization.
    Being able to sort what are necessary services that are 
being used because there is no longer a financial barrier 
versus those which are discretionary or unneeded, is not 
something that has been possible to do.
    We have done work in looking at other aspects of Medicare, 
in particular, looking at laboratory services under the End 
Stage Renal Disease (ESRD) program. We find where there is no 
cost sharing a totally inexplicable pattern of service use: 
extensive overuse as well as underuse. We had a panel of 
nephrologists review the tests that were being provided. In 
some instances, tests were being provided every week, and the 
nephrologist panel said they never understood why you would 
ever provide this kind of a test.
    So the absence of cost sharing creates lack of discipline. 
Having cost sharing potentially creates some barriers. Finding 
the balance between those two is the challenge that we face.
    Chairwoman Johnson. Thank you. Does anyone else wish to 
comment on that point? Is that what you mean, Dr. Hogan, by 
Medigap costing us $1,000 per beneficiary?
    Dr. Hogan. That is right. Once all of the copays and 
deductibles are paid, when care is free, beneficiaries will use 
more.
    Chairwoman Johnson. You say that, but Mr. Stark in his 
opening statement did not agree with you. So you need to 
document that if you believe that is true.
    Dr. Hogan. Yes. If I wanted to point to some particular 
pieces of research, the Congressional Budget Office has their 
own studies. Joe Newhouse at RAND had the National Health 
Insurance Experiment in the eighties. It was an under-65 
population, but it was a true experiment. They literally 
assigned people to different plans and looked at their 
expenditures and that found the same result.
    I can guarantee you that every cost estimate you see for 
the cost of a drug benefit will have such an effect embedded in 
it, and every cost estimate comes out of the actuary's office 
and HCFA will have such a cost estimate.
    I am kind of an agnostic on the whole concept of necessary 
care. I do not think that is the way decisions are actually 
made. It is not healthy beneficiaries who are using services 
frivolously. Most beneficiaries have something wrong with them, 
and if you look at the services where Medicare pays the most 
money, Part B--Part B is what I know. I worked for the 
Physician Payment Review Commission for a number of years. 
Cataract surgery is the number-one service for which Medicare 
pays physicians. What is the indication for cataract surgery? 
Well, you have to have some loss of visual acuity. It is not a 
necessary or unnecessary decision. If you say to a beneficiary, 
``Now with current technology, cataract surgery is quick, 
painless, and has almost no complications,'' you say to a 
beneficiary, ``We can fix your visual deficit and it is free'' 
versus ``We can fix your visual deficit and it will cost you 
$600 or $700,'' I think that is enough to deter enough people 
to at least think about it a while. So I just want to say I am 
an agnostic on the concept of necessary care.
    You definitely find that people will use fewer preventive 
services when they have to have copays and deductibles, but 
they use fewer services right across the board.
    Chairwoman Johnson. Thank you.
    Mr. Stark.
    Mr. Stark. Madam Chair, I would like to follow on that.
    In your chart, Dr. Hogan, you suggest that you are using 
$5,000 per beneficiary per year, and then you are comparing and 
you are saying that with employer-based Medicare plus some kind 
of an employer base-sponsored supplement, you save 100 bucks, 
it is $4,900. With Medicare and a Medigap policy, you are 
suggesting the cost is $5,400. So that is $400 more. What you 
further say to get to that $1,000 savings is that those people 
with Medicare only, only costs $4,000, right? But you further 
said that that is only 10 percent of the Medicare 
beneficiaries, right? I think it follows that they are the very 
poorest of the Medicare beneficiaries, right, and least apt to 
have medical services available and, and, and, and. So that, I 
think that the idea of suggesting that these copays cost us 
1,000 bucks may not be entirely based in the supplemental 
payments is what I am getting at. We are talking about 10 
percent who arguably are the most challenged of our 
beneficiaries.
    Further, we did not get into this. Dr. Scanlon, what is the 
average per-capita Medicare cost for the 40 million 
beneficiaries? Do you have a number off the top of your hat?
    Dr. Scanlon. I think it is approximately $6,000 per year.
    Mr. Stark. OK, it is 6,000 bucks. So Dr. Hogan used $5,000 
just as an estimate here.
    But if you take the $6,000 figure and take the Medicare 
Plus Choice, we have been told that if we risk the Plus Choice, 
we would be paying 7-percent less, so there is a $420 
overpayment in Plus Choice. It certainly does not have any 
deductibles, I do not think, any Plus Choice. It may have some 
modest copays. But I am not sure that we can just capriciously 
suggest that a variety of charges tacked on hither and yon will 
save money that we want to save because, in none of these 
purely numeric calculations, I do not believe, any of our 
witnesses have talked about whether the savings came from 
unnecessary medical procedures.
    You did not take that into account, did you, Dr. Hogan? You 
do not make a judgment here as to whether the difference in the 
$4,000 for Medicare only was a savings of 1,000 bucks on 
services that were unnecessary.
    Dr. Hogan. In my written testimony, I point out it is, more 
or less, across the board. In fact, all of the five preventive 
services that can easily be identified in the current 
beneficiary survey are used less by the beneficiaries who have 
to pay their own copays and deductibles.
    Mr. Stark. I guess you could get a fight in any bar in town 
as to whether or not preventive services are worthwhile and 
which ones we ought to be paying for, but this Subcommittee has 
added preventive services. We may all have a different list of 
priorities, but I think many of us have some we still do not 
pay for that we would like to add.
    So all I would like my colleagues to consider in this is 
that while there can be some savings in ratcheting up copays or 
certainly in deductibles in going to the hospital for a day 
where it is $600 or $700 is that what we want to do? There are 
ways to save money, and we have got a whole litany of those, 
but I just want to urge us to be cautious that we do not 
eliminate necessary medical procedures and overlook unnecessary 
ones. I am not sure that just dealing with broad copays or 
Medigap does that.
    I do not have any answer, but I just want to remind us that 
we could do some real harm here to people who need services.
    Chairwoman Johnson. I certainly appreciate the barrier that 
copayments can cause, but that is why I asked Dr. Scanlon and 
Dr. Hogan and they did name off a number of research projects 
that have been done that demonstrate that deductibles do lead 
people to think about whether they need the service or not. In 
the employer sector or even actually in Medicare, there does 
not seem to be any evidence that deductibles have been a 
barrier to care.
    Now, in Medicare, there are a lot of other barriers to 
care. So it is a little hard to make the comparison.
    Why don't I recognize Mr. McCrery and see if others pursue 
this topic and can come back to it. I think the point is we 
really have to have better documentation on this issue of 
deductibles because it does seem to be a factor, and we need to 
understand what kind of factor it could be for us as we face 
governing a program whose costs are exploding.
    Mr. McCrery.
    Mr. McCrery. I appreciate the testimony and especially the 
references to other studies that have been done on the 
effectiveness of copays and deductibles in discouraging over 
utilization.
    My own sense is, though, that discouragement is probably 
greater in the under-65 population than it is the over-65 
population. The over-65 population, generally speaking, 
probably has more need to go for services than the under-65 
population.
    Having said that, though, I do believe that there ought to 
be some requirement on the part of beneficiaries to pay some 
copayment or some deductible. The question to me is finding the 
right balance between discouraging over utilization and 
discouraging proper utilization, and I have not heard any of 
you give us that magic formula today.
    I was intrigued, though, Dr. Hogan, by your proposal or, I 
think it was, the AMA's proposal that you mentioned for a 
prepaid deductible that they could get back at the end of the 
year if they did not use. Have you thought about what effect 
that proposal would have on the secondary insurance market?
    Dr. Hogan. Really, the point of that proposal is twofold. 
For better or worse, it works like a small medical savings 
account.
    Mr. McCrery. Right.
    Dr. Hogan. But, mostly, it creates a little space where 
Medicare says for the amount that we are comfortable with, it 
might be a few hundred dollars, copays and deductibles shall 
apply, and the secondary insurers will not touch that. So the 
main point of it is to assert a small amount of money over 
which Medicare controls the copays and deductibles, not the 
secondary insurers.
    Their Medigap premiums would fall because they would not 
pay that first few hundred dollars of copays and deductibles, 
but would not fall a whole lot because you have to realize 
there is an awful lot of money out there on the far tail of 
spending. There is a few catastrophic cases that account for 
most of the costs, but other than that, if they would make 
their packages conform to Medicare's new structure, they would 
simply take it in stride. They would have a new set of plans, A 
through whatever, and they would charge somewhat lower premiums 
to cover the amounts beyond that prepaid deductible.
    Mr. McCrery. So, in other words, you would not allow 
secondary insurance to cover that prepaid deductible?
    Dr. Hogan. No. The whole point is you would not allow 
secondary insurance to cover the prepaid deductible.
    Mr. McCrery. That is a very interesting proposal, Madam 
Chair, and I hope that we will explore that further. It might 
be that we could even encourage it by making it like an MSA 
(medical savings account) and making it pre-tax dollars to be 
put into the account, and it could be rolled over from year to 
year if they so desired.
    Dr. Davis, you encouraged us to look at providing more 
services, prescription drugs, lower deductibles, and so forth, 
and it rang familiar. Isn't what you are describing very much 
like the catastrophic plan that Congress adopted back in 1988, 
I believe it was?
    Dr. Davis. Obviously, the catastrophic plan was designed to 
improve benefits. It was designed to put a ceiling on total 
spending that the elderly would have to pay, and it did have a 
prescription drug benefit.
    There are some significant differences. That particular 
proposal was financed by an income-related premium. That was a 
very sharp increase for beneficiaries that currently have 
employer supplemental coverage. So they saw themselves as 
getting no new benefits and, yet, paying a higher premium.
    What is laid out in this report that we have released today 
are four options, one with prescription drugs, three to change 
the cost sharing. All of them actually would increase the Part 
B deductible slightly, up to $200 from $100. That is the one 
deductible that has not increased in real terms, but they would 
markedly reduce the Part A deductible.
    One of the effects of that, for example, one of the options 
reduces the Part A deductible to $200. More people would be 
willing to do without supplemental coverage if they knew the 
most they had to pay for Part B was $200, the most they had to 
pay for Part A was $200, and there was a total ceiling of 
$2,000 on any cost sharing and deductibles overall.
    So, in fact, it is restructuring it, but the basic effect 
is to lower the average amount that beneficiaries pay as a 
percent of income across all services.
    Mr. McCrery. Did your study estimate a cost of the 
proposal?
    Dr. Davis. Yes.
    Mr. McCrery. What was that?
    Dr. Davis. There are cost estimates attached to those. If 
you think about, say, the year 2000 as a typical base, the 
first option increases Medicare outlays by about 2 percent, 
option two by about 7 percent, option three is budget-neutral. 
Obviously, if you were to do that, you would want to do 
participation rates, and you would want to do estimates over 
time and behavioral shifts, but there are estimates in 
percentage terms and in dollar terms. Option one is $3.2 
billion in the year 2000; option two, 16.4. Option three is 
financed by increasing the Part B premium to $105 a month. So 
there is actually budget neutrality in that particular option, 
but there are cost estimates provided, to give you a sense of 
what these would entail.
    Mr. McCrery. Thank you.
    Chairwoman Johnson. Mr. Kleczka.
    Mr. Kleczka. Thank you, Madam Chair.
    Dr. Hogan, in your testimony, you indicated those folks 
with supplemental insurance or Medigap actually cost the 
Medicare Program on average about $1,000 more.
    Can you point out specifically what services are being over 
utilized or where we are being taken advantage of or where the 
Federal Government is paying more?
    Dr. Hogan. I keep telling you folks necessary care is a 
fiction that physicians created. I do not think there is any 
such thing.
    There are some clear-cut cases. There are some cases that 
are not clear-cut. Most medical care is kind of gray, and I do 
not think it is particularly profitable to talk about necessary 
and unnecessary care. Maybe ``value'' is the better word, 
whether the value of the services that you get with zero copay 
is----
    Mr. Kleczka. But if, in fact, you are going to contend that 
on average, we are spending for the program $1,000 more, I 
would think that at least you could pinpoint where. Is it just 
doctor's visits?
    Dr. Hogan. Oh, no, no. If you look at the research, the 
research shows that the impact is much higher on the B side 
than on the A side. So it is not the hospitalization. That is 
the typical research.
    Mr. Kleczka. So with physician's visits, OK.
    Dr. Hogan. Right. So it is physician visits and tests and 
procedures and images. That is where the largest dollar impact 
is.
    If you go back to the national health insurance experiment, 
which is the under-65 and it is old, Joe Newhouse found that 
when you charge copays and deductibles, their utilization fell 
mostly, again, for physician services, but it did not seem to 
affect their health status as far as he could tell with some 
important exceptions, and the exceptions were pretty obvious 
once you saw them.
    Poor people with mental health problems: If you charge them 
copays and deductibles, their health deteriorates. So there is 
a bit of research to tell you where you should not charge 
copays and deductibles, and poor people with mental health 
problems is one of them.
    Beyond that, doctors cannot tell you what is necessary and 
unnecessary. You certainly would not want to ask an economist 
to tell you that.
    Mr. Kleczka. But if I were a doctor, I would want to do 
more versus less because medicine is an imprecise science, and 
so, if I am trying to do a decent analysis of a patient, I am 
going to have to maybe do another test which you say if it was 
not for this Medigap policy, this doctor would have done it, 
anyway. It gets kind of murky and cloudy.
    This is an interesting discussion, and I guess it is a 
rhetorical question. However, what I am wondering about is what 
is the actual purpose of copays. Is the purpose of copays and 
deductibles to have the patients share in the cost, or is it to 
try to restrict utilization, or is it a combination of both? If 
it is an effort to restrict utilization, then the answer for 
this Committee and the Congress is raise those copays and 
people just will not go. So, in your view, Ms. O'Sullivan, what 
are we trying to accomplish with copays and deductibles?
    Ms. O'Sullivan. It is essentially a combination of the two.
    Mr. Kleczka. That is what I was afraid of.
    Ms. O'Sullivan. You are trying to make beneficiaries cost-
conscious at the point when they use services, but not make the 
cost sharing so high that they will forego needed services and 
then perhaps incur larger expenditures down the road.
    Mr. Kleczka. Do you agree with Dr. Hogan's contention that 
because of supplementals and Medigaps that we are under a 
Medicare Program paying about $1,000 more?
    Ms. O'Sullivan. There is research that shows that Medicare 
beneficiaries that also had Medigap policies do cost the 
Medicare Program more.
    I think you should remember that people who buy Medigap 
policies are buying a policy that they know is going to cover 
most, if not all, of their cost sharing, and they probably 
purchased a policy based on the expectation that they are 
actually going to need covered services. So there is some of 
that entering the picture, also.
    We know that people that have employer-based policies cost 
Medicare more. They cost about 10 percent more than people that 
have no coverage. Arguably, people that have no coverage are 
the people that are low income, but above the Medicaid line. So 
any cost sharing could seem fairly burdensome to them. For 
them, cost sharing has a fairly big implication for them, and 
they may well be foregoing services that they actually need.
    The other comment I would make is when you are talking 
about impact of change in cost sharing, we do not have one 
supplementary market out there. We have Medigap. We have the 
Qualified Medicare Beneficiaries and the Specified Low-Income 
Beneficiaries (QMB/SLMB) populations for whom Medicaid is 
paying Medicare's cost-sharing charges. We have employer-based 
policies which have various ways of wrapping around Medicare, 
and we also have Medigap and there are 10 of those. So any 
tweaking of Medicare will have differential impacts.
    Mr. Kleczka. Fine. Thank you.
    Chairwoman Johnson. Mr. Ramstad.
    Mr. Ramstad. Thank you, Madam Chairwoman, and thank you for 
calling this important hearing on Medicare beneficiary cost 
sharing.
    I am concerned like you, Madam Chair, about the costs that 
beneficiaries must pay when they get sick, the plans they must 
purchase to cover their needs because of Medicare's copays and 
the lack of catastrophic coverage, and, of course, I am also 
concerned about the fact that this problem is really 
exacerbated because Medicare lacks catastrophic protection. 
That is contrasted with 97 percent of private health policies 
which have such protection.
    So I think in total, when you look at Medicare's limited 
benefits package, it is high copays, and the complete absence 
of catastrophic, that means that nearly half of our seniors' 
health care costs are not covered by Medicare. That practically 
means that Medicare seniors must bear the cost themselves. This 
fact of lack of coverage is unacceptable and needs to be 
addressed through our comprehensive reform.
    In that vein, I would like to ask you, Dr. Scanlon, first, 
does the status quo in Medicare cost saving make sense to you 
when compared to private-sector health insurance plans which 
structure, of course, are out-of-pocket obligations?
    Dr. Scanlon. No, sir, they do not.
    Clearly, as you indicated, the lack of catastrophic 
protection is something that private insurance does not have, 
and it is sorely lacking in Medicare. It creates a situation 
where we do not really have a true insurance policy. You can be 
catastrophically harmed by your medical expenses, and that is 
something that we would hope for as the first thing to 
accomplish in a Medicare reform.
    Second, what has happened is over time, the cost sharing 
that was put into place in 1966 and has been modified, as Ms. 
O'Sullivan indicated, only slightly since then has evolved in 
ways that distort it even further than what it was before.
    We did not expect in 1966 hospital costs to be growing so 
much so that the deductible would be close to $800 today, so 
that a single hospitalization alone creates a large expense for 
individuals.
    We have not seen the Part B deductible keep pace with 
inflation. So it is withering in terms of the share of real 
income that it represents.
    These are not the kinds of things you would see in most 
private insurance plans because they have been adjusted over 
time to try and reflect the changes in medicine as well as the 
changes in the cost of medicine.
    Mr. Ramstad. Dr. Scanlon, I think your summary statement 
says it all when you said that Medicare beneficiaries do not 
really have a true insurance policy. That should concern all of 
us on this panel, as I know it concerns so many people in the 
Medicare system.
    Let me ask you, Dr. Hogan, if you will, please. In your 
testimony, you stated that the current Medicare supplemental 
system is, to use your words, regressive and disproportionately 
affects the poor. Could you just expand on those comments?
    Dr. Hogan. I will not say it is the worst of all possible 
worlds, but beneficiaries who can most afford to pay the 
copayments do not. They buy Medigap. The beneficiaries who 
cannot afford to pay the copayments cannot afford Medigap, and 
those who can afford Medigap drive up costs for everyone, 
including the Part B premiums that poor people have to pay.
    So I could think of two reasonable approaches. Either make 
it free for everybody or make everybody pay, but allowing the 
working stiffs who do not have a decent job and do not have 
decent employer-sponsored coverage have to pay those 
copayments, those irrational copayments out of pocket, and 
everybody else has enough money to buy Medigap. That is not 
sensible.
    Mr. Ramstad. I thank you for that very honest and, I think, 
accurate response.
    I think oftentimes a statement made earlier this year by 
our colleague working on Medicare reform on the Senate side, 
Senator Breaux, who said right now what we are doing with 
respect to the Medicare system is analogous to putting gasoline 
into a 1965 Chevy when, in fact, we need a new car, and I think 
all of you would agree to that statement as to the need for 
overall comprehensive Medicare reform.
    I thank you for your testimony here before the 
Subcommittee, and your continuing counsel is definitely 
appreciated. Thank you, and I yield back the balance of my 
time.
    Chairwoman Johnson. Congresswoman Thurman.
    Mrs. Thurman. Thank you, Madam Chairman.
    I want to thank the witnesses for being here today and 
giving us some information here.
    I go through this every time we have a group before us. So 
you guys kind of need to help me here. If a Medicare 
beneficiary chooses to enroll in a Medicare Plus program, he or 
she then does not have to have a Medigap coverage. We all know 
that because they have no deductibles. They have maybe some co-
payments.
    Then, in an article--and I just kind of would like your 
all's opinion about this--published in Health Affairs in 
January 1999, Gail Wilensky and Joe Newhouse suggested--and I 
will quote them here--that, ``In an informed program, 
additional benefits should be provided through the Medicare 
Program and not through a Medigap plan.'' In other words, my 
understanding of this is to create a level playingfield between 
traditional Medicare and Medicare Plus Choice plans, Medigap 
should be merged into traditional Medicare fee-for-service 
plans so that the Medicare beneficiaries would not have to 
purchase separate Medigap insurance.
    So the question is do you agree or not agree with that 
summary, and if so, why, and if not, why. I will ask all four 
of you that question.
    Dr. Davis. I certainly have a lot of agreement with the 
idea that Medicare benefits ought to be improved to the extent 
that people would not need to buy Medigap. So that means 
covering prescription drugs, which is covered in most Medicare 
Plus Choice plans. It means getting the deductibles down to 
modest amounts that people can afford to pay without filling 
in, and to really have a modern benefit package.
    We talked a lot about employer plans. The typical employer 
conventional fee-for-service plan has a $239 deductible across 
all services. Medicare has far more than that. It has a $1,500 
ceiling on a lot of out-of-pocket expenses, and that is for 
conventional fee-for-service. For their preferred provider 
plans, their point-of-service plans, those amounts are lower. 
So I think modernizing Medicare's benefits means you do not 
have to buy supplemental.
    People with employer coverage do not go buy supplemental 
coverage. The fact that 90 percent of Medicare beneficiaries 
have to go buy something else means that what they have, they 
certainly perceive as inadequate. I think there are, as I have 
mentioned, efficiencies to be gained by simply consolidating 
that benefit within the Medicare Program.
    Mrs. Thurman. And just to add to that, I would further 
think that it puts everybody then on that level playingfield. 
Right now, we have so many things going on in Medicare, quite 
frankly, that just because of where your geographical location 
is does not give you the same benefit even though the payment 
is coming still directly from the government.
    Dr. Hogan.
    Dr. Hogan. While I agree with the sentiment of that, there 
are a few little details. I only say this because I used to 
work for Joe and Gail. I was on the staff of one of their 
commissions, and there are a few little details you have to 
keep in mind. How much are you going to charge for the 
Medicare-sponsored Medigap policy, and are you going to pay 
less if you do not have it? If you add the Medigap premium to 
my $1,000 cost estimate, there would be almost $2,000 
difference between what you would want to have, a beneficiary 
with no supplemental insurance pay and a beneficiary who has 
the Federally sponsored Medigap pay. So there may be a premium 
attached to that, that might be kind of unpleasant to look at.
    The second issue is what about the people who have 
employer-sponsored coverage now. How are you going to make 
their employers continue to pay for that coverage, or are you 
just going to let them skate and have the taxpayers pay for it? 
So it is not as easy as you might think.
    Nevertheless, what Karen said is exactly right. You would 
certainly get some efficiencies just from the overhead alone 
rolling Medigap into the Medicare program because their 
overhead charges are lower, and it is a lot easier for Medicare 
to run the individual purchase policy than it is for the 
private sector to do it.
    Having said that, this sentiment is correct, but there is a 
devil in the details that you really have to pay attention to.
    Dr. Scanlon. I agree, and I think there is a rationality to 
improving Medicare so that the need for a Medigap policy 
declines.
    There is a reality today that there is a rational need to 
buy catastrophic protection. It is somewhat irrational to be 
buying first dollar coverage. Essentially, what you are doing 
is for that first $100 of medical care that you are going to 
use, you are paying someone $120 to write that check. That does 
not make a lot of sense.
    So the idea of incorporating these types of protections 
into a better Medicare program and offering it to 
beneficiaries, I think, would reduce the need for Medigap.
    Mr. Stark indicated, also, we have a very complex system 
that has developed here in terms of the different participants 
and that we would be creating some very significant disruption 
in terms of making a change like that.
    Mrs. Thurman. But aren't we creating some problems out 
there with the Medicare population, anyway, because their 
benefits are so different depending, again, whether they can 
have prescription drugs, whether they can have eyeglasses, 
whatever other procedures, and in Medicare Choice, really 
catastrophic? I mean, they have a catastrophic payment, and 
that is us.
    Dr. Scanlon. We definitely are.
    Our problem is we sometimes have trouble making the 
transition to a new system. If you look at the statistics on 
Medigap policies fully, a third today are policies that existed 
before 1992, many of which have much poorer coverage than the 
policies that are available today.
    There may be issues of people not being able to get access 
to these benefits because of health status, but a full third 
are those are in older policies which have relatively limited 
coverage.
    Ms. O'Sullivan. Certainly, one advantage of expanding 
Medicare's benefits would presumably make it more in line with 
the coverage people are used to up through age 65. Now, when 
they transition to Medicare, they are faced with a whole new 
set of requirements. So, from that perspective, it could 
potentially be easier for the population. Obviously, of course, 
this is a much more expensive population group than the under-
65 population, and also, as has been mentioned here, you have 
to think of what the implications are for people with employer-
based policies, would they just wrap around to the new Medicare 
coverage. Presumably, it could potentially be cheaper for some 
of the employers, though we also know a lot of employers who 
are getting out of the business of retiree coverage, anyway. So 
whether this would speed it or slow it down is a question you 
could ask.
    But, yes, there are certainly some advantages. So, 
obviously, it has many implications when you flesh out the 
details.
    Chairwoman Johnson. Mr. McCrery.
    Mr. McCrery. Thank you, Madam Chair.
    Since we have such a distinguished panel--I read a news 
report just a couple of days ago or maybe yesterday about a 
study that was done recently that indicated that seniors are in 
better health than they used to be, basically, and that because 
they are in better health, they are costing less and that that 
might have fairly significant, positive consequences for 
Medicare spending in the out years. Did you all see that 
report, and do you have any comment on it?
    Dr. Hogan. May I be the first to jump in here?
    Mr. McCrery. Sure.
    Dr. Hogan. Ken Manton, who did that report, is a well-
respected demographer, and if he says it, I imagine it so. I 
certainly have not seen that come through in any statistics 
that I look at, but I do not look at a long-time series.
    The only point I really want to make is this.
    Mr. McCrery. I am from Louisiana. If you would talk just a 
little slower.
    Dr. Hogan. I am sorry, and I need less caffeine.
    Jim Lubitz, years ago, did a study. Jim Lubitz is a 
researcher at the Health Care Financing Administration and did 
a study of beneficiaries' lifetime spending. What you find is 
the longer you live, the more you cost Medicare, period.
    Mr. McCrery. All right.
    Dr. Hogan. You will spend less in the last couple of years 
of life, but extending lifespan or coming in a little bit 
healthier and living a little bit longer, it is arguable that 
that will reduce. Even if it is true, it is arguable that that 
will reduce costs.
    Dr. Davis. I do think it is a very important study that the 
National Academy of Sciences has published showing that 
disability rates of the elderly have dropped markedly from 1982 
to 1997. If you really break it down by the kinds of 
conditions, you do see that we have had a major reduction in 
strokes over that period and much better control of 
hypertension over that period, breakthroughs in treatment for 
heart disease over that period. There is another major study 
supported by the Lasker Foundation that really looks at the 
benefits to the economy of that improved health, particularly 
in the last half of the 20th century that comes from these 
kinds of improvements, both in preventive care and 
breakthroughs like beta blocker treatment for heart attack 
victims.
    They argue that the gains to the economy in the last half 
of the 20th century from these advances in health care equal 
the gains that have come from increased productivity over that 
period. So they really are quite significant. It is not just a 
matter of looking at how they affect Medicare spending. The 
longer we live, certainly there are going to be more years that 
we are on the Medicare program. That is, in part, the goal. The 
fact that we are improving life expectancy, we are reducing 
disability, I think it is quite significant.
    I think it plays in today's discussion in the following 
way. When you talk about cost sharing, we have emphasized 
preventive services like getting mammograms or Pap smears or 
colonoscopies, but it is also important to have chronic 
conditions well maintained.
    If you have got hypertension, if you have got diabetes, if 
you have got high cholesterol or arthritis, you need to be 
making regular visits to physicians. Many times, you need to be 
on a prescription medication to control that condition to avoid 
these adverse consequences of strokes and mortality from heart 
disease or disability from heart disease.
    So, if you deter people from getting proper maintenance of 
chronic conditions--we supported, for example, a study that 
showed that people without supplemental drug coverage are much 
less likely to get hypertensive medication for people with 
hypertension than those that have supplemental drug coverage. 
So these issues of cost sharing and supplemental coverage and 
the quality of the benefits do affect these issues of life 
expectancy, disability, and quality of life.
    Mr. McCrery. Dr. Scanlon.
    Dr. Scanlon. Yes. I think the studies indicate some of the 
very positive things that have happened with medicine over the 
last 30 years, and that is part of why we are so concerned 
about getting people access to health care.
    Dr. Hogan's comment about the lifetime expenditures, we do 
not know how that is going to work out yet because we have a 
new cohort of people who are aging with a very different life 
history than the cohorts of the past--better nutrition, better 
medical care, different lifestyles--and we will wait to see how 
that happens. That is the positive side.
    In terms of your question of how much relief this provides 
us, it may provide some relief in terms of per-capita spending, 
but as I have heard others say, it is not the per capita that 
is our problem. It is the capitas. It is when those baby-
boomers come and they multiply whatever per-capita amount we 
are going to spend. That is the challenge, I think, that we are 
overwhelmed by.
    Mr. McCrery. Ms. O'Sullivan.
    Ms. O'Sullivan. I would agree with Dr. Scanlon.
    Mr. McCrery. Madam Chair, it was a very interesting summary 
of the study that I read, and it might be that ina future 
hearing, we would like to bring in the authors of that study 
and others on the panel that might want to comment on the 
study. It would be very interesting for this Subcommittee to 
investigate.
    Chairwoman Johnson. Thank you.
    Let me ask the panel one final question. If you added the 
deductibles and the premiums under Part B or I guess you would 
probably want to exclude the deductibles since Medigap covers 
that--I mean, I am impressed that so many of my seniors are 
paying Part B and also Medigap premium. The Medigap premiums 
right now are pretty steep. They have gone up considerably.
    So, if you just took the two of those and made them the 
deductible, then the out-of-pocket expenditure--I mean, I am 
not really proposing this. I just want to get your opinion. 
This is what seniors are spending now, a big chunk of them. If 
they spend it in a different pattern and if instead of spending 
it for premiums, it was a deductible or it was some kind of 
prepare bank account like Dr. Hogan proposes, then what would 
be the impact? Would you get the benefits of first dollar 
expenditure thinking? On the other hand, the exposure would not 
be any greater? See, if you do that, there are some advantages 
for low-income people, just above the levels that we now 
subsidize. You could subsidize those premiums, but that is, in 
fact, what seniors are spending now. If we are going to merge 
these and rationalize the program and broaden its coverage, 
then what would be wrong with broadening the deductible to 
cover, in a sense, what they are already paying and turn it in 
from a premium to a deductible and subsidize the premium for 
people in that group that now cannot afford either? That is one 
way. Would that have any impact on cost, Ms. O'Sullivan?
    Ms. O'Sullivan. I believe your proposal is saying basically 
you take the Part B premium which is $600 a year and you would 
be adding to that an average Medigap premium which is $1,300, 
$1,500 a year. So you would be talking something----
    Chairwoman Johnson. Except the Medigap premium usually pays 
the Part B premium.
    Ms. O'Sullivan. No. No, it does not. It is separate.
    Chairwoman Johnson. Or, just the deductible?
    Ms. O'Sullivan. It is separate. So you would be talking 
something close to $2,000 as a deductible.
    We know that beneficiaries, regardless of how you present 
something to them, are very risk-averse, and they do not want 
to be liable for even that first dollar coverage. Many of them 
might view the $2,000 as a very large gap before the program--
--
    Chairwoman Johnson. They might, and I understand the fear 
issue, but they would not have any monthly payments.
    Ms. O'Sullivan. Correct. The issue would be it would have 
to be presented, I believe, in a very simple form to be 
understood by everybody and people would have to understand 
what the tradeoffs are and you would probably also have to 
think about the implications of the people on the lower end of 
the income scale.
    Chairwoman Johnson. Oh, you certainly would have to think 
about that, no question about that, but it is sort of 
interesting to contemplate. You have got a lot of people out 
there putting a lot of money out and not getting much for it, 
frankly, except peace of mind. Peace of mind is worth a lot, 
but it is not buying medical care.
    Dr. Scanlon.
    Dr. Scanlon. You do need to look at all of the sources of 
cost to the elderly, but you do need to break up these, the 
Medicare beneficiary population into the different groups 
because they are having very different experiences right now.
    Those that are paying the Medigap premium are about a 
quarter of all beneficiaries. We have got more than a third who 
have employer coverage, and they are paying more in premiums 
today than they used to in the past, but they may be paying 
much lower premiums.
    We have the people in Medicare Plus Choice plans. They are 
paying more today than they used to, but they still may be 
paying a lot less.
    Then, finally, we have those who are Medicaid-eligible. 
That is a key part of this equation that you are thinking about 
in terms of how do you balance a restructured cost-sharing 
framework with affordability while avoiding negative impacts. 
The Medicaid dual eligibles and the QMB program provide you one 
of the mechanisms that you have already in place to think about 
how to protect people with lower income.
    Chairwoman Johnson. Yes. The reason this is very important 
is that, as you say, there are different populations with 
different coverage. There is a third that has pretty good 
coverage, not just for prescription drugs, but for a lot of 
things that Medicare does not cover. Then there is this other 
third with Medigap who are paying an awful lot of money and, 
for the most part, not getting much in terms of prescription 
drugs. Then you have the ones that are Medicaid-eligible, as we 
say in our slang down here, SLMBs and QMBs, but they get 
everything for the most part. Some of them pay a little 
premium, but they are pretty well cared for and covered.
    So you have then the group just above 100 percent of 
poverty income, and people in that level of income that can 
afford Medigap insurance, in a sense, they are the worst off. 
They have the Medicare-only plan. They have the Medicare 
premium of about $50 every month, and they have all the 
copayments under Medicare. If you look at all of the 
prescription drug plans, regardless of which party they 
originated from, they provide the least help to that very group 
because the other groups would have plans that would wrap 
around the help that is provided. So they will all do better 
under a prescription drug program, but the group that has the 
least will pay an additional premium which they can ill afford, 
and then they will get 50 percent of their cost of drugs up to 
$2,000. This is not a big benefit in today's world of drug 
prices.
    So I hear, Dr. Davis, your concern for the beneficiary cost 
issue, but I do not see the solutions directing themselves to 
the beneficiaries who right now have the highest costs with the 
least means, and I do not see how you can, frankly, in good 
faith deal with their concerns fairly and honestly and provide 
retirees with comfortable incomes the same benefits.
    I do not think it is outright fair that my husband and I 
would have the same catastrophic level of coverage that I think 
many of these seniors need, which I think is about $1,000. I do 
not even know where some of them would get $1,000 to meet the 
catastrophic coverage, but many seniors we are most concerned 
about will never meet the threshold, the $4,000 catastrophic 
coverage. So I am very concerned that we talked blithely about 
helping the beneficiary, but the group that is least helped by 
any of these plans is the group that is least helped by any of 
the reform proposals unless you take Dr. Davis' that is very 
much richer in every, every case, but, frankly, I think would 
be unaffordable.
    I will look at your cost estimates, but I cannot imagine 
without some means testing that you could do all the things you 
want to do and have no disincentive to buy because there is too 
much evidence in every market, employer-provided market, every 
market that people buy more health care than they actually 
need.
    I will look more closely, and I will help the Committee 
look more closely at the evidence of the discipline of first 
dollar coverage. I think we absolutely are obliged to look at 
that and any other proposals you can think of to help us look 
at cost discipline because the more we rationally govern costs, 
the more we can help those who need it most to have the 
resources to get a fair and reasonable health plan.
    If you have any closing comments, you may comment. 
Otherwise, we will close the hearing.
    Dr. Davis. Just to stress that all of the options I laid 
out are not first dollar. They all have at least a $200 Part B 
deductible.
    Chairwoman Johnson. Oh, yes. I am sorry. I forgot that. I 
was glad to hear that.
    Dr. Davis. A Part B deductible of $200, which is the 
typical employer plan, but I think the idea of charging a 
$2,000 deductible for beneficiaries, two-thirds of whom are 
either very sick and paying an awful lot of money already or 
have very modest incomes below----
    Chairwoman Johnson. But you could not do it outright.
    Dr. Davis. Twenty thousand dollars is just not an 
affordable kind of benefit package.
    Chairwoman Johnson. What I guess I am suggesting is if you 
think of what are currently paid as ``premiums,'' as instead a 
kind of savings account, that if you did not use it all, you 
could roll it over for future expenses, we need some creative 
thinking, and that would functionally be a higher deductible, 
but it would be paid out like a premium into a savings account.
    Anyway, we will talk about these ideas, and I hope you will 
all think about them because we do not really have the ideas 
that we need yet, and I hope you will be a part of generating 
them. I think the old way of linear thinking, sort of using the 
old employer model, is for this population not very useful 
because the costs are so extraordinarily variable and we are 
insuring people now, so very many years, with varying different 
means and capacities to participate in the costs themselves, 
and also with an urgency to keep in the market a variety of 
solutions, the employer solution, the choice solution, as well 
as a decent fee-for-service plan.
    I hope you will draw from this hearing that we are really 
at the beginning of the road, and we are really not toward the 
end.
    Thank you.
    [Whereupon, at 3:37 p.m., the hearing was adjourned.]
    [Submission for the record follows:]

                                


          Statement of the United HealthCare Insurance Company
    The United HealthCare Insurance Company (United) is pleased to 
provide the Subcommittee with this written statement to supplement the 
transcript of the Subcommittee's May 9 hearing on modernizing 
beneficiary cost sharing in Medicare. The United HealthCare Insurance 
Company underwrites Medicare Supplement Insurance plans provided to 
AARP members through AARP's Health Care Options program. The views 
expressed in this statement are solely those of the United HealthCare 
Insurance Company and are not necessarily the views of AARP.
    Medicare cost sharing is an important issue. Over the years, 
beneficiaries have been asked to cover an increasing share of their 
health costs. Today, Medicare covers roughly half of a typical 
beneficiary's health care costs, and it is likely that this proportion 
will continue to decline.
    To remain viable, Medicare has relied upon supplemental coverage 
from a number of sources, including employers and Medicare Supplement 
carriers. Without this supplemental coverage, many seniors would not be 
able to meet their cost-sharing obligations.
    Roughly one third of Medicare beneficiaries have a Medicare 
Supplement policy. For many beneficiaries, particularly in rural areas, 
Medicare Supplement policies are the only available supplemental 
insurance option. Therefore, it is extremely important that Congress 
consider the impact upon Medicare Supplement of any potential 
legislation to reform or modernize Medicare.
Issues for Consideration
    In reviewing the supplemental insurance market, Congress should 
consider whether to revise the existing standardized benefits and 
whether there are ways to make supplemental insurance more affordable 
and accessible to beneficiaries.
    Standardization was intended to provide consumers with a common set 
of benefits around which carriers would compete based upon price and 
service. Ten years of experience, however, has shown that 
standardization has not achieved all of its original goals.
    First, although there are ten plans, only a few are frequently 
purchased by consumers. This suggests that some of the benefits need to 
be reexamined in light of the existing market and changes that have 
been implemented in Medicare.
    Second, premiums have increased substantially, primarily due to 
medical inflation and additional requirements placed on Medigap 
carriers, such as coverage for beneficiaries under age 65. At the same 
time, many carriers have switched to attained age rating, a pricing 
system that raises premiums annually based solely upon age. To ensure 
that fee-for-service remains viable, Medicare Supplement plans need to 
be affordable for seniors of all ages.
    Finally, since standardization, most Medicare Supplement carriers 
have imposed substantial medical underwriting requirements, excluding 
many people with high cost health conditions. At the same time, recent 
changes in guaranteed issue rights have created an extremely complex 
set of requirements that are almost impossible to administer. 
Underwriting requirements and guaranteed issue rules should be examined 
to ensure that Medicare Supplement plans are as widely available as 
possible.
Options for Reform
    There are a number of reform options that Congress should consider 
in examining the Medigap market. First, because only a few plans are 
popular among consumers, Congress should consider combining existing 
plans and adding new benefits that consumers want, such as alternative 
medicine.
    Similarly, Congress should review the prescription drug benefit in 
plans H, I, and J. Despite consumer desire for prescription drug 
coverage, these plans are not as popular as the non-drug plans. 
Moreover, most companies do not offer the drug plans in many areas. 
United is the only carrier offering at least one of the three drug 
plans in every state and, as a result, sells roughly half of all 
Medicare Supplement drug plans in the country.
    Second, Congress should consider standardizing the rating 
methodology by which carriers establish premiums. Although 
standardization was intended to simplify the market, multiple rating 
methodologies are confusing to seniors and, particularly with attained 
age rating, create market incentives that actually disadvantage 
seniors. A uniform rating methodology would help accomplish one of the 
original goals of standardization--competition based upon comparable 
prices, value, and service.
    Third, Congress should consider options that reduce premiums and 
utilization, such as co-pays and additional deductibles. Although these 
low-cost options should not be in every plan, they could provide 
broader benefit choices for people who want to reduce or minimize their 
monthly payments.
    Finally, Congress should consider other reforms designed to reduce 
premiums and increase benefits to consumers, such as standardizing 
enrollment and other regulatory requirements, implementing ``speed to 
market'' measures that reduce administrative burdens on states and 
insurers, and allowing standardized plans as additional options in 
waiver states.