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

                     MEDICARE: THE NEED FOR REFORM



                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION


             HEARING HELD IN WASHINGTON, DC, JULY 25, 2001


                           Serial No. 107-15


           Printed for the use of the Committee on the Budget

  Available on the Internet: http://www.access.gpo.gov/congress/house/


74-333                     WASHINGTON : 2002

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire        JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
PETER HOEKSTRA, Michigan               Ranking Minority Member
  Vice Chairman                      JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire       BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota             KEN BENTSEN, Texas
VAN HILLEARY, Tennessee              JIM DAVIS, Florida
MAC THORNBERRY, Texas                EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas                     DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia                 GERALD D. KLECZKA, Wisconsin
ERNIE FLETCHER, Kentucky             BOB CLEMENT, Tennessee
GARY G. MILLER, California           JAMES P. MORAN, Virginia
PAT TOOMEY, Pennsylvania             DARLENE HOOLEY, Oregon
WES WATKINS, Oklahoma                TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             CAROLYN McCARTHY, New York
JOHN T. DOOLITTLE, California        DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    MICHAEL E. CAPUANO, Massachusetts
RAY LaHOOD, Illinois                 MICHAEL M. HONDA, California
KAY GRANGER, Texas                   JOSEPH M. HOEFFEL III, 
EDWARD SCHROCK, Virginia                 Pennsylvania
JOHN CULBERSON, Texas                RUSH D. HOLT, New Jersey
HENRY E. BROWN, Jr., South Carolina  JIM MATHESON, Utah
MARK KIRK, Illinois

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held in Washington, DC, July 25, 2001....................     1
Statement of:
    Hon. David M. Walker, Comptroller General of the United 
      States.....................................................     5
    Ruben Jose King-Shaw, Deputy Administrator, Centers for 
      Medicare and Medicaid Services.............................    40
    Bill Scanlon, Director, Health Care Issues, U.S. General 
      Accounting Office..........................................    48
    Dr. Gary S. Kaplan, Chairman, Board of Directors, Medical 
      Group Management Association...............................    74
    Dr. James R. Bean, Neurosurgical Associates..................    82
    Marilyn Moon, Senior Fellow, Urban Institute.................    88
Prepared statement, additional submissions of:
    Hon. Jim Matheson, a Representative in Congress from the 
      State of Utah..............................................     3
    Mr. Walker:
        Prepared statement.......................................     8
        Reply to Messrs. Spratt and Watkins......................    27
    Mr. King-Shaw................................................    42
    Mr. Scanlon..................................................    50
    Hon. Frank Pallone, Jr., a Representative in Congress from 
      the State of New Jersey....................................    72
    Dr. Kaplan...................................................    76
    Dr. Bean.....................................................    84
    Ms. Moon.....................................................    89

                     MEDICARE: THE NEED FOR REFORM


                        WEDNESDAY, JULY 25, 2001

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Gutknecht, 
Collins, Fletcher, Watkins, Culberson, Spratt, McDermott, 
Bentsen, Clayton, Hooley, Baldwin, and Holt.
    Chairman Nussle. Well, good morning. This is the full 
committee hearing, Budget Committee, on Medicare and the need 
for reform.
    Earlier this year when the committee first met we, I 
believe, had a fantastic bipartisan discussion about the role 
of the Budget Committee and where, in fact, the Budget 
Committee should be taking the Congress, leading in a new 
direction. So much of the first charter of the Budget 
Committee, and particularly during the reforms of the 1980's, 
was to get us out of the deficit, get us out of the chronic 
deficits that our country faced and that the Budget Committee, 
by and large, was the fire department. You know, you pull the 
alarm and we arrived and sometimes we put the fire out, 
sometimes we made it worse. Our heart was in the right place, 
but there was no question that we were looking at the short 
term. We were not looking at fire prevention in the future.
    And one of the biggest fires that is out there on the 
horizon are obligations that the Federal Government is making 
today, writing checks that we can't cash possibly in the 
    Our entitlement programs, as we learned during the reform 
discussion of the last couple of weeks, are gobbling up just 
about every portion of the tax dollars, the surplus and future 
obligations for our budget. Now the entitlement programs, 
Social Security, Medicare, Medicaid, a number of welfare-type 
programs, assistance programs, are becoming the largest 
growing, fastest growing, and now the largest part of our 
Federal budget.
    And so one of the things that Ranking Member Spratt and 
myself, Mark Kirk, Ernie Fletcher, and a number of others--I do 
not mean to leave people out--but a number of people said we 
ought to start focusing on the long term. Let us take a little 
longer horizon. We always look at Medicare for what it is going 
to do next week, next month, next year, but we very rarely look 
at what happens at 2016 and beyond.
    That is the purpose of the hearing today, to talk about 
what we can do in order to deal with what we know is a 
certainty; and that is that we have a program that is a very 
important program to the seniors of this Nation, not only the 
seniors today, but the seniors of the future of which we all 
count ourselves in. By the time we are seniors, it will be the 
Budget Committee that will have to grapple with the fact that 
we didn't make the reforms necessary today in order to deal 
with the future that we know is coming.
    We have an opportunity to make those changes. And I always 
point this out, because being from a rural area in particular, 
I am very concerned about the way health care is delivered, the 
way the Medicare system works in my State of Iowa. Just to give 
you an example, Iowa ranks the third highest in population of 
seniors 65 years and older. We are the second highest 
population of seniors 75 years and older. And now we are number 
one when it comes to the population of seniors 85 years and 
older. That is just in Iowa. And yet we rank 50th in the 
country when it comes to Medicare reimbursement overall. That 
is not fair to our seniors. That doesn't sound to me like a 
program that is working. That is just the one hand.
    I go out and I talk to my hospitals, I talk to my doctors, 
I talk to folks who have to rely on these reimbursements in 
order to provide and deliver the health care product in a 
quality way. They do a great job and they have always done a 
great job in providing that kind of quality product. But they 
tell us not only is the reimbursement low--and that is one 
focus and they are happy that we are focusing on that--but they 
tell us the regulatory burden is just unimaginable.
    I was in a meeting here not too long ago where just for one 
patient for a 2-day stay at the hospital, they rolled out a 
document. They taped it all together so you could see all the 
pieces of paper that they had to fill out. The nurse who is 
there to provide care, is now becoming a secretary and a clerk, 
which is absolutely not what they went to school for. And this 
piece of paper started from about where I am and went to the 
back of the room here in length. That was just for one patient, 
for one stay. And the question came up, ``who reads this?'' of 
course, nobody reads this. It is spot checked. But the 
paperwork burden, the regulatory burden on our providers is not 
delivering quality health care. And that is also burdening this 
health care system.
    We know from the testimony from our very first witness here 
today, that the agency that provides Medicare as well as the 
contractors that deliver the health care product aren't getting 
their questions answered correctly from what was HCFA--now what 
are you called now? What is HCFA called now? Center for Medical 
Services--is that right--Medicare and Medicaid Services. It was 
easier when the Secretary came up and said he was going to call 
it Momma. That was a lot easier to remember. But we didn't call 
it Momma.
    The point is that the name change is good, but there are 
many things within the agency that need to be reformed. And 
that is part of what we are also going to be talking about 
today, the way that they might impact our long-term focus.
    I didn't mean to start without you, Mr. Spratt, but the 
focus of this hearing is to look at the long term. We have an 
opportunity today to begin looking at a much longer horizon. We 
always look at tomorrow and the next month. We decided--you and 
I decided, the committee decided--that we were going to try and 
change the focus for the committee this year and take a little 
longer-term approach to this. And we have got some great panels 
to talk about this.
    The first one today that is going to talk about this is the 
Comptroller General, who is here today from the General 
Accounting Office, David Walker, who has spoken to our 
committee on a number of occasions. We welcome you back and 
appreciate the opportunity to visit with you about the serious 
problem that Medicare has and its long-term financial 
    Our second panel, we will have Frank Pallone, Member of 
Congress and also the co-chairman of the Democratic Task Force 
on Health Care Reform. From New Jersey, Rubin Jose King-Shaw, 
who is Deputy Administrator, Centers for Medicare and Medicaid 
Services, CMS. And Bill Scanlon who is the Director of Health 
Care issues for the General Accounting Office.
    These three will focus on Medicare's regulatory and 
bureaucratic structures in the areas for possible regulatory 
reform and how that could impact long-term stability for 
    And then, finally, panel III, we have Gary Kaplan, who is a 
doctor from Kentucky--Lexington, Kentucky. We have Marilyn 
Moon, Senior Fellow from the Urban Institute. And these 
witnesses will discuss the effect on providers of the 
regulatory burden and the bureaucracy they face.
    I think the good news that we have got today is that there 
is a bipartisan desire to make sure that Medicare is modernized 
so it can deliver a quality product for seniors for many years 
to come. We may disagree slightly on exactly how we are going 
to get there, but I know the desire is one that is shared. The 
Budget Committee has a responsibility, now that we are out of 
the chronic deficits, to take a longer-term horizon, longer-
term approach to these issues. This was a good idea. To begin 
holding these kinds of hearings. I credit Mr. Spratt and other 
members for the idea, and we look forward to the testimony of 
our witnesses.
    Mr. Spratt.
    Mr. Spratt. Let me say to all our witnesses, to General 
David Walker in particular, thank you for your interest, thank 
you for your commitment in coming. This is a gravely important 
subject and we appreciate your participation.
    Chairman Nussle. With that, we will turn--let me ask 
unanimous consent that all members have 7 days to submit 
written statements, opening statements in the record at this 
point. Without objection, so ordered.
    [The prepared statement of Mr. Matheson follows:]

 Prepared Statement of Hon. Jim Matheson, a Representative in Congress 
                         From the State of Utah

    Thank you, Chairman Nussle and Ranking Member Spratt, for holding 
this hearing today to examine the need for Medicare reform. I believe 
this is a very important issue that affects all of our constituents. 
Medicare needs to be reformed to ensure long-term solvency for current 
and future generations, provide a modern benefit plan for seniors, and 
to improve program management.
    Since its creation in 1965, the Medicare program has provided a 
vital source of health coverage for many seniors and disabled 
individuals who could have otherwise faced significant challenges in 
obtaining insurance. Medicare now provides health insurance for around 
40 million people nationwide, but this population is expected to double 
over the next thirty years with the impending retirement of the baby 
boomer population.
    We must take the necessary actions now to ensure the program's 
solvency for current and future generations. Now more than ever, it is 
important for Congress to make prudent fiscal decisions to protect the 
current Medicare surpluses. As members of the Budget Committee, we have 
a responsibility to ensure that any legislation passed by Congress does 
not dip into these surpluses.
    Medicare's current benefit structure includes coverage for the 
costs of many acute care services; however, it has very limited 
preventive and prescription drug benefits. I believe it is important 
that we reform the Medicare program so that beneficiaries receive a 
more modern benefits package, including prescription drug coverage and 
preventive benefits.
    I support adding a voluntary prescription drug benefit under 
Medicare to help seniors meet their medication needs. Unlike medical 
care thirty years ago when Medicare was created, prescription drugs are 
now an integral part of modern day medical treatment. This additional 
coverage would help ensure that seniors with fixed incomes are better 
able to fill their prescriptions without having to choose between 
medicine and food, energy costs, and other essential expenses.
    I support adding preventive benefits under Medicare to help seniors 
take steps to prevent diseases. Early detection and prevention are 
critical elements in helping seniors maintain a longer, healthier 
lifestyle. Simple screening tests to detect high cholesterol and blood 
pressure, nutrition counseling, and other benefits are not currently 
covered by Medicare. I believe we must modernize the program in a 
fiscally prudent manner so that we can include important early 
detection and preventive benefits.
    We must take additional steps to improve Medicare's management 
structure. Since being elected to Congress, I have heard from a number 
of health care providers and Medicare beneficiaries regarding the need 
to reform the Centers for Medicare and Medicaid Services (CMS, formerly 
the Health Care Financing Administration). I have met with many Utah 
physicians, nurses, hospital administrators, home health agencies, 
laboratories, and other health professionals who have indicated that 
the current system is often burdensome and duplicative, making it 
difficult for them to devote all of their efforts to ensuring quality 
health care. I share the concerns of my constituents regarding this 
important issue, and I have cosponsored legislation designed to make 
necessary management reforms so that the focus of Medicare is on 
patient care rather than burdensome paperwork.
    I appreciate the recent steps that Health and Human Services 
Secretary Tommy Thompson has taken to improve CMS, and I look forward 
to Congress and the administration working together in a bipartisan 
fashion to make additional improvements.
    Again, I thank Mr. Nussle and Mr. Spratt for holding this hearing 
today, and I look forward to working with my colleagues on the Budget 
Committee to meet all of the challenges facing the Medicare program.

    Chairman Nussle. And now we turn to you Mr. Walker, as the 
head of the General Accounting Office, Comptroller General. We 
want to look at Medicare and we want to look at the long-term 
stability of Medicare. We will put your entire testimony in the 
record, and it is quite lengthy and we appreciate that. It has 
quite a bit of substance and charts. And we appreciate the 
fact--what I would invite you to do is to summarize and to hit 
the high points that you think we should pay attention to as we 
examine your testimony. And then we will have some questions 
for you.
    Mr. Walker.

                         UNITED STATES

    Mr. Walker. Thank you, Mr. Chairman and other members of 
the committee. It is a pleasure to be here today to speak with 
you about the long-range financial condition of the Medicare 
    Mr. Chairman, as you noted, if we look at our current 
fiscal situation, it is clear that our challenges are not 
immediate. However, they are on the horizon, and I think that 
my testimony will dramatically demonstrate that today. Although 
the short-term outlook for Medicare's Hospital Insurance Trust 
Fund improved somewhat from last year, the long-term 
projections are much worse due to a change in expectations 
about future health care costs. Specifically, the Medicare 
trustees' latest projections released in March incorporate 
higher assumptions about the long-term growth in health care 
spending. As a result, the long-term outlook for Medicare's 
financial future, both the HI Hospital Insurance Part A Trust 
Fund and the SMI Part B Trust Fund is considerably worse than 
previously estimated.
    The Congressional Budget Office also increased its long-
term estimates of Medicare spending. The slowdown in Medicare 
spending growth that we have recently seen appears to have come 
to an end. In the first 8 months of fiscal 2000, Medicare 
spending was 7.5 percent higher than the previous year. The 
fiscal discipline imposed by the Balanced Budget Act of 1997 
continues to be challenged, while the interest in modernizing 
the Medicare benefits package to include prescription drug 
coverage has increased. Taken together, these developments mean 
higher, not lower, health care cost growth. They reinforce the 
need to begin taking steps to address the challenges associated 
with meaningful Medicare reform.
    In pursuing such reform, it is important to focus on the 
long-term sustainability of the combined Medicare program 
rather than the solvency of the HI Trust Fund alone. 
Ultimately, any comprehensive Medicare reform must confront 
several fundamental challenges.
    In summary, Medicare spending is likely to grow faster than 
previously estimated.
    Secondly, as our first chart shows, based upon GAO's most 
recent long-term budget simulation, known demographic trends 
and rising health care costs are likely to drive us back into a 
period of escalating deficits and debt, absent meaningful 
reform. Basically, what this chart shows is if you assume that 
the tax rate as a percentage of GDP, as a percentage of the 
overall economy, stays roughly the same over the next 50 
years--and this is after considering certain recent actions by 
the Congress--and if you consider that Congress saves every 
penny of the Social Security surplus, but either through tax 
cuts, spending increases or some combination thereof, spends 
the on-budget surplus, then this is what the future looks like 
based upon the best estimate assumptions of the Social Security 
and Medicare trustees.
    These represent point-in-time estimates, and obviously you 
move progressively from one point in time to the other. But if 
you take 2030, once we pay Social Security, Medicare, and 
Medicaid, you have to either cut all other spending by 50 
percent or raise taxes by 25 percent. And this is just at the 
Federal level. Or by the year 2050, the deficits escalate so 
quickly, primarily due to entitlement programs, you either have 
to double taxes or cut total spending by 50 percent. And this 
considers the increased assumptions by both CBO and OMB in the 
rate of productivity growth which were underlying their last 
    This simulation does not, however, consider any updates to 
CBO's projections that are forthcoming in the near future, 
hopefully, within the next month or so.
    Medicare sustainability can no longer be measured merely by 
using the traditional measure of HI Trust Fund solvency. The 
financial status of this trust fund does not reflect the whole 
picture. In fact, focusing on HI solvency alone can be 
misleading and can give a false sense of security regarding the 
overall condition of the Medicare program.
    Cash flow is key. Whether you are a business, whether you 
are a family or an individual, or whether you are a government 
program, cash flow is key. If you just look at Part A alone, 
this demonstrates what the cash flows will be in that program. 
You can see that right now, we are experiencing positive cash 
flows. But in the year 2016, it is projected to turn negative 
and it gets progressively worse. This does not consider the SMI 
program. This does not consider any prescription drug benefit. 
Cash flow is very important.
    I might also point out that based upon the Medicare and 
Social Security trustees' latest estimates, the Social Security 
Trust Fund is expected to turn negative cash flow in 2016 as 
    Both Part A expenditures which are financed through payroll 
taxes and Part B SMI expenditures which are financed through 
general revenues and beneficiary premiums should be taken into 
consideration. When viewed from this comprehensive perspective, 
total Medicare spending is projected to double as a percentage 
of the economy by 2035. Importantly, this estimate does not 
include any prescription drug benefit. Since the cost of the 
drug benefit would boost these spending projections even 
further, adding prescription drug coverage will require 
difficult policy choices that will likely have significant 
effects on beneficiaries, taxpayers and the program.
    Recognition of who bears the cost of Medicare is critical. 
Currently, there may not be full awareness among the public and 
others that payroll tax contributions and premiums do not 
finance current Medicare benefits. In other words, virtually 
everybody gets a real good deal on Medicare. Hardly anybody is 
paying for their Medicare benefits.
    Properly structured reforms to promote competition among 
health plans can help make beneficiaries more cost conscious. 
However, improvements to traditional fee-for-service Medicare 
are also critical, as it will likely remain dominant for some 
time to come.
    Fiscal discipline is difficult, but the continued 
importance of traditional Medicare underscores the need to base 
adjustments to provide payments to providers based on hard 
evidence rather than anecdotal information, and to carefully 
target relief both where it is needed and deserved.
    From a similar standpoint, reform of Medicare's management, 
which is on the table as discussions of Medicare program 
reforms proceed, will require carefully targeted efforts to 
ensure that adequate resources are properly coupled with 
improved performance and increased accountability.
    Ultimately, we will need to look at broader health care 
reforms to balance health care spending with other societal 
priorities. It is important to look at the entire range of 
Federal policy tools, tax policy, spending and regulation. It 
is also important to note the fundamental differences between 
health care wants, which are virtually unlimited, from needs, 
which should be defined and hopefully can be addressed, and 
overall affordability of which there is a limit.
    In the end, Congress will need to take a range of steps 
along with the administration to increase the transparency of 
health care costs and quality, target assistance to those in 
need, reexamine related tax incentives, and assure 
accountability for desired outcomes. The consensus is that 
Medicare is likely to cost more than previously estimated, and 
therefore that serves to reinforce the need to act sooner 
rather than later.
    The next chart demonstrates the cost of delay. The next 
chart shows that if Congress were to take steps today, then you 
would either have to reduce benefits by 37 percent or increase 
the payroll tax by 60 percent in order to deal with just Part A 
alone. If you wait until 2016 when you experience a negative 
cash flow in that program, obviously you have a higher benefit 
reduction and higher tax increase that would be necessary. And 
if you delay even further, it escalates.
    Importantly, the situation gets worse year by year. These 
are based upon a 75-year projection, the so-called ``cliff 
effect.'' Remember when Columbus sailed the ocean blue? The 
debate was whether the Earth was flat or round. We now know the 
Earth is round. Unfortunately on these projections, they assume 
that the Earth is flat in year 2075, when in reality the 
deficit in 2075 is much worse than that far-right column, and 
gets worse every year. As a result, we must recognize that the 
longer we delay, the tougher it is going to be, because the 
more people will be enfranchised and the more significant the 
change will have to be.
    In addition, efforts to update the program's benefit 
package will need to be carefully considered and obviously 
openly deliberated.
    As the Congress considers Medicare reform, it will be 
important to adopt effective cost containment reforms alongside 
potential benefit expansions. Any benefit expansion efforts 
hopefully will be coupled with adequate program reforms, in 
order for Medicare's long-term financial condition not to be 
worsened. This is especially important in connection with 
potential prescription drug coverage, as this coverage 
represents the fastest growing health care expenditure for most 
public and private sector plans. Therefore, the time to begin 
to address the Medicare challenge is now.
    Obviously, incremental steps will be necessary. Candidly, 
the financial challenges associated with Medicare are multiple 
times greater than Social Security. The expectation gap 
associated with Medicare is much greater than Social Security. 
In Social Security, you have an opportunity to exceed the 
expectation of all generations of Americans, because current 
retirees and near-term retirees are not expecting they are 
going to get all their benefits, when in reality they probably 
will when you act.
    Secondly, baby boomers like myself and Generation X-ers and 
Y's, like my children, are discounting what they think they are 
going to get, in some cases discounting more than they should. 
This Congress has the opportunity to exceed the expectations of 
all generations of Americans if it approaches Social Security 
reform in a timely and reasonable manner. Unfortunately, I hate 
to say I do not think that is the case with Medicare. The 
expectation gap is so great, the situation is getting worse, 
that it is going to require heavy lifting on an incremental 
basis over an extended period of time.
    Thank you, Mr. Chairman.
    [The prepared statement of David M. Walker follows:]

Prepared Statement of Hon. David M. Walker, Comptroller General of the 
                             United States

    Mr. Chairman and members of the committee, I am pleased to be here 
today as you discuss the long-term financial condition of the Medicare 
program. In previous congressional testimony over the past several 
years, I have consistently stressed that without meaningful reform, 
demographic and cost trends will drive Medicare spending to 
unsustainable levels.\1\ These trends highlight the need to act now 
rather than later when needed changes will be increasingly more painful 
and disruptive.
    Although the short-term outlook of Medicare's Hospital Insurance 
trust fund improved somewhat in the last year, the long-term 
projections are much worse due to a change in expectations about future 
health care costs. Specifically, the Medicare Trustees' latest 
projections released in March incorporate more realistic--i.e., 
higher--assumptions about long-term health care spending. As a result, 
the long-term outlook for Medicare's financial future--both Hospital 
Insurance (HI) and Supplementary Medical Insurance (SMI)--is 
considerably worse than previously estimated. The Congressional Budget 
Office (CBO) also increased its long-term estimates of Medicare 
spending. The slowdown in Medicare spending growth that we have seen in 
recent years appears to have come to an end. In the first 8 months of 
fiscal year 2001, Medicare spending was 7.5 percent higher than the 
previous year. The fiscal discipline imposed through the Balanced 
Budget Act of 1997 (BBA) continues to be challenged, while interest in 
modernizing the Medicare benefits package to include prescription drug 
coverage has increased. Taken together, these developments mean higher, 
not lower health care cost growth. They reinforce the need to begin 
taking steps to address the challenges of meaningful Medicare reform. 
In pursuing such reform, it is important to focus on the long-term 
sustainability of the combined Medicare program, rather than the 
solvency of the HI trust fund alone.
    Ultimately, any comprehensive Medicare reform must confront several 
fundamental challenges. In summary:
     Medicare spending is likely to grow faster than previously 
estimated. The Medicare Trustees are now projecting that, in the long-
term, Medicare costs will eventually grow at 1 percentage point above 
per-capita gross domestic product (GDP) each year--about 1 percentage 
point faster per year than the previous assumption. Accordingly, as 
estimated by the Office of the Actuary at the Centers for Medicare and 
Medicaid Services (CMS)--formerly known as the Health Care Financing 
Administration (HCFA), the estimated net present value of future 
additional resources needed to fund Part A HI benefits over the next 75 
years increased from $2.6 trillion last year to $4.6 trillion this 
year--an increase of more than 75 percent.
     Our long-term budget simulations show that demographics 
and health care spending will drive us back into periods of escalating 
deficits and debt absent meaningful entitlement reforms or other 
significant tax or spending actions. Our March 2001 long-term 
simulations show that even if the often-stated goal of saving all 
Social Security surpluses is realized, large and persistent deficits 
will return in less than 20 years.
     Medicare's sustainability can no longer be measured merely 
using the traditional measure of HI trust fund solvency. The financial 
status of this trust fund does not reflect the whole picture. In fact, 
focusing on solvency can be misleading and give a false sense of 
security regarding the overall condition of the Medicare program. Both 
Part A expenditures financed through payroll taxes and Part B SMI 
expenditures financed through general revenues and beneficiary premiums 
must be taken into consideration. When viewed from this comprehensive 
perspective, total Medicare spending is projected to double as a share 
of GDP by 2035. Importantly, this estimate does not include the cost of 
any prescription drug benefit.
     Since the cost of a drug benefit would boost these 
spending projections even further, adding prescription drug coverage 
will require difficult policy choices that will likely have significant 
effects on beneficiaries, taxpayers, and the program. Recognition of 
who bears the cost of Medicare is critical. Currently, there may not be 
full awareness that beneficiaries' payroll tax contributions and 
premiums generally finance considerably less than their lifetime 
     Properly structured reforms to promote competition among 
health plans can help make beneficiaries more cost conscious. However, 
improvements to traditional fee-for-service (FFS) Medicare are also 
critical, as it will likely remain dominant for some time to come.
     Fiscal discipline is difficult, but the continued 
importance of traditional Medicare underscores the need to base 
adjustments to provider payments on hard evidence rather than anecdotal 
information and to carefully target relief where it is both needed and 
     Similarly, reform of Medicare's management, which is on 
the table as discussions of Medicare program reforms proceed, will 
require carefully targeted efforts to ensure that adequate resources 
are appropriately coupled with improved performance and increased 
     Ultimately, we will need to look at broader health care 
reforms to balance health care spending with other societal priorities. 
In doing this, it is important to look at the entire range of Federal 
policy tools--tax policy, spending, and regulation. It is also 
important to note the fundamental differences between health care 
wants, which are virtually unlimited, from needs, which should be 
defined and addressed, and overall affordability, of which there is a 
limit. In the end, we will need to take a range of steps to increase 
the transparency of health care costs and quality, target assistance to 
those in need, re-examine incentives, and assure accountability for 
desired outcomes.
    The consensus that Medicare is likely to cost more than previously 
estimated serves to reinforce the need to act soon. Realistically, 
reforms to address the Medicare program's huge long-range financial 
imbalance will need to proceed incrementally. In addition, efforts to 
update the program's benefits package will need careful and cautious 
deliberation. As the Congress considers Medicare reform, it will be 
important to adopt effective cost containment reforms alongside 
potential benefit expansions. Any benefit expansion efforts will need 
to be coupled with adequate program reforms if Medicare's long-range 
financial condition is not to be worsened. This is especially important 
in connection with a potential prescription drug benefit, as this 
coverage represents the fastest-growing expenditure for many public and 
private health plans. Therefore, the time to begin these difficult, but 
necessary, incremental steps is now.


    As I have stated in other testimony, Medicare as currently 
structured is fiscally unsustainable. While many people have focused on 
the improvement in the HI trust fund's shorter-range solvency status, 
the real news is that we now have a more realistic view of Medicare's 
long-term financial condition and the outlook is much bleaker. A 
consensus has emerged that previous program spending projections have 
been based on overly optimistic assumptions and that actual spending 
will grow faster than has been assumed.

                        MEDICARE'S FISCAL HEALTH

    First, let me talk about how we measure Medicare's fiscal health. 
In the past, Medicare's financial status has generally been gauged by 
the projected solvency of the HI trust fund, which covers primarily 
inpatient hospital care and is financed by payroll taxes. Looked at 
this way, Medicare--more precisely, Medicare's Hospital Insurance trust 
fund--is described as solvent through 2029.
    However, even from the perspective of HI trust fund solvency, the 
estimated exhaustion date of 2029 does not mean that we can or should 
wait until then to take action. In fact, delay in addressing the HI 
trust fund imbalance means that the actions needed will be larger and 
more disruptive. Taking action today to restore solvency to the HI 
trust fund for the next 75 years would require benefit cuts of 37 
percent or tax increases of 60 percent, or some combination of the two. 
While these actions would not be easy or painless, postponing action 
until 2029 would require more than doubling of the payroll tax or 
cutting benefits by more than half to maintain solvency. (See fig. 1.) 
Given that in the long-term, Medicare cost growth is now projected to 
grow at 1 percentage point faster than GDP, HI's financial condition is 
expected to continue to worsen after the 75-year period. By 2075, HI's 
annual financing shortfall--the difference between program income and 
benefit costs--will reach 7.35 percent of taxable payroll. This means 
that if no action is taken this year, shifting the 75-year horizon out 
1 year to 2076--a large deficit year--and dropping 2001--a surplus 
year--would yield a higher actuarial deficit, all other things being 

  Figure 1: Estimated Benefit Reduction or Tax Increase Necessary to 
                     Restore HI Trust Fund Solvency

Source: Office of the Actuary, CMS, 2001 intermediate assumptions.

    Moreover, HI trust fund solvency does not mean the program is 
financially healthy. Under the Trustees' 2001 intermediate estimates, 
HI outlays are projected to exceed HI tax revenues beginning in 2016, 
the same year in which Social Security outlays are expected to exceed 
tax revenues. (See fig. 2.) As the baby boom generation retires and the 
Medicare-eligible population swells, the imbalance between outlays and 
revenues will increase dramatically. Thus, in 15 years the HI trust 
fund will begin to experience a growing annual cash deficit. At that 
point, the HI program must redeem Treasury securities acquired during 
years of cash surplus. Treasury, in turn, must obtain cash for those 
redeemed securities either through increased taxes, spending cuts, 
increased borrowing, retiring less debt, or some combination thereof.

Figure 2: Medicare's Hospital Insurance Trust Fund Faces Cash Deficits 
                         as Baby Boomers Retire

Source: GAO analysis of data from the Office of the Actuary, CMS, 2001 
intermediate assumptions.

    Finally, HI trust fund solvency does not measure the growing cost 
of the Part B SMI component of Medicare, which covers outpatient 
services and is financed through general revenues and beneficiary 
premiums.\2\ Part B accounts for somewhat more than 40 percent of 
Medicare spending and is expected to account for a growing share of 
total program dollars. As the Trustees noted in this year's report, a 
rapidly growing share of general revenues and substantial increases in 
beneficiary premiums will be required to cover part B expenditures.
    Clearly, it is total program spending--both Part A and Part B--
relative to the entire Federal budget and national economy that 
matters. This total spending approach is a much more realistic way of 
looking at the combined Medicare program's sustainability. In contrast, 
the historical measure of HI trust fund solvency cannot tell us whether 
the program is sustainable over the long haul. Worse, it can serve to 
distort perceptions about the timing, scope, and magnitude of our 
Medicare challenge.


    These figures reflect a worsening of the long-term outlook. Last 
year a technical panel advising the Medicare Trustees recommended 
assuming that future per-beneficiary costs for both HI and SMI 
eventually will grow at a rate 1 percentage point above GDP growth--
about 1 percentage point higher than had previously been assumed.\3\ 
That recommendation--which was consistent with a similar change CBO had 
made to its Medicare and Medicaid long-term cost growth 
assumptions\4\--was adopted by the Trustees. In their new estimates 
published on March 19, 2001, the Trustees adopted the technical panel's 
long-term cost growth recommendation.\5\ The Trustees note in their 
report that this new assumption substantially raises the long-term cost 
estimates for both HI and SMI. In their view, incorporating the 
technical panel's recommendation yields program spending estimates that 
represent a more realistic assessment of likely long-term program cost 
    Under the old assumption (the Trustees' 2000 best estimate 
intermediate assumptions), total Medicare spending consumed 5 percent 
of GDP by 2063. Under the new assumption (the Trustees' 2001 best 
estimate intermediate assumptions), this occurs almost 30 years sooner 
in 2035--and by 2075 Medicare consumes over 8 percent of GDP, compared 
with 5.3 percent under the old assumption. The difference clearly 
demonstrates the dramatic implications of a 1-percentage point increase 
in annual Medicare spending over time. (See fig. 3)

    Figure 3: Medicare Spending as a Share of GDP Under Old and New 

Note: Data are gross outlays as projected under the Trustees' 
intermediate assumptions.

Source: GAO analysis of data from the 2000 and 2001 HI and SMI Trustees 

    In part the progressive absorption of a greater share of the 
Nation's resources for health care, as with Social Security, is a 
reflection of the rising share of the population that is elderly. Both 
programs face demographic conditions that require action now to avoid 
burdening future generations with the program's rising costs. Like 
Social Security, Medicare's financial condition is directly affected by 
the relative size of the populations of covered workers and 
beneficiaries. Historically, this relationship has been favorable. In 
the near future, however, the covered worker-to-retiree ratio will 
change in ways that threaten the financial solvency and sustainability 
of this important national program. In 1970 there were 4.6 workers per 
HI beneficiary. Today there are about 4, and in 2030, this ratio will 
decline to only 2.3 workers per HI beneficiary.\6\ (See fig. 4.)

        Figure 4: Workers Per HI Beneficiary Expected to Decline

Source: GAO analysis of data from the Office of the Actuary, CMS.

    Unlike Social Security, however, Medicare growth rates reflect not 
only a burgeoning beneficiary population, but also the escalation of 
health care costs at rates well exceeding general rates of inflation. 
Increases in the number and quality of health care services have been 
fueled by the explosive growth of medical technology.\7\ Moreover, the 
actual costs of health care consumption are not transparent. Third-
party payers generally insulate consumers from the cost of health care 
decisions. All of these factors contribute to making Medicare a much 
greater and more complex fiscal challenge than even Social Security.
    When viewed from the perspective of the Federal budget and the 
economy, the growth in health care spending will become increasingly 
unsustainable over the longer term.\8\ Figure 5 shows the sum of the 
future expected HI cash deficit and the expected general fund 
contribution to SMI as a share of Federal income taxes under the 
Trustees 2001 intermediate estimates. SMI has received contributions 
from the general fund since the inception of the program. This general 
revenue contribution is projected to grow from about 5 percent of 
Federal personal and corporate income taxes in 2000 to 13 percent by 
2030. Beginning in 2016, use of general fund revenues will be required 
to pay benefits as the HI trust fund redeems its Treasury securities. 
Assuming general fund revenues are used to pay benefits after the trust 
fund is exhausted, by 2030 the HI program alone would consume more than 
6 percent of income tax revenue. On a combined basis, Medicare's draw 
on general revenues would grow from 5.4 percent of income taxes today 
to nearly 20 percent in 2030 and 45 percent by 2070.

  Figure 5: SMI General Revenue Contribution and HI Cash Deficit as a 
          Share of Federal Corporate and Personal Income Taxes

Note: Estimates are based on the Trustees' 2001 intermediate 
assumptions and assume that personal and corporate Federal income taxes 
remain at the same share of gross domestic product as in 2000.

Source: GAO analysis of data from the Office of the Chief Actuary, CMS, 
2001 intermediate assumptions.

    Figure 6 reinforces the need to look beyond the HI program. HI is 
only the first layer in this figure. The middle layer adds the SMI 
program, which is expected to grow faster than HI in the near future. 
By the end of the 75-year projection period, SMI will represent almost 
half of total estimated Medicare costs.
    To get a more complete picture of the future Federal health care 
entitlement burden, Medicaid is added. Medicare and the Federal portion 
of Medicaid together will grow to 14.5 percent of GDP from today's 3.5 
percent. Taken together, the two major government health programs--
Medicare and Medicaid--represent an unsustainable burden on future 
generations. In addition, this figure does not reflect the taxpayer 
burden of state and local Medicaid expenditures. A recent statement by 
the National Governors Association argues that increased Medicaid 
spending has already made it difficult for states to increase funding 
for other priorities.

       Figure 6: Medicare and Medicaid Spending as a Share of GDP

    1. Medicare data are gross outlays as projected under the Trustees' 
2001 intermediate assumptions.
    2. Federal Medicaid data based on CBO's October 2000 long-term 
budget outlook.

Source: GAO analysis of data from the Congressional Budget Office and 
the March 2001 HI and SMI Trustees Reports.

    Our long-term simulations show that to move into the future with no 
changes in Federal health and retirement programs is to envision a very 
different role for the Federal Government. Assuming, for example, that 
Congress and the President adhere to the often-stated goal of saving 
the Social Security surpluses, our long-term simulations show a world 
by 2030 in which Social Security, Medicare, and Medicaid absorb most of 
the available revenues within the Federal budget. Under this scenario, 
these programs would require more than three-quarters of total Federal 
revenue even without adding a Medicare prescription drug benefit. (See 
fig. 7.)

 Figure 7: Composition of Federal Spending as a Share of GDP Under the 
           ``Save the Social Security Surpluses'' Simulation

    1. Revenue as a share of GDP declines from its 2000 level of 20.6 
percent due to unspecified permanent policy actions. In this display, 
policy changes are allocated equally between revenue reductions and 
spending increases.
    2. The ``Save the Social Security Surpluses'' simulation can only 
be run through 2056 due to the elimination of the capital stock.

Source: GAO's March 2001 analysis.

    This scenario contemplates saving surpluses for 20 years--an 
unprecedented period of surpluses in our history--and retiring publicly 
held debt. Alone, however, even saving all Social Security surpluses 
would not be enough to avoid encumbering the budget with unsustainable 
costs from these entitlement programs. Little room would be left for 
other Federal spending priorities such as national defense, education, 
and law enforcement. Absent changes in the structure of Medicare and 
Social Security, sometime during the 2040's government would do nothing 
but mail checks to the elderly and their health care providers. 
Accordingly, substantive reform of the Medicare and Social Security 
programs remains critical to recapturing our future fiscal flexibility.
    Demographics argue for early action to address Medicare's fiscal 
imbalances. Ample time is required to phase in the reforms needed to 
put this program on a more sustainable footing before the baby boomers 
retire. In addition, timely action to bring costs down pays large 
fiscal dividends for the program and the budget. The high projected 
growth of Medicare in the coming years means that the earlier reform 
begins, the greater the savings will be as a result of the effects of 
    Beyond reforming the Medicare program itself, maintaining an 
overall sustainable fiscal policy and strong economy is vital to 
enhancing our Nation's future capacity to afford paying benefits in the 
face of an aging society. Today's decisions can have wide-ranging 
effects on our ability to afford tomorrow's commitments. As I have 
testified before, you can think of the budget choices you face as a 
portfolio of fiscal options balancing today's unmet needs with 
tomorrow's fiscal challenges. At the one end--with the lowest risk to 
the long-range fiscal position--is reducing publicly held debt. At the 
other end--offering the greatest risk--is increasing entitlement 
spending without fundamental program reform.
    Reducing publicly held debt helps lift future fiscal burdens by 
freeing up budgetary resources encumbered for interest payments, which 
currently represent about 12 cents of every Federal dollar spent, and 
by enhancing the pool of economic resources available for private 
investment and long-term economic growth. This is particularly crucial 
in view of the known fiscal pressures that will begin bearing down on 
future budgets in about 10 years as the baby boomers start to retire. 
However, as noted above, debt reduction is not enough. Our long-term 
simulations illustrate that, absent entitlement reform, large and 
persistent deficits will return.

                         AND MANAGEMENT REFORM

    Despite common agreement that, without reform, future program costs 
will consume growing shares of the Federal budget, there is also a 
mounting consensus that Medicare's benefit package should be expanded 
to cover prescription drugs, which will add billions to the program's 
cost. This places added pressure on policymakers to consider proposals 
that could fundamentally reform Medicare. Our previous work provides, I 
believe, some considerations that are relevant to deliberations 
regarding the potential addition of a prescription drug benefit and 
Medicare reform options that would inject competitive mechanisms to 
help control costs. In addition, our reviews of HCFA offer lessons for 
improving Medicare's management. Implementing necessary reforms that 
address Medicare's financial imbalance and meet the needs of 
beneficiaries will not be easy. We must have a Medicare agency that is 
ready and able to meet these 21st century challenges.

                          MULTIPLE TRADE-OFFS

    Among the major policy challenges facing the Congress today is how 
to reconcile Medicare's unsustainable long-range financial condition 
with the growing demand for an expensive new benefit--namely, coverage 
for prescription drugs. It is a given that prescription drugs play a 
far greater role in health care now than when Medicare was created. 
Today, Medicare beneficiaries tend to need and use more drugs than 
other Americans. However, because adding a benefit of such potential 
magnitude could further erode the program's already unsustainable 
financial condition, you face difficult choices about design and 
implementation options that will have a significant impact on 
beneficiaries, the program, and the marketplace.
    Let's examine the current status regarding Medicare beneficiaries 
and drug coverage. About a third of Medicare beneficiaries have no 
coverage for prescription drugs. Some beneficiaries with the lowest 
incomes receive coverage through Medicaid. Some beneficiaries receive 
drug coverage through former employers, some can join Medicare+Choice 
plans that offer drug benefits, and some have supplemental Medigap 
coverage that pays for drugs. However, significant gaps remain. For 
example, Medicare+Choice plans offering drug benefits are not available 
everywhere and generally do not provide catastrophic coverage. Medigap 
plans are expensive and have caps that significantly constrain the 
protection they offer. Thus, beneficiaries with modest incomes and high 
drug expenditures are most vulnerable to these coverage gaps.
    Overall, the Nation's spending on prescription drugs has been 
increasing about twice as fast as spending on other health care 
services, and it is expected to keep growing. Recent estimates show 
that national per-person spending for prescription drugs will increase 
at an average annual rate exceeding 10 percent until at least 2010. As 
the cost of drug coverage has been increasing, employers and 
Medicare+Choice plans have been cutting back on prescription drug 
benefits by raising enrollees' cost-sharing, charging higher co-
payments for more expensive drugs, or eliminating the benefit 
    It is not news that adding a prescription drug benefit to Medicare 
will be costly. However, the cost consequences of a Medicare drug 
benefit will depend on choices made about its design--including the 
benefit's scope and financing mechanism. For instance, a Medicare 
prescription drug benefit could be designed to provide coverage for all 
beneficiaries, coverage only for beneficiaries with extraordinary drug 
expenses, coverage only for low-income beneficiaries. Policy makers 
would need to determine how costs would be shared between taxpayers and 
beneficiaries through premiums, deductibles, and co-payments and 
whether subsidies would be available to low-income, non-Medicaid 
eligible individuals. Design decisions would also affect the extent to 
which a new pharmaceutical benefit might shift to Medicare portions of 
the out-of-pocket costs now borne by beneficiaries as well as those 
costs now paid by Medicaid, Medigap, or employer plans covering 
prescription drugs for retirees. Clearly, the details of a prescription 
drug benefit's implementation would have a significant impact on both 
beneficiaries and program spending. Experience suggests that some 
combination of enhanced access to discounted prices, targeted 
subsidies, and measures to make beneficiaries more aware of costs may 
be needed. Any option would need to balance concerns about Medicare 
sustainability with the need to address what will likely be a growing 
hardship for some beneficiaries in obtaining prescription drugs.


    The financial prognosis for Medicare clearly calls for meaningful 
spending reforms to help ensure that the program is sustainable over 
the long haul. The importance of such reforms will be heightened if 
financial pressures on Medicare are increased by the addition of new 
benefits, such as coverage for prescription drugs. Some leading reform 
proposals envision that Medicare could achieve savings by adapting some 
of the competitive elements embodied in the Federal Employees Health 
Benefits Program. Specifically, these proposals would move Medicare 
toward a model in which health plans compete on the basis of benefits 
offered and costs to the government and beneficiaries, making the price 
of health care more transparent.
    Currently, Medicare follows a complex formula to set payment rates 
for Medicare+Choice plans, and plans compete primarily on the richness 
of their benefit packages. Medicare permits plans to earn a reasonable 
profit, equal to the amount they can earn from a commercial contract. 
Efficient plans that keep costs below the fixed payment amount can use 
the ``savings'' to enhance their benefit packages, thus attracting 
additional members and gaining market share. Under this arrangement, 
competition among Medicare plans may produce advantages for 
beneficiaries, but the government reaps no savings.\9\
    In contrast, a competitive premium approach offers certain 
advantages. Instead of having the government administratively set a 
payment amount and letting plans decide--subject to some minimum 
requirements--the benefits they will offer, plans would set their own 
premiums and offer at least a required minimum Medicare benefit 
package. Under these proposals, Medicare costs would be more 
transparent: beneficiaries could better see what they and the 
government were paying for in connection with health care expenditures. 
Beneficiaries would generally pay a portion of the premium and Medicare 
would pay the rest. Plans operating at lower cost could reduce 
premiums, attract beneficiaries, and increase market share. 
Beneficiaries who joined these plans would enjoy lower out-of-pocket 
expenses. Unlike today's Medicare+Choice program, the competitive 
premium approach provides the potential for taxpayers to benefit from 
the competitive forces. As beneficiaries migrated to lower-cost plans, 
the average government payment would fall.
    Experience with the Medicare+Choice program reminds us that 
competition in Medicare has its limits. First, not all geographic areas 
are able to support multiple health plans. Medicare health plans 
historically have had difficulty operating efficiently in rural areas 
because of a sparseness of both beneficiaries and providers. In 2000, 
21 percent of rural beneficiaries had access to a Medicare+Choice plan, 
compared to 97 percent of urban beneficiaries. Second, separating 
winners from losers is a basic function of competition. Thus, under a 
competitive premium approach, not all plans would thrive, requiring 
that provisions be made to protect beneficiaries enrolled in less 
successful plans.


    The extraordinary challenge of developing and implementing Medicare 
reforms should not be underestimated. Our look at health care spending 
projections shows that, with respect to Medicare reform, small 
implementation problems can have huge consequences. To be effective, a 
good program design will need to be coupled with competent program 
management. Consistent with that view, questions are being raised about 
the ability of CMS to administer the Medicare program effectively.
    Our reviews of Medicare program activities confirm the legitimacy 
of these concerns. In our companion statement today, we discuss not 
only the Medicare agency's performance record but also areas where 
constraints have limited the agency's achievements. We also identify 
challenges the agency faces in seeking to meet expectations for the 
    As the Congress and the administration focus on current Medicare 
management issues, our review of HCFA suggests several lessons:
     Managing for results is fundamental to an agency's ability 
to set meaningful goals for performance, measure performance against 
those goals, and hold managers accountable for their results. Our work 
shows that HCFA has faltered in adopting a results-based approach to 
agency management, leaving the agency in a weakened position for 
assuming upcoming responsibilities. In some instances, the agency may 
not have the tools it needs because it has not been given explicit 
statutory authority. For example, the agency has sought explicit 
statutory authority to use full and open competition to select claims 
administration contractors. The agency believes that without such 
statutory authority it is at a disadvantage in selecting the best 
performers to carry out Medicare claims administration and customer 
service functions. To be effective, any agency must be equipped with 
the full complement of management tools it needs to get the job done.
     A high-performance organization demands a workforce with, 
among other things, up-to-date skills to enhance the agency's value to 
its customers and ensure that it is equipped to achieve its mission. 
HCFA began workforce planning efforts that continue today in an effort 
to identify areas in which staff skills are not well matched to the 
agency's evolving mission. In addition, CMS recently reorganized its 
structure to be more responsive to its customers. It is important that 
CMS continue to reevaluate its skill needs and organizational structure 
as new demands are placed on the agency.
     Data-driven information is essential to assess the 
budgetary impact of policy changes and distinguish between desirable 
and undesirable consequences. Ideally, the agency that runs Medicare 
should have the ability to monitor the effects of Medicare reforms, if 
enacted--such as adding a drug benefit or reshaping the program's 
design. However, HCFA was unable to make timely assessments, largely 
because its information systems were not up to the task. The status of 
these systems remains the same, leaving CMS unprepared to determine, 
within reasonable time frames, the appropriateness of services provided 
and program expenditures. The need for timely, accurate, and useful 
information is particularly important in a program where small rate 
changes developed from faulty estimates can mean billions of dollars in 
overpayments or underpayments.
     An agency's capacity should be commensurate with its 
responsibilities. As the Congress continues to modify Medicare, CMS' 
responsibilities will grow substantially. HCFA's tasks increased 
enormously with the enactment of landmark Medicare legislation in 1997 
and the modifications to that legislation in 1999 and 2000. In addition 
to the growth in Medicare responsibilities, the agency that administers 
this program is also responsible for other large health insurance 
programs and activities. As the agency's mission has grown, however, 
its administrative dollars have been stretched thinner. Adequate 
resources are vital to support the kind of oversight and stewardship 
activities that Americans have come to count on--inspection of nursing 
homes and laboratories, certification of Medicare providers, collection 
and analysis of critical health care data, to name a few. Shortchanging 
this agency's administrative budget will put the agency's ability to 
handle upcoming reforms at serious risk.
    In short, because Medicare's future will play such a significant 
role in the future of the American economy, we cannot afford to settle 
for anything less than a world-class organization to run the program. 
However, achieving such a goal will require a clear recognition of the 
fundamental importance of efficient and effective day-to-day 


    In determining how to reform the Medicare program, much is at 
stake-not only the future of Medicare itself but also assuring the 
Nation's future fiscal flexibility to pursue other important national 
goals and programs. I feel that the greatest risk lies in doing nothing 
to improve the Medicare program's long-term sustainability. It is my 
hope that we will think about the unprecedented challenge facing future 
generations in our aging society. Engaging in a comprehensive effort to 
reform the Medicare program and put it on a sustainable path for the 
future would help fulfill this generation's stewardship responsibility 
to succeeding generations. It would also help to preserve some capacity 
for future generations to make their own choices for what role they 
want the Federal Government to play.
    Updating Medicare's benefit package may be a necessary part of any 
realistic reform program. Such changes, however, need to be considered 
in the context of Medicare's long-term fiscal outlook and the need to 
make changes in ways that will promote the program's longer-term 
sustainability. We must remember that benefit expansions are often 
permanent, while the more belt-tightening payment reforms--vulnerable 
to erosion--could be discarded altogether. The BBA experience reminds 
us about the difficulty of undertaking reform.
    Most importantly, any substantial benefit reform should be coupled 
with other meaningful program reforms that will help to ensure the 
long-term sustainability of the program. In the end, the Congress 
should consider adopting a Hippocratic oath for Medicare reform 
proposals--namely, ``Don't make the long-term outlook worse.'' 
Ultimately, we will need to engage in a much more fundamental health 
care reform debate to differentiate wants, which are virtually 
unlimited, from needs, which should be defined and addressed, and 
overall affordability, of which there is a limit.
    We at GAO look forward to continuing to work with this Committee 
and the Congress in addressing this and other important issues facing 
our Nation. In doing so, we will be true to our core values of 
accountability, integrity, and reliability.
    Chairman Nussle, this concludes my prepared statement. I will be 
happy to answer any questions you or other Members of the Committee may 


    1 Medicare: Higher Expected Spending and Call for New Benefit 
Underscore Need for Meaningful Reform (GAO-01-539T, March 22, 2001); 
Medicare Reform: Leading Proposals Lay Groundwork, While Design 
Decisions Lie Ahead (GAO/T-HEHS-AIMD-00-103, Feb. 24, 2000); Medicare 
Reform: Ensuring Fiscal Sustainability While Modernizing the Program 
Will Be Challenging (GAO/T-HEHS/AIMD-99-294, Sept. 22, 1999).
    2. At Medicare's inception, the law initially established a formula 
for Part B premiums that set the rate to cover 50 percent of expected 
program costs for aged enrollees, with the remaining 50 percent covered 
by general revenues. Legislation enacted in 1972 limited the annual 
percentage increase in the premium to the same percentage by which 
Social Security benefits were adjusted for changes in cost of living. 
As a result, from the mid-1970's through the early 1980's, the portion 
of program costs covered by premium income dropped from 50 percent to 
below 25 percent. Beginning in the early 1980's, Congress regularly 
voted to set part B premiums at a level to cover 25 percent of expected 
program costs, in effect overriding the cost-of-living adjustment 
limitation. In 1997 BBA permanently set the rate at 25 percent.
    3. Technical Review Panel on the Medicare Trustees Reports, Review 
of Assumptions and Methods of the Medicare Trustees' Financial 
Projections (Dec. 2000). As the panel noted, for many years the 
Medicare projections have been based on an assumption that in the long 
run, average per-beneficiary costs would increase at about the same 
rate as program underlying funding sources. For HI, this meant that 
expenditures were assumed to increase at the same rate as average 
hourly earnings. For SMI, this meant that per-beneficiary costs were 
assumed to grow at the same rate as per-capita GDP.
    4. CBO, The Long-Term Budget Outlook (Oct. 2000).
    5. See 2001 Annual Report of the Board of Trustees of the Federal 
Hospital Insurance Trust Fund (March 2001) and 2001 Annual Report of 
the Board of Trustees of the Federal Supplementary Medical Insurance 
Trust Fund (March 2001).
    6. For Social Security, there were 3.7 covered workers per 
beneficiary in 1970. Today there are 3.4, and the ratio is expected to 
decline to 2.1 in 2030.
    7. In arriving at their recommendation for Medicare long-term cost 
growth, the Medicare Technical Panel observed that historically, the 
primary long-run determinant of real health care spending has been the 
development and diffusion of new medical technology.
    8. See Long-Term Budget Issues: Moving from Balancing the Budget to 
Balancing Fiscal Risk (GAO-01-385T, Feb. 6, 2001).
    9. In fact, the government has been losing money on the 
Medicare+Choice program. Medicare pays more, on average, for 
beneficiaries enrolled in managed care plans than if these individuals 
had remained in traditional Medicare. See Medicare+Choice: Payments 
Exceed Cost of Fee-for-Service Benefits, Adding Billions to Spending 
(GAO/HEHS-00-161, Aug. 23, 2000).

    Chairman Nussle. Thank you, Mr. Walker.
    First of all, I want to make sure I am clear on your 
medicine, or what you are suggesting that we should do. I do 
not want you to leave the impression that the only two 
alternatives are to cut benefits or raise taxes. What I hear 
you saying is, that may be the only solution that is left if we 
do not act now. Is that what you are suggesting?
    Mr. Walker. That is correct. I mean, obviously, to the 
extent that you can increase economic growth further, then that 
ends up increasing the pie and therefore the relevant burden 
becomes less. Although I would point out that in the 
projections that we have, the first one--what I call the hair 
cut chart or the scalp chart--it assumes very healthy 
productivity growth. It assumes a paradigm shift in the 
economy, that we are now in a knowledge-based economy, and 
where we are going to be be able to sustain a lot higher annual 
productivity rates than historically has been the case.
    Chairman Nussle. But it also assumes the status quo with 
Medicare; that the program does not change.
    Mr. Walker. It assumes the status quo with Medicare and 
Social Security and that Congress spends the on-budget surplus 
but saves every penny of the Social Security surplus. But 
unfortunately as you know, Mr. Chairman, the Social Security 
system will not have a surplus starting in 2016. It will still 
have a trust fund with significant assets in it, but it will 
not have a cash flow surplus and therefore this represents a 
period of significant challenge.
    Chairman Nussle. Now, the alarm that you are sending is a 
big one. And it is deafening and serious, and I take it that 
way. And yet in your testimony, both written and oral today, 
you indicate that the change should be incremental. And I am 
just wondering what you mean by incremental. When you say 
``incremental,'' what are you suggesting? Because what I hear 
you saying is act big and act now; but ``incremental'' suggests 
a little something different than that.
    Mr. Walker. I am trying to be realistic, Mr. Chairman. I 
think there is clearly a need to act sooner rather than later. 
I think that there is a need for fundamental reform. At the 
same point in time, the gap between promised benefits and 
funded benefits is so great I believe it is unrealistic to 
expect that you are going to be able to address that in one 
fell swoop. The gap is just too great.
    The other thing I think we have to understand, and I am 
sure you and the other members appreciate that the further out 
you go, the more uncertainty there is. So therefore, you may 
not want to try to address everything all at once, until you 
get a little bit closer, to find out are things as bad as they 
appear to be, are they better or are they worse?
    But what we do know for sure is that this is driven by two 
factors, known demographic trends which are a lot more reliable 
than certain other trends, because the people are alive; and 
secondly, rising health care costs which appear to be back and 
appear to be back with vigor.
    Chairman Nussle. We heard testimony at the last hearing 
with regard to budget reform that there is somewhere near 200 
different trust funds in the government and that just about 
every one has a different definition. What we discovered is 
that if Congress calls it a trust fund, it is a trust fund. Yet 
when I think of the word ``trust fund,'' I think of something a 
little bit more secure and much more trustworthy than maybe 
just calling it a trust fund. What is the trust fund? Tell us 
what the Medicare Trust Fund--is that we are all referring to. 
Exactly what is it and how does it work?
    Mr. Walker. There are actually two Medicare Trust Funds. 
There is the Part A Trust Fund, which is HI, which is depicted 
on the other chart that I showed, the cash flows for HI. And 
there is the Part B Trust Fund, which is SMI. Part A is 
financed through payroll taxes primarily. Part B is financed 
about 25 percent through beneficiary premiums, and about 75 
percent through general revenues.
    The trust fund is largely an accounting device. It is a 
means by which you can keep track of annual revenues and annual 
expenses. To the extent that there are surpluses, which we are 
currently experiencing and have for the past several years, 
then it is a means by which you can keep account of the Federal 
Government's obligation to pay benefits and expenses of 
Medicare to the extent of those accumulated past surpluses.
    As you know, by law, the government has to invest any 
surplus in securities that are backed by the full faith and 
credit of the United States Government. That is what is in 
these trust funds. But ultimately, in order to pay benefits 
when due, those securities must be converted into cash. To do 
that, you either are going to have to raise taxes, cut 
benefits, borrow from the public or do a combination thereof. 
So the trust funds are largely an accounting device in order to 
account for the government's obligations associated with these 
important programs.
    Chairman Nussle. My final question is, because my time has 
expired--you amplify this in your testimony and again today 
orally--that you seem to be much more focused on the financial 
stability of Medicare versus the solvency of the trust funds. 
And yet in my tenure here in Congress, it sure seems like we 
focus on the solvency of the trust funds. That is where we 
always look for the solvency report from the Medicare trustees. 
We are constantly worried about how solvent this is out into 
the future.
    And you are telling us today that is not the ball we ought 
to be keeping our eye on. It is financial stability. Would you 
explain what you mean by that and what we need to be watching?
    Mr. Walker. As you know, Mr. Chairman, I was a public 
trustee for Social Security/Medicare from 1990 to 1995, so I 
had to deal with this on the front line, if you will. Solvency 
does have some significance, and so it is not that it is not 
significant; however, it is not the most significant issue. The 
real significance is, can the Federal Government deliver on the 
promises it has made to the current and future generations 
associated with the Medicare program and other programs.
    To assess that, solvency is not the key measure. The key 
measure is sustainability, sustainability being focused on 
things like what percentage of the budget does the program 
represent; what percentage of the economy does the program 
represent; what are the consequences of the continued growth in 
this and other mandatory spending programs on the ability of 
the Congress to meet other discretionary spending needs or on 
the willingness and ability of the Congress to raise taxes to 
continue to fund these programs. And so the real key is what is 
the ability of the government to deliver on its promises, both 
now and in the future, and for that, sustainability is the key 
measure, not solvency.
    Let me give you an example, because I think this is very 
important. If Medicare runs a surplus this year--HI--which it 
will, as we all know, then Congress by law will have to take 
whatever that amount of that annual surplus is and invest it in 
securities that are backed by the full faith and credit of the 
United States Government. Right now it is special issue 
securities that meet that definition, that bear interest and 
are guaranteed both as to principal and interest by the U.S. 
Government. But then Congress will take that cash and decide 
what to do with it.
    The fact is, irrespective of what Congress does with that 
cash, cut taxes, increase spending, pay down debt, the solvency 
of the HI Trust Fund is exactly the same. It is not different 
by 1 penny. However, what the Congress decides to do with that 
money makes a big difference from a sustainability standpoint 
on the ability of the Congress to be able to deliver on its 
promises in the future and for this program to deliver.
    All the more reason why solvency is not the key measure. 
Solvency does not deal with economics. Solvency really deals 
with a legal, moral and political obligation. It does not deal 
with economic substance. Sustainability deals with economic 
    Chairman Nussle. Congress in its budget has decided that we 
are going to pay down debt with that cash. That was our 
commitment last year; that is our commitment this year. Is that 
what you would suggest is the best in the long term 
sustainability at least to start with without any reforms?
    Mr. Walker. Clearly the best thing for the long term is to 
take the surplus and pay down debt held by the public, because 
then you know you have accomplished something. Then you know 
you have relieved burdens in the future, which gives you 
additional flexibility and capacity to address those challenges 
when they come up.
    Chairman Nussle. Thank you.
    Mr. Spratt.
    Mr. Spratt. Let me follow up on that then. What you are 
saying is paying down outstanding debt, buying that debt up, 
redeeming it and putting it in the Part A Trust Fund is better 
than using the Part A Trust Fund to fund new benefits in 
Medicare, including prescription drugs, when it comes to long 
term sustainability--your standard?
    Mr. Walker. Ultimately, Mr. Spratt, as you know, the 
Congress has to make these difficult decisions. From the long 
term sustainability standpoint, from the long term fiscal 
pressures, it is clearly less risk. It is clearly a preferred 
option to pay down debt held by the public. The least risk is 
to pay down debt held by the public. The highest risk is to 
increase entitlement spending.
    Now if you decide, for example, to add a prescription drug 
benefit, then hopefully if you do that, that can be coupled 
with some program reforms that save money. Hopefully you will 
be in a situation where at least you don't make the situation 
worse. One of the things I say on the last page of my statement 
is that hopefully there can be a Medicare Hippocratic Oath, 
which means if you're going to add something, engage in reforms 
such that in the end you are at least not making the long term 
situation worse.
    If you take Part A alone, $4.6 trillion is how much money 
we would have to have right now and invest it in order to be 
able to close the gap between promised and funded benefits just 
based upon the current situation, and that is without 
prescription drugs, and that is without SMI.
    Mr. Spratt. Does that assume that Medicare health care cost 
will grow at 1 percent above the rate of GDP growth?
    Mr. Walker. That is correct. It assumes that the most 
recent estimate that the Social Security/Medicare trustees came 
up with is the case. As you know, a 1 percent difference can 
make a huge difference because of compounding over time. For 
example, that 1 percent change drove the deficit, the unfunded 
liability, from $2.6 trillion to $4.6 trillion. Is it right? 
Candidly, God only knows, and God is not telling us. But what 
we do know, costs are on the rise again. And we do know that we 
have a system that doesn't provide adequate incentives, 
transparency or accountability to control cost, and therefore, 
we are going to have to end up doing something about that.
    Mr. Spratt. We are only 2 years removed from the year when 
we had a phenomenal result in Medicare; namely, no cost growth 
at all. What happened that year, and why is this year and the 
apparent future different?
    Mr. Walker. Well, one, there were a number of things that 
happened, one of which was BBA. BBA was an act which served to 
end up placing a significant constraint on reimbursements and 
cost control growth. A lot of BBA has been relieved, in some 
cases justifiably, because maybe there were unintended 
consequences. But in some cases relief may have been provided 
that may not have been justifiable.
    The fact is, the private sector is seeing that health care 
costs are back on the rise, partially driven by prescription 
drugs. That is the fastest growing cost in the health care 
sector; partially driven by the fact that the benefits of 
managed care, which were gained by the private sector and, to a 
certain extent, the public sector over in the 1990's have 
played out. And so those are some of the reasons.
    Mr. Spratt. You stated earlier in your testimony that if 
and when we make reforms, we should base them upon hard 
evidence and not anecdotal evidence. Do you have something 
particularly in mind where we went off on anecdotal evidence 
and were mistaken and did the wrong thing?
    Mr. Walker. I would suggest you ask Mr. Scanlon, who is 
head of our health care team, and they have done a tremendous 
amount of good work in this area, and I wouldn't want to steal 
his thunder. 
    Mr. Spratt. Thank you very much.
    Chairman Nussle. Mr. Gutknecht.
    Mr. Gutknecht. I appreciate this testimony today, and it 
was a great life insurance salesman to demonstrate how much it 
was important to buy your life insurance when you were still 
young; used to carry around with him a marble, a golf ball and 
a baseball. He said, if you buy this insurance today, it is 
like carrying this marble around all the time. If you wait 5 
years, it is going to be like carrying the next size ball up 
the list, and at some point it becomes so big that you can't 
get it in your pocket. I think that is where we are with this 
    You have answered most of the questions I had. I am not 
really clear--I think you used the term ``sustainability.'' Can 
you talk about that, what exactly you mean by that and why that 
is important?
    Mr. Walker. Sustainability is really, as I mentioned, 
focusing on the ability of the government to deliver on its 
promises. And if you look at sustainability, I think it is more 
important to look at the combined Medicare program, both Part 
A, Part B. If the Congress decides to pass prescription drugs, 
then whatever that might be as well, and what percentage of the 
Federal budget is represented by these combined programs; what 
percentage of the U.S. economy is represented by these combined 
programs; and what is the long term fiscal effect, in light of 
the ability of the Government to be able to fund other 
discretionary spending and the ability and willingness of the 
Congress and the American people to allow themselves to be 
taxed at higher levels.
    I mean, this chart shows a lot. It says that if you 
continue the status quo, you are facing a future where you are 
going to have to significantly increase taxes, cut spending, or 
some combination thereof, by magnitudes that we have not 
experienced previously.
    Mr. Gutknecht. Thank you, Mr. Chairman. I have no further 
    Chairman Nussle. Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Mr. Walker, a couple of things. You point out that the 
rising obligation and the sustainability of the program, and 
you talk about it in the context of the government's ability to 
fund this program. At what percentage of GDP do we think is 
enough or too much? Shouldn't this argument also be put into 
the context of society, because whether it was the government 
or private sector, health care costs and particularly health 
care costs for the elderly, are going to rise if there was no 
Medicare program. If we were to look at how much was being 
spent of GDP, it would rise proportional to the demographic 
changes that are going on in the country. So it seems to me we 
ought to put that in some perspective.
    You made a point regarding as we go up the curve, what we 
do with the surplus. I appreciate your comment about the full 
faith and credit, because there has been some confusion over 
the last week about whether or not those bonds are any good or 
not, and I think your point is well taken. I think if you read 
the bond, it is pretty clear in there.
    But you said that the best approach would be to pay down 
debt. Now, the budget that passed the Congress allocates some 
to debt repayment and allocates some to tax cuts, but it also 
says we are going to spend $300 billion over the next 10 years 
out of the Medicare Trust Fund for the creation of a new 
prescription drug program. Now, I think, most of us are in 
favor of a drug prescription program, but the question I would 
ask you, is that not going in sort of the opposite direction, 
because aren't we, in effect, borrowing additionally against 
the trust fund or adding another $300 billion in long term 
obligation when we take those surplus receipts and use them to 
expand benefits under the program?
    Mr. Walker. That will have an adverse effect on solvency 
and sustainability. That will end up increasing the unfunded 
obligation of the Medicare program substantially.
    Mr. Bentsen. So that money probably runs at about--well, 
today it would be about 590 percent over a 30-year period that 
we are going to have to pay on that $300 billion, and maybe 
higher, depending on what the cost of debt is at the time.
    In the privatization issue, you talk about the long term 
cost and the need for program reform. You also talk about--and 
I think very appropriately--that the managed care aspect of 
savings has somewhat played itself out. This has been true in 
Texas and across the Nation where we have seen the managed care 
companies getting out of the Medicare business because they 
can't make any money at it, and their costs are rising too 
rapidly. Part of that is due to prescription drug costs. And 
Congress has bumped up payment under the AAPCC to these 
    Two questions. One is how close are we to the Federal 
Government paying a third party for the same benefit that can 
be provided directly through the Center of Medicare and 
Medicaid Services? The second question is, we hear a lot of 
talk about privatization or reform of the system in giving more 
choice and all these things, and trying to model after the 
private sector insurance or the Federal Employees Health 
Benefit Programs. All these things sound nice on their face, 
but I am worried about when you unwrap the package and look 
what it is inside. What are we talking about? Do we need to 
raise premiums dramatically on beneficiaries? Are we talking 
about having to curtail services, because as you say, just 
going to managed care, apparently--the empirical evidence has 
shown us that that is not going to provide savings, if any, 
certainly none close to what is necessary to get to long term 
sustainability. So what are we talking about?
    Mr. Walker. Let me address a couple of things. And I would 
suggest on some of the details of the Medicare program, Mr. 
Scanlon might be able to address that if I do not adequately 
    First, let me take Medicare+Choice as an example. 
Medicare+Choice does not save the Federal Government money. It 
costs the Federal Government money. One of the reasons we put 
that in place was to save money. It is not saving money. It is 
costing money.
    Secondly, if you look at the imbalances that exist, I think 
ultimately what the Congress is going to have to address is 
some fairly fundamental questions: What do people need versus 
what people want, versus what we can collectively afford? Needs 
have not been adequately defined, in my opinion, in health 
care. Wants are unlimited in health care. Everybody wants as 
much as they can get as long as somebody else is paying for it. 
And the collective affordability challenge is demonstrated by 
our long-range simulation.
    I think ultimately Congress is going to have to get into 
tough issues like what is the nature of the promise; what are 
we promising under this program. For example, there are several 
different elements of health care, and as you know, I was a 
partner with Arthur Andersen for a number of years and did 
consulting in a number of areas including health care, pensions 
and a variety of other areas. One of the fundamental elements 
you have to have is the ability to purchase health care at 
group rates. In other words, guaranteed insurability at 
reasonable group rates. Secondly, protection against financial 
ruin due to an unexpected catastrophic illness. By the way, we 
do not have either one of those in this country, although we 
spend a lot of money on health care.
    There is a difference between guaranteed access at group 
rates, leveraging purchase power, which government should do to 
help everybody, and who should pay for the coverage; and there 
is a difference between having a one-size-fits-all, which all 
too frequently we tend to do by saying this is the level of 
coverage. Everybody is going to get the same thing no matter 
what it costs, no matter what their means are and no matter 
what their needs are. Our current system is such that we have 
not separated between access to health care group rates, 
guaranteed insurability, protection in areas where people 
really need protection, and then targeting assistance to those 
who are truly in need, and that is part of the problem. The 
failure to do so is one of the reasons why health care costs 
are out of control.
    If you look at our tax system, you can say our tax system 
is not exactly encouraging people to control health care costs, 
because the employer gets a deduction, which arguably they 
should because otherwise they pay it in wages, and they will 
get a deduction for, and obviously you want health care 
coverage. Individuals do not include in income the value of any 
of the health care insurance that they get no matter how 
lucrative the policy is. Eighty-five plus percent of the costs 
are paid for by a third party. The individual may or may not 
even look at the bill. With a system like that, it is no wonder 
we have costs that are out of control.
    We have the best health care system in the world as it 
relates to quality. We have one of the worst as it relates to 
cost control.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Chairman Nussle. I would just say to the gentleman, one of 
the reasons why we added the word--and I think this committee 
took the lead on it--as opposed to just a prescription drug 
benefit was also modernization. I am not suggesting that 
answers your concern or mine or Mr. Walker's, but to try and 
add modernization reforms to it as opposed to just adding a 
prescription drug benefit to the program.
    Mr. Bentsen. I appreciate that, Mr. Chairman, on that, and 
I do not want to raise anybody's concerns about my supposed 
Keynesian leanings, but there is no free lunch.
    Chairman Nussle. I am not suggesting that this is going to 
calm your nerves at all, but we did at least take the lead to 
add not just a benefit.
    Mr. Watkins.
    Mr. Watkins. Thank you, Mr. Chairman. I think we have got a 
basketful of things that we have to resolve along the way, and 
I think we know it is either your children or your 
grandchildren saying there is a difference of needs and wants. 
Adults, as we look at what type of health care we are going to 
be including in the Medicare package and all the cost, all that 
will make a big difference in what the overall package will be.
    I want you to elaborate a little bit in your equation here. 
You talked about how the sustainability does not rely on the 
economy, and you said solvency does not rely on the economy. I 
am having a little bit of a--I would like to hear you elaborate 
on that because I think solvency does depend a little bit on 
the economy, to say the least, in my opinion. But I am trying 
to work through that in my mind just a little bit in the 
overall long term picture of Medicare solvency. Where you are 
coming from on that?
    Mr. Walker. Well, the economy can have some effect on 
solvency because, obviously, to the extent that you have the 
more people working, making more money, they are going to be 
paying more payroll taxes. So it can affect payroll taxes. 
Solvency focuses on how much in assets does the trust fund 
have, and the assets, which are these U.S. Government bonds 
backed by the full faith and credit of the U.S. Government, 
they represent a moral, legal, political commitment. But by 
themselves they are not going to get the job done.
    In order to convert those bonds into cash, the Congress is 
either going to have to raise taxes, cut spending or borrow 
from the public in order to do that. So that is what I mean 
when I say that, we need to recognize it is not that solvency 
is not important. The most important issue from an economic 
standpoint is are you going to be able to deliver on those 
promises, and are you going to be able to sustain depending on 
how big it is going to get as a percentage of the overall 
economy. The problem is not really today's retirees and people 
even close to retirement. It is boomers, X-ers, Generation Y. 
That's really the issue.
    It is similar to the issue on Social Security, but the 
difference is the magnitude is so much greater, and the 
expectation gaps are so much greater than Social Security, and 
the emotion is so much higher, because when you talk about 
health care, it is a very important and emotional issue.
    Mr. Watkins. I will have to think about this--how solvency 
is not dependent upon the growth of the economy. Our overall 
budget depends upon the economy and the growth. I think 
Medicare depends on that economy. I think we cannot dismiss 
having a strong economic growth sustained over this long period 
of time.
    Mr. Walker. If we can grow the economy faster, OK, then 
hopefully we will be able to have more employment, and 
hopefully we will be able to have a situation where there will 
be more wages. To the extent that the average wage goes up, 
then obviously you will generate more payroll tax revenues. 
However, let me be clear, this projection assumes CBO's most 
recent higher productivity growth assumptions. Therefore, this 
already has a lot of that already built into it. Obviously we 
want to try to do better, but the gap is so great, you are not 
going to solve the problem.
    Mr. Watkins. I have not had time to read your testimony. 
Can you tell me what the economic assumptions are that you base 
these figures on?
    Mr. Walker. We have used CBO assumptions. I will be happy 
to provide it for the record. We are not trying to compete with 
CBO. They are in the legislative branch.
    Mr. Spratt. Will the gentlemen yield for clarification?
    Does that mean that you are assuming after 2016, the 
economy will grow at a productivity rate of 2\1/2\ percent per 
    Mr. Walker. I can't recall the exact percentage, Mr. 
Spratt, that they used. I will provide it for the record.
    Mr. Watkins. That would make a big difference in overall 
things. If you would be able to provide it for the record.
    [The information referred to follows:]

Mr. Walker's Responses to Questions Posed by Messrs. Spratt and Watkins

    Mr. Spratt: Does that mean that you are assuming after 2016, the 
economy will grow at a productivity rate of 2\1/2\ percent per year?
    Mr. Walker: No. From 2000 to 2016 labor productivity growth 
averages 2.1 percent per year. After 2016 labor productivity growth 
slows as the Federal Government's diminishing surpluses and then 
escalating deficits increasingly absorb national saving and reduce 
capital formation. The table of assumptions shows the CBO assumption 
for total factor productivity.
                         key model assumptions
     Model assumptions for the first 10 years are generally 
based on CBO's January 2001 economic and budget assumptions. Spending, 
revenue, and interest follow CBO's baseline totals in which total 
discretionary spending grows with inflation.
     As in CBO's long-term work, the model uses calendar year--
not fiscal year--data and is based on the National Income and Product 
Account (NIPA) framework rather than on the unified budget basis. This 
framework facilitates modeling of the Federal budget's effects on the 
economy. Our charts show estimated unified surpluses and deficits 
derived from this framework.
     After the first 10 years:
          Discretionary spending, mandatory spending other than health 
        and Social Security, and revenue are held constant as a share 
        of the economy at the same value as at the end of CBO's 
        projection period.
          OASDI, HI, and SMI Trustees' intermediate projections are 
        used for Social Security and Medicare spending. Once the OASDI 
        and HI Trust Funds have been exhausted, the model assumes 
        general fund financing of all current law benefits in excess of 
        program revenues.
          For Medicaid, the model uses CBO's October 2000 long-term 

    Source: GAO's March 2001 analysis.

              Model inputs                         Assumptions
Surplus/deficit........................  CBO's January 2001 baseline
                                          through 2010; GAO simulations
Social Security spending (OASDI).......  2001 Social Security Trustees'
                                          intermediate projections.
Medicare spending (HI and SMI).........  2001 Medicare Trustees'
                                          intermediate projections.
Medicaid spending......................  CBO's October 2000 long-term
Other mandatory spending...............  CBO's January 2001 baseline
                                          through 2010; thereafter
                                          increases at the rate of
                                          economic growth (i.e., remains
                                          constant as a share of GDP).
Discretionary spending.................  CBO's January 2001 baseline
                                          through 2010; thereafter
                                          increases at the rate of
                                          economic growth.
Revenue................................  CBO's January 2001 baseline
                                          through 2010; thereafter
                                          remains constant at 20.4
                                          percent of GDP.
Nonfederal saving rate: gross saving of  16.1 percent.
 the private sector and state and local
 government sector.
Net foreign investment.................  An estimated 2000 nominal
                                          dollar level plus one third of
                                          any change in gross national
Labor: growth in hours worked..........  2001 Social Security Trustees'
                                          intermediate projections.
Total factor productivity growth.......  1.5 percent (CBO's January 2001
Inflation (GDP price index)............  CBO through 2011; 1.9 percent
                                          thereafter (CBO's projection
                                          in 2011).
Interest rate (average on the national   Average rate implied by CBO's
 debt).                                   January 2001 inflated baseline
                                          interest payment projections
                                          through 2005; 5.4 percent
                                          thereafter (based on CBO's
                                          assumption for the average
                                          rate on Treasury securities).
1. These assumptions apply to our base simulation, Save Unified
  Surpluses. For alternative fiscal policy simulations, certain
  assumptions are varied, which are noted in the discussion of the
  alternative paths.
2. In our work, all CBO budget projections were converted from a fiscal
  year to a calendar year basis. The last year of CBO's projection
  period is fiscal year 2011, permitting the calculations of calendar
  year values through 2010.

Source: GAO's March 2001 analysis.

    Chairman Nussle. Thank you.
    Ms. McCarthy.
    Ms. McCarthy. Thank you, Mr. Chairman.
    I am trying to figure out how about to phrase my question 
without it sounding like I am bashing anybody, because I don't 
want to do that. Going back so many years ago, probably 20, 30 
years ago, we basically took care of everybody in the hospital. 
We didn't know who had insurance, who doesn't have insurance. 
Obviously going back then, seeing that the cost of health care 
was rising, HMOs came into place promising that they would 
lower the cost of health care. Now, obviously we are seeing 
that the HMOs can't deliver that either.
    I think what I am trying to go back is, not denying anybody 
trying to make a profit on their company and I think they 
should, I think that is what this company is all about, but I 
think they got themselves into a problem here because they are 
trying to deliver a health care system. Yet I was curious if 
there is any possibility of knowing what the cost analysis 
would be on what we have done on Medicare in delivering a 
health care system versus what the HMOs do and what it costs 
them to really deliver a health care system, especially since 
they are over cost. They have got to be high because they are 
still trying to make a profit.
    I guess I come back from a person, as a health care 
provider, that I just don't see how anybody in health care can 
make money. You just can't. Because any monies that are made in 
a hospital--which very few hospitals would ever make money--it 
goes into the infrastructure, which means hiring more nurses. 
Now we have a crisis because now they don't have money to pay 
for nurses. Going down the system or any part of the health 
care system, whether you are an occupational therapist, doctor, 
they are not encouraging their children to go into the field. 
So our problem is a lot more complex.
    So what I am trying to say is without going into--I am not 
one for universal health care because I have traveled around 
the world and we still have the best health care system as far 
as I am concerned. But we have a big problem. Because we all 
want good health care which I think we actually end up 
delivering. But how do we keep those costs down when the HMOs 
have to make a profit to sustain themselves and yet cut back on 
basic health care which most of us only use but let's face it 
as we get older and probably the last 3 months of anyone's life 
is probably the most expensive time for health care.
    Mr. Walker. We can sit here and talk about paying down the 
debt. As we come up with better technologies for health care, 
the technology that is coming down the pike is amazing. Anyone 
that spends time with the high techs where they say you are not 
going to have cancer or anything, we have the ability for that. 
But in the end, it is going to cost money. I don't know how 
anyone here in Congress is going to handle it particularly. 
First, my daughter-in-law is an R.N. so I am familiar with some 
of the challenges associated with that profession as well. 
Demographics are working against us. I mean, we have fewer and 
fewer workers supporting more and more retirees. The good news 
is people are living longer. By and large, they are living 
healthier, although in many cases, they want to retire earlier. 
And so you have a double whammy. You have a situation where 
people are going to be in retirement a lot more years. You are 
going to have a lot more people that are seniors where 
generally you are going to have more health care and yet they 
are not going to be paying in payroll taxes because they are 
exiting the work force earlier, if you will, sometimes because 
they can afford to, sometimes because they think they can 
afford to and they really can't afford to.
    So this is a very big challenge by itself, but I also think 
it is part of a broader challenge. And part of the broader 
challenge is not only the issue of the overall budget outlook 
and the fiscal outlook, but it is also how long we end up 
dealing with slow workforce growth. How can we end up trying to 
encourage our citizens to contribute to the economy for a 
longer period of time, such that it not only will end up 
helping with regard to revenues, but it may also end up helping 
with regard to expenditures as well.
    Ms. McCarthy. I think if you go shopping in Home Depot, you 
will see the majority of people working there are definitely 
way over the Social Security age. And number one, because they 
love working, but also because Congress increased people being 
able to earn some more money, they are back to work. I mean, I 
know last time I when shopping I had a number of senior 
citizens say thank you for passing that bill. They want to 
    Mr. Walker. And that was a plus. Because otherwise it was a 
disincentive for them to work. So Congress took steps to try to 
do that. I think that is a positive thing to try to encourage 
people but not require people to do it.
    Ms. McCarthy. Thank you.
    Chairman Nussle. Mr. Fletcher.
    Mr. Fletcher. Thank you, Mr. Chairman. And Mr. Walker I 
appreciate this. I am sorry I didn't get into the first part of 
your testimony but appreciate you being here and Mr. Chairman 
for having this hearing. Let me ask you from the chart and from 
what you have said, even though some folks say we can grow out 
where the GDP grows adequately out of Social Security, 
Medicaid, Medicare obligations, what you are saying, I think 
Mr. Watkins said this as well, it is very difficult. We are not 
going to be able to grow ourselves out of the demands and 
obligations we have under the current system. Is that correct?
    Mr. Walker. In theory we can. I wouldn't want to bet the 
ranch on these numbers.
    Mr. Fletcher. What kind of growth rate would we have to 
have in order to meet the obligations, any idea?
    Mr. Walker. I haven't calculated it, but we can try to take 
a stab at it and provide it for the record.
    Mr. Fletcher. We appreciate that. How much do we have in 
the securities and the trust fund worth, how many certificates 
do we have? What's the total value of that at this point?
    Mr. Walker. I think it is several hundred billion. But let 
me see if we can come up--we have the number. We will try to 
come up with that in a minute.
    Mr. Fletcher. What is their real worth in your estimate in 
the sense that are they worth anything?
    Mr. Walker. Anything that is backed by the full faith and 
credit of the United States Government is worth something. I 
think what we have to recognize is that they represent 
basically a promise to pay, a bond, but in order to be able to 
convert that bond into cash, in order to pay benefits, you are 
either going to have to raise taxes, cut spending or go out and 
borrow from the public in order to be able to do that. So yes, 
there is some value. But you can't pay the doctors with that 
bond, OK, and you can't, you know, buy groceries with that 
    Mr. Fletcher. So no intrinsic value, but there is a value 
in certainly the security of the promise that the U.S. 
Government would do that.
    Mr. Walker. Basically what you have is the trust fund 
basically says that the government has a legal, moral and 
obviously political obligation to be able to pay benefits in a 
timely manner to the extent of positive cash flows, to the 
extent that there is cash in excess expenditures plus the value 
of these bonds. When that runs out, then what happens? By the 
way, the number is $168 billion in the HI trust fund as of the 
end of fiscal 2000.
    Mr. Fletcher. What kind of interest does that accrue if 
they just sit there?
    Mr. Walker. It is an average of Federal obligations, I 
believe it is over 10- or 15-year maturities. I can provide 
that for the record. But it is based upon actual interest rates 
that are paid on U.S. obligations with stated maturities.
    Mr. Fletcher. How does what we do with the Medicare 
surplus, the annual surplus, what effect does that have on the 
solvency of the Medicare program?
    Mr. Walker. Whatever you do with the Medicare surplus will 
not affect solvency at all. It will affect sustainability, 
which is all the more reason why I say it is important to focus 
on sustainability, not just solvency. Because let me describe 
it. If you run a surplus this year of $10 billion in Medicare, 
you are required by law to issue bonds to the trust funds, 
IOUs, bonds backed by the full faith and credit of the U.S. 
Government. You are required to issue those to the Medicare 
trust fund, no matter what you do with that $10 billion. You 
could spend that $10 billion in a prescription drug benefit, 
you could spend it on housing, you could use it for a tax cut, 
or you could use it to pay down debt held by the public.
    Whatever you do has no effect on solvency. It does have 
effect on sustainability. And that is why I think we need to 
keep our eye on the ball that solvency is not the whole ball 
game. Sustainability is as much or more important.
    Mr. Fletcher. You said you have several options, in order 
to have solvency, in any one particular year, since the 
revenues coming in are what paid those year's obligations, can 
we meet those obligations if we say well, we don't want to 
raise taxes, we don't want to lower or increase the age of 
eligibility, do we have any other way other than reforming 
Medicare in the program of trying to make sure that we have 
sustainability and a yearly solvency?
    Mr. Walker. If you are not going to raise taxes and if you 
don't want to change the benefit structure under Medicare, then 
you are either going to have to cut discretionary spending 
significantly or you are going to have to end up going back 
into deficit financing, borrowing from the public to a greater 
and greater extent. But the problem is sooner or later you got 
to pay the piper. You know, as Mr. Bentsen said, ``There is no 
free lunch.''
    Mr. Fletcher. Would there be the possibility of reforming 
the system in the way that it works that might help insolvency? 
You mentioned changing the particular things that we cover.
    Mr. Walker. I think realistically one of the things that 
Congress is going to need to consider over time is what is the 
nature of the promise in the Medicare system. And whether or 
not the promise should be the same that it is today, which is 
to provide a defined level of coverage that is the same for 
everybody, irrespective of their means, irrespective of how 
much they paid in, or whether or not it is something different 
and whether or not there might be several levels of coverage, 
some of which everybody might get based upon their taxes; 
others might want to be able to buy more coverage and if they 
do that, then they might have to assume some obligation.
    I think you are going to have to look at what is the nature 
of the promise. That could vary by generation. You could say, 
for example, that for today's retirees or near-term retirees, 
it is the current deal. Because that is what they expected, 
they don't have time to make adjustments. It may not be 
feasible, it may not be fair to do anything different than 
that. But for those that are further away from retirement, you 
could decide that you want to end up making some changes, that 
while they still have time to do something about it, try to 
plan for it.
    But I also think that there are things that can and should 
be done within the context of the current system. And I think 
the second panel is going to end up talking about some of those 
things. We spend a tremendous amount of money on 
administrative, you know, paperwork costs in this system, and 
it is staggering.
    Mr. Fletcher. Thank you, Mr. Walker.
    Chairman Nussle. Mr. Walker we have two votes that have 
been called on the floor. We need to recess the hearing. Do we 
have others that would like to inquire? Are there others? Mr. 
Collins would like to inquire.
    So what we will do is we will recess, my understanding is 
you have been gracious enough to sit through the vote and to 
allow us to do that. So we will recess and after the second 
vote we will come right back, and at that point Mr. Collins 
will be recognized. Hearing is in recess.
    Chairman Nussle. This will resume the hearing on Medicare 
and the need for reform. My understanding is Mr. Walker has a 
meeting with the Senate at 12:15. He needs to leave here at 
noon. We will get right into this.
    Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman. And thank you Mr. 
Walker. Your comments kind of remind me of the story about 
Harry Truman when he was delivering a speech and someone said, 
``Give 'em hell, Harry.'' He says, ``son, I am telling the 
truth; they just think it's hell.''
    I appreciate your comments. Solvency should not be the 
focus. It is cash flow. Cash flow is the focus. Cash flow will 
be the sustainability. The cash flow of this trust fund, other 
trust funds and the Federal Treasury depend on the cash flow in 
the private sector, period. That is where we generate revenues 
is from the private sector and from that cash flow.
    When you look back over the last 40 years, in the 1960's, 
under President Kennedy, and he said to a rising tide, lift all 
boats and the Congress then passed meaningful tax relief. What 
were those funds used for in the 1960's? What happened with 
that stimulus of that immediate influx of new money into the 
Treasury? The great society, Medicare, Medicaid, and the 
welfare program?
    Now we have addressed the welfare program to a certain 
extent, the other two are still there. Then in the 1980's, with 
a large tax reduction, to leave the cash flow in the private 
sector and drastic increase of revenues to the Federal 
Treasury, what were those funds used for? They were used to, as 
President Reagan said, to end the evil empire. That was the 
cold war. Bring down the Soviet Union, the Berlin Wall, and 
people think that was a good investment and it was.
    The most recent tax cut to increase the cash flow of the 
private sector, hopefully will have the same meaning. It won't 
be as fast because budget law restricted us on how politically 
we could make those tax reductions and increase that cash flow 
in the private sector. But why do we need a new influx of money 
into the Treasury now? You have been talking about it sir. We 
have got to address Social Security/Medicare. Medicare does 
have far greater problems than Social Security. And it is going 
to take general funds to address both, to be able to sustain 
    I am concerned about Medicare. I am concerned about it 
because it is congressionally managed. It is a job run 
government HMO, very inefficiently operated, as you so 
outlined, based on meeting needs and increased care in costs. 
And we are experiencing an increase in the cost of health care 
across this country. I am afraid some of the things that we are 
dealing with here in the Congress today will only increase 
costs more and will reduce access for many people across this 
country to health care. And I am talking about the patients 
Bill of Rights.
    We again, therefore, are trying to manage from Congress 
health care in this country. What is going to be the coverage, 
what will be in the plans and how they will be mandated. That 
will increase costs. And there are a lot of people who are 
insured today or people who are providing them with that 
insurance or assisting them with that insurance won't be able 
to meet that cost. Therefore, we will have a reduction to 
health care and coverage in this country. You mentioned 
incremental change. The changes that we make in Medicare will 
have to be incremental because politically we can't bite the 
bullet and do it all at once.
    The main thing that the people have got to understand that 
those who are covered under Medicare or Social Security today, 
they won't see any drastic changes except maybe some 
improvements in what they are already receiving, their wants, 
as you say. But there won't be any reduction. That is the 
incremental change. It is the generations behind me. I am one 
of the baby boomers, but the generation behind me and the one 
behind them, they have to see change coming and they will be 
more prepared for the change based on the daily lives they lead 
today and what they have access to.
    It all reminds me of the definition of a democracy. And 
that is, a democracy is indefinite because those who are 
governed under a democracy will learn of the benefits they can 
reap from its Treasury, and they have a tendency to elect 
people who will enhance those benefits leading to the demise of 
the democracy. The sustainability of the government, the 
sustainability of its programs whether it is Medicare, 
Medicaid, Social Security, defense, whatever, depends on the 
ballot box and what happens with those, by those who are 
    I appreciate your comments, your forwardness, your 
frankness because these are reeling issues that have to be 
dealt with to sustain this republic, this democracy. Thank you, 
Mr. Walker.
    Chairman Nussle. Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman. I regret that I had 
attended another markup in another committee meeting. I wasn't 
able to be here, so I don't want to ask any questions at this 
time and repeat what might have already been asked, but thank 
Mr. Walker for appearing today.
    Chairman Nussle. Mr. Kirk.
    Mr. Kirk. I note that with Mr. Scanlon's testimony we are 
about to see we have got some real problems with the 
information provided by carriers regarding the incredibly 
complicated Medicare regulations. I wonder if you could expand 
something on the problems that we have got: 8 out of 10 web 
sites that you found with inaccurate information on Medicare 
billing procedures, 85 percent of the calls--the 60 calls--85 
percent of them gave inaccurate information, and five out of 
nine carriers had wrong information in their Medicare billing.
    Those are pretty dramatic numbers on an ability to deal 
with the hopelessly complicated system. I wonder if could you 
comment on the work you have done.
    Mr. Walker. Well, first there are some problems with regard 
to customer service and the reliability of information that is 
being provided. It is a very, very complicated program. The 
people at CMS are under a constant pressure, frankly, to do 
more with less. They face some of the same challenges that the 
Internal Revenue Service faces with regard to the accuracy of 
some of the information that they have been providing to 
taxpayers. There are some similarities. Quite frankly, you know 
how complicated the tax code is. Quite frankly, Medicare is 
probably as much or more complicated than the Tax Code.
    We also have another problem as it relates to data, that 
is, we don't have enough timely, accurate, useful information 
in order for the Congress to be able to make informed decisions 
in this area and in order for CMS to be able to effectively 
manage the program.
    Health care is over 13 percent of our economy and growing. 
Unfortunately when the Congress has to consider, for example, 
whether to make adjustments in BBA, all too frequently it has 
had to make these decisions based upon the assertions of the 
providers rather than a hard core analysis of the facts. We 
need to do something on both sides, customer service as well as 
to get more timely accurate useful information so the Congress 
make more informed judgments and timely judgments and so CMS 
can better manage the program.
    Mr. Kirk. I wholeheartedly agree. We have another big 
issue, and I am wondering if it will play in your future look 
at the expanding cost of the system. I note here that we have 
got the new trustees intermediate assumption report and they 
have some pretty dramatic changes from the level of growth we 
had before. But I noted that the State of Florida has made a 
major decision, and this is with regard to case management. One 
of the realities in Medicare today--well, in all health care, 
is poor patient compliance with doctor's orders that we do not 
have the prescription drugs taken on time or in the right 
quantities and other procedures are not followed.
    To sum up, my understanding of case management, it is 
hiring a few doctors--but mainly nurses--to keep in contact 
with the patient and dramatically increase compliance with 
doctors' orders making sure that the medicines are taken on 
time and in the right quantity and other procedures are 
followed. My understanding is the record of case management is 
the health status of the patients dramatically improves as we 
dedicate resources to providing necessary compliance follow-up. 
Costs fall to the point where one major drug company has made 
an offer to the State of Florida to keep costs at a certain 
level, and they will take any profit. They bet that they took a 
good risk with the State of Florida, and they will take all the 
    It is a dramatic cost savings that this one company has 
promised the State of Florida using this procedure. Do you see 
this in any way as trend? Can case management contain Medicare 
    Mr. Walker. You are speaking of one element of case 
management, Mr. Kirk. I would make a brief comment on it, then 
I would suggest that Dr. Scanlon, who heads up our health care 
team who is going to be on the next panel, might be able to 
develop the subject a little deeper than I am. Clearly, there 
are opportunities to capitalize on these practices. In some 
cases, it means spending a little bit more money now in order 
to save money later. That is one of the things that we need to 
keep in mind. We need make sure that you know, CMS has adequate 
resources to be able to do its job now and we can't just focus 
on you know, what the immediate impact is of some of these 
    We also have to think about what the impact is over time 
and the compounding effect. There are some things we can do 
that can compound for us rather than compound against it, and 
this may be one example of that.
    Mr. Kirk. Last follow-up. The Congress no doubt will 
provide a prescription drug benefit. As we provide public 
resources to do that, our prescription drug intake will 
increase the out payment consumption. Do you see that with 
increasing access and affordability of medicine, improving the 
health status of the patient population at all, will decrease 
the future costs of the system? Is there any--for lack of a 
better word--cost savings response to the system as patients 
have greater access to affordable medicine?
    Mr. Walker. Based upon data that I have seen, and I do not 
believe that we have done an extensive analysis of this, let me 
say that up front, but based upon data that I have seen is that 
clearly there are some types of prescription drugs that can 
result in not only improved health status, but also decreased 
health costs as compared to more intrusive procedures. However, 
in the aggregate prescription drugs under the current 
environment result in a net cost increase, not decrease, 
because not all prescription drugs fall into that category.
    Mr. Kirk. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. McDermott.
    Mr. McDermott. Thank you, Mr. Chairman. Mr. Scanlon, or Dr. 
Scanlon, in your testimony, you said that if there were no 
benefit cuts or increases in payroll taxes, then we will end up 
cutting discretionary spending or end up with deficit 
financing. That was predicate you put into this whole process. 
    Mr. Walker. Or raise taxes. That is an option.
    Mr. McDermott. That is what I said. You have got to do 
something with payroll taxes if you don't. If you--we have 
heard a lot talk about Medicare reform and Medicare 
modification, and people talk about competition and that is 
going to drive down costs and so forth. I sat on the Medicare 
Commission for a whole year and listened to this business about 
how competition would work and the commission came up with the 
Breaux-Thomas proposal. It didn't pass the Commission, but 
there were significant number of people, a majority who thought 
that was the way to go.
    Now, we have Breaux-Frist and Breaux II, and--I would like 
to hear your view. That seems like an alternative to cutting 
benefits or increasing payroll taxes or cutting discretionary 
spending or going into deficit financing. There might be a 
better way to do it. Do you think Breaux-Frist or Breaux II 
or--you pick your poison on that one, I don't really care which 
one you want to talk about, any of those competitive models 
really hold forth any possibility of saving money?
    Mr. Walker. I believe that first competition can help but 
it is not panacea. It can be an element of a much broader array 
of actions that will be necessary, ultimately, to deal with 
this. Obviously, I don't want to endorse any particular 
legislative proposal. I will just make some generic comments.
    Mr. McDermott. God forbid you should do that.
    Mr. Walker. It is not my job, I don't have a vote. I will 
say that there are certain elements of Breaux-Frist in its 
various versions that represent a fundamental shift in how we 
have historically looked at Medicare. And I do think that 
ultimately the Congress is going to need to debate such things 
as what is the promise to the beneficiaries. What is the 
promise to the providers. Because there are huge expectation 
gaps, and obviously we have mismatches between what has been 
promised right now, which is a defined level of coverage for 
everybody, no matter what their circumstance is, and we have 
got a huge financing gap.
    Mr. McDermott. Are you talking, then, in code language 
about vouchers?
    Mr. Walker. No. No. I am not necessarily talking about 
vouchers. I mean, for example, you could say, that you want to 
provide guaranteed access to health care, guaranteed 
insurability, for--then could you say, what level of coverage 
do you want to make sure that everybody has, which may be 
somewhat less than what you have right now, although could you 
say for current retirees and near-term retirees, you get the 
current deal because they don't have time to make adjustments 
to what their expectation has been. It may not be fair to do 
    But for people like myself, baby boomers or like my kids, 
you Generation X, or like my grandkids, I only have one right 
now, you could end up deciding that you want to end up defining 
the level of coverage that is provided.
    You can get more if you want. But you may have to end up 
coming out-of-pocket if you want to end up having more coverage 
in order to try to increase incentives for more rational 
choices, enhance transparency, both as to cost and to quality.
    So I think one of the things that Breaux-Frist proposal 
does do, is it tries to get into some of these basic issues. 
What is the nature of the promise?
    Mr. McDermott. Is that a sophisticated way of making a 
benefit cut? Because if I am 65 and I have the program, you are 
not going to cut me, you are just going to cut it for my kid 
who is coming down the road. Since he doesn't have the 
benefits, at this time, you are not cutting his benefits. It is 
just when he gets here, he will get a lower level of benefit, 
and therefore you can't define that as a benefit cut?
    Mr. Walker. Well, candidly, I think Mr. McDermott, that we 
have done work on Social Security reform as well, let me give 
that as an analogy. All the work that we do on Social Security 
reform, we end up analyzing all the reform proposals based upon 
a standard series of questions, because there are positives and 
negatives to every reform proposal when we compare it to two 
scenarios, one is promised benefits and the second is funded 
benefits. I think it is relevant to consider the same for 
Medicare, because the fact of the matter is we have promised 
``X,'' but we only have adequate funding to fund some 
percentage of ``X.'' Therefore, like pensions, before ERISA was 
passed, the Employee Retirement Income Security Act, there are 
a lot of employers out there that made a lot of promises that 
they never delivered on. They never delivered on their 
    So I think we not only have to look at promised benefits, 
we have to look at funded benefits. Because ultimately, over 
time, I hope that the Congress, whatever it promises to my 
children, whatever it promises to my grandchildren, I think it 
is important that it be able to deliver on that promise. Right 
now I don't think you are going to be able to deliver on what 
you promised.
    Mr. McDermott. Is that because you don't think there is 
enough money in this country or is it because the mechanisms we 
have for collecting it and applying it to the program at the 
moment are unsatisfactory?
    Mr. Walker. I think it is a multiplicity of issues. I think 
part of it is the fact that our current system doesn't have 
adequate incentives, transparency and accountability. Therefore 
that is fueling a lot of our problems. Part of it is because of 
known demographics. Part of it is because people want unlimited 
health care. Part of it is because I think there is a practical 
limit as to how much the American people will allow themselves 
to be taxed. I don't know what that limit is. I don't know that 
anybody knows that. Part of it is because my kids and grandkids 
are going to want government to be able to do some things in 
the discretionary spending category. And they are probably 
going to want some choice about what that is. They don't want 
all those choices to have been made for them by you and me.
    Mr. McDermott. Do you think they have been presented with 
an opportunity to find out what the maximum is they would pay 
for health care? Do you think we have max'd out in health care? 
Maybe in overall taxes, yes. But how about in health care? Have 
we max'd out on what people would be willing to pay?
    Mr. Walker. If you want to look at it on that basis. And if 
you look at the surveys, for example, take employer surveys 
because those people aren't eligible for the most part for 
Medicare yet, the number one benefit of choice is health care. 
The number 2 benefit of choice is health care. Number 3 benefit 
of choice is health care. That is where the demand is, OK? 
Obviously, there is a limit as to how much people are going to 
pay. But to what extent can you use that as part of the 
equation? To what extent can you say, gee, let us provide you 
some choices? Let's let you make more decisions as to how much 
of your resources you want to put up. Make sure that the 
government has a promise that it can deliver on that is 
universal and then potentially consider some other options that 
people can make some of their own choices about how much of 
their resources do they want to put aside in order to lay off 
risk. That is what insurance is.
    Mr. McDermott. Thank you, Mr. Chairman.
    Chairman Nussle. In the final minute before you have to 
leave, I do have a question that a member wanted to ask and had 
to leave. I appreciate your time. Does it matter whether 
Medicare prescription drugs are funded out of part A or part B 
or other sources, and would that decision impact the solvency 
and sustainability of the Medicare program?
    Mr. Walker. First, right now, the only thing that the 
program is really focused on from a solvency standpoint is part 
A because part A is funded with payroll taxes, which is 
intended to adequately finance it over a long period of time. 
Part B is the SMI program, which is really a term insurance 
program. It is just supposed to have enough cash to be able to 
pay current benefits and claims incurred, but not reported at 
the end of the year. My view is the most important thing is 
sustainability. Therefore, whether you pay for it out of A or B 
wouldn't affect sustainability because sustainability deals 
with the combined Medicare program, and what percentage of the 
budget and what percentage of the economy does this represent 
rather than solvency, which although has some significance, I 
think is not the key issue.
    Mr. Bentsen. Could I ask a question for the record and then 
you can get back to me on this. I appreciate your entire 
testimony and think it is very interesting. A lot has been said 
about the trust fund, both here and for Social Security, the 
credit worthiness of the trust fund, the impact or the claims 
that that has against the future potential growth of the 
economy, et cetera. Could you provide a response to two 
hypotheticals putting aside the philosophical issues?
    What would be the difference had we taken the trust funds, 
both Medicare and Social Security and rather than invest them 
in government funds, invested them in utility bonds, AA utility 
bonds--I don't know if there are any AAA utility bonds, but AA 
utility bonds or an index, where it would have been a separate 
corpus than being in government bonds, and thus not a 
bookkeeping entry form. What would be the difference there?
    And you have to clarify between well, the government were 
to run huge deficits and run up debt because I think that would 
underscore that there is a real trust fund. So if you could 
respond to me on that. And the other is--and that gets to your 
other point, rather than have payroll taxes for this program--
and I think the same would be said for Social Security, but 
since we are talking about Medicare, rather than fixing payroll 
taxes for the purposes of establishing long-term solvency in a 
trust fund, what would be the merit or the pros and cons of 
having a floating payroll tax so that you never run a surplus--
arguably never run a deficit either and that way again, you 
don't have these trust funds questions?
    Mr. Walker. Of course, on the latter, you may not have a 
surplus or a deficit. You would have some cushion obviously, 
because you don't know exactly what the costs are going to be. 
On the other hand, you are going to backload these obligations. 
Tax rates are going to be going up, up, up, up, up. Part of the 
problem is us you have to end up looking at this as a piece of 
a bigger picture. There is a tendency to say, gee, what are we 
going to do to solve Social Security? What do we need to do to 
solve Medicare? What do we need to do to solve Medicaid?
    The problem is is that we believe--and I will provide 
something for the record--you just can't look at the single 
issue, but the aggregate, because money you use to solve 
problem X is not available for Y. And in the end, there is some 
practical limit as to how much total tax burden is going to be 
and to how much pressure you are going to want to put on 
discretionary spending.
    Mr. Bentsen. The bigger issue that you raise and I think 
you raise it very well, it is society. It is not just the 
government. This could be the private sector, and we could be 
saying are we spending too much on GDP or not enough on GDP on 
this particular issue?
    Mr. Walker. I think it is clearly a societal issue, and I 
think that in the end, it is just not dealing with Medicare, it 
is dealing with health care broadly defined because it is just 
not a Medicare problem. It is much bigger.
    Chairman Nussle. Thank you. Mr. Walker, you never fail to 
provide us with good information. I want to compliment you and 
your entire shop. The General Accounting Office does a very 
valuable service to the Congress, and it is one of those areas 
that, unfortunately, we don't give enough praise to. We really 
appreciate good news, bad news and everything in between. You 
give it to us straight. I'm very serious when I say on behalf 
of all the members of this committee, we appreciate the service 
that all of you provide to the Congress and to the Nation.
    Mr. Walker. Thank you, Mr. Chairman. I am pleased to lead 
an outstanding group of professionals, and we look forward to 
continuing to work with the Congress.
    Chairman Nussle. And we got you out of here pretty close to 
on time. We appreciate your time today.
    Our second panel today includes three distinguished 
individuals who will provide us some more information with 
regard to Medicare and the need to reform. We have today Frank 
Pallone, Member of Congress, a colleague, who will--who is the 
co-chairman of the Democratic Task Force on Health Care Reform. 
We appreciate his--and we have been trying to get his schedule 
and our schedule together and he will be here shortly; Mr. 
King-Shaw, deputy administrator for Centers for Medicare and 
Medicaid services, CMS; and Bill Scanlon, who has been referred 
to quite a bit today and we appreciate your attendance, also 
from the General Accounting Office, director of health care 

                       HEALTH CARE REFORM

    Chairman Nussle. And so we invite all three of you to come 
forward at this time. And what I will do, because I know Mr. 
Pallone has a number of very important things he needs to be 
doing, I will take him when he arrives.
    What we will do to begin with is to being with you, Mr. 
King-Shaw, deputy administrator for the Centers for Medicare 
and Medicaid Services, the name that I blew earlier and I 
apologize for that. It was so easy to remember HCFA. Now we 
have to think of new names. We appreciate your services and 
your entire testimony will be in the record and the time you 
have. You may summarize your testimony. Welcome.


    Mr. King-Shaw. Thank you, and it is good to be here, 
Chairman Nussle, Congressman Spratt, distinguished members. Let 
me first say that as deputy administrator and chief operating 
officer of CMS, I am responsible for many of the issues that 
were discussed earlier in terms of responsiveness and customer 
service, so it is a pleasure for me to talk about what I do and 
what the plans are. We openly admit that we have had issues in 
many of the service areas at CMS. And that was part of the 
thinking of bringing in somebody as chief operating officer to 
focus on the day-to-day operations and the customer service 
issues as well as implementation of new initiatives, new 
    And so it is in recognition of all that that I will 
summarize the testimony that I provided for you in writing. 
Since the topic that was assigned to me was more on the 
physician relation and burden and paperwork issues, my summary 
will focus on those. Clearly, many physicians have communicated 
to us, as have health care providers and Members of Congress 
that there are serious concerns, grave concerns, even about the 
regulatory environment and the paperwork involved with the 
Medicare program. We appreciate those concerns. We have been 
working within CMS to identify those concerns and correct them.
    Essentially, it is imperative to preserve the viability, 
the longevity, the stability of the Medicare program; that we 
streamline many of the Medicare requirements; that we restore 
or perhaps bring, for the first time, the spirit of openness 
and responsiveness to the agency; and see to it that the 
regulatory environment, the regulations that govern the 
Medicare program are sensible and predictable, something we'll 
talk about in a few moments. Medicare program will pay 
approximately $240 billion in health care claims this year for 
almost 40 million beneficiaries. It is perhaps the largest 
insurance company, if you will, in America. And so something 
that big obviously will have some rules--must have some 
structure to it. But those rules should not undermine the 
physician-to-patient relationship. It should not disrupt 
medical care. In fact, it should help and not hinder our 
efforts to assist people and it must control costs, but also 
must ensure quality, and those rules must be consistent with 
our efforts to control fraud and error.
    And so as we go through this review of our rules, these are 
things we are specifically looking to do. One is to listen to 
Americans and those who provide care to Medicare beneficiaries. 
And what we hope to learn are those things that we can do 
within our auspices, our own authority in a very short-term to 
relieve some of these burdens and those things that obviously 
we have to work with Congress to rectify. So in that vein, the 
Secretary has already established a regulatory reform group 
that specifically will be looking at current rules that must be 
better explained, a separate set of rules that need to be 
streamlined, and potentially a third category of rules that 
will be cut all together.
    The simplicity of these rules will be very important. So 
much of an industry has been built up to explain what formerly 
HCFA, currently now called CMS, really means. And so much of 
the rules that are developed and the infrastructure around 
those rules come from a lack of clarity or in many cases, an 
inconsistent interpretation of those rules.
    Therefore, the Department of Justice or the OIG and CMS 
would do well to have a common understanding of what the rules 
mean, so that all of our interaction with the provider 
community can be in a more coordinated fashion. So we will be 
having a series of listening forums around the country to 
better understand what the day-to-day practitioner and provider 
is experiencing with the Medicare program and coming up with 
action plans on how to fix those. And obviously beneficiaries 
will be a key part of that.
    We will have a number of open door policy committees, where 
a senior staff member at CMS will be responsible for 
reestablishing, restructuring a relationship between CMS and a 
provider group. I have the pleasure of performing that task for 
the physician community, The House of Medicine. Others will 
focus on hospitals, long-term care nursing homes, etcetera. The 
improved communications will go a long way toward directing our 
efforts in how to come up with specific action plans to relieve 
the stress and make valuable changes. And third, we will have a 
team of in-house experts. When I say ``experts,'' within CMS, 
specifically, but often what you find that deep in the rank and 
file of any organization, are people who know a great deal 
about these programs, and when asked, will tell you how to fix 
it or some new, innovative ideas.
    So we hope to listen to our own employees who put years 
into the system who have quite valuable insight that when 
empowered and uplifted can release all kinds of creative energy 
to solve these problems, but others as well from around the 
country. The other thing we are looking to do is to have a more 
regular release of information, a quarterly compendium so that 
the world will have one place to look on a quarterly basis 
about all the upcoming changes that are on the docket, if you 
will, for the Medicare program, just relieving the stress and 
expense of trying to figure out where CMS is going.
    There will be a definitive document that will tell us that. 
We are looking into electronic rule making. And we are looking 
at ways to improve our communications with physicians at large 
through the Internet and paper and seminars and all kinds of 
ways we don't do now. We intend to do some things around the 
rural and urban settings that may not connect well to Internet-
based communication strategies.
    And as I will openly say to you, we will need to spend much 
more effort in our oversight of contractors. So much of the 
provider relationship is built on the conversation or lack 
thereof between contractors and the provider community. We will 
do things such as better oversight of their web sites, their 
contractor call center performance, their provider relations 
efforts, and look at ways we should perhaps nationalize our 
provider relation function and communications rather than 
leaving it completely to a local-by-local market process.
    So we hope we will begin our conversation today and not 
just have a conversation today. We are very excited about the 
new things on the horizon and look forward to working with you 
and all the Members of Congress to lead us to a higher glory. 
When questions are asked, I'll be happy to answer them.
    Chairman Nussle. Thank you very much.
    [The prepared statement of Mr. King-Shaw follows:]

   Prepared Statement of Ruben Jose King-Shaw, Deputy Administrator, 
               Centers for Medicare and Medicaid Services

    Chairman Nussle, Congressman Spratt, distinguished committee 
members, thank you for inviting me to discuss the Centers for Medicare 
& Medicaid Services' (CMS's) work to streamline Medicare's regulatory 
processes and our provider and beneficiary education efforts. Many 
physicians, health plans, providers and Members of Congress have raised 
concerns about Medicare's regulatory and paperwork burden and the cost 
of doing business with the Medicare program. We can appreciate these 
concerns, and are taking every effort to identify and address areas 
where improvements can be made. Physicians and other health care 
providers play a critical role in ensuring that Medicare beneficiaries 
receive quality health care. We know that to make sure that 
beneficiaries continue to receive the highest quality care, we must 
streamline Medicare's requirements, bring openness and responsiveness 
into the process, and make certain that regulatory and paperwork 
changes are sensible and predictable. In the coming months, we will 
take aggressive action to meet these critical goals.
    In June, Secretary Thompson and Administrator Scully announced that 
as a first step in reforming the Medicare program, they were changing 
the Agency's name to the Centers for Medicare & Medicaid Services. The 
name-change is only the beginning of our broader effort to change the 
face of the Medicare program and bring a culture of responsiveness to 
the Agency. These are not empty words: creating a ``culture of 
responsiveness'' means ensuring high-quality medical care for 
beneficiaries, improving communication with providers, beneficiaries 
and Congress, and redoubling our education efforts. As we work to 
reduce Medicare's regulatory and paperwork burden and further improve 
our provider education efforts, we look forward to our continued 
partnership with Congress and the physician and provider community.


    This year, Medicare will pay approximately $240 billion for the 
health care of nearly 40 million beneficiaries, involving nearly one 
billion Medicare claims from more than one million physicians, 
hospitals, and other health care providers. CMS strives to ensure that 
Medicare pays only for the services allowed by law while making it as 
easy as possible for qualified health care providers to treat Medicare 
beneficiaries. We have to carefully balance the impact of Medicare's 
laws and regulations on physicians and other providers with our 
accountability for billions of dollars of Medicare payments.
    Medicare's requirements, as outlined in the law, generate many of 
the concerns that our constituents bring to your attention and mine. Of 
course, there is a genuine need for some rules. But rules should exist 
to help, not hinder, our efforts to assist people, help control costs, 
and ensure quality, though the rules must remain consistent with our 
obligation and commitment to prevent fraud and error. When regulations, 
mandates, and paperwork obscure or even thwart the services providers 
are trying to give, those rules need to be changed. Our constituents, 
the Americans who depend on Medicare, and the physicians and other 
health care providers who care for them, deserve better. And so we are 
working with the Secretary to reform the way Medicare works, making it 
simpler and easier for everyone involved. We are dedicating ourselves 
to listening closely to Americans' concerns, learning how we can do a 
better job of meeting providers' needs, and serving them in the best 
way we can. We also have to ensure that we focus our efforts 
appropriately, and that means being less intrusive to the providers who 
participate in Medicare and more responsive to the beneficiaries who 
depend on Medicare.


    As I mentioned, we are taking aggressive steps to bring a culture 
of responsiveness to CMS. This culture, this spirit, is rooted in a 
commitment to compassion and responsibility to beneficiaries and the 
physicians and providers who serve them. We intend to reinvigorate the 
entire Agency with a spirit of responsiveness to our constituents--to 
you, Members of Congress; to our colleagues in government here in 
Washington and throughout the Nation; and to the men, women, and 
children our programs protect. To promote responsiveness, the Agency 
    Creating Senior-Staff Level Primary Contacts for beneficiary 
groups, plans, physicians, providers, and suppliers to strengthen 
communication and information sharing between stakeholders and the 
Agency. We recently designated senior-level CMS staff members as the 
principal points-of-contact for each specific provider group, such as 
hospitals, physicians, nursing homes, and health plans. These designees 
will work with the industry groups to facilitate information sharing 
and enhance communication between the Agency and its business partners. 
The designees will help ensure that each of these important voices is 
heard within CMS. I will discuss this effort in greater detail later.
     Enhancing Outreach and Education to providers, plans, and 
practitioners by building on the current educational system with a 
renewed spirit of openness, mutual information sharing, and 
partnership. The Agency is developing and improving training on new 
program requirements and payment system changes, increasing the number 
of satellite broadcasts available to health care industry groups, and 
making greater use of web-based information and learning systems for 
physicians and providers across the country.
     Establishing Key Contacts for the States at the regional 
and central office level. Similar to the senior-staff level contacts 
for industry and beneficiary groups, these staff members are available 
to work directly with the Governors and top State officials to help 
eliminate Agency obstacles in obtaining answers, feedback, and 
guidance. Each State now has one Medicaid staff member assigned to them 
in the regions and another in Baltimore, both of whom are accountable 
for each State's specific issues.
    Responding More Rapidly and Appropriately to Congress and External 
Partners by promptly responding to their inquiries. We are developing 
an intra-Agency correspondence routing system and timeliness standards 
to respond more efficiently and promptly to congressional inquiries. We 
also are also exploring ways to make data, information, and trend 
analyses more readily available to our partners and the public in a 
timely manner. In addition, CMS will make explicit and widely publicize 
the requirements for obtaining data and analyses from us, including 
protecting the confidentiality of the data.

                           REGULATORY REFORM

    A culture of responsiveness alone will not alleviate the regulatory 
and related paperwork burdens that far too long have been associated 
with the Medicare program. Thus, the Secretary is forming a new 
regulatory reform group to look for regulations that prevent hospitals, 
physicians and other health care providers from helping Medicare 
beneficiaries in the most effective way possible. This group will 
determine what rules need to be better explained, what rules need to be 
streamlined, and what rules need to be cut altogether, without 
increasing costs or compromising quality. To assist this group, we have 
developed a multifaceted approach, focusing on listening and learning, 
which will get us on the right track. This methodical, sector-by-sector 
approach will enable us to administer our health care programs as 
effectively and efficiently as possible.
    Under the first aspect of the plan, CMS will conduct public 
listening sessions across the country to hear directly from physicians 
and health care providers away from Washington, DC, and away from 
Baltimore, and out in the areas where real people live and work under 
the rules we develop; where these people may not have such easy access 
to policymakers to share their good ideas and legitimate concerns. Most 
of you in Congress have these kinds of listening sessions with your 
local constituents on a regular basis. We want to hear from local 
seniors, large and small providers, State workers, and the people who 
deal with Medicare and Medicaid in the real world. We want to get their 
input so we can run these programs in ways that make sense for real 
Americans in everyday life. We hear from some of these people now, but 
we want to get input from many, many more.
    We want to hear from the broad range of providers, from those in 
rural offices and inner city clinics to the suburban health centers and 
urban hospitals. We want to hear from the large hospital systems and 
the small, two doctor practices and the solo providers. We want input 
from folks like group practice managers, physician assistants, and 
nurses. These professionals who are in the field every day can give us 
good ideas that improve our management of these vitally important 
programs. This type of input is good for our beneficiaries because 
regulatory reform will allow physicians and providers to spend more 
time caring for beneficiaries, and it will encourage physicians and 
providers to remain in the Medicare program.
    The second aspect of the plan is to meet with the various health-
sector workgroups--these are the industry folks here in Washington. 
Some of the people who we hear from the most are the individual and 
institutional providers who are dealing with our rules every day. They 
are the ones caring for our beneficiaries, and they are the ones 
filling out many of the forms, trying to understand the rules, and 
working to do the things they spent years training to do--making people 
healthy. And so the second aspect of our approach will focus 
specifically on the collective expertise of the industry groups who 
represent these physicians and providers, working with CMS senior 
staff. We are convening seven health-sector workgroups with a senior 
CMS person as each group's principle contact. The purpose of these 
groups is to suggest ways that we can improve their interactions with 
CMS and the Medicare program to reduce regulatory complexity and 
burden. For example, the American Hospital Association (AHA) recently 
released a report, ``Patients or Paperwork: The Regulatory Burden 
Facing Hospitals.'' The AHA found that due to regulatory burden, every 
hour spent providing actual patient care generates at least 30 
minutes--and sometimes an hour--of paperwork. We need more input like 
this to improve our operation of Medicare, so that health care 
professionals can spend more time delivering the care for which they 
were trained, and so that beneficiaries can spend more time with their 
doctors and other providers--not in waiting rooms.
    Like the physicians, providers, and beneficiaries who live and work 
with Medicare every day, CMS staff have dealt with the system for 
years, and they have suggestions about how we can operate the Medicare 
program more simply and effectively. They certainly have heard from all 
of you and from many, many providers about what could be fixed. To 
examine these important concerns, the third aspect of our plan is 
forming a group of in-house experts from the wide array of Medicare's 
program areas. We are asking them to think innovatively about new ways 
of doing business, reducing administrative burdens, and simplifying our 
rules and regulations, without increasing costs or compromising 
quality. Today, providers are forced to spend more time keeping up with 
the latest rules and interpretations rather than keeping up with 
providing patient care. Frankly, the complexity of the program makes it 
difficult for those of us who administer it to keep up. It is difficult 
to educate beneficiaries, providers and our business partners when 
there is so much complex information to explain. This group of experts 
will develop ways that we can reduce burden on providers, eliminate 
complexity wherever possible, and make Medicare more ``user-friendly'' 
for everyone involved.
    In no way will we diminish our interest in fighting waste, fraud 
and error in the Medicare program. Most physicians and other providers 
are honest and want only to be fairly reimbursed for the high-quality 
care they provide, but for the small percentage of people who take 
advantage of the system, we will continue our aggressive efforts to 
protect the funds that taxpayers have entrusted to our use.
    These outreach efforts will allow us to hear from all segments of 
people who deal with Medicare and Medicaid, from the beneficiaries and 
the public at large, to the physicians and providers, to the CMS 
employees. We are going to listen to them, and we are going to learn 
how we can do a better job. But listening is not enough. Getting 
together and generating great solutions is not enough. So we are going 
to take action. To improve the way we do business and make Medicare and 
Medicaid easier for everyone involved with them without increasing 
costs or compromising quality, the Secretary and Administrator have 
already announced some important changes and we plan to announce more 
in the coming weeks.


    In addition to easing the regulatory burden on health plans, 
physicians and other providers, we are working with providers and 
Congress to streamline the regulatory process. Although the Agency has 
made some progress on this front, we still have important work to do. 
We are committed to making common-sense changes and ensuring that the 
regulations governing our program not only make sense, but also are 
plain and understandable. The Secretary has made this a priority for 
the Department and we are committed to this effort. Streamlining will 
go a long way toward alleviating providers' fears and reducing the 
amount of paperwork that has all too often in the past been an 
unnecessary burden on the providers who care for Medicare 
beneficiaries. In the coming months, with the leadership and support of 
Secretary Thompson, we will take important.steps toward reaching these 
    As a first step, we will develop a quarterly compendium of all 
changes to Medicare that affect physicians and other providers to make 
it easier for them to understand and comply with Medicare regulations 
and instructions. The compendium will be a useful document for 
predicting changes to Medicare's instructions to physicians and 
providers, and will contain a list of all regulations we expect to 
publish in the coming quarter, as well as the actual publication dates 
and page references to all regulations published in the previous 
quarter. All changes--both regulatory and non-regulatory--will be 
treated the same, regardless of whether the change results in increased 
or decreased payment, coverage, or reporting burden. The compendium 
will be published only at the beginning of a quarter, unless the 
Secretary or Administrator directs otherwise. By publishing changes in 
the quarterly compendium, physicians and other providers will no longer 
be forced to sift through pages and pages of the Federal Register--or 
pay someone to do it for them--for proposed rules, regulations, and 
other changes that may effect them. The compendium will include all 
program memoranda, manual changes, and any other instruction that could 
affect providers in any way. It will provide predictability, and will 
ensure that physicians and other providers are fully aware of Medicare 
changes and that they have time to react before new requirements are 
placed on them.
    In addition to the quarterly compendium, we will develop a system 
of electronic rulemaking to make the rulemaking process more efficient 
and to reduce the flow of paper between providers and CMS. Today, in an 
effort to make updated regulations more readily accessible, we 
routinely post them on our website, www.hcfa.gov. These postings 
coincide with the display of these documents in the Federal Register 
and have been well received by providers and other interested parties. 
Over the next 6 months, we will further explore the use of emerging 
technologies and the electronic exchange of information, such as 
posting proposed rules and taking comments online. We will work closely 
with the provider, plan and practitioner communities, as well as with 
Congress and other parts of the executive branch, to better understand 
their needs as we move toward an electronic rulemaking environment.


    As part of our efforts to reinvigorate the Agency and bring a new 
sense of responsiveness to CMS, we are enhancing our provider education 
activities and opening lines of communication to our physician and 
provider partners. The Medicare program primarily relies on private 
sector contractors, who process and pay Medicare claims, to educate 
physicians and providers and to communicate policy changes and other 
helpful information to them. Working with the Medicare contractors, we 
have taken a number of steps to ensure the educational information that 
is shared with physicians and providers is consistent and unambiguous. 
CMS is responsible for providing policy guidelines to these private 
contractors, and ensuring that the contractors then perform their 
activities in a timely and accurate manner.
    We recognize that the decentralized nature of this system has, in 
the past, led to inconsistency in the contractors' communications with 
physicians and providers, and we have recently taken a number of steps 
to improve the educational process. For example, we have centralized 
our educational efforts in our Division of Provider Education and 
Training, whose primary purpose is to educate and train the contractors 
and the provider community regarding Medicare policies. We are also 
providing contractors with in-person instruction and a standardized 
training manual for them to use in educating physicians and other 
providers. These programs provide consistency and ensure that our 
contractors speak with one voice on national issues. For example, in 
coordination with the Blue Cross/Blue Shield Association, we developed 
train-the-trainer sessions for implementing both the Hospital 
Outpatient and Home Health Prospective Payment System regulations, 
which included a satellite broadcast that was rebroadcast several times 
prior to the effective date of the regulation. Following these 
sessions, we held weekly conference calls with regional offices and 
fiscal intermediaries to enable us to monitor progress in implementing 
these changes. We are continuing to refine our training on an on-going 
basis by monitoring the training sessions conducted by our contractors, 
and we will continue to work collaboratively to find new ways of 
communicating with and getting feedback from physicians and providers.
    Just as we are working with our contractors to improve their 
provider education efforts, we also are working directly with 
physicians and other health care providers to improve our own 
communications and ensure that CMS is responsive to their needs. We are 
providing free information, educational courses, and other services 
through a variety of advanced technologies. We are:
     Expanding our Medicare provider education website. We 
provide a variety of resources online at the Medicare Learning Network 
homepage, www.hcfa.gov/MedLearn.htm. MedLearn provides timely, 
accurate, and relevant information about Medicare coverage and payment 
policies, and serves as an efficient, convenient provider education 
tool. The MedLearn website averages over 100,000 hits per month, with 
the Reference Guides, Frequently Asked Questions and Computer-Based 
Training pages having the greatest activity. I would encourage you to 
take a look at the website and share this resource with your physician 
and provider constituents. We want to hear feedback from them on its 
usefulness so we can strengthen its value.
     Providing free computer and web-based training courses. 
Doctors, providers, practice staff, and other interested individuals 
can access a growing number of web-based training courses designed to 
improve their understanding of Medicare. Some courses focus on 
important administrative and coding issues, such as how to check-in new 
Medicare patients or correctly complete Medicare claims forms, while 
others explain Medicare's coverage for home health care, women's health 
services, and other benefits.
     Creating a more useful Agency website. We are creating a 
new website architecture and tailoring it to be intuitive and useful to 
the physician user. We want the information to be helpful to 
physicians' and their staffs' office and billing needs. The same design 
is being used in creating a manual of ``Medicare Basics'' for 
physicians. We just completed field testing the first mock-ups for the 
project at the recent American Medical Association House of Delegates 
meeting. Once this new website is successfully implemented, we will 
move to organize similar web navigation tools for other Medicare 
    In tandem with our efforts to improve physician and provider 
education, we are also focusing on improving the quality of our 
provider customer service. Last year, our Medicare contractors received 
24 million telephone calls from physicians and providers, and it is 
imperative that the contractors provide correct and consistent answers. 
Now that we have toll-free answer-centers at all Medicare contractors, 
the need is even more pressing. We have performance standards, quality 
call monitoring procedures, and contractor guidelines in place to 
ensure that contractors know what is expected and so that we can be 
satisfied that the contractors are reaching our expectations. This 
year, for the first time, Medicare contractors' physician and provider 
telephone customer service operations are being reviewed against these 
standards and procedures separately from our review of their 
beneficiary customer service. During these week-long contractor 
performance evaluation reviews, we identify areas that need improvement 
and ``best practices'' that can be shared among our other Medicare 
physician and provider call centers. As a result of the reviews, 
performance improvement plans will be instituted when needed, and CMS 
staff in our Regional Offices will continue to monitor the specific 
contractor throughout the year.
    We also want to know about the issues and misunderstandings that 
most affect provider satisfaction with our call centers so that we can 
provide our customer service representatives with the information and 
guidance to make a difference. To improve our responsiveness to the 
millions of phone calls our call centers handle each year, we are:
     Developing Call Center Profiles. Earlier this year, we 
visited eight of our largest Medicare contractors to collect 
information on their operations, their use of technology, their 
performance data, their most frequently asked provider questions, and 
their training needs. We are now collecting similar information from 
all of the remaining Medicare call centers via an online profile. The 
profiles will be completed by early August, and we will analyze them to 
identify additional training needs and other improvements we can make 
at our contractors.
     Creating a Customer Service Training Plan. Based upon the 
call center profiles we have gathered, we have drafted a Customer 
Service Training Plan to address the training needs of our Medicare 
customer service representatives'. This training plan will bring 
uniformity to the contractor training, and improve the accuracy and 
consistency of the information that representatives give to physicians 
and providers across the country. Our first training effort will focus 
on the widely misunderstood Correct Coding Initiative. Customer service 
representatives will be trained on the language and concepts of coding 
issues so that they can properly direct physicians and providers to the 
best sources of information. We plan to offer this and other training 
via a satellite network. We expected to provide training to all of our 
contractors this fall.
     Holding Telephone Customer Service Conferences. In March, 
we held our first National Telephone Customer Service Conference for 
Medicare contractor call center managers and our Central and Regional 
Office staff. The conference emphasized our goal of making Medicare 
customer service as uniform in look, feel, and quality as possible.
     Conducting Monthly Call Center Meetings. We currently hold 
monthly conference calls with contractor call center managers and CMS 
Central and Regional Office staff to identify problems, give 
contractors additional information, and increase the accuracy and 
consistency of call center service nationwide.
    At the same time, we are working to develop effective standards for 
appropriately meeting the customer service needs of physician and 
provider communities we serve. We are:
     Analyzing Baseline Performance Data. Medicare call center 
managers were required to report data from October 1999, through May 
2001 (and monthly thereafter), on a variety of performance measures. We 
are analyzing this data to determine contractors' relative performance 
and the impact of the installation of toll free lines on contractor 
workload and performance.
     Modernizing Customer Service Representative Workstations. 
To the extent resources permit, we are looking at modernizing the 
workstations and other tools used by our customer service 
representatives to ensure that they have instant access to the most 
current information in responding to provider inquiries.
     Monitoring Call Quality. We also formed a contractor 
workgroup with CMS staff to review and improve the scorecard and 
criteria chart that was used to measure beneficiary telephone customer 
service, so that it also could effectively measure the customer service 
of our provider customer service representatives. This new scorecard, 
now used by both groups, places greater emphasis on accuracy of 
information given in determining the final score.


    As Medicare requirements frustrate plans, physicians and providers, 
beneficiaries also have difficulty understanding the program's benefits 
and options. We know, from our research and focus groups, that far too 
many Medicare beneficiaries have a limited understanding of the 
Medicare program in general, as well as their Medigap, Medicare Select, 
and Medicare+Choice options. We firmly believe that we must improve and 
enhance its existing outreach and education efforts so beneficiaries 
understand their health care options. In addition, we will tailor our 
educational information so that it more accurately reflects the health 
care delivery systems and choices available in beneficiaries' local 
areas. We know that educating beneficiaries and providing them more 
information is vital to improving health care and patient outcomes.
    With that goal in mind and in an effort to ensure that Medicare 
beneficiaries are active and informed participants in their health care 
decisions, we will expand and improve the existing Medicare & You 
educational efforts with a new advertising campaign. We will launch a 
multimedia campaign using television, print, and other media to reach 
out and share information and educational resources to all Americans 
who rely on Medicare, their families, and their caregivers. We are 
     Increasing the Capacity of Medicare's Toll-Free Lines so 
that the new wave of callers to 1-800-MEDICARE generated by the 
advertising campaign receive comprehensive information about the health 
plan options that are available in their specific area. By October 1, 
2001, the operating hours of the toll-free lines will be expanded and 
made available to callers 24 hours a day, 7 days a week. The 
information available by phone also will be significantly enhanced, so 
specific information about the health plan choices available to 
beneficiaries in their state, county, city, or town can be obtained and 
questions about specific options, as well as costs associated with 
those options, can be answered. Call center representatives will be 
able to help callers walk-through their health plan choices step-by-
step and obtain immediate information about the choices that best meet 
the beneficiary's needs. For example, a caller from Mason City, Iowa, 
could call 1-800-MEDICARE and discuss specific Medigap options in Iowa. 
Likewise, a caller from Rock Hill, South Carolina, or Kingston, New 
Hampshire, could call and get options and costs for Medigap or 
Medicare+Choice alternatives in their areas. If requested, the call 
centers will follow-up by mailing a copy of the information discussed 
after the call.
     Improving Internet Access to Comparative Information and 
providing a new decision making tool on the Agency's award winning 
website, www.Medicare.gov. These enhanced electronic learning tools 
will allow visitors, including seniors, family members, and caregivers 
to compare benefits, costs, options, and provider quality information. 
This expanded information is similar to comparative information already 
available, such as Nursing Home Compare and ESRD Compare websites. With 
these new tools, beneficiaries will be able to narrow down by zip code 
the Medicare+Choice plan options that are available in their area based 
on characteristics that are most important to them, such as out-of-
pocket costs, whether beneficiaries can go out of network, and extra 
benefits. They also will be able to compare the direct out-of-pocket 
costs between all their health insurance options and get more detailed 
information on the plans that most appropriately fit their needs. In 
addition, the Agency will provide similar State based comparative 
information on Medigap options and costs.


    Physicians and other providers play a crucial role in caring for 
Medicare beneficiaries, and their concerns regarding the program's 
regulatory burden must be addressed. Enhancement of our communication 
and education efforts is essential to the success of Medicare, and we 
believe will ultimately reduce the level of physicians' and other 
providers' frustration with the Medicare program, as well as increase 
beneficiaries' options and satisfaction. We recognize we have a number 
of issues to address and improvements to make. We have already taken 
some critical first steps, and we are seeking input from the health 
care community and Congress as we work toward our goals. I appreciate 
having had the opportunity to discuss these issues with you today, and 
I am happy to answer your questions.

    Chairman Nussle. I agree with you, I appreciate the fact 
that you are starting from within and asking the good people 
who work there for their ideas. I think that is a good idea.
    Dr. Scanlon, we appreciate your being here. You have been 
referred to quite a bit already and your work that you have 
done on behalf of the General Accounting Office. We welcome 
you. Your testimony will be part of the record and you may 
summarize. Thank you.


    Mr. Scanlon. Thank you very much, Mr. Chairman and Mr. 
Spratt, and members of the committee. I think the references to 
the two testimonies today indicate the very strong connection 
between what we face in the present and in the short-term and 
the long-term prospects for this program. In terms of my 
discussion with respect to the current management challenges 
for the agency that runs Medicare, currently called the center 
for Medicare and Medicaid Services, we have heard from 
Comptroller General Walker about the program's problematic 
long-term financial sustainability.
    Alongside that macro view, policymakers are also examining 
the program's day-to-day management in an effort to identify 
the improvements that can help Medicare meet current 21st 
century needs and expectations, in particular, operating 
efficiently and effectively and fairly for its multiple 
stakeholders, beneficiaries, providers and taxpayers.
    Last month's renaming of the Health Care Financing 
Administration is indicative of the heightened attention being 
placed on the agency that runs Medicare and it is for good 
reason. Medicare is always going to pose an enormous management 
challenge regardless of who runs it. Medicare is a huge program 
with an extremely complex mission. As Deputy Administrator 
King-Shaw indicated, assuring access to and paying 
appropriately for needed medical services for approximately 40 
million beneficiaries, delivered by almost a million providers, 
is a challenging task. In attempting to fulfill this mission 
responsibly, agency actions may inevitably make it the target 
of parties that feel disadvantaged or harmed by some of its 
    Nevertheless, it is possible to take stock of HCFA's past 
performance and determine what lessons it holds for CMS in the 
future. Tasked with administering this virtually impossible 
complex program, HCFA earned mixed reviews. On the one hand, 
the agency presided over a program that is very popular with 
beneficiaries and the general public. It implemented payment 
methods that helped constrain program cost growth and ensured 
that Medicare contractors paid claims quickly at a little 
administrative cost. On the other hand, HCFA had difficulty 
making needed refinements to payment methods and fell short in 
its efforts to avoid inappropriately paying for certain claims.
    In recent years, HCFA took steps to try to achieve greater 
success in safeguarding program dollars. However the agency now 
faces criticism to the provider community for a program that 
now, in their view, is unduly complex and has burdensome 
requirements. We are currently examining a number of the issues 
relating to program regulation, provider education and reviews 
of disputed claims. In the coming months we will be issuing 
several reports looking at CMS efforts to provide customer 
service to the physician community and the beneficiary 
    I can provide you today some preliminary findings from my 
review of the provider communications. This work was done at 
the request of this committee. Our findings unfortunately 
suggest a disappointing performance in this area. As you know, 
providers have voiced concern that the information they receive 
from carriers to explain Medicare rules and policies is often 
difficult to interpret, incomplete or untimely. So far, we've 
looked at the bulletins or newsletters that nine carriers 
issued since February. These bulletins are a primary mechanism 
for updating providers on policy changes.
    Of the nine carriers reviewed, five failed to include in 
their bulletins important notices about billing rules that went 
into effect in early July. Their bulletins published the 
notices either after the policies had gone into effect or had 
not done so as of a few days ago when we last checked. We are 
also finding these bulletins' content can be poorly organized 
and difficult to use. We also--Mr. Kirk has indicated some of 
our results in this area--made 60 telephone calls to five 
carrier call centers. These are the centers that receive 
thousands of calls from providers every day about basic issues 
with respect to Medicare. We asked the call center 
representatives questions that providers commonly ask. It was 
disheartening to report, however, that as you have heard for 
the vast majority of those calls that we placed, the answers 
the phone representatives provided were either incomplete or 
inaccurate. The steps that Deputy King-Shaw has indicated both 
in his oral and written testimony----
    Chairman Nussle. Could I just interrupt you. My 
understanding is that when you made those calls, you also told 
them that you were GAO calling. I mean this isn't just a trick 
phone call.
    Mr. Scanlon. We said we were calling them to ask them a 
question and we were going to be assessing the accuracy. As I 
was indicating, the steps that the Deputy Administrator has 
outlined in his written and oral statements regarding both call 
centers and other provider education mechanisms, we believe, 
hold some promise for meaningful improvement. Our findings 
though, which are very current, strongly suggest how important 
those improvements will be, realizing the improvements will 
require continued diligence and attention to assure they are 
faithfully and consistently implemented and maintained 
throughout the entire program. As with other problems in 
Medicare's day-to-day operations, the issue of resources may to 
some extent account for the lackluster performance and is key 
to future improvements. Insufficient numbers of staff 
performing certain activities and shortages in staff with 
appropriate skills and expertise handicap CMS.
    These problems were brought into sharp focus as HCFA 
struggled to handle the number and complexity of Balanced 
Budget Act requirements as well as the program modifications 
that have been enacted since then.
    Let me end by noting again some of the expectations we have 
for CMS and for Medicare. With the growth and the 
transformation of the health care industry, there are 
expectations that the agency running the Nation's largest 
health insurer will act as a prudent purchaser of services. 
There are also expectations that Medicare, despite its size, 
will be minimally disruptive of the health care market and 
minimally burdensome for beneficiaries and providers while 
simultaneously vigilant in protecting program dollars.
    This latter centers on an expectation less often 
articulated that the program be operated as efficiently as 
possible to serve the interest of taxpayers and future 
generations. It is an expectation less often articulated 
perhaps because of the tension it creates relative to the 
interest of providers and beneficiaries. Today's Medicare 
agency, while successful in certain areas, may not be able to 
meet all of these expectations effectively without further 
congressional attention to its multiple missions and the 
capacity to carry them out.
    Thank you very much, Mr. Chairman, and I will be happy to 
answer any questions you or the committee members may have.
    [The prepared statement of William J. Scanlon follows:]

Prepared Statement of William J. Scanlon, Director, Health Care Issues, 
                     U.S. General Accounting Office

    Mr. Chairman and members of the committee, I am pleased to be here 
today as you discuss the long-term sustainability and the more 
immediate management challenges of the Medicare program. As noted in 
our companion statement today by the Comptroller General, the Hospital 
Insurance trust fund is expected to run a cash deficit in 15 years.\1\ 
This projection, while only a partial picture of Medicare's fiscal 
health, nevertheless sounds the alarm for the longer term, when it is 
projected that, without meaningful reform, demographic and cost trends 
will drive Medicare to fiscally unsustainable levels. As the Congress 
examines large-scale reform proposals, it is also focusing on 
improvements needed in Medicare program management to meet current 21st 
century needs and expectations.
    In that spirit, the Committee asked us to report on the agency that 
runs Medicare, newly named the Center for Medicare and Medicaid 
Services (CMS) and formerly known as the Health Care Financing 
Administration (HCFA).\2\ My remarks today will focus on (1) the 
Medicare agency's record in carrying out selected program activities, 
(2) key factors affecting program management, and (3) challenges the 
agency faces in running a more modern Medicare program. My comments are 
based on our previous and ongoing work.
    In brief, against a backdrop of Medicare reform proposals, the 
management of the Medicare program has come under close scrutiny. Our 
past work shows that HCFA had some notable successes as Medicare's 
steward but also had serious shortcomings. The agency was successful in 
developing payment methods that have helped contain Medicare cost 
growth and in paying its fee-for-service claims quickly and at low 
administrative cost. However, the agency's efforts to ensure that 
claims were paid appropriately achieved mixed results. In addition, the 
performance of Medicare claims administration contractors in 
communicating with Medicare providers was often substandard. For 
example, in our ongoing work for the Committee, we find shortcomings in 
how Medicare contractors provide information to physicians and respond 
to their questions.
    HCFA took significant steps in recent years to address certain weak 
areas, such as strengthening payment safeguards, but several factors 
deterred improvements. The agency's responsibilities for other programs 
and activities and its new Medicare responsibilities emanating from 
recent statutory changes are substantial. Its capacity to carry out 
these responsibilities has not kept pace. Notably, the agency faces 
staff shortages in both skills and numbers and is operating Medicare 
with archaic information technology systems that are unsuited to meet 
requests for basic management information within reasonable time 
periods. At the same time, HCFA faltered in adopting a results-based 
approach to agency management. In addition, constraints exist on the 
agency's contracting authority, limiting its use of full and open 
competition to choose claims administration contractors and assign 
administrative tasks.
    Stakeholder expectations for a modern Medicare program are putting 
increased pressure on CMS to improve agency operations, particularly 
the agency's relationship with the Medicare beneficiary and provider 
communities. Such improvements will require efforts by the agency to 
implement a performance-based management approach that holds managers 
accountable for accomplishing program goals. However, in combination 
with agency actions, congressional attention also appears to be 
warranted to meet the challenges associated with administering Medicare 
in the 21st century.


    The complexity of the environment in which CMS operates the 
Medicare program cannot be overstated. It is an agency within the 
Department of Health and Human Services (HHS), but has responsibilities 
over expenditures that are larger than those of most other Federal 
departments. Medicare alone ranks second only to Social Security in 
Federal expenditures for a single program. Medicare is expected to 
spend nearly $240 billion in fiscal year 2001; covers about 40 million 
beneficiaries; enrolls and pays claims from nearly 1 million providers 
and health plans; and has contractors that annually process about 900 
million claims. Among numerous and wide-ranging activities associated 
with the Medicare program, CMS must monitor the roughly 50 claims 
administration contractors that pay claims and establish local medical 
coverage policies;\3\ set tens of thousands of payment rates for 
Medicare-covered services from different providers, including 
physicians, hospitals, outpatient and nursing facilities, home health 
agencies, and medical equipment suppliers; and administer consumer 
information and beneficiary protection activities for the traditional 
program component and the managed care program component 
(Medicare+Choice plans).
    The providers billing Medicare--hospitals, general and specialty 
physicians, and other practitioners--along with program beneficiaries 
and taxpayers, create a vast universe of stakeholders whose interests 
vary widely. Not surprisingly then, the responsibility to be fiscally 
prudent has made the agency that runs Medicare a lightening rod for 
those discontented with program policies. For example, the agency's 
administrative pricing of services has often been contentious, even 
though a viable alternative is not easily identifiable. It is 
impractical for the agency to rely on competition to determine prices. 
The reason is that when Medicare is the dominant payer for services or 
products, the agency cannot use market prices to determine appropriate 
payment amounts, because Medicare's share of payments distorts the 
market. Moreover, Medicare is prevented from excluding some providers 
to do business with others that offer better prices.\4\
    In addition, Medicare's public sector status means that changing 
program regulations requires obtaining public input. The solicitation 
of public comments is necessary to ensure transparency in 
decisionmaking. However, the trade-off to seeking and responding to 
public interests is that it is generally a time-consuming process and 
can thwart efficient program management. For example, in the late 
1990's, HCFA averaged nearly 2 years between its publication of 
proposed and final rules.\5\
    Consensus is widespread among health policy experts regarding the 
growing and unrelenting nature of the Medicare agency's work. The 
Balanced Budget Act of 1997 (BBA) alone had a substantial impact on 
HCFA's workload, requiring, among other things, that the agency develop 
within a short time frame new payment methods for different post-acute 
and ambulatory services. It also required HCFA to preside over an 
expanded managed care component that entailed coordinating a never-
before-run information campaign for millions of beneficiaries across 
the Nation and developing methods to adjust plan payments based 
partially on enrollees' health status.
    The future is likely to hold new statutory responsibilities for 
CMS. For example, some reform proposals call for expanding Medicare's 
benefit package to include a prescription drug benefit. As we have 
previously reported, the addition of a drug benefit would entail 
numerous implementation challenges, including the potential for the 
annual claims processing workload to double to about 1.8 billion a 


    Tasked with administering this highly complex program, HCFA has 
earned mixed reviews in managing Medicare. On one hand, the agency 
presided over a program that is very popular with beneficiaries and the 
general public. It implemented payment methods that have helped 
constrain program cost growth and ensured that claims were paid quickly 
at little administrative cost. On the other hand, HCFA had difficulty 
making needed refinements to payment methods. It also fell short in its 
efforts to ensure accurate claims payments and oversee its Medicare 
claims administration contractors. In recent years, HCFA took steps to 
achieve greater success in these areas. However, the agency now faces 
criticism from the provider community for, in the providers' view, a 
program that is unduly complex and has burdensome requirements.


    HCFA was successful in developing payment methods that have helped 
contain Medicare cost growth. Generally, over the last 2 decades, the 
Congress required HCFA to move Medicare away from reimbursing providers 
based on their costs or charges for every service provided and to use 
payment methods that seek to control spending by rewarding provider 
efficiency and discouraging excessive service use. Payment development 
efforts have been largely successful, but making needed refinements to 
payment methods remains a challenge. For example, Medicare's hospital 
inpatient prospective payment system (PPS), developed in the 1980's, is 
a method that pays providers fixed, predetermined amounts that vary 
according to patient need. This PPS succeeded in slowing the growth of 
Medicare's inpatient hospital expenditures. Medicare's fee schedule for 
physicians, phased in during the 1990's, redistributed payments for 
services based on the relative resources used by physicians to provide 
different types of care and has been adopted by many private insurers.
    More recently, as required by the BBA, HCFA worked to develop 
separate prospective payment methods for post-acute care services--
services provided by skilled nursing facilities, home health agencies, 
and inpatient rehabilitation facilities--and for hospital outpatient 
departments. Prospective payment methods can help constrain the overall 
growth of Medicare payments. But as new payment systems affected 
provider revenues, HCFA often received criticism about the 
appropriateness and fairness of its payment rates. HCFA had mixed 
success in marshaling the evidence to assess the validity of these 
criticisms and in making appropriate refinements to these payment 
methods to ensure that Medicare was paying appropriately and 

                            PAYMENTS NEEDED

    HCFA also had success in paying most claims within mandated time 
frames and at little administrative cost to the taxpayer. Medicare 
contractors process over 90 percent of the claims electronically and 
pay ``clean'' claims\6\ on average within 17 days after receipt. In 
contrast, commercial insurers generally take longer to pay provider 
    Under its tight administrative budget, HCFA kept processing costs 
to roughly $1 to $2 per claim--as compared to the $6 to $10 or more per 
claim for private insurers, or the $7.50 per claim paid by TRICARE--the 
Department of Defense's managed health care program.\7\ Costs for 
processing Medicare claims, however, while significantly lower than 
other payers, are not a straightforward indicator of success. We and 
others have reported that HCFA's administrative budget was too low to 
adequately safeguard the program. Estimates by the HHS Inspector 
General of payments made in error amounted to $11.9 billion in fiscal 
year 2000, which, in effect, raises the net cost per claim 
considerably. At the same time, HCFA estimated that, in fiscal year 
2000, program safeguard expenditures saved the Medicare program more 
than $16 for each dollar spent.\8\ Taken together, these findings 
indicate that increasing the investment in CMS' administrative 
functions is a cost that can ultimately save program dollars.
    However, HCFA's payment safeguard activities have raised concerns 
among providers about the clarity of billing rules and the efforts 
providers must make to remain in compliance. To fulfill the program's 
stewardship responsibilities, claims administration contractors conduct 
medical reviews of claims and audits of providers whose previous 
billings have been questionable. These targeted reviews have been a 
cost-effective approach in identifying overpayments.
    Providers whose claims are in dispute, however, have complained 
about the burden of reviews and audits and about the fairness of some 
specific steps the contractors follow. Their concerns about fairness 
may also emanate from the actions of other agencies involved in 
overseeing health care--such as the HHS Office of Inspector General and 
the Department of Justice--which, in the last several years, have 
become more aggressive in pursuing health care fraud and abuse.
    CMS faces a difficult task in finding an appropriate balance 
between ensuring that Medicare pays only for services allowed by law 
and making it as simple as possible for providers to treat Medicare 
beneficiaries and bill the program. While an intensive claims review is 
undoubtedly vexing for the provider involved, very few providers 
actually undergo such reviews. In fiscal year 2000, Medicare 
contractors conducted complex medical claims reviews of only \3/10\ of 
1 percent of physicians--1,891 out of a total of more than 600,000 
physicians who billed Medicare that year.\9\ We are currently reviewing 
several aspects of the contractors' auditing and review procedures for 
physician claims to assess how they might be improved to better serve 
the program and providers.


    Congressional concern has recently heightened regarding the 
regulatory requirements that practitioners serving Medicare 
beneficiaries must meet. Of the several studies we have under way to 
examine the regulatory environment in which Medicare providers operate, 
one study, conducted at the request of this Committee, examines ways in 
which explanations of Medicare rules and other provider communications 
could be improved. The preliminary results of our review of several 
information sources from selected carriers--the contractors that 
process physicians' claims--indicate a disappointing performance 
record. In particular:
     Bulletins. Contractor bulletins, which are newsletters 
from carriers to physicians outlining changes in national and local 
Medicare policy, are viewed as the primary source of communication 
between the agency and providers. However, providers have complained 
that the information in these bulletins is often difficult to 
interpret, incomplete, and untimely. We reviewed the bulletins issued 
since February 2001 by nine carriers to determine, among other things, 
whether they included notices about four new billing procedures that 
were going into effect in early July 2001. The bulletins of five 
carriers either did not contain notices about the billing procedures 
until after the procedures had gone into effect or had not published 
this information as of mid-July. We also found that many of the 
bulletins contained lengthy discussions with significant technical and 
legalistic language.
     Telephone call centers. Call centers are intended to serve 
as another important information source for providers on a variety of 
matters, including clarification of Medicare's billing rules. 
Contractors maintain these call centers to respond to the roughly 
80,000 provider inquiries made each day. We placed about 60 calls to 5 
carrier call centers to obtain answers to common questions (those found 
on the ``Frequently Asked Questions'' Web pages at various carriers' 
web sites). For 85 percent of the calls placed, the answers that call 
center representatives provided were either incomplete (53 percent) or 
inaccurate (32 percent).
     Web sites. A third source of information for Medicare 
providers is the Internet. The agency imposes minimum requirements on 
carriers to maintain Web sites. Of 10 carrier Web sites we examined, 8 
did not meet all of the Web site requirements, which include, among 
others, the inclusion of a frequently-asked-questions Web page and the 
capability for providers to send e-mail inquiries to customer service. 
These 8 also lacked the required links to both the CMS and Medicare Web 
sites. Many lacked user-friendly features: 7 did not have ``site 
maps,'' which list the Web site's contents, and although 6 sites had 
search functions, only 4 worked as intended. Five sites contained 
outdated information.
    Although these results cannot be generalized to all carriers, the 
carriers we reviewed serve tens of thousands of physicians and the 
results are consistent with some of the concerns recently expressed by 
physicians in the Medical Group Management Practice Association.\10\
    Our study, to be issued this fall, seeks to identify the actions 
CMS can take to ensure that carriers improve the consistency and 
accuracy of their communications with providers; it will also assess 
the adequacy of carriers' budgets to conduct these activities.
 various constraints complicate efforts to manage medicare effectively
    CMS faces several limitations in its efforts to manage Medicare 
effectively. These include divided management focus, limited capacity, 
lack of a performance-based management approach, and constraints 
impeding the agency's ability to hold Medicare contractors accountable.
 agency focus is divided across multiple programs and responsibilities
    CMS' management focus is divided across multiple programs and 
responsibilities. Despite Medicare's estimated $240-billion price tag 
and far-reaching public policy significance, there is no official whose 
sole responsibility it is to run the Medicare program. In addition to 
Medicare, the CMS Administrator and senior management are responsible 
for oversight of Medicaid and the State Children's Health Insurance 
Program. They also are responsible for individual and group insurance 
plans' compliance with standards in the Health Insurance Portability 
and Accountability Act of 1996 in states that have not adopted 
conforming legislation. Finally, they must oversee compliance with 
Federal quality standards for hospitals, nursing homes, home health 
agencies, and managed care plans that participate in Medicare and 
Medicaid, as well as all of the Nation's clinical laboratories. The 
Administrator is involved in the major decisions relating to all of 
these activities; therefore, time and attention that would otherwise be 
spent meeting the demands of the Medicare program are diverted.
    A restructuring of the agency in July 1997 inadvertently furthered 
the diffusion of responsibility across organizational units. The intent 
of the reorganization was to better reflect a beneficiary-centered 
orientation throughout the agency by dispersing program activities 
across newly established centers. However, after the reorganization, 
many stakeholders claimed that they could no longer obtain reliable or 
timely information. In addition, HCFA's responsiveness was slowed by 
the requirement that approval was needed from several people across the 
agency before a decision was final.
    The recent change from HCFA to CMS reflects more than a new name. 
It consolidates major program activities: the Center for Medicare 
Management will be responsible for the traditional fee-for-service 
program; the Center for Beneficiary Choices will administer Medicare's 
managed care program. We believe that this new structure is consistent 
with the desire to be more responsive to program stakeholders.
 agency capacity limited relative to multiple, complex responsibilities
    As we and others have consistently noted, the agency's capacity is 
limited relative to its multiple, complex responsibilities. Human 
capital limitations and inadequate information systems hobble the 
agency's ability to carry out the volume of claims administration, 
payment, and pricing activities demanded of it.
    Staff shortages--in terms of skills and numbers--beset the agency 
that runs Medicare. These shortages were brought into sharp focus as 
HCFA struggled to handle the number and complexity of BBA requirements. 
When the BBA expanded the health plan options in which Medicare 
beneficiaries could enroll, HCFA's staff had little previous experience 
overseeing these diverse entities, such as preferred provider 
organizations, private fee-for-service plans, and medical savings 
accounts. Few staff had experience in dealing with the existing managed 
care option-health maintenance organizations. Half of HCFA's regional 
offices lacked managed care staff with clinical backgrounds--important 
in assessing quality of care issues--and few managed care staff had 
training or experience in data analysis--key to assessing plan 
performance against local and national norms and monitoring trends in 
plan performance over time.\11\
    At the same time, CMS faces the potential loss of a significant 
number of staff with valuable institutional knowledge. In February 
2000, the HCFA Administrator testified that more than a third of the 
agency's current workforce was eligible to retire within the next 5 
years and that HCFA was seeking to increase ``its ability to hire the 
right skill mix for its mission.'' As we and others have reported, too 
great a mismatch between the agency's administrative capacity and its 
designated mandate could have left HCFA, and now CMS, unprepared to 
handle Medicare's future population growth and medical technology 
advances.\12\ To assess its needs systematically, CMS is conducting a 
four-phase workforce planning process that includes identifying current 
and future expertise and skills needed to carry out the agency's 
mission.\13\ HCFA initiated this process using outside assistance to 
develop a comprehensive database documenting the agency's employee 
positions, skills, and functions. Once its future workforce needs are 
identified, CMS faces the challenge of attracting highly qualified 
employees with specialized skills. Due to the rapid rate of change in 
the health care system and CMS' expanding mission, the agency's 
existing staff may not possess the needed expertise.
    Another constraint on agency effectiveness has been inadequate 
information systems for running the Medicare program. Ideally, program 
managers should be able to rely on their information systems to monitor 
performance, develop policies for improvement, and track the effects of 
newly implemented policies. In reality, most of the information 
technology HCFA relied on was too outdated to routinely produce such 
management information. As a result, HCFA could not easily query its 
information systems to obtain prompt answers to basic management 
questions. Using its current systems, CMS is not in a position to 
report promptly to the Congress on the effects of new payment methods 
on beneficiaries' access to services and on the adequacy of payments to 
providers. It cannot expeditiously determine the status of debt owed 
the program due to uncollected overpayments.


    To encourage a greater focus on results and improve Federal 
management, the Congress enacted the Government Performance and Results 
Act of 1993 (GPRA)--a results-oriented framework that encourages 
improved decisionmaking, maximum performance, and strengthened 
accountability. Managing for results is fundamental to an agency's 
ability to set meaningful goals for performance, to measure performance 
against those goals, and to hold managers accountable for their 
results. As late as January 1998, we reported that HCFA lacked an 
approach consistent with GPRA to develop a strategic plan for its full 
range of program objectives. Since then, the agency developed a plan, 
but it did not tie global objectives to management performance.
    Last month, we reported on the results of our survey of Federal 
managers at 28 departments and agencies on strategic management issues. 
The proportion of HCFA managers who reported having output, efficiency, 
customer service, quality, and outcome measures was significantly below 
that of other government managers for each of the performance measures. 
HCFA was the lowest-ranking agency for each measure--except for 
customer service, in which it ranked second from the lowest. In 
addition, the percentage of HCFA managers who responded that they were 
held accountable for results to a great or very great extent--42 
percent--was significantly lower than the 63 percent reported by the 
rest of the government.


    Constraints on the agency's flexibility to contract for claims 
administration services have also frustrated efforts to manage Medicare 
effectively. Under these constraints, the agency is at a disadvantage 
in selecting the best performers to carry out Medicare's claims 
administration and customer service functions.
    At Medicare's inception in the mid-1960's, the Congress provided 
for the government to use existing health insurers to process and pay 
physicians' claims and permitted professional associations of hospitals 
and certain other institutional providers to ``nominate'' their claims 
administration contractors on behalf of their members. At that time, 
the American Hospital Association nominated the national Blue Cross 
Association to serve as its fiscal intermediary.\14\ Currently, the 
Association is one of Medicare's five intermediaries and serves as a 
prime contractor for member plans that process over 85 percent of all 
benefits paid by fiscal intermediaries. Under the prime contract, when 
one of the local Blue plans declined to renew its Medicare contract, 
the Association--rather than HCFA--chose the replacement contractor. 
This process effectively limited HCFA's flexibility to choose the 
contractors it considered most effective.
    HCFA also considered itself constrained from contracting with non-
health insurers for the various functions involved in claims 
administration because it did not have clear statutory authority to do 
so. As noted, the Congress gave HCFA specific authority to contract 
separately for payment safeguard activities, but for a number of years 
the agency has sought more general authority for ``functional 
contracting,'' that is, using separate contractors to perform functions 
such as printing and mailing and answering beneficiary inquiries that 
might be handled more economically and efficiently under one or a few 
contracts. HCFA sought other Medicare contracting reforms, such as 
express authority for the agency to pay Medicare contractors on an 
other-than-cost basis, to provide incentives that would encourage 
better performance.\15\


    Although the health care industry has grown and transformed 
significantly since Medicare's inception, neither the program nor the 
agency that runs it has kept pace. Nevertheless, CMS is expected to 
make Medicare a prudent purchaser of services using private sector 
techniques and improve its customer relations.


    Private insurance has evolved over the last 40 years and employs 
management techniques designed to improve the quality and efficiency of 
services purchased. In a recent study, an expert panel convened by the 
National Academy of Social Insurance (NASI) suggested that Medicare 
test private insurers' practices designed to improve the quality and 
efficiency of care and determine whether these practices could be 
adapted for Medicare.\16\ Private insurers have taken steps to 
influence utilization and patterns of service delivery through efforts 
such as beneficiary education, preferred provider networks, and 
coordination of services. They are able to undertake these efforts, in 
part, because they have wide latitude in how they run their businesses. 
In contrast, Federal statutory requirements and the basic obligation to 
be publicly accountable have hampered agency efforts to incorporate 
private sector innovations.
    Medicare's efforts to encourage use of preferred providers is a 
case in point. The Medicare statute generally allows any qualified 
provider to participate in the program. This is significant in light of 
HCFA's experiment related to coronary artery bypass graft surgery in 
which certain hospitals--identified as those with the best outcomes for 
these surgeries--were designated to receive bundled payments for 
hospitals and physicians delivering certain expensive procedures.\17\ 
The experiment cut program costs by 10 percent for the 10,000 coronary 
artery bypass surgeries performed and saved money for beneficiaries 
through reduced co-insurance payments. HCFA began a similar experiment 
at selected acute-care hospitals, which involves bundling payments for 
hospital, physician, and other health care professionals' services 
provided during a beneficiary's hospital stay for selected 
cardiovascular and orthopedic procedures. However, more wide-scale 
Medicare implementation of such hospital and physician partnership 
arrangements may be difficult. Providers have raised concerns about 
government promotion of certain providers at the expense of others, 
thus creating a barrier to this and other types of preferred provider 
    Efforts to facilitate disease management provide another example of 
the potential limitations of adapting private sector management 
strategies to Medicare. HCFA was able to implement broad-based 
education efforts to encourage the use of Medicare-covered preventive 
services, but the agency could be deterred in approaches targeting 
individual beneficiaries most likely to need the help. For example, the 
agency has overseen the dissemination of more than 23,000 posters with 
tear-off sheets that beneficiaries can hand to physicians to facilitate 
discussions of colon cancer screening that otherwise might be avoided 
because of unfamiliar terms and sensitive issues. It has also been 
involved in a multifaceted effort to increase flu vaccinations and 
mammography use. However, the agency may be less able to undertake the 
more targeted approaches of some private insurers, such as mailing 
reminders to identified enrollees about the need to obtain a certain 
service. Because targeting information would require using personal 
medical information from claims data, CMS could encounter opposition 
from those who would perceive such identification to be government 
intrusion. Providers might also object to a government insurance 
program advocating certain medical services for their patients.
    In its study, NASI concluded that these and other innovations could 
have potential value for Medicare but would need to be tested to 
determine their effects as well as how they might be adapted to reflect 
the uniqueness of Medicare as both a public program and the largest 
single purchaser of health care. In addition, CMS would likely need new 
statutory authority to broadly implement many of the innovations 
identified in the NASI study.


    Congressional concern has heightened recently regarding the 
regulatory burden on the practitioners that serve Medicare 
beneficiaries. In his testimony before the Senate Committee on Finance, 
the Secretary of HHS emphasized the importance of communication between 
CMS and providers, stating, ``When physicians call us * * * we need to 
respond quickly, thoroughly and accurately.''\18\ Under the spotlight 
held by both the Congress and the administration, CMS is expected to 
improve its customer service to the provider community.
    Concern about regulatory burden is not limited to providers in 
Medicare's traditional fee-for-service program. Policymakers are also 
concerned about the regulatory burden on health plans that participate 
in the Medicare+Choice program. During each of the last 3 years, 
substantial numbers of health plans reduced the geographic areas they 
served or terminated their Medicare participation altogether. 
Cumulatively, these withdrawals affected more than 1.6 million 
beneficiaries who either had to return to the fee-for-service program 
or switch to a different health plan. Industry representatives have 
attributed the withdrawals, in part, to Medicare+Choice requirements 
that they characterize as overly burdensome.\19\
    HCFA took steps to address plans' regulatory concerns by modifying 
some requirements or delaying their implementation. It also launched an 
initiative designed to help the agency better understand plans' 
concerns, assess them, and recommend appropriate regulatory changes. At 
the request of the House Ways and Means Subcommittee on Health, we are 
evaluating Medicare+Choice requirements. Our study will compare 
Medicare+Choice requirements with the requirements of private 
accrediting organizations and those of the Office of Personnel 
Management for plans that participate in the Federal Employees Health 
Benefits Program. The study's objective is to document differences in 
these sets of requirements and determine whether these differences are 
necessary because of the unique nature of the Medicare program and the 
individuals it serves.


    CMS is also expected to improve communications with beneficiaries, 
particularly as the information pertains to Medicare+Choice health plan 
options. The agency has made significant progress in this regard but 
continues to face challenges in meeting the sometimes divergent needs 
of plans and beneficiaries.
    As required by the BBA, HCFA began a new National Medicare 
Education Program (NMEP).\20\ For 3 years the agency has worked to 
educate beneficiaries and improve their access to Medicare information. 
It added summary health plan information to the Medicare handbook and 
increased the frequency of its distribution from every few years to 
each year. It also established a telephone help line and an Internet 
Web site with comparative information on health plans, Medigap 
policies, and nursing homes and sponsored local education programs.
    Beginning this fall, it will become more important for 
beneficiaries to be aware that Medicare+Choice health plan alternatives 
to the traditional fee-for-service program may be available in their 
area and to understand each option and its implications. As required by 
the BBA, Medicare will now have an annual open enrollment period each 
November when beneficiaries must select either the fee-for-service 
program or a specific Medicare+Choice plan for the following calendar 
year. Beneficiaries will have strictly limited opportunities for 
changing their selection outside of the open enrollment period, a 
provision known as ``lock-in.''
    CMS recently announced that it would fund a $35 million advertising 
campaign this fall to help beneficiaries learn about Medicare's new 
features--such as the proposed discount prescription drug card program, 
coverage for preventive services and medical screening examinations, 
and the annual enrollment and lock-in provisions--and provide general 
information about Medicare+Choice plans and the availability of 
Medicare's Web site and telephone help line. The agency will also 
extend the operating hours of the help line and add an interactive 
feature to the Web site designed to help beneficiaries select the 
Medicare option that best fits their preferences.
    CMS has made other decisions about the fall information campaign 
that illustrate the sometimes difficult trade-off between accommodating 
plans and serving beneficiaries. To encourage health plan participation 
in the Medicare+Choice program, CMS has allowed plans additional time 
to prepare their 2002 benefit proposals. This extension will hamper the 
ability of CMS and health plans to disseminate information before the 
BBA-established November open enrollment period. CMS will not, for 
example, include any information about specific health plans in the 
annual handbook mailed to Medicare households.\21\ To reduce the 
potentially adverse effects of an abbreviated fall information 
campaign, the agency will allow health plans to distribute marketing 
materials with proposed benefit package information marked ``pending 
Federal approval.'' CMS will also extend the open enrollment period 
through the end of December.

                        CONCLUDING OBSERVATIONS

    Medicare is a popular program that millions of Americans depend on 
to cover their essential health needs. However, the management of the 
program is not always responsive to beneficiary, provider, and taxpayer 
expectations. CMS, while making improvements in certain areas, may not 
be able to meet these expectations effectively without further 
congressional attention to the agency's multiple missions, limited 
capacity, and constraints on program flexibility. The agency will also 
need to do its part by implementing a performance-based management 
approach that holds managers accountable for accomplishing program 
goals. These efforts will be critical in preparing the agency to meet 
the management challenges of administering a growing program and 
implementing future Medicare reforms.


    1. Medicare: New Spending Estimates Underscore Need for Reform 
(GAO-01-1010T, July 25, 2001).
    2. Our statement will refer to ``HCFA'' where our findings apply to 
the organizational structure and operations associated with that name.
    3. Most medical policies for determining whether claims for 
services provided are medically necessary and covered by Medicare are 
established locally by the claims administration contractor that serves 
the specific geographic area involved.
    4. Statutory constraints on limiting the providers from which 
Medicare beneficiaries may obtain medical services or products have 
resulted in the program including all qualified providers who want to 
    5. This finding reflects the last half of 1997 and the first half 
of 1998 and an average of 631 days.
    6. These are claims that have been filled out properly and whose 
processing has not been stopped by any of the systems' computerized 
edits. According to HCFA data on claims processed in fiscal year 1999, 
about 81 percent of Medicare claims were processed and paid as clean 
    7. Much of the cost difference appears attributable to differences 
in program design and processing requirements, but we and others 
believe that TRICARE has opportunities to reduce this administrative 
cost. See Defense Health Care: Opportunities to Reduce TRICARE Claims 
Processing and Other Costs (GAO/T-HEHS-00-138, June 22, 2000).
    8. As part of the Health Insurance Portability and Accountability 
Act of 1996 (HIPAA), the Congress created the Medicare Integrity 
Program (MIP), which gave HCFA a stable source of funding for program 
safeguard activities. In fiscal year 2000, HCFA used its MIP funding to 
support a wide range of anti-fraud-and-abuse efforts, including 
provider and managed care organization audits and targeted medical 
reviews of claims.
    9. Complex medical reviews are in-depth reviews of claims by 
clinically trained staff based on examination of medical records. In 
contrast, routine medical reviews may be carried out by nonclinical 
staff and do not involve review of patient records.
    10. These concerns are contained in a June 2001 letter from Medical 
Group Management Practice Association to the House Budget Committee 
    11. HHS Office of the Inspector General, Medicare's Oversight of 
Managed Care: Implications for Regional Staffing (OEI-01-96-00191, 
April 1998).
    12. Gail Wilensky and others, ``Crisis Facing HCFA & Millions of 
Americans,'' Health Affairs, Vol. 18, No. 1 (Jan./Feb. 1999).
    13. HCFA's workforce planning efforts were in line with our 
guidance in Human Capital: A Self-Assessment Checklist for Agency 
Leaders (GAO/GGD-99-179, Sept. 1999).
    14. Intermediaries primarily review and pay claims from hospitals 
and other institutional providers, while carriers review and pay claims 
from physicians and other outpatient providers.
    15. For a discussion of this issue, see Chapter 3 in Medicare 
Contractors: Despite Its Efforts, HCFA Cannot Ensure Their 
Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999).
    16. From a Generation Behind to a Generation Ahead: Transforming 
Traditional Medicare, Final Report of the Study Panel on Fee-for-
Service Medicare, National Academy of Social Insurance (Washington, 
D.C.: January 1998).
    17. A number of studies prior to this experiment have found that 
hospitals with the greatest volume of these procedures generally had 
better outcomes, as measured by mortality and complications.
    18. Statement Before the Senate Committee on Finance, Hearing on 
Medicare Governance: Perspectives on the Centers for Medicare and 
Medicaid Services (formerly HCFA) (June 19, 2001).
    19. Industry representatives have also cited Medicare's payment 
rates as a cause of the withdrawals. They believe that Medicare 
payments are inadequate for the services health plans provide. However, 
our studies have estimated that such payments exceed what Medicare 
would have spent if beneficiaries enrolled in health plans instead 
received services through the traditional fee-for-service program. See 
Medicare+Choice: Payments Exceed Cost of Fee-for-Service Benefits, 
Adding Billions to Spending (GAO/HEHS-00-161, Aug. 23, 2000).
    20. We have reviewed the agency's NMEP activities to date and will 
soon release a report discussing our findings.
    21. As a result of these decisions, the Secretary of HHS is now the 
subject of a lawsuit that claims he did not have the authority to 
change the benefit filing date and that the BBA requires an annual 
mailing containing comparative health plan information.

    Chairman Nussle. Thank you very much for your testimony. 
And as I said, when Congressman Pallone arrives, we will take 
his testimony. In the meantime I am sure a number of us have 
questions. I was amazed at a meeting I was at very recently, 
some health care providers in my district came and we were on 
the subject of overall health care reform and modernization and 
prescription drugs and kind of along the line of where Mr. 
Bentsen and Mr. McDermott were going and other members on the 
committee were going. While these providers were very hopeful 
about the kind of reforms that were coming down the pike, I 
think the one thing they told us, please don't hurt us anymore. 
You know, it is easy to beat up on HCFA and CMS and say it is 
all your fault. What are you doing down there? Eighty-five 
percent of the phone calls are no good. We could go into that 
diatribe very easily, but Congress is the one that passes the 
law, determines the benefits and makes a lot of the rules and 
tries to shove it down through the system and it doesn't seem 
to work.
    I was amazed because they brought to me--one constituent in 
particular brought to my attention something I thought that was 
fascinating. On a home health visit--and basically what it was 
just so you have the context--I am not supposed to use the 
name, but what it was was the beneficiary's paperwork 
requirement for single home health episode.
    The reason there was the home health episode was because 
the woman in question had a hip replacement and was 74 years 
old. I reviewed the paperwork and, interestingly enough, she 
was doing fine. Hip replacement went well, as many--most do in 
our Nation. It has become a very routine procedure. I looked 
through the paperwork and the only thing I can find that is 
interesting--and I don't mean to suggest that it is not 
interesting. We do take our health care and the quality of our 
health care for granted these days, but the one thing that is 
interesting from the paperwork that I read was that she was in 
pain that morning during the visit because she had sat too long 
she thought the day before in one of her chairs that she 
thought was too hard and should have been over on the couch 
using the pillow that she was given to help manage some of the 
circulations. She had some slight discomfort. She didn't want 
to admit it was pain; it was just discomforting.
    Well, you would think that the visiting nurse could report 
back and say, you know, I went to visit Mary Johnson--that is 
not her name--but I went to visit her. She was fine. Hip 
replacement seems to be going well. No infection. Everything is 
fine, which is what this says. She did have some pain because 
she needed to be instructed on how to use her pillow. But 
everything is fine.
    Well, let me just show you what they had to turn in when it 
comes to paperwork and everything else. What I will do is ask 
one of these guys--I want you to see what is involved because 
this is amazing to me. This is the first sheet. And it is going 
to keep going. Now this is what she had to do--this is the 
nurse now--had to fill this out for one single 60-day home 
health episode. And I invite you--anybody to read it. All I can 
find in there, and I am very serious, she is in pain. Not a lot 
of pain, but it is--it is not even double-sided. It almost goes 
to the door. We didn't quite get a long enough one to get to 
the door. Actually, this is the one they provided for us. I 
don't know what we need to do. I am not suggesting that this is 
the fault of any one, two people, agencies involved, but our 
nurses are frustrated because this is health care for them. Our 
patients are frustrated and our beneficiaries are frustrated 
because someone has to sit through the examination, and that is 
usually them. Our health care providers are frustrated because 
they know that I am probably the only person outside that 
hospital that has read this. And trust me when I say I didn't 
really read it as much as I skimmed it, because no one would 
want to read that. I have got much more reading that I need to 
do. But there is no way in my estimation that we will ever get 
our hands around the cost and the long-term obligations of this 
program if we can't do something as simple as that, and that is 
figure out a way to put on one single sheet of paper the visit 
that says she is OK. Her hip is OK. No infection. Everything is 
fine. I will see her in another 60 days and I told her to use 
her pillow.
    I would be happy for you to comment on that. And the other 
thing, Mr. King-Shaw, I would invite you to comment on--I know 
you had a chance to review the concerns about the bulletins, 
the call centers and the web sites, at least to begin with, to 
give you a chance to respond to those issues because I know you 
are concerned about them. I am not suggesting by any of this 
that you are going to defend any of this because I know both 
from your background as well as your mission that that is what 
you are here to fix.
    So I am just interested in what process you are going 
through in order to get your arms around some of these details 
that GAO has provided today, and if you have any expectation 
that you can provide to us and when we will might be able to 
see some improvements that not only are practicable 
improvements with regard to the quality and delivery of health 
care, but also the financial long-term stability for our 
Medicare program for our country.
    Mr. King-Shaw. Sure. In 10 words or less, I would say first 
on the issue of performance, we are relooking at many of our 
forms, enrollment forms, documentation forms. We have a number 
of them that are being designed for simplicity and are going 
through a clearance process. So I think you will begin to see 
new forms replacing these old forms that will be simpler, more 
user friendly that will contain the right information. That is 
a definitive process that has begun already, and I think you 
will begin to see increasingly forms coming out in a more user-
friendly format.
    We also have a longer term initiative, something called our 
physicians regulatory initiative team. That is a team that 
focuses working with physicians about some of the practical 
ways that we can simplify, remove, correct and streamline the 
day-to-day regulations that are gumming up the works, such as 
this. And that has been extremely effective already in just 
coming to the less lofty, more specific everyday type of 
regulations, rules, interpretations and requirements that don't 
add to quality of care or facilitate good medicine. And that is 
a national effort.
    One other thing I will say is, there are a number of 
provider groups that are coming together that now have an open 
door and open access with CMS to talk about these things in 
coming up with strategies to change them. In those discussions 
we are learning that some of those requirements are not ours at 
all, but it is what the in-house counsel is telling providers 
that they must do to defend against a lawsuit. It is what CMS 
expects or we can't really understand the CMS rules, so do all 
these things to cover you no matter how they interpret it 
because it changes all the time. Or the Department of Justice 
will interpret this rule this way, OIG will interpret it this 
way, so you do all these things to cover the waterfront.
    So what we are trying to do is separate those things that 
we at CMS can do immediately and then work with our partners to 
have a common understanding of what these rules mean and 
clearly communicate what the rules are so the world doesn't 
have to guess all the time and do this defensive strategy.
    On the contractor performance, I will spend a great deal of 
time on those. Part of that is driven by the fact that we don't 
have great flexibility in contracting. The actual performance 
of our contractors is very unrelated to our ability to change 
the contract or find a better performer or move business to 
those who have more capabilities. These are not outcome-based 
contracts. These are cost contracts. And so it is not that we 
can go out and replace one with a better performer of a 
different type.
    So what we have begun to put together is a reform package 
that includes contractor reform. And when Congress will feel 
comfortable with our ability to manage under more flexible 
contracts, more outcome driven contracts, I think you will see 
the performance of contractors change. Internally, we have to 
get better at specifying the expectations that we have of our 
contractors. We spend a great deal of time looking at the fraud 
and abuse, financial integrity issues and the beneficiary 
issues. We need to put more time into looking at how 
contractors interact with providers and be more specific and 
have higher expectations of the way they interact with 
providers. So we will be having specific standards for Internet 
and call centers and our own service observe programs where we 
listen in on telephones and conversations so we can keep track 
of the quality of the answers, not just how quickly they answer 
the phone, but the accurateness of the information given in 
that conversation, all those things that the rest of the world 
does that we have to begin to do.
    Chairman Nussle. Mr. Spratt.
    Mr. Spratt. HCFA has gotten a lot of flack. Every Member of 
Congress can testify to that. Any one at least who has spoken 
to a local hospital administrator's group or physician's group. 
But in truth, HCFA largely manages this program through fiscal 
intermediaries, does it not?
    Mr. King-Shaw. That is correct.
    Mr. Spratt. To what extent would you, on the back of the 
envelope, estimate that the work is actually contracted out, 
management work; 80 percent, 90 percent?
    Mr. King-Shaw. Up to the mid-90's, if you really look at 
where the work is done. I can get the exact figures. But the 
vast majority of the program administration is contracted out 
either to the health plan side, private plans or the 
intermediaries that pay the claims and do the reviews.
    Mr. Spratt. How many different fiscal intermediaries are 
there across the country?
    Mr. King-Shaw. I think in the 50's now. Fifty of them. We 
go through a process of consolidating where we can to the 
stronger providers. But there are a number of, I guess, fiscal 
intermediaries for the part A side, a different number for the 
part B side and medical equipment beyond that. There is a whole 
other network of things beyond that do such things as program 
safety and program integrity.
    Mr. Spratt. One of the complaints that I have received is 
that different fiscal intermediaries read the regs differently 
themselves and they have different rules for PSAs and what is 
an approved drug for a particular illness. Is this a chronic 
and serious problem?
    Mr. King-Shaw. It is a problem. The system was designed by 
Congress to be that, however. I mean when the Nation 
established the Medicare program, it was to contract for the 
services through a number of Blues organizations, each relying 
on much of their own decision making for medical management 
decisions. And so, a lot of what we have today is a reflection 
of the original intent of the mid-60's that has been outmoded. 
It has not kept up with the medical practices or services that 
are financed and administered today.
    As far as the coverage decisions, a number of coverage 
decisions are delegated to the carriers for local application, 
and so there are inconsistencies. The alternative to that would 
be for Medicare essentially to determine coverage in every 
respect and manage centrally a program that was on paper 
designed to be a regional one. And that is a rethinking of the 
direction of the Medicare program, and Congress would have to 
direct us to do that.
    Mr. Spratt. Dr. Scanlon, do you find this arrangement 
creates confusion, problems with the span of control of 
    Mr. Scanlon. We find that on a repeated basis that it does 
create confusion. The contractors, while fulfilling to some 
extent the original intent of not interfering with the local 
practice of medicine, they put their own interpretations on 
those instructions at times, creating confusion for providers. 
Since intermediaries deal with hospitals and other part A 
providers, and there may be multiple intermediaries operating 
in a single community, it is possible for different providers 
to be hearing very different things about what the program 
allows or does not allow. So it is something that we think that 
centralization of some sort, either oversight or more explicit 
operation from a centralized focus, would have real benefits in 
terms of making the program operate more effectively.
    Mr. Spratt. Would you still have to contract out services 
    Mr. Scanlon. Without creating a much larger agency of 
Federal employees, one needs to contract for these services. 
And there are real gains from contracting for these services 
because what we are talking about are things that private 
sector parallels to in terms of processing information. Think 
of Visa and MasterCard in terms of being able to process 
transactions. Medicare transactions are much more complicated, 
but they still are transactions that can be processed 
electronically. Today more than 80 percent of them are. So we 
want to buy that expertise instead of trying to rebuild it, I 
think, within the agency.
    Mr. Spratt. Mr. King-Shaw.
    Mr. King-Shaw. I don't think the Medicare program can adapt 
and develop and grow and achieve viability without contracting 
out many of its functions, its administrative functions 
included. I think the critical issue is the nature of those 
contracts, the leverage we have in those contracts, the ability 
to negotiate new and different contracts with, in some cases, 
new and different providers. That I think is the pivotal piece 
toward achieving the objective we all share.
    Mr. Spratt. I represent one of the larger contractors, one 
of the Blues that does a lot of work for you, and their 
complaint to me is that they have underfunded themselves. And 
Dr. Scanlon touched on that in his testimony. They say the 
costs per claim administered speaks for itself. It is 
dramatically low compared to private carriers, administration 
of their own programs, compared to TRICARE, for goodness sake, 
which is 7\1/2\ dollars a claim, I think. So they say they are 
rendering good stewardship over the program, but every year 
comes back to us and I guess to the administration too, because 
if you don't drive the point home adequately, we cut them and 
cut the money back for them and they are stretched to the point 
where quality is affected.
    Do you share that view?
    Mr. King-Shaw. There are some contractors that clearly are 
under financial pressure and that the costs attributed to their 
operations is a very tight squeeze for them. I don't know if 
that is true for all contractors. But I do think we need to 
look at the overall financing of the program and the allocation 
of resources. It is not that these contractors can recoup an 
investment in a profit or a surplus situation. These are cost 
contracts. So there is very little incentive for a good 
provider to plow more money into their operations in hopes of 
getting a return and therefore conducting the kind of 
continuous quality improvement that their private sector peers 
    Mr. Spratt. Dr. Scanlon, we passed Medicare+Choice several 
years ago. You note in your testimony that HCFA wasn't really 
ready for it in terms of personnel trained to deal with managed 
care. They were woefully inadequate. And we had testimony this 
morning and I have heard the GAO say it on other occasions, 
that Medicare+Choice, which was supposed to save money, has 
actually cost us money because of adverse selection.
    Mr. Scanlon. That is right, and we have looked at this 
extensively and issued two reports last year to update some 
earlier work that we had done. What we did find was there was 
continued adverse selection and that the program was costing 
Medicare more than if those people remained in fee for service. 
In addition to looking at the health status of the individuals 
that were enrolling in Medicare+Choice, if you looked at what 
the Medicare+Choice plans were offering beneficiaries, you had 
a sense that there may be some slack here. On average, plans 
were offering about 60 dollars worth of benefits because of the 
statutory requirement that they not make any more profit on a 
Medicare beneficiary than they do on some other enrollee. On 
top of that, they were offering about 60 more dollars worth of 
benefits, seemingly as loss leaders, to attract beneficiaries 
to their plan.
    This I think has been a clear indication that we may be 
paying plans too much in terms of delivering the Medicare 
benefit package--though there is a paradox, which is we have 
had so many plans leaving the program. And they have said that 
they cannot afford to remain in Medicare, and they have 
indicated that strongly by leaving the program.
    The issue is do we value Medicare+Choice and the type of 
managed care that it delivers enough to pay that additional 
price to attract plans in the program. I think that is a 
decision that we need to provide--gather better information and 
provide that to the Congress so the Congress can make that 
    Mr. Spratt. One final question, Mr. King-Shaw. One of the 
topics covered in Mr. Scanlon's testimony was making 
beneficiaries understand the program better, their recourses, 
what the benefits are. You recently introduced a new benefit 
which some of my constituents are calling about to find out 
what it means, and that is the discount pharmacy card.
    What role has HCFA played in this area and what does this 
card mean?
    Mr. King-Shaw. Well, the card essentially means that 
beneficiaries can join one of the buying groups, if you will, 
once these cards are approved--I will get to that in a moment--
and with that card, have the benefit of group pricing discounts 
on a number of drugs. These drugs will be actually supplied by 
the prescription drug benefit managers, and CMS is responsible 
for endorsing those cards that meet standards for service, will 
communicate the benefits and that kind of thing.
    It is not a benefit in the sense that this is a new benefit 
change that Congress would have to adopt. In fact, we are 
endorsing cards that have the capability to pool beneficiaries, 
and as a result of that volume buying power, negotiate 
superior, as in lower, prices for beneficiaries so that their 
out-of-pocket costs for----
    Mr. Spratt. Will this be negotiated with the pharmaceutical 
companies or with the drug retailers, or both, and will they be 
preferred providers?
    Mr. King-Shaw. It is our anticipation that the PBN's that 
sponsor these cards will negotiate their discounts with their 
drug companies. There are other types of cards out there that 
we are not attached to, that we are not endorsing, that achieve 
their discounts by negotiating a different price with the 
retailer, the pharmacist or the distributor.
    These programs are intended to result in a reduction in the 
pricing of drugs with the manufacturer of the drugs, not the 
    Mr. Spratt. So before this is an operable card, we have got 
some negotiating to do.
    And do you have benefit managers hired and lined up to do 
this work yet?
    Mr. King-Shaw. Not yet. We have issued a request for those 
interested to participate in this program, to document their 
capabilities, you know, their discounts, their program, 
etcetera. We at CMS will select, based on known and published 
criteria, those card programs that we will endorse. The actual 
management of this program will fall to a consortium that these 
card programs, the PBMs, will fund.
    Part of their agreement to take part in these programs is 
that each one of these cards will contribute financially to a 
consortium that will be responsible for making sure that every 
senior who has a card is only in a one-card program, therefore, 
they are not double counting; that each one of these card 
programs supplies the necessary information so that seniors can 
choose which card program they want, understanding that 
different card programs may have different levels of discount 
on the same drug.
    And so, ultimately, a consortium will be responsible for 
managing the program. CMS will support in some way as an equal 
partner in this consortium, but this will not be a CMS-driven 
or federally funded program, if you will.
    Mr. Spratt. When is it ultimately coming? Is it a year off 
before you can really have a card that you can take to the 
local pharmacy?
    Mr. King-Shaw. We anticipate that elders will have cards in 
their hands by January of 2002, if not sometime in December. We 
are hoping to have the cards selected sometime in September or 
October. We know that the consortium will be up so that there 
is an infrastructure, you know, so folks can begin making 
choices in that November-December time frame.
    Mr. Spratt. Is this just a Medicare beneficiary?
    Mr. King-Shaw. That is all we are focusing right now is the 
Medicare beneficiary.
    Chairman Nussle. Mr. Kirk.
    Mr. Kirk. Dr. Scanlon, I find your report excellent. Again, 
the management problems that you highlighted that five out of 
nine bulletins were wrong, 85 percent of the telephone calls 
wrong, eight out of ten web sites incomplete. You had some 
interesting claims cost data that CMS showed, that it cost $2 
to process a claim; and you reported that the industry started 
at $6 a claim.
    And something that now concerns me, TRICARE, the military's 
HMO, was $7 a claim. So it makes me think about what CMS is 
doing that industry and TRICARE should be doing.
    But later on in your report, you indicate that CMS has 
losses from bad claims management totaling $12 billion. If you 
add that back into their claims management cost, it is $14 a 
claim, which makes me then think, what is the industry doing 
right that CMS is doing wrong?
    Further, in your report, you mentioned, in the Government 
Performance and Results Act, that CMS was the lowest ranking of 
28 Federal agencies for every measure except customer service 
and it is second from the bottom on customer service. Given 
your work and what you have done, can you contrast any of these 
performance measures with the Federal Employee Health Plan and 
the kind of claims administration numbers or performance that 
it might show?
    Mr. Scanlon. Well, of course, the Federal Employees Health 
Benefits Program operates exclusively through private sector 
health plans. So some of the information we provide about the 
private sector health plans will actually be plans that are 
participating in FEHBP, so that is their type of experience.
    And I do think in terms of making the comparison about how 
much is lost by CMS in terms of inappropriate payments, we 
would also have to adjust the numbers on the private side. 
There has not been the same kind of effort on the private side 
to measure their losses to inappropriate payments. So their 
numbers are going to go up as well.
    We have come to the conclusion that the old adage of penny 
wise and pound foolish may apply here, that there are sort of 
more efforts that are being exercised on the private side and, 
potentially, in TRICARE to try and reduce the losses to 
inappropriate payments, to try to provide better customer 
services to both beneficiaries and physicians. I think that 
that is a key to us--that we need to think about if we are 
dissatisfied with losses for inappropriate payments and 
customer service--perhaps we need to make the investment to 
make those things better.
    When we make that investment, we ought to make sure that we 
have a plan to accomplish that. And then we hold CMS 
accountable to that plan.
    The report that you indicated, where CMS ranked low 
relative to other government agencies really was an issue of 
accountability. Do managers have performance targets that they 
feel have been clearly articulated and to which they feel they 
are held accountable? And the answer was, fewer CMS managers 
felt that than virtually any other Federal agency.
    Mr. Kirk. I would note from your report, $1 in additional 
administrative compliance would be $16 in savings. So you 
rapidly see how CMS, if it was at the claims level of industry 
or TRICARE, closes the gap.
    Mr. Scanlon. We may encounter some diminishing returns 
there, but we certainly would make some considerable savings.
    Mr. Kirk. On the case management issue, your report says 
that CMS would be unable to take wide advantage of case 
management, which is where the employer-provided health care is 
going. Because targeted information would require using 
personal medical information from claims data, CMS would 
encounter opposition and could not do it. That is a question 
for the both of you.
    Do you see this as something for Congress to address so we 
could move CMS in the same direction that other health care 
providers are going to ensure that patients are complying with 
their doctors' directions, and therefore, their health status 
is improving and costs are lower?
    Mr. Scanlon. It could be beneficial to consider having some 
type of case management service to be part of Medicare in which 
the beneficiaries and providers could avail themselves of that 
service; and there would be a fraction of the beneficiary 
population with chronic needs that would then benefit from 
that. The program would benefit, as you indicated, from the 
better management of services--in particular, pharmaceuticals, 
which can be problematic in terms of interactions, lack of 
compliance, etcetera.
    The thing we are concerned about, or feel there will be 
concerns about, is the way the private health plans have 
approached this. They have been more proactive. They have 
identified, through their claims information, who it is that 
has a chronic illness within their beneficiary population; and 
they have gone and contacted them and said, we think you need 
case management, or maybe even more aggressively, said, we want 
to case manage your services.
    The idea of a government program potentially doing that, we 
think potentially can be problematic; and it is an issue about 
the perception of the government analyzing your health data and 
making a decision about what you need.
    As Mr. King-Shaw indicated, when we started Medicare, 
Congress gave clear instructions we were not to interfere with 
the practice of medicine. So this would be a very bold step, 
one that would depart from that.
    Mr. Kirk. Mr. King-Shaw, do you think that having patients 
comply with their doctors' direction is a very ``bold'' step?
    Mr. King-Shaw. No. I think Medicare is bringing up the rear 
in case management. I believe very firmly in case management 
and the more robust disease management applications. I think 
the fusion, if you will, of clinical best practice and 
administrative support and financial structures that really 
support compliance and early detection and maintenance and 
behavioral change, is an essential part of moving the health 
care delivery system in the Medicare program forward. I see 
nothing inconsistent about Federal or government programs 
participating in disease management and case management or 
State programs.
    Some of the leaders in disease management and case 
management have been the States, notably Florida, Virginia and 
others. So I am actually quite excited about seeing Medicare 
embrace disease management and case management. There is 
legislation that passed Congress last year that enabled some 
demonstration projects in disease management for Medicare that 
would include prescription drug therapy. And I think we should 
all look forward to good outcomes there.
    Quickly, on the note of claims costs, to my knowledge, I 
don't believe that TRICARE does calculate error rates for their 
claims. And so I don't know if we have that second number, what 
to add back in for TRICARE and the others to compare it to the 
number that you ran for us. If we do have error rates for the 
other Federal programs, either Federal employees or TRICARE, 
and we add those back in, then we would get a picture of where 
CMS ranks according to the other two. But to my knowledge, they 
do not calculate that.
    Mr. Kirk. I defer to Dr. McDermott, who recommends we all 
eat our broccoli.
    Chairman Nussle. Dr. McDermott, with that introduction.
    Mr. McDermott. Mr. Chairman, I want to begin by saying I am 
sorry I can't stay for the rest of the hearing because you will 
have some good examples of people who are actually out in the 
field doing this. Dr. Kaplan is from Seattle and represents the 
managers of these programs, and I think can give you some 
really concrete examples.
    But I would like to ask a question. Mr. Scanlon, as I 
understand this process, we pass the laws and then HCFA writes 
the rules and regulations applicable to the laws to implement 
the laws that we have passed. And administrators, whether they 
are intermediaries or whoever, they simply follow the rules 
that have come down through that process; is that correct?
    Mr. Scanlon. Largely correct. There is in the law as well 
as in the regulations some room for local variations and in 
some provisions of the statute.
    Mr. McDermott. So the paper trail that Mr. Nussle just 
showed here really came from us. When we are looking for the 
enemy, we are the ones that set that in motion; is that 
    Mr. Scanlon. You didn't create the form, but essentially 
you created the demand for what the form was intended to do, 
which was appropriately pay for the service as well as use it 
for quality-of-care purposes.
    Dr. McDermott. Let me turn to one of the areas that I think 
has been an area of great concern, and that is the sole issue 
of fraud. Several years ago, we decided we were going to save a 
whole bunch of money with fraud. And we went after people and 
we said, this is fraud because you said you did this, but there 
is no documentation; and so now everybody is documenting and 
documenting and documenting and documenting and documenting. 
And it seems to me that an enormous amount of what you saw in 
that paper trail or what was on that paper trail was probably 
documentation of what had gone on. Would that be your guess?
    Mr. Scanlon. Well, in that particular instance, I think we 
have a very unusual circumstance because there has been a 
requirement--I mean, a lot of the documentation you are talking 
about is documentation that Mr. King-Shaw indicated that 
providers decide they need to do in order to be able to justify 
their claim. But in the case of home health, there has been 
specified a very detailed assessment instrument for each 
beneficiary who is entering into the home health episode.
    A part of the reason is, the Medicare program is going to 
pay for that episode between $1,000 and $6,000. And the issue 
is, do we know why we are paying for--for an episode that is 
expensive and can we have expectations as to how much care an 
individual is going to get?
    The second reason that that assessment was created is that 
there were concerns created a number of years ago about the 
quality of care being provided by some home health agencies. We 
had tremendous proliferation in terms of their numbers. We were 
concerned with the fact that the certification standards were 
very loose, and it was very easy to become an agency.
    So one of the things that the assessment is intended to do 
is to try and spotlight the quality problems so that 
certification efforts can be more in focus. But in other 
circumstances, I mean, there are not similar kinds of 
requirements and there necessarily should be those kinds of 
    Mr. McDermott. Are you saying--if I understand what you 
just said--you are saying that doctors are doing all this 
documentation now, simply in order to have a paper trail to 
deal with a fraud investigator who comes thundering into their 
offices and goes into their records looking for fraud about 
whether or not a particular thing has been undercoded, 
overcoded or whatever. The doctors are doing that. There are no 
regulations that they are following that specify--I give you 
this example.
    If I charge for a long-term case--excuse me, a full 
examination--I have got to look at every one of the systems in 
the body and document everything from the skin all the way 
through to whatever; and if I don't do that, the presumption is 
that it is fraudulent that I said I did a full examination, it 
is all written down, then have I done a fraudulent examination.
    Now, the doctor decides, I am not going to be considered 
fraudulent, so I am going to put all this stuff in because I 
don't want these guys hanging around beating me up.
    You saying this is a figment of their imagination?
    Mr. Scanlon. No. I am saying there is a general requirement 
for the documentation that if you provide a service and bill 
Medicare for that service that you would be able to demonstrate 
that you have provided that service; and, therefore, there is a 
documentation requirement that is associated with that.
    Mr. McDermott. Where does the fraud investigator get his or 
her list of things to look and say, it isn't there, so that is 
fraudulent? Where do they get their scheme by which they look 
at these issues?
    Mr. Scanlon. The area that I think you are pinpointing is 
the area of evaluation and management services, which is what 
we used to know as ``office visits'' and ``hospital visits'' 
for physicians. Over the past 10 years, determining what is the 
appropriate level those visits or those evaluation management 
services has become much more complex because we have gone from 
a system where we used to pay for each visit in terms of the 
amount of time and the specialty that was providing the service 
to a system where we have tried to pay for the same service, 
the same amount of money, which means there is not a specialty 
    There has been a joint activity on the part of HCFA and the 
American Medical Association to try and develop mechanisms as 
to which ones demonstrate what the service involves. And this 
is exactly the kind of thing you talked about--their having to 
say, I have dealt with every body system, I have done the 
following, I have considered the following, and therefore this 
is a visit of this complexity.
    And physicians tell us all the time--and I sincerely 
believe them--that it, in some ways, has changed the practice 
of medicine. In addition to doing things that you would 
routinely do, you now have to write them down, and that is 
something that we have concerns about. And I think in terms of 
CMS's review of documentation requirements, that this is an 
area where there should be some strong focus.
    Mr. McDermott. Do--I mean, I would like to see if you have 
written recommendations about how to change that system. Nobody 
wants fraud. I don't know any doctor who is going to say, we 
want to be allowed to be fraudulent. But the question is, how 
do you do that in the least wasteful way or the most efficient 
    If you have suggestions that you can give us, to the 
committee or to the Ways and Means Committee--I mean, both of 
us are dealing with this issue--I would be appreciative.
    Mr. Scanlon. I wish we did. We have been struggling with 
that issue ourselves. Because given the concept that we want to 
pay a single price for a specific type of service and the fact 
that there are so many things that happen in a medical 
encounter that we have to try and sort those into homogenous 
groups, that it is an awful task; and we have not found the 
simple solution to this or even a way to simplify the current 
    Mr. McDermott. Mr. Chairman, could I have one more 
    Chairman Nussle. Yes.
    Mr. McDermott. My whole medical career has been spent in 
Seattle, where we had group health and we had managed care 
since the day the century turned, started--it is 1945 or 1946. 
And the idea that HMOs, managed care, was somehow going to save 
money as--I have great difficulty understanding how, if we take 
the average cost of a patient in Medicare and we pay that to an 
HMO and then we say, well, you are more efficient, so you get 
95 percent, why isn't that enough for them to get by?
    Why do they keep coming in and saying we need more and more 
and more?
    Mr. Scanlon. I think it is partly the issue that on top of 
the medical costs that they are going to incur, they have added 
some management costs in terms of really trying to scrutinize 
care and decide what is appropriate; and this does cost money.
    In terms of I think what is happening now with respect to 
the increased growth in health care costs, what we are seeing 
is that managed care in the first round was able to get 
significant discounts from providers. The era of those 
discounts has probably ended in many areas, and therefore, 
their costs are rising as providers are demanding essentially 
to be paid higher rates. So I think that is part of what drives 
some of the need for additional funding.
    This last year, in terms of the Medicare+Choice plans, 
withdrawal from Medicare was very different from what preceded 
it. What preceded it was, the plans that were generally not 
doing as well in an area, left that area; it was plans that had 
recently joined an area and didn't do well initially in 
marketing themselves, and they decided to leave.
    This year, we had much more widespread withdrawal of plans. 
But it would also coincide with the cost pressures that were 
coming more generally in the health care market, and I think 
that was a factor in terms of what we saw.
    Mr. McDermott. So the bottom line then is that managed care 
is no better than the other system?
    Mr. Scanlon. We mentioned that Medicare and HCFA and the 
Congress, in fact, in terms of the legislation specifying how 
the program was going to pay for services, really has been 
effective in controlling costs, or at least the cost of 
individual services. Medicare was a leader--I mean, starting 
with the hospital prospective payment system in 1983, that was 
probably the first time a large payer got aggressive about 
trying to say we are not going to pay so much for a unit of 
service. And so that is what the managed care plans are 
competing against, Medicare's leverage and Medicare's record in 
trying to control prices.
    Mr. McDermott. Thank you, Mr. Chairman, for your 
    Chairman Nussle. Mr. Holt.
    Mr. Holt. Thank you, Mr. Chairman. I would like to raise a 
somewhat more specific issue for Mr. King-Shaw and Mr. Scanlon, 
but it is a problem that I think involves a larger issue 
touching on Medicare reform and costs. And I would like to work 
with you in trying to come up with a solution to this in the 
future; it may require legislation.
    The problem is simply this: Current Medicare policy pays 
for injectable forms of drugs in the case of kidney dialysis 
patients, but not the exact same supplements in their cheaper 
oral form. And I know that the agency is looking at many issues 
related to Medicare and end-stage renal disease. My colleagues, 
Representative Ryan and Representative Baldwin, here on the 
committee have also paid some attention to this.
    The legislative prohibition preventing Medicare from 
covering self-administered prescription drugs for patients 
undergoing kidney dialysis may be costing our taxpayers well 
over $100 million a year.
    Now, I realize in the scheme of the numbers that we have 
been talking about today, that may not seem like so much, but 
it is not chicken feed either. Current Federal policy requires 
Medicare to treat drugs with the same therapeutic benefits in 
fundamentally different ways.
    There really is a logical gap here, when for drugs injected 
into a patient by a physician, Medicare can pay most of the 
cost of the drug, but if the drug is taken orally Medicare is 
prohibited from paying for it. And so this is costly to the 
patient and to the taxpayer.
    And, you know, I think that right now the vast majority of 
patients who undergo hemodialysis and who almost all also deal 
with calcium deficiencies or potential calcium deficiencies, 
have to take one of two injectable drugs. But the oral drug has 
been found to be as safe and as effective as the injectable 
drugs in most cases.
    Well, I don't need to go into the detail of it. I think you 
get the gist of the problem.
    Medicare policy now may view the injectable drugs and the 
oral version as different substances. But doctors assure me--
and I, as a scientist, am convinced that they are not--that 
they have the same active ingredient and studies show that the 
two substances are equally safe and effective; and it just 
seems irrational that Medicare covers one form of the drug, the 
more expensive form, and not the other.
    Again, this may require legislation to fix, but I would 
very much like to work with you to find--well, the real cost of 
this disparity and possible solutions to it.
    Mr. King-Shaw. Briefly, we can, of course--we will at the 
staff level, respond to you with the exact cost differentials 
that you are looking for, to the extent that we can.
    I think the larger issue points to what the President and 
Administrator Tom Scully have been saying, Medicare needs to be 
reformed and needs to modernized and made current according to 
current medical practice. And so we could either interact with 
you on this specific issue--but it is symptomatic of a very 
much larger issue, and that is keeping Medicare policy up with 
the times and with technology. Distinctions that used to exist 
don't anymore, and we haven't adjusted our policies in the 
congressional statutory framework in which we live to reflect 
those changes.
    And we will be happy to have all those discussions with 
    Mr. Holt. Well, I hope that we can deal with some of these 
particular individual problems and perhaps some other 
individual problems rather than delaying them while we wait for 
a wholesale reform of the program, because this really has to 
do with the quality of care that patients are getting now, the 
convenience of their medication; and as I said, you know, 
something on the order of $100 million is serious money. So I 
look forward to working with you on that.
    Thank you.
    Chairman Nussle. Thank you, Mr. Holt. I want to thank our 
panelists for their testimony and for their information on 
this. We look forward--I think you can tell from the attitude 
here, we look forward to working with you in trying to come up 
with solutions. As I said when I opened this with all the 
paperwork, I am certainly not blaming or suggesting that it is 
all one entity's responsibility or fault. We have got the same 
responsibility at this end of the street, and we will work with 
you to figure that out, and I know we have a number of issues.
    So we look forward to your suggestions on what Congress can 
do to help make sure this program works. So thank you very 
    At this point in the record, I would like to ask unanimous 
consent to insert Congressman Pallone's testimony. He has been 
patient with us. We have not been able to accommodate his 
schedule and visa versa and so we will--I will ask unanimous 
consent to put his statement in the record at this point.
    [The prepared statement of Mr. Pallone follows:]

  Prepared Statement of Hon. Frank Pallone, Jr., a Representative in 
                 Congress From the State of New Jersey


    Mr. Chairman, Members of the Committee, thank you for extending me 
the opportunity to speak before your Committee today.
    In 1965, our Nation made a promise to the American people that they 
would have health insurance when they turned 65 and that they would not 
be denied medical care simply because they could not afford it. This 
promise has held up remarkably. Medicare has been a reliable program 
that has provided important services to our seniors since 1965 and 
every time I talk to seniors in my district, I know that these services 
are making a meaningful difference in people's lives.
    The Medicare program currently serves about 40 million 
beneficiaries and the program ensures that seniors and the disabled are 
able to live longer and richer, more productive lives. However, we are 
at a crossroads. Medicare needs to be improved and there are several 
directions in which we can move forward. The issue of regulatory burden 
needs to be addressed, along with important improvements such as adding 
a prescription drug benefit that would cover all seniors who want it, 
increasing protections to ensure that Medicare remains affordable for 
all beneficiaries and extending the life of the Medicare program so 
that it will be there for the baby boomers and beyond.


    As the largest health insurer in the U.S., Medicare is a vast and 
extremely complex program. The program works with literally hundreds of 
thousands of physicians and thousands of hospitals, suppliers, and 
other types of providers. It is not surprising that CMS processes 
nearly 1 billion Medicare fee-for-service claims per year.
    Given the complexities of this program and the extent of its 
statutes and regulations, it is no doubt that providers are bogged down 
with regulatory burdens and endless paperwork. The program should be 
run efficiently and most importantly, should allow legitimate providers 
to practice medicine and serve their patients most effectively. I hear 
from providers on a daily basis and the message I hear is that being 
forced to sit behind stacks of paperwork day after day is unacceptable 
and a hindrance to providing necessary care to seniors.
    There have been improvements to Medicare that have helped clarify 
the processes for receiving appropriate reimbursements. In addition, 
Medicare's payment error rate was reduced by about 45 percent between 
1996 and 1998. This is a positive step in the right direction; however, 
Congress must remain committed to providing an avenue for further 
cutting payment error rates. This will ensure that providers are 
receiving appropriate payments for their services and inadvertently, 
that beneficiaries will be receiving proper care.

                           PRESCRIPTION DRUGS

    The lack of an affordable prescription drug benefit is without 
question the biggest problem with the Medicare program today. The 
problem cannot be corrected piecemeal by simply devising a plan to 
cover the poorest seniors. A comprehensive, affordable drug benefit 
should be available to all seniors regardless of income. 50 percent of 
Medicare beneficiaries without drug coverage are middle class seniors.
    Instead of providing a meaningful benefit through Medicare, it 
seems as though President Bush and the Republican Leadership are 
preparing to either provide drug coverage to only low-income 
beneficiaries or to provide drug coverage that relies on private drug-
only insurance. Neither of these plans will allow beneficiaries to 
receive a comprehensive, affordable, guaranteed benefit and in fact, 
these plans will nurture the price discrimination beneficiaries face 
when purchasing pharmaceuticals.
    In terms of privatizing Medicare, a proposal that relies on a 
voucher-type system under which private health plans compete with one 
another, as well as with the traditional Medicare program, raises 
several problems. Most importantly, private health plans have already 
abandoned hundreds of thousands of seniors from Medicare+Choice plans 
and yet, we are hearing of proposals that rely on private health plans 
for Medicare restructuring. In the last 2 years alone, 106 plans 
dropped out of Medicare+Choice altogether, 111 plans reduced their 
service areas and any other plans increased premiums and reduced 
    In addition, the drug discount card program proposed by the 
President is not an interim solution to providing a comprehensive 
prescription drug benefit. Many companies already provide these cards 
at little or no expense, drug manufacturing companies are not held 
accountable while it places the entire burden of any possible savings 
on hometown pharmacies and it does not require Medicare to pay even a 
portion of the Medicare recipients' cost of prescription drugs. When 
talking about reforming or modernizing Medicare, a drug discount card 
or privatization is not helpful to seniors, rather, a comprehensive 
benefit under the Medicare program is what people want.

                     SOLVENCY AND COSTS TO SENIORS

    At a time when seniors can barely afford their prescription drugs, 
it is important in this discussion of Medicare reform to ensure that 
health costs to seniors for basic services do not increase. There are 
proposals that claim that a combined benefit package would be easier to 
administer the Medicare program and that the private market no longer 
separates hospital and insurance policies, so why should the Medicare 
program? More importantly, the argument is made that redefining 
solvency by measuring the combined status of trust funds will make 
Medicare's financial status more clear. The President's budget has 
already endorsed this policy because it would help lawmakers reduce the 
amount of general revenues allocated to the Medicare program.
    Merging Parts A and B of the Medicare program may contribute to a 
rise in cost of the Medicare program, which would be financially 
detrimental to seniors nationwide. If both Parts A and B of Medicare 
are combined, it seems clear that most seniors would face a higher 
deductible. The deductible for Part A is $776 but only 15% of seniors 
utilize Part A services in a given year. The deductible for Part B is 
$100 and an overwhelming 85% of seniors use Part B services in a given 
    Combining these two parts and finding a deductible that falls in 
between the Part A and B amounts will surely present a majority of 
beneficiaries with a significantly higher deductible--which means that 
most seniors would have to pay more out-of-pocket before their Medicare 
benefits kick in. It is important to keep in mind that this higher 
deductible would add to the average of about $3,000 out-of-pocket that 
seniors pay for health services, including prescription drugs.
    This would only be exacerbated by the fact that most seniors would 
see a rise in premiums for their supplemental insurance policies. Many 
of these policies pay for Part A and Part B coinsurance and 
deductibles--and if these costs increase from merging the two parts, it 
is likely that employers and beneficiaries will both have to make up 
the difference in cost.
    Asking beneficiaries to pay more out of pocket than they already do 
is unacceptable and an aspect of Medicare reform that is certainly 
detrimental is merging the Hospital Insurance and Supplemental 
Insurance Trust Funds, thereby increasing the cost of Medicare before 
we even add a prescription drug benefit.


    Thank you again, Mr. Chairman and Members of the Budget Committee, 
for allowing me to testify on Medicare reform. I hope you will keep in 
mind that along with easing regulatory burdens for providers, we must 
protect the integrity of the Medicare program, secure solvency of the 
Medicare trust fund, keep costs down for seniors, and provide a 
comprehensive prescription drug benefit under the Medicare program.
    Thank you.

    Chairman Nussle. I invite the third panel to come forward 
at this time, and we will take a 2-minute recess while they are 
getting situated.
    Chairman Nussle. The third and final panel that we have on 
Medicare and the need to reform, first of all, Dr. Gary Kaplan 
is the chairman of the board of directors for the Medical Group 
Management Association; Dr. James Bean, who is a neurosurgeon 
from Lexington, Kentucky; and also Marilyn Moon, who is--Dr. 
Marilyn Moon, who is senior fellow from the Urban Institute.
    We welcome all three of you here today. Your entire 
testimony will be made part of the testimony and during the 
time you have, we would ask you to summarize what you have come 
here to tell us today.

                        URBAN INSTITUTE

    Chairman Nussle. And we will begin with you, Dr. Kaplan. I 
think I got it wrong earlier, I may have said you were the one 
who was from Kentucky. You are from Seattle and it is Dr. Bean 
who is from Kentucky. My apologies, welcome.

                  STATEMENT OF DR. GARY KAPLAN

    Dr. Kaplan. My name is Dr. Gary Kaplan. I'm the Chair of 
the board of directors for the Medical Group Management 
Association. On behalf of MGMA, I want to thank the chairman 
and the entire committee for convening today's hearing.
    The hearings held by this committee during the 106th 
Congress focused the attention of lawmakers and the new 
administration on numerous administrative barriers affecting 
the delivery of care to Medicare beneficiaries. This foresight 
resulted in a GAO study measuring Medicare's administrative 
complexities in which MGMA members participated.
    As Dr. Scanlon testified earlier, the GAO confirmed the 
difficulties which providers have in obtaining accurate, timely 
and consistent information from Medicare's carriers. MGMA is 
the Nation's oldest and largest medical group practice 
organization, representing more than 18,000 administrators 
working in organizations in which over 176,000 physicians 
practice medicine.
    In addition to my leadership position with MGMA, I am a 
practicing internal medicine physician and the chairman and CEO 
of the Virginia Mason Medical Center, an integrated, nonprofit 
medical center with 400 physicians, a 330-bed hospital and over 
5,000 employees in western Washington State.
    Too much time today is spent by practice personnel dealing 
with the innumerable and continually changing Federal rules and 
regulations governing coding, documentation, billing, 
referrals, coverage, credentialing and reassignment of 
physician billing rights, all at the expense of patient care. 
Complex regulations such as these create a gold mine for 
attorneys and consultants, but an administrative land mine for 
group practice physicians and administrators.
    My comments today focus on the administrative ills of the 
Medicare program and how these problems lead to government and 
medical group practice management inefficiencies, unnecessarily 
diverting limited resources away from patient care. While MGMA 
agrees with both the current and previous administrations that 
additional CMS funding is warranted, the efficiencies resulting 
from improving CMS's organization, communication and 
responsiveness should vastly improve the system without 
creating additional costs.
    I will begin my discussion with two examples or problems we 
have personally experienced with the administration of the 
Medicare program. My first example involves a recent routine 
audit conducted earlier this year by our Medicare intermediary. 
In certain circumstances, Medicare requires providers to 
determine whether Medicare or another payer will be the primary 
source of payment for a service provided. The fiscal 
intermediaries are responsible for occasional routine reviews 
to assure that a provider is collecting the proper 
documentation from hospital patients. A glaring example of a 
good thing taken to an inefficient extreme, the intermediary 
requested copies of specific documents for each service billed 
to Medicare for one entire month. The intermediary indicated 
that it would select at random only 60 encounters from the 
entire collection of documents for use in its audit.
    We informed the intermediary's representative that the 
request would involve many thousands of patient visits and 
claims and would require a dramatic time-consuming effort to 
produce. We were informed that these were the audit guidelines 
and that we were to produce the documents as requested.
    This example highlights the administrative overkill which 
practices must deal with on a routine basis. Over the next 5 
weeks, Virginia Mason personnel, from the director of 
operations to temporary staff we hired specifically for this 
audit, put in 1,019 hours and used 12 boxes of copier paper to 
collect, print and copy the requested documents. By the day of 
the audit, 33 boxes containing information for 17,000 patients 
and 43,000 claims had been collected. As promised, upon arrival 
of the auditor, he promptly chose 60 claims at random from the 
roomful of boxes. The auditor reviewed the documents quickly 
and then left having spent 2\1/2\ hours on site.
    In the end, the auditor turned up no problems with the 
claims. Our staff, however, was left to refile or destroy over 
60,000 documents.
    My second example involves the lack of coherence in 
Medicare rule presentations to providers. Medicare requires 
that physicians provide patients with an advance beneficiary 
notice, an ABN, of non-covered services. This well-intentioned 
requirement was designed to give the patient better knowledge 
of their coverage and potential out-of-pocket costs before 
accepting a particular service.
    However, the situations which providers must provide an ABN 
are not easily understood, and they vary from code to code. 
Further, these rules are not set out in a central location in 
CMS rules or carrier guidelines, but are instead strewn 
throughout various manuals and guidebooks.
    Recognizing the daunting task these rules posed to 
physicians and staff wanting to provide ABNs at the appropriate 
time, Virginia Mason was forced to accumulate and organize the 
rules for ourselves into an internal manual. And, after over 
300 person-hours of long and largely duplicative work, the 
manual was a remarkable 188 pages in length. This was for only 
one specific rule. Because each page must be reviewed for 
accuracy whenever any governing authority releases a revised or 
new policy, the work of updating the manual is never over. 
Needless to say, the task of creating usable Medicare manuals 
should not fall on providers whose time should be spent caring 
for patients.
    While I have outlined more detailed solutions in my written 
testimony, let me quickly turn to some basic steps the Congress 
can take to cure the administrative ills of the program. 
Congress should, number one, require HHS to create and 
distribute a user-friendly manual that contains all the 
information necessary for Medicare compliance.
    Number two, it should require HHS to publish and notify 
providers of policy and operational changes on four specific 
dates during the year, rather than the current haphazard 
    And number three, finally, require HHS to annually conduct 
a review of and report to Congress on the sources and 
complexities in the program as is required of the I.R.S. In the 
Restructuring and Reform Act of 1998.
    On behalf of the Medical Group Management Association, 
thank you for the opportunity to share our thoughts with you 
today. MGMA realizes that both CMS and its contractors are 
called upon to accomplish an extremely difficult and complex 
task. However, much more needs to be done to improve the 
administration of Medicare to eliminate waste and 
innefficiency. We should never lose focus on why the program 
was developed in the first place to provide quality patient 
care. Thank you very much.
    [The prepared statement of Dr. Kaplan follows:]

 Prepared Statement of Gary S. Kaplan, M.D., CMPE, Chairman, Board of 
            Directors, Medical Group Management Association

    Good morning. My name is Gary Kaplan, M.D. I am the chair of the 
Board of the Medical Group Management Association. On behalf of MGMA, I 
would like to thank the chairman, the ranking member, and the entire 
committee for convening today's hearing. I also would like to extend 
our gratitude to the Committee for its leadership in pursuing 
information on the costs and administrative burdens that the Medicare 
program imposes on both providers and the government.
    The hearings held by this Committee during the 106th Congress 
focused the attention of Members of Congress and the new administration 
on numerous administrative barriers affecting the delivery of care to 
Medicare beneficiaries. The foresight of this Committee resulted in a 
GAO study measuring Medicare's paperwork burdens in which MGMA members 
participated. This study and other efforts by the Committee led to 
policy makers actively discussing solutions to these problems.
    MGMA is the Nation's oldest and largest medical group practice 
organization representing more than 18,000 administrators working in 
organizations in which over 176,000 physicians practice medicine. 
MGMA's membership reflects the full diversity of physician 
organizational structures today. Our members work on a daily basis 
ensuring their practices provide the best care possible to Medicare 
beneficiaries, while at the same time navigating their medical groups 
through a sea of complex, and often contradictory rules, regulations, 
and policy memoranda. As a result, MGMA is uniquely familiar with the 
administrative requirements of Medicare's regulations.
    In addition to my leadership position with MGMA, I am a practicing 
internist and the Chairman and CEO of the Virginia Mason Medical 
Center, an integrated, non-profit medical center with 400 physicians 
and over 5000 employees. These health care professionals serve together 
in a multi-specialty group practice in Western Washington State with 13 
clinic sites and a 330-bed hospital. Virginia Mason hosts a thriving 
graduate medical education program, a prominent research center, and 
serves as a referral center for the entire Pacific Northwest.
    As the Chair and CEO of Virginia Mason I am charged with many 
diverse responsibilities. The physicians in our practice rely on me and 
my administrative staff to guide them through the remarkable 
complexities of today's health care delivery system. They require our 
business ``know how'' to allow them focus on the importance of their 
day-to-day clinical interaction with their patients. As the leader of 
an organization that honors strong commitment to quality and integrity, 
I am responsible for ensuring that each of our physicians, 
administrators and staff understand and abide by the rules that govern 
our work. Too much time is spent by practice personnel dealing with the 
innumerable and continually changing Federal rules and regulations 
governing coding, documentation, billing, physician referral rules, 
Local Medicare Review Policies, physician credentialing and the 
assignment and reassignment of patient and physician billing rights, at 
the expense of patient care.
    I have experienced, on a personal level, the growing frustration of 
most managers and administrators with the ever-increasing mass and 
complexity of Federal regulations. The varied level of communication, 
organization, and responsiveness from CMS and its contractors makes 
efforts to understand, much less comply with these rules, all the more 
difficult. Regulations such as the recently released privacy rule 
create a gold mine for attorneys and consultants, but an administrative 
landmine for our medical group practices.
    My comments today will focus on the administrative ills of the 
Medicare program and how these problems lead to Federal Government and 
medical group practice management inefficiencies, unnecessarily 
diverting limited resources away from patient care. While MGMA agrees 
with both the current and previous administrations that additional CMS 
funding is warranted, the efficiencies resulting from improving CMS's 
organization, communication and responsiveness will vastly improve the 
system without creating additional costs.
    Examples of Breakdowns:
    Let me begin with actual examples of burdens and breakdowns in the 
administration of Medicare. I will begin my discussion with two 
examples of problems we have personally had with the administration of 
the Medicare program, followed by those experienced by my colleagues 
nationwide. Through these examples, I hope to give you some insight 
into medical group practice management and the constant battles we wage 
with inefficiencies in the Medicare system. As you continue your 
oversight of this program and develop recommendations for improvements, 
I urge you to personally visit a group practice in your district and 
discuss Medicare's complexities with the practice administrator.


    In certain circumstances Medicare requires providers to determine 
whether Medicare or another payer will be the primary source of payment 
for the services provided. The fiscal intermediaries (FI) are 
responsible for occasional routine reviews to assure that a provider is 
collecting the proper documentation from hospital patients.
    Our FI notified us of a routine audit earlier this year. However, 
in a glaring example of a good thing taken to an inefficient extreme, 
the FI requested copies of specific documents for each service billed 
to Medicare for one entire month. The FI indicated that they would 
select, at random, only 60 encounters from the entire collection 
documents for use in their audit.
    We informed the FI representative that the request would involve 
many thousands of patient visits and claims, and would require a 
dramatic, time-consuming effort to produce. This work seemed neither 
necessary nor cost efficient given their ultimate need for just 60 
items. We were informed that these were the audit guidelines, and that 
we were to produce the documents as requested.
    Over the next 5 weeks, Virginia Mason personnel from the Director 
of Operations to temporary staff (hired specifically for this audit) 
put in 1,019 hours and used twelve boxes of copier paper to collect, 
print, and copy the requested documents. By the day of the audit, 33 
boxes containing information for 17,000 patients and 43,000 claims had 
been collected.
    As promised, upon arrival the auditor quickly chose documents 
representing 60 claims at random from the roomful of boxes. The auditor 
reviewed the documents quickly then left, having spent 2.5 hours on 
site. We were left with over 60,000 documents to refile or destroy.
    We understand that the auditor was simply following established 
audit guidelines. We believe, however, that there are more effective 
means of addressing Medicare's well-intentioned audit concerns.


    Medicare requires that physicians provide patients with an Advance 
Beneficiary Notice (ABN) of non-covered services. This well-intentioned 
requirement was designed to give a patient better knowledge of their 
coverage and potential out of pocket costs before accepting a 
particular service.
    However, the situations in which providers must provide an ABN are 
not easily understood, varying from code to code. Further, these rules 
are not set out in a central location in CMS rules or carrier 
guidelines, but are instead strewn through out various manuals and 
    Recognizing the daunting task these rules posed to physicians and 
staff wanting to provide ABNs at the appropriate times, Virginia Mason 
was forced to accumulate and organize the rules itself into an internal 
manual. After over 300 person-hours of long and largely duplicative 
work, the manual was a remarkable 188 pages in length. Because each 
page must be reviewed for accuracy whenever any governing authority 
releases a revised or new policy, the work of updating the manual is 
never done.
    We appreciate and applaud CMS' recent efforts to design a simpler, 
more patient-friendly model ABN form. However, we now ask for similar 
help in formulating simple, provider-friendly rules that govern when to 
use them.


    We also encounter inconsistencies between local coverage rules and 
a carrier's implementation of those rules. Often policy changes are 
made without notice to the provider. As an example, Local Medicare 
Review Policies (LMRPs) for the state of Washington do not designate 
coverage limitations for spirometry services (measurements of lung 
volume and air flow). However, our detailed review of Medicare denials 
discovered that these claims were routinely being denied as non-covered 
    After a time consuming investigation, we found that while 
Washington State LMRPs do not limit coverage for spirometry, other 
states within our Part B Carrier's area do. The Carrier had simply 
adopted these other states' standards and applied them to its entire 
area, effectively trumping our local LMRPs. This decision was made 
without creation of a formal policy and notice to providers. If it were 
not for our detailed denial review and extensive investigation these 
claims would have continued to be denied for completely unknown 
    As a result of our efforts in this area we understand that a 
carrier-wide sprirometry policy is now being drafted, and we applaud 
the carrier's responsiveness to our concerns. However, we feel 
providers should not shoulder the burden of discovering such 
inconsistencies through denial reports.


    Under current coding guidelines (Current Procedural Terminology-4, 
or CPT-4), if a physician performs two related procedures for a patient 
on the same day, one of the procedures will be paid at only 50 percent 
of the regular allowed amount, since the costs involved are presumed to 
be lower for the second procedure. In billing language, the guidelines 
require a -51 modifier to be attached to the second procedure code.
    The CPT manuals clearly indicate certain exceptions to this rule, 
however, including diagnostic cardiac catheter procedures. Thus, under 
CPT guidelines no modifier must be attached for these procedures, and 
full payment is indicated.
    However, despite this CPT guideline, our Carrier has determined--
without prior explanation or notice--that the above rule will indeed 
apply to diagnostic cardiac catheter procedures in its coverage area. 
It therefore processes the claims accordingly, and imposes the 50 
percent payment reduction. The carefully constructed and extensively 
used CPT manuals should not be arbitrarily reversed through Carrier 
discretion without a clear explanation and well published notice to 
those affected. And again, providers should not need to discover these 
rules through their after-the-fact denial reports.

                         CARRIER SYSTEMS ISSUES

    Our Medicare carrier credentials physicians for both their 
specialty and any appropriate subspecialties. A physician may therefore 
be credentialed not only for internal medicine, but also for a 
subspecialty in pulmonology. However, the carrier's claims processing 
system is able to receive only one of these data fields through its 
interface with the credentialing system, essentially ignoring any 
information on subspecialty.
    Under Medicare rules, only one physician visit from the same 
specialty may be charged in a single day. In complex cases, however, 
patients will frequently be seen by both an internal medicine physician 
who is coordinating the patients' care, and a second internist with a 
subspecialty in pulmonology. Because of the carrier's system 
limitations, the subspecialty of the second physician is ignored, and 
the pulmonologist's claim is simply denied as unnecessary.
    We recognize that this is a systems problem and are grateful for 
the carrier's intentions to upgrade its claims processing systems to 
address the issue. However, we spend tremendous time and effort in 
addressing these particular denials each day. Practices should not be 
forced to bear the burdens of correcting problems caused by inadequate 
carrier systems.


    On October 30, 2000, CMS sent carriers an electronic quarterly 
update of the Correct Coding Initiative (CCI). The CCI contains more 
than 121,000 pairs of codes that cannot be billed on the same claim to 
Medicare. Each quarter it is ``updated'' to add or delete various code 
combinations. Under CCI, claims are scanned and scrubbed electronically 
for ``disallowed'' code pairs, which are then automatically denied.
    Without any prior notice to providers or carriers as to its 
contents, the October version of the CCI disallowed the billing of 
sixty-six different evaluation and management (E&M) codes when 
performed on the same day as over 800 procedures. Providers were never 
told that as a result of this revision, in order to bill for a 
physician visit or other E&M code on the same day as any one of the 
800+ procedures, they were required to use the ``-25'' billing 
``modifier'' or annotation. Implementation of the CCI update resulted 
in thousands of claim denials. However, many carriers did not become 
aware of the cause of the denials until the provider community notified 
them of the problem. The carriers simply implemented the electronic 
edits received from CMS without knowing how the action would affect 
their claims processing operation. To further exacerbate the situation, 
carriers denied claims that actually used the correct modifier. In a 
memo sent out to the provider community outlining the problem in late 
January, CMS admitted that, ``Unfortunately, a number of carrier 
processing systems do not recognize the -25 modifier'' with certain 
    While parts of the October update were rescinded on February 8, 
2001, the original implementation occurred at tremendous cost to both 
providers and carriers. Not only did this communication breakdown 
between CMS, the carriers and ultimately providers, result in physician 
practices around the country having to resubmit thousands of denied 
claims billed from October 30, 2000 to February 8, 2001, it undermined 
the trust and credibility necessary to preserve a good working 
relationship between practices and carriers. As a side note, members of 
the Committee might be interested to know that if my, or any other 
practice, as a participating provider in the Medicare program, desires 
access to a copy of the quarterly CCI update, it is not accessible 
online and only available through NTIS Products (CMS's authorized 
distributor) for an annual $300, four issue, subscription fee or $85 
per single update, plus shipping and handling.


    Frequently, the relationship between providers, carriers and CMS is 
strained due to the ambiguous and, at times, incorrect information in 
the Medicare Carriers Manual itself. The Medicare Carriers Manual 
contains CMS's instructions to its carriers on how to administer the 
program. The following technical, yet illustrative example shines light 
on one such example of this problem. Under 1861(s)(3) of the Social 
Security Act, ``diagnostic X-rays, diagnostic laboratory services and 
other diagnostic tests'' are covered separately by Medicare from 
physician services. However, section 2070 of the Medicare Carriers 
Manual states ``for diagnostic X-ray services and other diagnostic 
tests, payment may be made only if the services are furnished by a 
physician or incident-to a physician service (which requires direct-
supervision by the ordering physician). This carrier manual provision 
is contrary to the Social Security Act Section 1861(s)(3) coverage 
provisions for these services and has caused numerous interpretive 
problems between providers and carriers concerning the appropriate 
level of physician involvement and supervision.

                       BILLING AND PAYMENT RULES

    Medical group practices trying to play by the rules are often 
blindsided by policies implemented without notice to or input from the 
effected parties. For example, in May 1998, CMS issued Transmittal No. 
1606, which drastically changed the billing rules for allergy 
immunotherapy. The new rule, which amended the definition of ``dose,'' 
meant that physicians could, in most situations, only bill for half as 
many doses as they had actually prepared. CMS's interpretation went 
against longstanding practice and was inconsistent with the CPT Code 
definition and the American Medical Association's CPT guidance. This 
change took effect without prior notice to the physician community. The 
effect of the adjustment reduced reimbursement in half for allergy 
immunotherapy billed under CPT Code 95165. It took the affected 
physician practices and their representatives two and a half years to 
get CMS to see the error of its policy. The policy was finally 
rescinded effective January 1, 2001 with the implementation of the 2001 
Medicare physician fee schedule.


    While some Medicare carriers and intermediaries are quite good, 
others are plagued with problems that may take months to resolve. 
Prompt action by Medicare carriers and intermediaries to resolve their 
own mistakes is critical to the Medicare program. The following example 
from a colleague of mine illustrates this point.
    In September 1999, a large multi-site practice organized as a rural 
health clinic, located in Michigan, received Medicare checks totaling 
$1,260,184.84, far in excess of their billed charges. The management 
service organization (MSO) that does billing for these clinics, 
immediately notified United Government Services, LLC, (UGS) their 
Medicare fiscal intermediary, about this overpayment and were told that 
the intermediary would get back to them on the issue. The MSO asked if 
they could return the checks but UGS instructed them to retain the 
payment until the problem had been sorted out. The MSO contacted the 
intermediary once a week for a month before they were told that there 
had been a problem with UGS' processing system that had produced this 
overpayment. UGS' Detroit office instructed the MSO to retain the money 
and that it would be recouped via withholdings from future payments. 
The MSO informed the Medicare intermediary that recouping the money in 
this way would take a minimum of 5 years. UGS' response was that the 
same type of erroneous payments had been sent to a number of other 
physicians. These incorrect payments were direct deposited to the 
physicians' accounts and as a result the physicians were drawing 
interest on the money. The clinic's payment had been sent in the form 
of a paper check and UGS felt that the clinic should have the same 
opportunity to draw interest on these incorrectly paid funds. The 
clinic did not want to cash the payments in the first place.
    To resolve this problem the MSO spent an extensive amount of time 
attempting to obtain corrected explanations of benefits so that they 
could ascertain what the correct payment should have been and then 
return the difference. This process took months and involved a great 
deal of back and forth between the MSO and the Medicare FI. Finally, on 
September 21, 2000, more than a year after the initial overpayment by 
the fiscal intermediary, these problems appeared resolved and the 
overpayment was returned to UGS the Medicare intermediary.
    The problem, however, was not resolved at this point. During the 
year in which the clinic and its MSO billing entity had been attempting 
to sort out the problem, UGS, the intermediary had, as they originally 
proposed, been withholding Medicare payments due to the clinic to make 
up for their original erroneous overpayment. When the MSO returned the 
overpayment, UGS continued to withhold payment for current claims. 
Efforts by the clinic to resolve this problem were unsuccessful until 
the HCFA Regional Office was contacted to assist the clinic in its 
dealings with the intermediary.


    The Medicare Carriers Manual, under Section 1030.1 (enrollment 
instructions to the carriers) states ``absent extenuating 
circumstances, [a carrier must] process an application for non-
certified providers within 45 calendar days of receipt of the 
application. For certified providers, process the application within 30 
calendar days, absent extenuating circumstances. If you need to review 
the application for incomplete or missing information, the processing 
time stops. Complete the review of the application and annotate what 
information is missing prior to returning application (emphasis 
added).'' In reality, this is not what occurs. If a carrier finds an 
error in the application, it sends it back to the provider at the first 
instance of an error taking place. Once corrected by the provider, the 
application goes to the ``back of the line'' to begin the process anew. 
Due to the complexity of the 34-page application and instructions, this 
resubmission process sometimes may occur several times before a 
physician is enrolled in the program. If a review was actually done in 
a complete manner as per the Medicare Carrier Manual, and the 
information annotated in its entirety, before being returned to the 
provider for correction, the process would work much more efficiently. 
Instead, it now may take up to 6 months to enroll a physician in the 
program. During this time period, a physician can examine and treat 
Medicare patients, but all claims resulting from those services cannot 
be submitted for payment until the certification process is complete. 
Situations like this are particularly aggravating given that the 
physician enrollment process has no statutory foundation in the 
Medicare Act and CMS has spent years trying to develop regulations 
governing the enrollment process.


    Education of providers concerning how to comply with rules and 
regulations is fundamental to the efficient administration of the 
Medicare program. I know of few, if any, physician practice managers 
who also happen to be lawyers. What is needed in the Medicare program 
are written materials and other unambiguous communications that explain 
the rules and regulations in a clear and concise manner. It is 
distressing to see directives from CMS to its carriers that impede the 
system's delivery of such necessary tools to its participating Medicare 
providers. For example in a January 25, 2001 Program memo (AB-01-12), 
from CMS to its carriers, CMS permits its carriers to charge a fee to 
providers for ``reference manuals, guides, workbooks, and other 
resource materials developed by the contractor designed to supplement 
or provide easy reference to formal Medicare provider/supplier manual 
and instructions.'' For practice managers, the idea that we may now 
have to pay carriers a fee for access to simplified and reasonable 
reference materials is difficult to understand. At a minimum, this type 
of guidance is clearly the wrong direction to take in providing proper 
education and communication between providers, CMS and the carriers.

                           PROPOSED SOLUTIONS

    There are many more examples such as these that I could share. The 
system is in dire need of change. But, instead, let me turn to 
solutions. While these are far from exhaustive, attending to the 
following would provide necessary first steps toward healing this 
ailing program.
     Congress should require the Secretary of Health and Human 
Services (HHS) to publish in the Federal Register, on no less than a 
quarterly basis, a notice of availability of all proposed policy and 
operational changes which may affect providers and suppliers including 
but not limited to changes to be issued through amendments to its 
carriers manuals and other CMS manuals, or program memoranda, program 
transmittals or operational policy letters, and of all such policy and 
operational changes issued in final form during the previous quarter. 
Simultaneous with publication in the Federal Register, the Secretary 
should transmit such proposed and final policy and operational changes 
to its Medicare contractors. The Secretary should require that its 
contractors notify all providers and suppliers in their service areas 
of such changes within 30 days of this Federal Register notice. The 
Secretary should further provide that any changes issued in final form 
will take effect no earlier than 45 days from the date such final 
change was noticed in the Federal Register. The Secretary should not 
make a change in policy or operations that affects providers and 
suppliers without going through the public notice process unless such 
change is required to meet a statutory deadline or is otherwise 
required by law. In that event, the Secretary must publish such change 
in the Federal Register along with the Secretary's justification for 
issuing such change in a manner other than that required.
     Congress should require the Secretary of HHS to create and 
distribute a user-friendly manual that contains all the information 
necessary for Medicare compliance. The manual should be organized, 
accessible (including on-line), free and up-dated quarterly. It should 
contain, in addition to actual regulations and program memorandum, 
etc., a summary of each issue, Q&A and other explanatory/supplemental 
material. I would be remiss not to note that as part of its small group 
compliance guidelines, the Office of Inspector General suggested that 
small groups create such a document on their own. Can you imagine, if 
HHS has not even accomplished this task with its many employees, how 
small medical group practices with few support staff could accomplish 
such a feat?
     Congress should require the Secretary of HHS to develop a 
site on the Internet, similar to what HHS has already developed for the 
Health Insurance Portability and Accountability Act section of their 
Web site, where Medicare providers and suppliers can post questions and 
obtain feedback. Responses should be maintained on the Internet site 
for reference.
     Congress should require the Secretary of HHS to furnish 
all education and training materials and other resources and services 
free of charge for providers, eliminating all user fees. The education 
materials should be drafted in easily understandable language with 
contact information should questions arise. The materials should be 
free and accessible on-line.
     Congress should require the Secretary of HHS to make every 
effort to educate not only the provider community but also its own 
staff and those of its contractors.
     Congress should instruct HHS to provide better oversight 
of its contractors to ensure uniform application of national policies 
and efficient administration of the Medicare program.
     Congress should require the Secretary of HHS to enhance 
and make public its contractor evaluations. The report should include 
all components of training, education, auditing and payment. Medicare 
providers and suppliers should be granted a formal process to provide 
feedback on the evaluation directly to CMS.
     Congress should require the Secretary of HHS to annually 
conduct a review of, and report to Congress on, the sources of 
complexity in the Medicare program as is required of the Internal 
Revenue Service in Section 4022 of the IRS Restructuring and Reform Act 
of 1998.
     Congress should provide the Secretary of HHS with the 
resources necessary to adequately manage the Medicare program without 
provider user fees.
    On behalf of the Medical Group Management Association, I thank you 
very much for the opportunity to share our thoughts with you today. 
MGMA realizes that both CMS and its contractors are called upon to 
accomplish an extremely difficult and complex task. MGMA members and 
staff are available as resources as you examine and address this 
critical issue.

    Chairman Nussle. Thank you very much, I appreciate that. 
Dr. Bean, my understanding is that Dr. Fletcher wanted to be 
here in person to introduce you and to welcome you to the 
committee. He has been called away to--he is involved in 
another small little health care project, as you may know, and 
is involved with a meeting with the White House, so he will not 
be here. But he extends his welcome, and I welcome you and we 
are looking forward to your testimony.

                  STATEMENT OF DR. JAMES BEAN

    Dr. Bean. Thank you, Mr. Chairman. I appreciate the 
invitation and the opportunity to speak to the committee today. 
And what I am here to talk about is the Medicare regulatory 
burden and how we have problems dealing with it from the 
    I'm a neurosurgeon, and I practice in Lexington, Kentucky, 
and have been there for 20 years. I want to preface it by 
saying when I went to medical school, I went to learn to take 
care of patients and treat people. The problem is that the time 
that I have to do that now is dwindling because the time that I 
have to spend filling out forms and following regulations is 
    I want to give you some examples, but these are just a few, 
and it is a problem that plagues physicians around the country.
    First, I want to talk about evaluation and management. And 
we heard a little bit about this before. I will give you a 
little bit different viewpoint. These are evaluation and 
management documentation guidelines. These are the reports that 
I dictate after I see a patient. What I used to do was write a 
report about what was wrong with the patient and what I was 
going to do. Now, if it was an easy problem, I would code it as 
a level 1 or 2, a simple service. And if it was a hard problem, 
I would code it as a level 4 or 5, a complex service. And if it 
was in the middle, like most are, it would be a 3, an average.
    We heard that doctors have asked for guidelines. In 1995, 
Medicare issued guidelines on what I had to write in a report 
to qualify for a given level of service. Now the problem is 
that HCFA or CMS cannot estimate how hard or easy a medical 
problem is. So they require that I write down a certain number 
of lines in each section of the report, whether the information 
had any relevance to deal with what the problem was. For 
instance, if it is a level 2 physical examination, I have to go 
through bullets, lines of items and report on 6 to 11 body 
parts to make sure it qualifies.
    Now, if it is the average, I have to look through and count 
12 to 18 body parts and make sure there is some report about 
that body part, whether it has anything in the world to do with 
the problem at hand. In order to make the document fit the 
level of service and comply with the rules, I have to look at 
grids. It is reproduced in the written report. It is a grid I 
have to look through and see if I have matched each one with 
the dictation to make sure I have enough information to qualify 
for the particular level of service which I have seen as the 
difficulty of the problem.
    If I don't put in enough of these bullets, they tell me I 
have committed fraud. That is no longer a medical report. That 
is an accounting document. The value of the service is not 
related now to the problem I took care of. It is related to the 
sheer volume of words, the number of lines that I put in the 
    Now, this is wrong. I did not ask for this. Physicians have 
objected to this format for 6 years. Since 1995, there have 
been four revisions, and we still do not agree with it. We need 
to give the medical report back to the doctors and stop using 
it as a billing statement.
    In regard to billing, I send claims to Medicare for the 
services I do and our Medicare carrier processes them. If we 
are lucky and they are complete and accurate, they pay them. It 
sounds easy, but the problem is that the processing is so 
complex that some get lost entirely, some are rejected by 
computer edits that I do not have access to and do not know 
what they are. Some are sent to other insurers without my 
knowledge, and honestly, some get delayed so long that it costs 
me more in clerical time to call and resubmit and appeal, that 
it is cheaper just to throw the claim away.
    If I appeal a denial right now in Kentucky, I am told it 
takes 12 months to get it resolved. It is wrong. It just simply 
is wrong and needs to be simplified and needs to be fixed. 
There are many other comments in my written testimony, but I 
want to mention one in particular that is not directly 
Medicare, but it is a HCFA regulation and does apply to 
Medicare patients, this is the EMTALA regulation. EMTALA is the 
Emergency Medical Treatment and Active Labor Act. This is a 
problem alarming to doctors, but I do not think anybody in 
Congress is aware of it.
    The law was passed to prevent patients from being turned 
away from emergency rooms or transferred somewhere else because 
they had no money. Congress wrote the law in 1986. HCFA wrote 
the regulation for the law in 1996. And it so far exceeds the 
original wording, that it is difficult for me to treat a trauma 
patient now and exposes them to more risk than existed before 
the regulation. Let me give you an example.
    If I am doing surgery in hospital A in Lexington and I am 
covering three other hospitals and I may be there 4 hours. And 
the patient comes to the emergency room in hospital B with a 
serious problem, I cannot ask for that patient to be sent to me 
to be treated promptly and if necessary--if it is necessary, to 
get them into surgery quickly. The regulation prevents that. I 
am unable to leave the operating room and I am in violation if 
I do not leave the operating room immediately, and I am in 
violation if I ask for the patient to be transferred.
    If I am found in violation, I will be fined $50,000, and 
there is no way out of it for me. Every day I schedule a case, 
and I am on call, that is my risk, because of the regulation.
    I have more in the written comments and I thank you for the 
opportunity to be here. And if there is also anything else I 
can do to help the committee, I would be glad to.
    [The prepared statement of Dr. Bean follows:]

  Prepared Statement of James R. Bean, M.D., Neurosurgical Associates

    Chairman Nussle, and members of the committee, thank you very much 
for inviting me here today to speak to you about problems that 
physicians face in dealing with the regulatory burdens of Medicare. My 
name is James R. Bean, and I am a neurosurgeon in private practice from 
Lexington, Kentucky. As you all might imagine, when I went to medical 
school I went to learn how to treat and take care of patients. 
Unfortunately, the time I spend with my patients is dwindling because 
of the ever-increasing number of rules and regulations issued by 
Medicare. Today I will share with you some examples of the effect 
Medicare regulations are having on my medical practice, although they 
are the same problems that physicians around the entire country are 
    I am one of four neurosurgeons in our practice, which also employs 
an additional 19 employees to perform all the necessary medical office 
administrative functions, such as scheduling, transcription, medical 
record keeping and billing and collections. I see 30-40 patients per 
day, 2 or 3 days per week, and perform surgery 8-10 hours per day, 2 or 
3 days per week. In additional to my regularly scheduled work, I also 
serve ``on-call'' to several hospitals, providing care to patients with 
emergency medical conditions. I have been in practice in Lexington for 
21 years, and have been increasingly frustrated with Medicare's 
regulatory burden. This burden takes several forms in a physician's 
office, creating unnecessary delays, expenses, and frustrations without 
perceptible benefit--either to the patient or the physician. Many of 
these regulations also expose physicians to potential civil penalties 
imposed by the Centers for Medicare and Medicaid Services (CMS--
formerly HCFA) and the Office of Inspector General (OIG). Whether any 
benefit accrues to the Medicare program, however, is unclear. If it 
does, it is at the expense of enormous time, money and effort, which 
would be better used for treating patients and solving their health 

                         MEDICAL DOCUMENTATION

    Evaluation and management (E&M) services are physician office or 
hospital visits that do not include a procedure, such as surgery. E&M 
services are categorized according to the AMA's Current Procedural 
Technology or CPT coding system. Visits are classified according to the 
location of the service and the type of service performed, such as new 
office visit, follow-up visit, new hospital consultation, follow-up 
hospital visit, and so on. Each type of code has 3 to 5 levels of 
complexity, ranging from simple to highly complex, with the more 
complex codes paid at higher rates. In my practice, E&M services 
account for roughly 70 percent of all the services that I provide.
    An E&M service involves a history, a physical examination, and an 
assessment and a plan of action (medical-decision making). Following 
the visit with the patient, the physician documents this E&M service in 
the medical record, which is meant to convey the important medical 
information about the patient, the problem he or she is experiencing, 
and what course of treatment is required. The sole purpose of the 
medical record should be to remind the physician and office personnel 
later of what was found and decided that day, and to communicate this 
information to other physicians who need to also evaluate and treat the 
    Beginning in 1995, however, Medicare began to define what 
particular items had to be included and documented in the medical 
record in order to qualify for payment at a particular level of 
service. Because of physician objections to the confusion and 
complexity of the rules, the requirements were revised in 1997, 1999 
and 2000. Each time physicians objected just as strongly to the 
requirements as being burdensome, confusing and not reflective of the 
practice of medicine.
    Medicare's E&M Documentation Guidelines are most objectionable 
because they require ``bullet counting'' of clinical elements necessary 
to be included in the medical record, whether or not those items have 
any relevance to the patient's problems. For example, the neurological 
physical examination section has 21 items. Each level of service has a 
requirement for notes about an arbitrary number of items, such as 12 
items for a middle level (level 3) office evaluation and 6 items for a 
level 2 evaluation, regardless of whether the information is helpful in 
understanding the patient and the problems.
    In order to make the document fit the level of service and comply 
with Medicare rules, I have to examine a complex series of grids with 
each dictation to see if enough information has been included in the 
medical report. In order to attempt to comply with this system, 
physician offices have attempted to design standardized templates and 
reference guides, but these are often just as incomprehensible as the 
underlying regulations. I've attached a sample template, which 
illustrates just how complicated this system is.
    Medicare's E&M Documentation Guidelines have tried to transform the 
medical record into a billing and accounting document. The Guidelines 
do not reflect the actual practice of medicine. They are so complex and 
inflexible that physicians have to spend extra time adding extra 
information that is not medically relevant, in order to avoid rejection 
of the claim or the accusation of fraud. When determining the 
appropriate level of E&M service, there are no right or wrong answers, 
but only shades of gray. From a doctor's point of view this is 
appropriate so we can ensure that the system has enough flexibility so 
clinical differences can be captured in the medical record 
appropriately. Unfortunately, these guidelines have attempted to apply 
a black and white approach, which appeals to the regulators and 
auditors. The art and science of medicine cannot always be described to 
satisfy the non-physician auditor, while at the same time satisfying 
doctors' and patients' medical needs.
    I understand that HHS Secretary, Tommy Thompson, has requested that 
CMS place this project on hold, so we take a step back and reevaluate 
the kind of documentation system that is necessary. I, personally, 
would welcome this review and urge the Committee to support this review 
process so a new more workable system can be developed.

                      PROCEDURE CODING AND BILLING

    All physician services are identified by a CPT code for purposes of 
billing Medicare. There are over 8,000 CPT codes describing all the 
various medical procedures currently in use. For instance, the CPT code 
61510 is the code for an operation for a brain tumor. Sometimes a 
second code is used to describe something done during the same surgery, 
but not included in the description of the primary code. For instance, 
sometimes a shunt must be placed when the tumor has blocked spinal 
fluid drainage in the brain. In that case as second CPT code, 62192, 
would be submitted as well.
    The physician office fills out a Medicare claim form with the 
patient information, the description of the service, and the charge for 
the service. The claim is submitted electronically or by mail to the 
local Medicare insurance carrier, who reviews the claim and returns the 
payment to the physician office. If all the information on the claim 
form is correct, the claim is processed; if not, the claim is rejected. 
The claim can be resubmitted by the physician's office with corrections 
made to the information, or rejections may be appealed.
    Medicare uses computer ``edits'', or screens to identify codes that 
should not be submitted together. Some edits are simply wrong, either 
because of misunderstanding by the agency, or just due to human error. 
To illustrate how frustrating a wrong error can be, I'll relate to you 
my experience with a claim for burr hole drainage of a subdural 
hematoma (blood clot on the brain), where the local Medicare carrier 
rejected CPT 61154. The rejection code (CO-97) indicated that the 
``payment is included in the allowance for the basic service/
procedure.'' This obscure language means that the service payment is 
included under another procedure code submitted at the same time, 
termed the primary procedure. The absurdity is that there was no other 
code or primary procedure submitted and 61154 was the primary code. 
Since the computer glitch prevents recognition of 61154 as the primary 
code, it cannot accept the claim and no payment can be made. Our office 
called the Medicare carrier and was told that this was a ``system 
error'' and that the bill could be resubmitted. There was no assurance 
that the computer error would be eliminated or that the claim would not 
be rejected again.
    Claims payments are rejected for numerous other erroneous reasons. 
Often Medicare identifies a second payer it believes should be the 
primary payer, such as auto accident insurance, and the claim is 
forwarded without notification of the practice. In our practice, we had 
an instance of Medicare identifying a Workers Compensation carrier 
claim as the primary payer through the existence of a 30-year unsettled 
claim. That service was never paid by anyone. Usually there is little 
recourse. If a rejected claim is appealed to our Medicare carrier, the 
current delay in resolving the claim in Kentucky is approximately 1 
    The time spent by office personnel on resubmitting and appealing 
claims often costs more than the amount of payment received, even if 
the resubmission or appeal is successful. For many claims this means it 
is less expense to the practice to forget the claim than to use 
personnel time on repeated telephone calls and repeated claim 
submissions. We have examples of claims resubmitted 8 or more times, 
with or without final payment. We have examples of claims simply lost 
by the Medicare carrier or receipt never recorded. When the claim is 
not acknowledged to have been received within 120 days of service, it 
becomes ineligible for processing, and payment is never made.
    The ever-changing rules for submitting claims are so extensive and 
labyrinthine that nobody can keep track of them all, or of the changes 
made each year. There are 6 different categories of laws and 
regulations that I am expected to know, and each involves hundreds and 
even thousands of pages.
    1. Federal statutes
    2. CMS Regulations
    3. Medicare Manuals & Program Memos
    4. Medicare Carrier & Intermediary Policies
    5. Bulletins & LMRPs (Local Medicare Review Policies)
    6. Generic Rules (e.g. CPT coding rules)
    The rules in levels 2-6 sometimes conflict with each other, so that 
it becomes literally impossible to remain in compliance with the rules. 
Certainly a reduction in the number of irrational and conflicting rules 
is not just reasonable, but urgent. CMS should also standardize the 
timetable for releasing new rules and regulations (for example on a 
quarterly basis), so physicians can better keep-up with the 
requirements of these rules. In addition, CMS has an absolute 
responsibility in educating physicians about these rules and 
regulations so they are able to be compliant.

                        PHYSICIAN CREDENTIALING

    Physicians who apply to participate in the Medicare program must 
submit an application. Applications from hospitals for privileges and 
private insurers for participation are common. The application required 
by the Medicare program is the lengthiest and most difficult to 
understand of any that a physician must complete in the course of 
practice. The application form has 10 pages of instructions explaining 
how to fill out the form, and 17 pages in the application itself.
    The rules of the application are still confusing, despite, or 
perhaps because of the lengthy instructions. As an example, an 
application for a physician assistant (PA) who joined our practice in 
November 1999 took until November 2000 to be approved. The application 
was returned several times before the problem could be understood and 
resolved. The problem turned out to be that the PA had different 
Medicare Personal Identification Number (PIN) assigned to the PA while 
working several years before at another practice. The carrier was 
unable to simply inform our practice that a prior PIN number in their 
records was the source of conflict. We therefore had to fill out a 
different application form.
    This is one area that the Committee should recommend CMS make some 

                           EMTALA REGULATION

    The Emergency Medical Treatment and Labor Act, or EMTALA, was 
passed in 1986 in response to reports of patient ``dumping'', or 
transfer from one hospital to another because the patient lacked 
insurance coverage. While certainly laudable in its purpose, since it 
was passed, CMS has issued a series of regulations related to EMTALA, 
which have expanded the scope of the law increasing the burdens on 
physicians to comply with the complex requirements of these rules. In 
addition, in some instances, the regulations make it more difficult to 
provide effective treatment, and rather than protecting patients the 
rules may actually endanger them.
    Lexington has 4 hospitals for which our practice covers emergency 
call. When I receive a call for an emergency transfer from a hospital 
outside of Lexington while I am performing surgery, the patient is 
transferred to the hospital at which I am operating. If the patient 
arrives while I am still in surgery, the patient can be stabilized and 
evaluated in our emergency department and diagnostic scans are 
performed, which I can review while I am still in surgery. Once I 
decide if emergency procedures are necessary, I can make arrangements 
for treatment, and even prepare that second patient for emergency 
surgery, to follow the case I am completing. With the patient at the 
facility where I am operating, I can make decisions and arrangements 
that prevent any delays in treatment.
    If, on the other hand, I receive a call from one of the other 
hospitals in Lexington for an emergency patient with a similar problem, 
and the most efficient treatment would be to have the patient 
transferred to the hospital at which I am operating, EMTALA regulation 
defines the transfer in this case as a dumping violation, so treatment 
decisions are delayed until I can finish the surgery, travel to the 
other hospital, see the patient, arrange new diagnostic studies if 
needed, and arrange for emergency treatment, even possibly surgery. 
This enforced delay could result in additional injury that could have 
been avoided if the in-city transfer had been permissible.
    In addition, I am also potentially liable for not responding to the 
second hospital, even though I may be at hospital one performing 
surgery and unable to respond. In order to strictly adhere to EMTALA 
regulation as written, I would be unable to schedule or perform any 
surgery during the days I am scheduled for emergency call at any of the 
4 hospitals. This would allow me to arrive at any of the 4 hospitals 
within 30 minutes of being called. It would also reduce my availability 
for routine surgery by 25 percent. If I were a solo neurosurgeon in a 
town with only one neurosurgeon, I could never perform elective surgery 
without being in violation of EMTALA's availability rule. It is the 
most inefficient and wasteful way to manage the time and availability 
issue, it ignores common practice that worked prior to the regulation, 
and creates unnecessary risks both for the patient and the surgeon.
    There are other examples of the absurdity of the application of 
this regulation. One hospital at which I perform surgery commonly 
utilizes an MRI scanner separated from the hospital grounds by \1/2\ 
block. Often patients who come to the emergency room at that facility 
need an MRI scan to decide on proper treatment. Accomplishing the scan 
requires an ambulance to transfer the patient the \1/2\ block to obtain 
the scan and return to the hospital emergency department. That process 
constitutes a ``transfer'' under EMTALA regulation and a violation of 
the rules. In short, the process of obtaining the necessary emergency 
diagnostic studies requires a violation of EMTALA regulation.
    I seriously urge the Committee to explore in detail the complexity 
and burdens of the EMTALA regulations, and the potential damaging 
effect that they are having on patients, physicians and hospitals 
    Thank you for your attention and the opportunity to relate a few of 
the very real and onerous problems that CMS regulation has created in 
my daily medical and surgical practice. I look forward to being a 
resource to the Committee as you evaluate solutions to these and other 
problems. These examples are, of course, only the tip of the iceberg, 
and comprehensive change in how CMS operates would likely address most, 
if not all of these.

    Chairman Nussle. Dr. Moon, thank you and we are pleased to 
accept your testimony now.


    Ms. Moon. Thank you, Chairman Nussle. I am very pleased to 
be here today. This hearing has been an interesting one in 
terms of raising many of the very practical issues facing the 
Medicare program. I was particularly pleased that so much 
attention is being focused on the current traditional Medicare 
program, which currently serves 86 percent of all Medicare 
beneficiaries, and for a very long period of time to come, will 
be the main source of coverage for most seniors and persons 
with disabilities. So as a consequence, the emphasis on 
improving this basic part of the program, is very important.
    My testimony today examines the principles that were laid 
out by the Bush Administration regarding Medicare reform. As 
yet, these principles are not very well fleshed out. Someone 
has to interpret them consequently. I focus on four issues that 
derive from those eight principles.
    The first is the need for improved benefits. The promises 
for only an option for drug benefits concerns me from the Bush 
Administration principles. Further, there are a number of 
issues regarding additional coverage beyond drugs that have 
come out in the testimony today. Some of the questions raised 
today indicate that major modernization for Medicare requires 
comprehensive coverage.
    One of the key issues facing the Medicare+Choice plans is 
that many of them feel they cannot offer a good benefit for 
individuals unless they offer more comprehensive services than 
the Medicare coverage services. So though these plans may be 
paid enough, for example, to offer Medicare coverage services, 
they are not paid enough to offer additional benefits. They 
believe that extra benefits, such as prescription drugs, are 
necessary. And the answer to the question about oral drugs for 
people with end-stage renal disease is a very simple answer. 
These drug supplements are not covered when they are taken 
orally because fear of the slippery slope. If you offer 
prescription drugs in that instance, why not in other 
    It is very difficult to manage or control a health 
insurance program unless you have good comprehensive coverage. 
It is difficult to imagine, for example, having good disease 
management or other coordination of care if you cannot say to 
people, ``You should take this prescription drug and it is 
covered.'' If you say, ``you should take this prescription 
drug, and I hope you can find a way to get coverage,'' you are 
going to have problems with that program.
    The second issue raised in the administration's principles 
is how to structure the program over time. Here my concern is 
to make sure that the solutions that ultimately get proposed 
actually resolve Medicare's real problems. There are often 
unrealistic expectations that the private market will do better 
than traditional Medicare, for which there is little or no 
evidence. And moreover, the problems with the market for 
Medicare+Choice suggest that a number of issues need to be 
resolved before we move wholeheartedly into that area.
    The issue of regulations also is relevant in this area. How 
good will protections for beneficiaries be? I do some work with 
the Medicare Rights Center in New York which runs a national 
HMO hotline for beneficiaries. Those on Medicare have problems 
that range from the very simple issue of what to do about extra 
bills that they should not be receiving and shouldn't pay if 
they are in a HMO. This can be resolved easily. More serious 
are denials of services that are clearly covered under the 
Medicare program, but the HMO chooses not to cover. And after 
the HMO covers a service for one individual, 3 weeks later the 
HMO is again refusing to cover it for another individual. So 
one of the issues about regulations and control is to make sure 
that the protections are there for beneficiaries if there is to 
be a greater reliance on these private plans.
    The third issue raised by the Bush Administration's 
principles is to strengthen the program's financial security. 
We have already heard a lot about this today. Mr. Walker made 
very good points about solvency sometimes being a distraction 
from some of the key issues. We are going to have to, as a 
society, make very hard choices about this program. The number 
of people covered by the program is going to double. The share 
of the population covered by the program is going to go from 1 
in every 8 to 1 in every 5. It simply is not easy to deal with 
these changes through greater efficiency or reducing fraud and 
abuse. Moreover, the program now covers only about 50 percent 
of the health care costs of seniors and persons with 
disabilities, so it is not a generous program. One way or 
another, people are going to have to get care and one of the 
questions is how as a society are we going to share that.
    Finally, I have little to add in terms of management and 
regulatory changes after hearing the very dramatic testimony 
from a number of witnesses today, except for the plea to keep 
in mind that beneficiary needs are important here as well. 
Information is the biggest gap for beneficiaries right now. The 
organizations that do counseling for seniors do a very good 
job, but they do it on a shoestring and can help only a few. 
Modernization and improvement, and getting rid of unnecessary 
regulations are important goals. But we are going to have to 
put money behind this system if we want to see real 
    When you think about all the things that need to be done, 
my conclusion is that it is going to take additional resources. 
And as a society, we are going to have to decide how to do that 
in a fair and reasonable way, protecting beneficiaries who 
currently are in the program and for the foreseeable future who 
will need our help. Thank you.
    [The prepared statement of Ms. Moon follows:]

 Prepared Statement of Marilyn Moon, Senior Fellow, the Urban Institute

    Chairman Nussle, Congressman Spratt, and members of the committee: 
Thank you for the opportunity to testify today on Medicare reform 
issues. My testimony today examines the eight principles for reform of 
the Medicare program recently put forth by the Bush Administration. 
These principles essentially raise four specific issues that I discuss 
     The need for improved benefits, including prescription 
     How the program should be structured in the future;
     How to strengthen the program's financial security; and
     Management and regulatory changes to improve the operation 
of the program.
    More details on these principles are needed to understand the 
intent of the administration, but they do address the range of issues 
that need to be considered in reform. However, in much of the initial 
discussion of these principles, beneficiary concerns are raised mainly 
in the context of expanded coverage. But beneficiary concerns should be 
a part of each of the issue areas; indeed, the program is intended to 
aid seniors and persons with disabilities and that should be at the 
forefront of debate about Medicare's future.

                           IMPROVED BENEFITS

    The first two principles outlined by the Bush Administration were 
for the option of a prescription drug benefit as part of a modernized 
Medicare, and for better coverage for preventive care and serious 
illnesses. Prescription drug coverage is a major concern and one on 
which there seems to be considerable agreement. However, this principle 
only promises an option for such coverage, implying that it would 
likely require an expensive premium contribution from beneficiaries and 
hence would not be universal. The second principle refers to coverage 
of certain screening and preventive services that could be further 
expanded, building on changes that have already been made in this area. 
But even more important, a goal of better coverage for serious 
illnesses refers to adding protections for beneficiaries who incur 
substantial expenses, usually done by placing a cap on total out-of-
pocket spending (referred to as stop loss).
    The inadequacy of Medicare's basic benefit package is now well 
known. Beneficiaries have had to scramble to fill in the gaps by 
supplementing Medicare with Medicaid, employer-sponsored insurance, 
Medicare+Choice enrollment, and/or private supplemental plans 
(Medigap). As a consequence, health care delivery for beneficiaries 
becomes complex and it is not always efficiently delivered since many 
of those with extra coverage have most of their cost sharing filled in 
as well. Further, those who rely on Medigap or who have no coverage 
experience very high out-of-pocket costs for meeting their health care 
    It is not surprising, then, that proposals to reform Medicare often 
include changes in the benefit package. However, such changes are 
sometimes viewed as a means for generating savings for the Medicare 
program. Since Medicare only covers a little over half of the health 
care expenses of the enrollee population and most beneficiaries are 
spending a rising share of their incomes each year on health care, it 
is difficult to ``improve'' the benefit package for beneficiaries in a 
way that saves costs. Unless additional taxpayer dollars are put into 
the program, few would benefit from such changes.
    For example, even the commitment of $300 billion over 10 years for 
a prescription drug benefit will cover only about 23 percent of the 
spending that is expected by beneficiaries on drugs over the next 10 
years. It is simply not possible to satisfy demands for a good drug 
benefit without more resources than what has been allocated at present. 
Beneficiaries will be very disappointed with this level of spending 
since it will do little to protect them from high out-of-pocket costs 
in the future. If drug spending costs grow at 10 percent per year, 
beneficiaries will face expenses of nearly $4500 by 2010. Private 
supplemental coverage is not adequate and likely will deteriorate as 
employers and HMOs pull back their drug coverage and Medigap premiums 
become prohibitively expensive. Further, beneficiaries' incomes will 
grow at a rate much less than 10 percent each year, causing them to 
devote an ever higher share of income to drug expenses.
    Adding prescription drug coverage to Medicare offers an opportunity 
to finally improve the overall benefit package, but this would increase 
taxpayer costs. From society's standpoint, care would be delivered more 
efficiently, but the public burden would rise. Any such plan likely 
needs to offer stop loss, keep the deductibles from becoming a barrier 
to care, and avoid changes that would burden the sickest beneficiaries. 
In particular:
     A combined A/B Medicare deductible would result in many 
people facing higher costs. While persons hospitalized would benefit 
from a combined deductible of $500, for example, five out of every six 
beneficiaries would not. Inattention to affordability issues may create 
problems with access to care. A high deductible on physician services, 
for example, may discourage some beneficiaries from getting needed care 
in a timely manner.
     It is probably simpler to retain two deductibles, 
adjusting their relative levels, than to combine them. This is 
consistent with the practices of many private plans, including those in 
FEHBP. The burden from the hospital deductible could be reduced and the 
Part B deductible increased without creating as much of an imbalance 
between those who have no hospital stay and those who do.
     Any change in the benefit package to eliminate the need 
for Medigap coverage is not feasible unless it contains stop loss 
protections--that is, a guaranteed amount above which the government 
(and not the individual) pays for any additional cost sharing. The 
problem with stop loss has always been that when it is low enough to be 
attractive, it becomes very expensive. For example, many private plans 
have $2000 or $2500 limits on out-of-pocket expenses. Under Medicare, a 
less costly limit of $4000 would probably not get many people to forego 
other insurance.
     If cost sharing is added to home health or to the early 
parts of a hospital or skilled nursing stay as some have suggested, 
costs would rise substantially for the sickest and poorest 
     High option/low option approaches could leave many 
moderate income individuals in the low option plan if the premiums are 
high for a better benefit package. This would largely defeat the 
purpose of offering an improved benefit package. Particularly if drugs 
are only in the high option portion, this approach would likely lead to 
risk selection (in which individuals with high drug expenses 
disproportionately enroll in the high option plans)and other problems 
for creating a well run program. As an essential part of the treatment 
of health care, drugs are now integral to care and should be part of a 
basic benefit package. Would we consider a low option plan that 
excluded hospitalization, for example?
     Low income protections need to be expanded and perhaps 
moved into Medicare itself if premiums go up to add drugs to the 
benefit package.
    Finally, another important issue relating to the goal of improving 
benefit coverage is whether such changes will or should be held hostage 
to other changes in Medicare. Good care either in fee-for-service 
Medicare or under private plan options requires comprehensive coverage 
of essential health care goods and services. This includes prescription 
drugs. It does not matter what shape reform takes, the need for 
improved coverage will still be there. And, in fact, adding drug 
coverage is a necessary element to reduce risk selection problems and 
to allow better management and coordination of care.


    This issue incorporates the third and fourth principles offered by 
the Bush Administration. The third principle is a promise extended only 
to persons above a certain age that the traditional program would 
remain as an option. Presumably this means no improvements in the 
benefit structure such as those described above; such improvements 
would only be available to those in private plans and perhaps to 
beneficiaries paying a substantially higher premium for a high option 
fee-for-service benefit. Over time, the principles imply that 
traditional Medicare benefit would be eliminated. The fourth principle 
promises more options like those available to Federal employees. 
Together, this suggests major emphasis on a premium support or a 
managed competition approach with a much larger role for private plans.
    Health care analysts have long raised the potential benefits of 
encouraging coordination and flexibility of care in a capitated 
setting, giving plans incentives to find the least expensive ways to 
deliver care within a budget. In theory, this should reduce the overuse 
of services associated with fee-for-service medicine and offer 
opportunities to insurers to try out new approaches. And, if there is 
price competition, economic theory would suggest that this will keep 
the pressure on plans to be attractive to potential enrollees, 
increasing their market share and delivering care efficiently.
    But in practice, will this really mean an improvement in health 
care for Medicare beneficiaries? In Medicare, FEHBP, and private 
insurance in general, problems with managed care and the market for 
insurance cast doubts on how well such a system would work. In 
Medicare, for example, such plans fail to save the Federal Government 
any money because of the cream skimming of low cost beneficiaries. 
Nonetheless, plans have engaged in many activities that put 
beneficiaries at risk. Supporters of private options often put the 
blame for problems with Medicare+Choice on HCFA's management. The 
problems facing Medicare+Choice have a complex set of causes, but 
cannot be explained away only by poor management by government.
    Plans are attractive to beneficiaries because they offer additional 
services. In fact, the ads that many plans run suggest the importance 
of vision, dental and drug coverage and mention only in small type that 
care must be received in network. Since plans have received payments 
higher than necessary for Medicare-covered services and because they 
may be providing those services at lower costs, they have been able to 
subsidize their offerings of additional benefits. But, over the last 3 
years, these extra benefits have been substantially reduced in many 
plans. For example drug coverage has declined from 84.3 percent in 1999 
to 70 percent having such coverage in 2001. Withdrawals have left a 
number of beneficiaries scrambling to enroll elsewhere or to get 
Medigap coverage if they return to traditional Medicare. And when drug 
coverage has been retained, stringent caps have been applied or 
substantial premiums levied on the beneficiary. The cross-subsidy for 
these extra services has been reduced. Plans and beneficiaries have 
come to depend upon subsidies not available to those in traditional 
Medicare, creating troubling inequities.
    In addition, beneficiaries have not been treated well by some of 
the private plans. Private plans have sometimes sought to save costs by 
limiting access to new technology, to exclude from their plans sub-
specialists with considerable experience in treating certain types of 
illnesses, and to put in place other barriers to getting care. If done 
carefully and with appropriate medical practice in mind, these methods 
may be a successful way of holding down costs. But, many researchers 
have concluded that these are sometimes arbitrary or problematic 
barriers. The ``flexibility'' available to plans can be problematic and 
that at least in some cases, patients do not have access to all 
Medicare-covered services. Ironically, these examples illustrate denial 
of ``choice'' in a form that is likely to be of more importance to 
beneficiaries than what is often touted as an advantage of private 
plans offering ``choice.''
    The organizations that contract with Medicare to provide counseling 
and information or who run specific hotlines for Medicare beneficiaries 
often find a disturbing pattern of denials of care. Plans routinely 
deny claims that have minor errors, with no explanation to 
beneficiaries. But most important, when people are sick, and least able 
to battle the system, arbitrary rules and the ``flexibility'' that 
plans utilize can result in egregious cases of denials. Plans are 
supposed to cover all Medicare-covered services, but clients of the 
Medicare Rights Center, which runs a national HMO hotline, have 
included people denied a type of cancer treatment specifically approved 
via a national Medicare coverage determination, for example. Others are 
sent to physicians only barely qualified to provide specialty care.
    In many ways, the Medicare+Choice benefit has been one of the less 
successful changes that have occurred in Medicare. Despite payments 
that should be sufficient to compensate plans for the costs of 
Medicare-covered services, the number of withdrawals of plans and 
cutbacks in services for those who remain reached a peak at the end of 
2000. The resulting disruptions for beneficiaries have been 
problematic. At present, the program is neither saving money for the 
Federal Government nor achieving good, stable care for many of its 
enrollees. Private plans certainly have a role to play in Medicare, but 
many of the issues described above need to be resolved and the current 
program needs to be working well for beneficiaries before greater 
reliance is put on private plans under Medicare. The problems go well 
beyond government management issues.


    Assuring Medicare's viability into the future is extremely 
important. But the Bush Administration set off on a misleading track in 
its budget submission that suggested that general revenue financing is 
not a legitimate source of funding for Medicare. This is despite the 
fact that such financing has been authorized in statute since 1965. 
Suggestions to combine Parts A and B of the program to generate a new 
test of solvency effectively use the existence of a trust fund as a 
means for controlling the costs of the program rather than of 
protecting it.
    If there is a national commitment to Medicare and its future, the 
level of funding and support needs to be determined on the basis of 
what is needed to provide reasonable benefits to those eligible for the 
program. Broader views of financing and solvency are needed in the 
debate on Medicare's future. According to the dictionary, a program is 
solvent if it is ``capable of meeting financial obligations.'' If as a 
society we decide to support the Medicare program, we have the 
capability of doing so. Hard choices will need to be made about what we 
want to support as a society, but a new measure of solvency is not 
helpful unless it realistically balances goals and resources. This 
cannot be funded out of fraud and abuse reductions, nor from 
``efficiencies'' from the private sector. To serve one in every five 
Americans in 2025 will require a substantial commitment of resources.


    The last three principles on the Bush Administration's list refer 
to the appropriate oversight and administration of the program. 
Although the principles do not raise the issue of resources for such 
improvements, that discussion is at the heart of the issue. In the 
1990's, Medicare became a much more complex program. The private plan 
option grew substantially so that essentially the Health Care Financing 
Administration had to oversee two very different types of Medicare 
programs. It did so in an environment of increased responsibilities 
beyond Medicare (i.e. SCHIP and HIPAA), of essentially no new 
resources, and of considerable hostility. In that context, it would 
have been surprising had HCFA been able to meet the unreasonable 
expectations placed on it.
    A new administration offers opportunities for reviewing old 
practices and taking a different tack in a number of areas. Improved 
management would be welcome for the program from all quarters, but the 
expectations need to be reasonable. Better information for consumers, 
measurement of quality, new innovations and demonstrations for 
improvements in coverage, greater use of the market where appropriate, 
and adding private sector expertise to the agency will require 
substantial additional financial resources, more operating flexibility, 
and de-politicization of an agency that needs to be efficiently run and 
serve its customers well.
    Another major area of concern has been regulatory burdens on plans 
and providers. But how many regulations are enough? What areas require 
the most oversight? While it is tempting to throw the current system 
out and start over again, many regulations continue to be needed to 
protect beneficiaries. Two types of regulation and oversight are 
essential: assurances that quality care is being delivered and that 
beneficiaries have adequate protections for assuring access to covered 
services. A careful review of existing regulations and requirements 
should closely examine whether there are enough protections for 
beneficiaries. Particularly if beneficiaries are locked into private 
plans by future reforms, the need for oversight will be considerable if 
abuses now occurring in Medicare+Choice are to be avoided. If 
beneficiaries are going to be asked to take greater responsibility for 
care, it is important to have in place appropriate protections and 
controls for those who are cognitively impaired, frail, non-English 
speaking, or face other barriers to their getting care. This is a 
substantially larger group than found in younger populations. In that 
way, Medicare is different and regulatory needs are also different.
    Finally, it is important to note that few private insurance 
companies escape problems of complexity and bureaucracy. Many patients, 
both young and old, find the requirements of their plans to obtain 
approval before getting some services, to determine which doctors and 
hospitals are in network and which are not, to understand the bills 
when they come due months later, and to use the appeals process to be 
cumbersome, complex and overly bureaucratic. Thus, problems with the 
complexity of our current health care system are by no means inherent 
only to government. So examining reform from the context of Medicare 
beneficiaries should consider whether more reliance on private plans 
will only complicate and confuse beneficiaries further. An assumption 
is often made that using private plans to provide services will ease 
the government's oversight burdens, but at what expense to 


    The principles outlined by the Bush Administration for Medicare 
reform are to some extent in conflict. Improved financial stability, 
for example, will be harder to obtain if the benefit changes and 
management improvements described above are made. And there is little 
evidence to indicate that reliance on the private sector will save 
government costs (unless substantial burdens are passed on to 
beneficiaries). Thus, the first task in fleshing out these principles 
should be for the administration to indicate its priorities and make 
clear how much in the way of further resources will be available for 
    A broad range of changes in Medicare will be needed in the future 
to improve the program. But no set of reforms can be expected to run 
perfectly over time with no adjustments. Medicare's future will likely 
be rewritten numerous times as health care changes and Baby Boomers 
move through the system. What is important, however, is to avoid making 
major structural changes on the basis of theory that may be difficult 
to undo if the reality falls short of the theory. Beneficiaries are the 
ones likely to be put at risk in such a situation. Much needs to be 
done, but improvements in Medicare do not need to be delayed until all 
the pieces are put into one tidy package.

    Chairman Nussle. Thank you for your testimony. One of the 
questions I have--and you bring up a very good point, Dr. Moon, 
and it is something that does need to be asked because just 
harping on paperwork and harping on regulations and harping on 
oversight of our doctors and our health care providers seems to 
be in vogue, or at least has been today. But the real question 
is, is the patient better off as a result of having those 
regulations, those forms, all that paperwork filled out, having 
the fraud, you know, oversight that we have? And what would be 
your opinion? Is all the paperwork--are they getting better 
level of care or quality of care or appropriate care as a 
result of all that oversight?
    Ms. Moon. I think the answer has to be mixed. Where the 
oversight and regulations and protections are used, for 
example, to assure that someone in a managed care plan gets the 
care that is covered, where they are held accountable for 
quality standards, where HMOs are held for quality standards, 
beneficiaries are substantially better off.
    On the other hand, I do not think any patient wants to deal 
with a doctor or a hospital that is extremely unhappy with 
their insurance company or Medicare. None of us want to go to 
the doctor and feel that he feels he does not have enough time 
to spend with you because he is not being paid enough, is being 
harassed by paperwork requirements or whatever. It is a 
beneficiary issue as well to make sure that we do not overdo 
    The new administration should be commended for taking on 
this very important issue and I am glad to see them spending 
time on it. I just hope that they take into account the full 
range of concerns including those of beneficiaries.
    Chairman Nussle. Well, I guess what I am getting at, and I 
realize that you cannot use this as a blanket statement in 
every instance, but we seem to have a one-size-fits-all system, 
so let us look at that for a moment. I guess what I am saying, 
who am I going to trust, given the opportunity before me? Am I 
going to trust either one of these two doctors who I have never 
met before in my life? If I am in the examination room with 
you--let us say I have some--and there are a probably a few of 
them who think I do need my head examined and I realize that 
not all of you do--but let us assume that is what it is for the 
moment--and I am in the examination room with Dr. Bean, for 
example. And I have to trust and the system has to either trust 
him, has to trust the contractor, has to trust HCFA, has to 
trust me as a Congressman to manage the system, has to trust 
lawyers, judges or HMOs or anything you want to trust, who am I 
going to trust?
    And, unfortunately, what we have in the system now is that 
we definitely do not trust the doctor. We just do not. It is 
not possible for us to trust the doctor or for us to trust the 
nurse who is visiting the home health situation for the example 
that I used--it is amazing the questions that they have to go 
through. But I don't have them. How is their eye sight? One of 
them was whether or not--diet, exercise. Exercise? My gosh, the 
person has got a hip replacement and just got home. There are 
all sorts of things they are supposed to ask and document. And 
then I assume someone has the opportunity to read them.
    I just do not know how we have gotten away from the system 
of trusting the professionals who have gone to school and have 
done the work to put themselves in a position. And the only 
thing I can come up with is that over time, there have been 
situations where there has been lack of trust, where a doctor 
or health care provider of some sort somewhere has done 
something that has suggested to someone, somewhere, that we got 
to have a form to fill out in order to manage this, otherwise 
we are going to be in big trouble.
    I guess the question I have for the doctors is, you have 
seen this metamorphosis over the period of your career. One of 
you mentioned you had been doing this for 20 years and that the 
amount of time that you spent in direct patient care versus 
where you are now is dramatically different. And I guess the 
question I have for you is give me that in a percentage, when 
you first started, how has this changed in the amount of hands-
on care versus paperwork back then versus today? Give me a time 
frame. Dr. Kaplan.
    Dr. Kaplan. I have been practicing internal medicine now 
for 20 years. And I think when I first started, the vast 
majority of what I did was spent taking care of patients. There 
was very little administrative hassle, very little paperwork. 
The purpose of a required document was to assure good quality 
continuity of care. Today, I would estimate that for every 2 
hours I spend in patient care, an hour is spent in paperwork. 
And that is not right. It is waste and inefficiency.
    My personal opinion is that oversight is critical, but it 
needs to be driven off of standardization of practices. We need 
to eliminate the unnecessary variation in waste, freeing up 
funds and time, which would be able to be better applied to 
direct patient care.
    Chairman Nussle. Dr. Bean, how has it changed for you?
    Dr. Bean. I would estimate that I spend 50 percent more 
time, perhaps 75 percent more time now than I did before. Now 
part of this is accomplished by hiring more people, both 
clinical people in my office, whether a nurse practitioner or a 
physician's assistant or even clerical people. They can do the 
same things that are being required of me. But still, my 
personal time, if you ask me how much it has increased, it is 
at least that much.
    I would say a third of it is about right. But that doesn't 
measure all the time, because those things required of me, I 
hire the people to do, which now drives the cost of doing 
business up. It employs people, certainly. But it doesn't do 
anything for me to take time to care for patients. I come in 
early and work late.
    Let me say something, if you would. One of the features 
that is interesting about legislators is cutting to the chase, 
getting through the reams of information and trying to distill 
it to the core problem. Doctors are very good at that. The 
problem with the system that we have created here with Medicare 
is that it penalizes the doctor who does it. It generates and 
asks for--it rewards reams of information--clouds of 
information so that you cannot get to the core; you cannot get 
concise to the point of the trouble and get the job done 
quickly. That is what we want to do and are trained to do.
    Chairman Nussle. I am amazed by the story of the audit you 
had to go through. I have heard similar examples from some of 
my hospitals. But you put it in much more graphic detail.
    One of the things--the last question I have for all of you 
has to do with this whole balancing between fraud--what is our 
perception of fraud as if we--I think--I am not sure that we 
have our arms around it as a result of all the paperwork. And 
in part, you know, we have created more paperwork. But unless 
there are people there to monitor every single piece of paper 
and unless we trust those people who are monitoring the paper 
and we have monitors on the monitors to monitor whether or not 
they are monitoring it correctly, do we really have a better 
system that is rooting out all the waste, fraud and abuse 
within the system?
    And I think Dr. Moon may have had the best idea of all, and 
that is more patient information. If the patient or the 
beneficiary, as you stated, had better information so that they 
could monitor it--I mean one of the frustrations we all have, I 
think, whenever we deal with providers, doctors, nurses, they 
speak in a jargon that we sometimes do not always understand 
because they are rushed to go out and do that 1 hour of 
paperwork, we do not always get to ask the questions we want to 
ask or we feel stupid in asking them. We do not always get the 
information we need.
    So if there is better beneficiary monitoring of their own 
health care delivery, that might be one of the solutions. But 
have we been able to, from your--I am not asking you to squeal 
on anybody--but do you feel that the system that has been 
created, has done a job that it was intended to do, to root out 
the fraud within the system or has it allowed it to stay the 
same or is it arguably worse? And I invite all three of you to 
answer that.
    Dr. Kaplan. Let me say as a practicing physician and leader 
of a health care system, I abhor fraud and I speak very clearly 
to our people about this. We must be in compliance with the 
law. The problem is that the rules and regulations have become 
so complex, that it is almost as if fraud or unintended error 
has been created as a result of the complexities that we are 
asked to deal with and interpret every day the variability of 
those regulations are very open to misinterpretation, such as 
one fiscal intermediary may interpret it differently than 
    I think what has happened is that there is a very small 
minority of intended fraud going on in this country. And it is 
unacceptable. It is criminal. But what has happened is a whole 
system and infrastructure has been built around that such that 
we are all painted with the same broad brush, and then asked to 
build that into our daily work life in a way that is a 
disadvantage to our patients and is driving people out of the 
profession. One of the things I am most concerned about is that 
in many marketplaces today, the capacity for providers to 
provide care is limited. And we are seeing many of our best and 
brightest young people choosing not to go into health care.
    So I think that the unintended consequences of the 
regulations have been detrimental.
    Chairman Nussle. Dr. Bean.
    Dr. Bean. I believe, if you will--let me say, my 
grandfather was a general practitioner in eastern Ohio, a 
little town called New Comerstown. He was highly respected. He 
worked hard through his life for 40 years and retired and died 
in his hometown. He was a respected man by his patients in the 
community. If he were alive today, he, like me, Dr. Kaplan, and 
every doctor in this country, would be regarded first as a 
criminal who has to be proven innocent. The only thing that we 
lack is an audit of all our practices, and then frequently, 
repeated to make sure we are still compliant. We are regarded 
as criminals now and this has happened virtually over the past 
6 years since the intensity of OIG investigations has happened.
    We have medical centers, respected academic medical centers 
making huge settlements, so they do not have to face criminal 
charges when what they need is education and just reform of the 
way they do their recordkeeping. It is threat and it results in 
anger and fear. So the relationship between this agency and our 
profession will remain anger and fear until this whole attitude 
    Chairman Nussle. Thank you. Dr. Moon.
    Ms. Moon. The strong emphasis on the costs of health care 
over the last decade or two and the hope that fraud, waste and 
abuse elimination can solve our problems has gotten us into 
this pickle. I would emphasize that many of the studies that 
have been done that come up with large fraud numbers of 20 
percent or 30 percent, refer not to fraud, but refer to waste 
and abuse. Waste and abuse are extremely difficult to determine 
particularly in areas in which the standards are unclear and 
what is necessary or unnecessary are unclear.
    The only way to deal with these areas where standards are 
not clear, is to use massive regulation to reduce waste and 
abuse or at least that has been the philosophy. That is why 
home health has been singled out because it is very difficult 
to know what is necessary care in this area.
    When Dr. Bean does neurosurgery or does a particular 
procedure, that is much easier to document. We have to, as a 
society, decide whether we want to err a little bit on the side 
of letting some fraud get through system and trust people or 
whether we want to make sure we root it out, but in doing so, 
we drive everybody crazy. We need a better balance. It seems to 
me for a while, it was probably in one direction, that there 
wasn't good oversight. We need to have better, smarter 
oversight and less of it than we have at the present time.
    Chairman Nussle. Thank you very much. You have all 
provided, I think, a very excellent contribution to some of the 
ideas that we need to consider, and I certainly appreciate your 
willingness to come forward and do that. And I think you are 
particularly correct, Dr. Bean, when you talk about the 
adversarial nature of the system. I don't know how anyone, as 
you have all stated, can do business that way or certainly keep 
the mission that you all started with when you went to school 
to serve. It has got to be very frustrating.
    I have a number of doctors back home in Iowa that are 
considering just getting out of it. They made enough money and 
socked away enough to go away and retire. And every single one 
of those that does that allows for less care, especially out in 
my area where it is very rural and yours, too, where you don't 
have that many choices to begin with. Losing an experienced 
surgeon or health care provider of any kind, particularly now 
with the nursing shortage that we have in many places in the 
country, is devastating to the overall system. As I think Dr. 
Scanlon said, while we're talking about Medicare today, because 
Medicare is so involved in all of the delivery of the health 
care of the country, we are talking about the future of our 
health care, period, when we talk about the future of Medicare. 
So I appreciate your testimony. And any final thoughts on the 
part of the witnesses? If not, we will recess the hearing. 
Thank you very much.
    [Whereupon, at 1:50 p.m., the committee was adjourned.]