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



 
MEDICARE MODERNIZATION: EXAMINING THE FEDERAL EMPLOYEES HEALTH BENEFIT 
                     PROGRAM AS A MODEL FOR SENIORS
=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 20, 2002

                               __________

                           Serial No. 107-105

                               __________

       Printed for the use of the Committee on Energy and Commerce


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

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                    COMMITTEE ON ENERGY AND COMMERCE

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

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

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

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

                                 ______

                         Subcommittee on Health

                  MICHAEL BILIRAKIS, Florida, Chairman

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

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Butler, Stuart M., Vice President for Domestic and Economic 
      Policy Studies, Heritage Foundation........................    32
    deMontmollin, Stephen J., Vice President and General Counsel, 
      AvMed Health Plan..........................................    40
    Jindal, Hon. Bobby P., Assistant Secretary for Planning and 
      Evaluation, U.S. Department of Health and Human Services...    16
    Moon, Marilyn, Senior Fellow, Urban Institute................    22
    Richtman, Max, Executive Vice President, National Committee 
      to Preserve Social Security and Medicare...................    38
Material submitted for the record by:
    Advanced Medical Technology Association, prepared statement 
      of.........................................................    85
    Alliance to Improve Medicare, prepared statement of..........    86
    American Psychiatric Asdsociation, prepared statement of.....    88
    Butler, Stuart M., Vice President for Domestic and Economic 
      Policy Studies, Heritage Foundation, response for the 
      record.....................................................    92
    deMontmollin, Stephen J., Vice President and General Counsel, 
      AvMed Health Plan, response for the record.................    96
    Moon, Marilyn, Senior Fellow, Urban Institute, response for 
      the record.................................................    99
    Richtman, Max, Executive Vice President, National Committee 
      to Preserve Social Security and Medicare, response for the 
      record.....................................................    95

                                 (iii)

  


MEDICARE MODERNIZATION: EXAMINING THE FEDERAL EMPLOYEES HEALTH BENEFIT 
                     PROGRAM AS A MODEL FOR SENIORS

                              ----------                              


                       WEDNESDAY, MARCH 20, 2002

                  House of Representatives,
                  Committee on Energy and Commerce,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Deal, Burr, 
Whitfield, Ganske, Norwood, Bryant, Buyer, Brown, Waxman, 
Strickland, Barrett, Capps, Pallone, Wynn, and Green.
    Staff present: Patrick Morrisey, majority counsel; Steve 
Tilton, health policy coordinator; Chuck Clapton, majority 
counsel; Eugenia Edwards, legislative clerk; Amy Hall, minority 
professional staff; Bridgett Taylor, minority professional 
staff; Karen Folk, minority professional staff; and Nicole 
Kenner, minority research assistant.
    Mr. Bilirakis. The hearing will come to order. The Chair 
apologizes to the panelists, as well as to the people in the 
audience. Frankly, we could not get on an elevator that had 
room for us.
    As per usual, and as per the rules, the Chair will 
recognize himself and the ranking member for 5 minutes, and all 
others for 3 minutes for an opening statement. I would like to 
welcome all of our distinguished witnesses.
    You all provide such valuable insight as we tackle these 
daunting issues, and I anxiously await your testimony, but I 
would particularly like to welcome Steve deMontmollin and Bobby 
Jindal.
    As many of you may know, Bobby, Mr. Jindal, was the former 
executive director for the Bipartisan Medicare Commission on 
which I served as a member.
    Mr. Jindal then took his expertise to Louisiana, and is now 
back helping the Nation as the Assistant Secretary for Planning 
and Evaluation at the Department of Health and Human Services.
    It is a pleasure to see you again and I look forward to 
working with you as we continue to tackle this continuing 
problem of modernizing Medicare.
    Steve serves as the Vice President and General Counsel for 
AvMed, the largest not for profit health plan in Florida, and 
he is also a fellow Gator as I understand.
    I am pleased to say that AvMed has been providing quality 
services to many people in my home State of Florida, and many 
other States since 1973. It is always a pleasure to welcome 
someone from my home State before the subcommittee.
    Unfortunately, I understand that AvMed pulled its Medi-
care+Choice plan out of my Congressional district. I am hopeful 
that you will be able to speak in your opening statement as to 
why AvMed was forced into making that decision.
    And I look forward to hearing about what I can do to 
encourage AvMed to come back to the district. I know that close 
to fifteen hundred Medicare beneficiaries were enrolled with 
AvMed, and I am sure that they would love to renew their 
service if you are willing return to the area.
    This is very important to me. I want to make sure that if 
we are going to help beneficiaries maintain access to choices, 
then we fix the problems in such a way that at a minimum, it 
ensures that plans will stay in Medicare+Choice and hopefully 
return to the program.
    Since first coming to Congress, I have pledged that I would 
not jeopardize the future of Medicare. The hearing today will 
afford us the opportunity to hear from experts in how we might 
design a proposal to mirror the structure of the Federal 
Employees Health Benefits Program, FEHBP.
    As many of you know, FEHBP provides many of us with our 
health coverage, and works very well as a national employer 
offered plan. I believe that there are many lessons that we can 
learn from this program that could, and should, be considered 
as we move forward with a Medicare modernization package.
    Modernizing the Medicare program and its benefit package to 
include prescription drugs, in an appropriate fashion, is 
certainly most critical. It is no great secret that the 
Medicare program is in dire straits. The financial health of 
the program is in extreme jeopardy, the benefit package is 
woefully inadequate, and the payment structures and systems are 
inefficient and inappropriate.
    We must work quickly and expeditiously together to develop 
legislation that improves the benefit package, but also does 
not bankrupt the country and risk the underlying benefits in 
the process.
    Structural reform of Medicare is central to the broader 
debate of protecting and strengthening the program for the 
future. Many experts agree that if Medicare was being designed 
today, the two-part system that drives this payment policy 
would probably not be adopted.
    At the same time, it may be difficult for us to 
dramatically alter this program in the short term. However, it 
is crucial that our legislation be designed to move us closer 
to a more modernized Medicare program.
    So I would like to think that we are all committed to 
protecting the long term solvency of the Medicare program, and 
we all look forward to a productive hearing today, which will 
shed light on some of the fundamental issues in this debate.
    The financial viability of this crucial program and the 
cost sharing liability of Medicare beneficiaries are some of 
the key issues that we must address as we move forward. This 
subcommittee has a strong record of working on a bipartisan 
basis, and we must continue to work together to find a 
bipartisan solution.
    This hearing will help bring us closer to accomplishing 
that goal as we evaluate the challenging issues inherent in any 
Medicare reform proposal. So again, in closing, I want to thank 
our witnesses for their time and effort in joining us, and I 
now recognize the ranking member, Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. I just want to thank 
Marilyn Moon for joining us and for Max Richtman for joining us 
also. I appreciate the chairman's sincerity, and I know from 
working with him closely over the years that his personal 
interest in the welfare of Medicare beneficiaries.
    But I am concerned that our first hearing on Medicare 
reform focuses on privatizing this program that has served 
Americans well for 36 plus years. Our first responsibility is 
to add a prescription drug benefit to Medicare.
    It is not right to condition our willingness to complete 
the Medicare benefits package on seniors' willingness to give 
up reliable, stable health benefits delivered through Medicare.
    The administration has made it clear that it feels 
differently. Let's face it. The big winner in Medicare 
privatization, or the big winners, are Medicare HMOs and not 
Medicare beneficiaries.
    The President's budget neglects the resource needs of every 
Medicare provider, and just listen to people at home, the 
resource needs of every Medicare provider except +Choice plans.
    The administration says that this is because for some 
seniors Medicare+Choice is a means of accessing supplemental 
benefits like drug coverage. What about the other 84 percent of 
seniors?
    Why most seniors accept private coverage to receive 
appropriate health benefits. I am interested in hearing what 
our five witnesses have to say about privatization of Medicare.
    But I won't be a party to the notion that privatization of 
prescription drug coverage must be linked, or to the inference 
that the financial stability of HMOs is more important than the 
stability of 38 million Medicare beneficiaries.
    The idea of turning Medicare into a voucher program has 
been kicking around Congress for several years. I understand 
why proponents of this approach would want to couch the issue 
as a choice between Medicare and FEHBP as if the voucher 
approach means giving seniors the added benefits available 
under that program, namely prescription drug coverage, lower 
cost sharing, with no strings attached.
    It is far more politically palatable than coming out and 
saying the Federal Government is considering whether to 
transform Medicare from a defined benefit program into a 
defined contribution program, and people know what that means.
    President Bush has certainly embraced the FEHBP rhetoric. 
He says that he wants to give seniors better options, like 
those available in FEHBP. The President has also said that he 
wants to help seniors pay for prescription drugs if they agree 
to enroll in an HMO and purchase stand alone prescription drug 
coverage.
    The President for sure has every right to push his 
privatization agenda, but not by co-oping on an issue as 
emotional and important as prescription drug coverage. The 
President should not go unchallenged when he mischaracterizes 
Medicare as a failed program so that he can justify his goal of 
privatizing it.
    Whether it is Medicare privatization or social security 
privatization, it is disingenuous of this administration to 
portray privatization as in some way better for the people who 
depend on these programs.
    The retirement safety net was not put in place because 
liberals wanted to make the Federal Government bigger. It 
should not be dismantled because conservatives want to make the 
Federal Government smaller.
    The safety net was put in place because the private sector 
simply could not make a profit offering health insurance to 
seniors, and so they did not do it. And it was put in place 
because the Nation believes that Americans who helped build 
this Nation's unrivaled prosperity through their working years 
should not face financial uncertainty and hardship when they 
retire.
    Pooling our resources into public programs was and is the 
best way to provide consistent, equitable, reliable income and 
health care benefits to our seniors. The stock market and the 
HMO industry may be good at many things, but alleviating 
uncertainty is not one of them.
    And now the future of Medicare is on the line, and the 
President says that seniors deserve better options than 
Medicare, and that's why he favors privatization. A private 
plan superior to Medicare, would seniors be better off with a 
voucher that helps pay for coverage on an HMO?
    Medicare is more reliable than private health plans. 
Medicare offers more choice, and offers more choice in spite of 
the word choice being thrown around at every opportunity. 
Medicare offers more choice than private health plans and 
operates more efficiently than private health plans.
    It is more popular than private health plans according to a 
survey conducted by the nonpartisan Commonwealth Fund and 
Medicare far outranks private insurance as a trusted source of 
health coverage.
    But the administration insists that it wants to give 
seniors more choice and better options than Medicare. Is it 
better to have your choice of HMOs than to have coverage that 
you can count on every day, every week, every month, every 
year?
    The Medicare program covers medically necessary care and 
services and that beneficiaries can see the health care 
professional they choose, and go to the health facility they 
choose.
    Those are the choices that matter in health care. It is a 
single plan and it treats all beneficiaries equally and 
provides maximum choice and access for patients and doctors. 
Contrast that with Medicare vouchers.
    Instead of being guaranteed access to needed health care 
services, seniors would be guaranteed access to a partial 
voucher for private health insurance. Proponents say that this 
program creates choice by enabling seniors to choose the health 
plan that best meets their needs.
    But what exactly would distinguish one plan from another? 
Realistically, the key differences would have to relate to the 
generosity and restrictiveness of the benefits, and whether you 
can see a doctor that you can trust, whichever one is assigned 
to you, or whether you can get the medicine your doctor 
prescribes, or the cheapest one on the formulary list.
    It appears that choice is actually a code for wealth. 
Higher income seniors can afford to supplement the voucher and 
buy a decent plan. Lower income enrollees would be relegated to 
restrictive alternatives. Some choice.
    Again, Medicare is a single plan, Mr. Chairman, that treats 
all beneficiaries equally, provides maximum choice and access 
for patients.
    Mr. Bilirakis. Please finish up.
    Mr. Brown. I will do that, Mr. Chairman. I apologize. If 
the administration truly wanted to give seniors something 
better, there would be sufficient dollars, $700 billion or so, 
in the budget to add a meaningful prescription drug benefit to 
Medicare.
    Instead, we get a tax cut with benefits overwhelmingly to 
the most privileged in our society, with only a few dollars 
left for prescription drugs for our constituents.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Deal for an opening statement.
    Mr. Deal. Mr. Chairman, I will pass.
    Mr. Bilirakis. Mr. Burr for an opening statement.
    Mr. Burr. Thank you, Mr. Chairman. I would be happy to 
yield to Mr. Norwood if he would like it.
    Mr. Norwood. No, go ahead.
    Mr. Burr. Mr. Chairman, I will be very brief. I think Mr. 
Brown did an excellent job of summarizing where we have been 
and how we got there. Let me take this opportunity to welcome 
all of our panelists today, and suggest that a lot of time a 
lot of bipartisan effort has gone into understanding that there 
is a need to change some things in Medicare.
    It is time to have a debate on what the scope of coverage 
should be, and should that include prescription drugs. Should 
we offer different choices to seniors on how they access their 
care. Can we offer a more quality way to provide that care.
    To take anything off the table is to suggest that they are 
satisfied with what they get today. In many cases that is not 
the case. We have got a lot of things in health care that are 
broken, and the time to modernize Medicare is now.
    Every year that we wait and we make it a partisan issue, we 
lose options. We lose options that affect the quality of care 
and affect the costs to the taxpayers.
    Now, my hope this year is that we can pass a prescription 
drug bill into law, and not just through the house, and see it 
die by Senate leadership, choosing to use it as a political 
issue in the November elections, versus as a policy issue for 
the seniors that deserve it.
    I am not sure that we can accomplish that. But if we can, 
we should take every opportunity to put Medicare reforms where 
they are appropriate, and where we can find agreement, and 
where they save us money, and where they increase the quality 
of care for seniors.
    We should take that opportunity to do it now, and at the 
end of the day, we are responsible to make sure that the 
program that is provided under this insurance--and I call it an 
insurance-based product because people pay into it.
    They pay their entire lives to make sure that this coverage 
is provided for them, and the only way we fail is if we don't 
structure it in a way that it provides the greatest benefit for 
the money that is available. I again want to thank our 
witnesses, and I yield back.
    Mr. Bilirakis. Mr. Waxman, you are recognized for 5 
minutes.
    Mr. Waxman. Thank you very much, Mr. Chairman, and I am 
pleased to welcome the panelists today to talk to us about this 
issue which I gather is titled, ``Looking at the Federal 
Employees Health Benefit Plan,'' and seeing whether that is a 
good model for Medicare.
    Well, I have to tell you that I think that the FEHBP is a 
good model in one particular respect, and that is that 
prescription drugs are covered under the employee plans that we 
have available to us, but prescription drugs are not now 
available to Medicare beneficiaries.
    If we decide, as I think the overwhelming consensus of the 
American people, and of all the politicians that ran for office 
in this last election, if we decide to follow that consensus 
and cover prescription drugs under Medicare, and make it as 
generous as the employee benefit plan, we are looking at an 
expenditure of $750 billion over the next 10 years.
    I think we ought to commit ourselves to passing a 
meaningful prescription drug benefit plan as part of Medicare. 
It ought to be a service the way doctor bills, hospital bills, 
and other medical services are now covered under Medicare.
    And we ought to recognize that it is going to cost money to 
do it. As to the rest of the Federal health benefit plans being 
a model, well, I don't think the people under Medicare are 
unhappy with Medicare.
    In fact, most of them like the way that the Medicare 
program works. It has been a Godsend to them that they are not 
wiped out by high medical bills. I don't think they are looking 
for more choices and a wider array of plans that will be very 
hard for them to comprehend whether they want to take on more 
costs to themselves, and less benefits, and looking at 
alternatives that might vary the premium from one part of the 
country to another.
    As Sherrod Brown indicated, what people on Medicare want is 
a choice of doctors, and choice of medical professionals, and 
not hopefully to rely on a fixed panel to provide their 
benefits to them.
    We ought to recognize something else about FEHBP. These 
plans frequently limit providers and they don't exceed any more 
than Medicare in containing costs. If we are going to reduce 
Federal expenditures by shifting costs to the beneficiaries, 
this is not a reasonable solution.
    And if we are going to cover eventually nearly twice as 
many people, it only stands to reason that we are going to need 
to make a very significant increase in our commitment of 
resources to the Medicare program. We owe our seniors no less, 
and I yield back the balance of my time.
    [The prepared statement of Hon. Henry A. Waxman follows:]
    Prepared Statement of Hon. Henry A. Waxman, a Representative in 
                 Congress from the State of California
    Mr. Chairman, once again we find ourselves at a hearing discussing 
how to make fundamental changes in the Medicare program. I find a 
certain irony in this since Medicare has long been, and remains, one of 
the most popular and widely supported of our public programs, ranking 
with Social Security.
    And this is no accident, for this Mediare has been a crucial 
support for seniors and disabled people in this country. It is indeed, 
vital to their economic security and their peace of mind, to know that 
their health care expenses will be covered.
    Of course, Medicare isn't perfect. It has one glaring deficiency 
that is at the top of seniors' list of what needs to be ``modernized'' 
in the program: it needs a good, affordable, comprehensive prescription 
drug benefit. It is that change that we owe it to all our Medicare 
beneficiaries to immediately pursue.
    Today we are looking specifically at the Federal Employees' Health 
Benefits Program (FEHBP) as a model for changes in Medicare. Again, as 
I look at that program, I see an obvious model for what we need to do 
in Medicare: add prescription drug coverage.
    And let's be clear: that is not adding coverage on the cheap.
    All estimates are that to add to Medicare prescription drug 
coverage equivalent to what Federal employees and members of Congress 
have, will take a commitment of somewhere in the neighborhood of $750 
billion over the next ten years.
    I firmly believe this is a commitment we should make, and we should 
do it now. Waiting isn't going to make it any easier or any cheaper.
    Once we adopt that improvement, we will have responded to the 
``reform'' in Medicare that the beneficiaries want.
    But there are other things they want, and one of them is that we do 
not undermine the current strengths of the program.
    Beneficiaries want to maintain their choice of provider, they like 
having a defined benefit plan so that they know what benefits are 
covered, they like to know that their premium will be the same no 
matter where in this nation they live.
    The rhetoric that we will hear today about what the FEHBP program 
can offer is choice: why shouldn't seniors have the choices that 
Federal employees have, we are asked.
    Well, the choice people want is not to face a bewildering array of 
plans, all with different benefits, participating providers, cost 
sharing and coverage. They want to be unrestricted in their choice of 
their doctor. They want to be able to go to the hospital their doctor 
recommends. And yes, they want the drugs their doctor prescribes.
    FEHBP plans frequently limit providers. To go to the doctor of your 
choice, you have to pay more out of pocket. I don't believe this is a 
choice our Medicare beneficiaries are calling out for.
    Finally, of course we all know that we have to deal with the issue 
of the baby boomer generation going on Medicare. It means that Medicare 
will have to cover many millions more seniors.
    But when we deal with that problem, let's remember a few things:

--FEHBP has been no more successful at containing costs than Medicare 
        has;
--reducing Federal expenditures by shifting costs to the beneficiaries 
        is not a reasonable solution; and
--if we are going to cover eventually nearly twice as many people, it 
        only stands to reason that we are going to need to make a very 
        significant increase in our commitment of resources to the 
        Medicare program.
    We owe no less to our seniors.
    Thank you.

    Mr. Norwood [presiding]. Thank you, Mr. Waxman, and I now 
recognize myself for 15 minutes. Just kidding. This is a very 
appropriate hearing for us to be holding today, and I look 
forward to the witnesses testimony and thank all of them for 
being here.
    Hearings are a time in which members can learn and study, 
and try to make some decisions, and we are certainly at a time 
in the life of Medicare that we need to be learning, and 
listening, and thinking out of the box.
    I am deeply concerned about the future of Medicare.
    I believe we are approaching a point with Medicare where a 
senior's access to care, and indeed even the quality of care, 
is in jeopardy.
    And perhaps it is because of the way that Medicare is 
structured, and perhaps there is another better way to 
structure it. Certainly the Medicare model makes sense or made 
sense when it was created 37 years ago.
    It was a fee for service model, and a patient sees a 
doctor, and the doctor sends Medicare a bill, and the Medicare 
pays the doctor, and that is how the coverage worked 37 years 
ago.
    But I think we are learning all too well that is a very 
expensive model that consistently leads us to difficult 
choices.
    When we need to balance a budget, we have to either 
increase payroll taxes, or increase the premiums paid by 
seniors, or reduce the services, or reduce payments to 
providers.
    Lately, it seems that reducing payment to providers seems 
to be our only answer. It is the problem that we face today, 
and it is only going to get worse in my opinion in the future.
    I am not convinced that Medicare can be sustained if we 
don't look at new ways to provide seniors health care coverage 
other than the original model, and I think we are obligated to 
think about that, and look, and study other ways.
    Mr. Chairman, ever since the Medicare Commission report 
several years ago, we have been examining FEHBP as a model for 
Medicare, and I think it is a very appropriate model for at 
least for us to consider, and seniors think that, too, at least 
in my district.
    Providing seniors with a range of choices and allowing 
private coverage to compete can provide improved coverage for 
seniors, and I am also very interested in learning more about 
what this type of structure could do for Medicare's long term 
financial solvency.
    It is important for us to consider alternatives as we 
examine the future of Medicaid, and not have our mind made up 
before we even consider it. As we have seen with physician 
payments, it is becoming more and more difficult for us to 
sustain Medicare's 37 year model without affecting access or 
services.
    I hope that se can engage in a serious conversation about 
modernizing Medicare. It is not in the interest of seniors for 
us to bury our heads in the sand and to act as though 
everything is just fine with Medicare. It is not, and it is not 
getting any better.
    I do again thank the witnesses for joining us today, and 
look very forward to hearing their testimony, and I would yield 
back the balance of my time.
    Mr. Pallone, you are now recognized.
    Mr. Pallone. Thank you, Mr. Chairman. I just wanted to--I 
am obviously in favor of modernizing Medicare as well, but what 
I am concerned about here is that I think what the Republicans 
are talking about today when they mentioned the Federal 
Employees Health Benefits Program as a model is that they are 
trying to squeeze more money if you will out of Medicare.
    And the problem is that we have to shore up Medicare. We 
can't keep taking away, and we need to shore up and not take 
away from Medicare for other health-related health care 
expenses.
    When we talk about modernization, the biggest issue as has 
been mentioned by my Democratic colleagues is to provide a 
prescription drug benefit, and in order to do that, we need to 
spend more money.
    I mean, if we want to have a decent prescription drug 
benefit, we will probably need as was mentioned by Sherrod 
about $750 billion over a 10 year period. And my main concern 
is that what the Republicans want to do in the name of reform 
or change in Medicare is to move to a voucher system, and that 
this is all budget driven.
    The Federal Government would in effect provide a set amount 
or voucher toward Medicare, and in effect to save money. 
Seniors would then take the voucher and try to find a plan to 
cover them, and seniors who want traditional fee for service 
Medicare would have to pay more out of pocket.
    And the poorer ones would end up choosing a cheaper option, 
like an HMO. And the effect I think it to kill traditional 
Medicare for most seniors and force them into an HMO that 
provides less and less coverage.
    And as the budget continues to have budgetary problems 
because we are spending money elsewhere, what the Republicans 
would do is to freeze the voucher amount to save money, and 
seniors would get less benefits and poor quality care, and what 
they are doing here again is to kill the traditional Medicare.
    There would no longer be any guaranteed benefit package, 
and the benefits would vary from region to region, and based on 
your ability to pay. And it would undermine the idea of 
Medicare being a social insurance program for anyone.
    In addition the Republicans are essentially privatizing 
Medicare. Their private health plans that have abandoned 
hundreds of thousands of seniors, like Medicare+Choice plans, 
and in the last 2 years over 100 plans dropped out of 
Medicare+Choice altogether.
    And an additional greater than a hundred plans reduced 
their service areas, and many other plans increased premiums 
and reduced benefits. Why should we assume that this 
privatization is going to help in any way in trying to make 
Medicare better.
    Compared to private health insurance plans, Medicare has 
done a much better job of controlling per person health care 
costs, and therefore there is no reason to turn Medicare over 
to the private sector.
    That has been shown over the last 30 years that per person 
private health insurance costs have increased faster than 
Medicare. Therefore, for protecting Medicare solvency, that 
should not depend on private health plans.
    And, last, Mr. Chairman, the Federal Employees Health 
Benefit Program as a model for restructuring Medicare doesn't 
work, because the FEHBP system has not moderated costs better 
than Medicare.
    It serves a much smaller population that is younger, 
healthier, wealthier, and more attracted to private insurance. 
And most importantly, the number of HMOs offering health 
coverage to Federal employees and retirees declined by almost 
half between 1996 and now.
    I am not trying to be cynical, but I really believe that 
the Republican effort here is to save money and to privatize, 
and in the long run it is going to mean less access and less 
quality care for seniors. Thank you, Mr. Chairman.
    Mr. Norwood. Thank you, Mr. Pallone.
    Mr. Buyer, you are recognized for 3 minutes.
    Mr. Buyer. I want to thank the witnesses for coming. I 
suppose if the accusation is that the Republicans want to bring 
efficiency to a system, and bring business plans and practices 
to government, guilty.
    I think that is a good idea, and if I come from a dimension 
that the government is best, and if I have a social mind and 
think that government can always deliver things for people and 
be the big brother, then I suppose that the private sector 
really is a bad idea.
    I can assure the panel of this. Myself and my comrades 
didn't leave freedom in their footsteps so that the liberals in 
Congress could turn me into a socialist later days of my life.
    That is a very strong comment, but it is a song that I have 
heard for 10 years here in Washington, DC, that Republicans are 
going to cut Medicare and let it whither on the vine, or jump 
into ``Mediscare'' or something else about Social Security.
    You can always tell when it is an election year in 
Washington, DC, because the same song and rhetoric comes out. 
And I can share this with the panel. I have worked in the VA 
system for 10 years, and I have worked with the Military Health 
Delivery System.
    And you know what? It is a good thing when you look for 
efficiencies in a system, and to look at the private sector to 
see what are you doing that's right, and what are you doing 
that's wrong.
    Let's do an examination of our own systems here and what we 
can do to improve, and when we put together with the Senate the 
Tricare for Life--we looked at the FEHBP, and there were some 
here in Congress that were saying that is what we should do 
with the military over 65 retiree.
    I think it was wise and it was prudent for us to examine 
other health systems, and Mr. Pallone is correct when he said 
that the difficult challenge that we have here is about the 
patient.
    FEHBP or the military health systems, it is a different 
kind of patient load, and we recognize that but we also have to 
recognize when Democrats use the word modernization, and 
Republicans use the word modernization, it means two completely 
different things.
    Or if the Republicans use the word incremental improvements 
to health care, and Democrats use the word incremental 
improvements to health care, it means two completely different 
things.
    They want incremental improvements to health care to move 
us to a universal health system, and we want improvements to 
health that improves upon the quasi-private health system that 
we have in our country.
    And I think it is a good thing that we are going to elicit 
from you today, and good us ideas on how we can improve 
Medicare. One thing is true about this so-called modernization 
of Medicare, is that I am going to agree with the Acting 
Chairman here for a moment.
    We have a tremendous opportunity, and if we don't make 
structural changes to Medicare--and you don't improve Medicare 
by just saying that we are going to add an out-patient 
prescription drug cost.
    If we don't make structural changes to improve Medicare, we 
are going to be in deep trouble with regard to the budget. It 
is 12 percent of the budget today, and baby boomers only 
getting older.
    And if we just want to shove this thing off to a later day, 
then shame on us and Congress today, because all of us will 
have abrogated our responsibility to the American people. I 
yield back.
    Mr. Norwood. Mr. Buyer, the chairman noted that you agreed 
for the moment, and I am grateful for that.
    Mrs. Capps, you are now recognized for 3 minutes.
    Ms. Capps. Thank you, Mr. Chairman. As was just noted, this 
committee is going to be charged with an awesome responsibility 
this year of deciding the direction of Medicare for the next 50 
years.
    We will have many critical choices to make, and as we do, I 
want to make sure that the goal of a prescription drug benefit 
that seniors can count on is our first priority, in terms of 
Medicare, and other agendas of the program are relegated to a 
lesser status, and especially if they obscure this goal.
    But I hope that we will also find innovative ways to extend 
the life and efficacy of Medicare. For 78 million baby boomers 
approaching retirement age, long term solvency is also a part 
of the issue.
    Seniors have been promised that Medicare will be there for 
them, and tomorrow's seniors as well, and we cannot make 
mistakes now that could jeopardize that. Today's hearing will 
allow us to examine how the FEHBP model could strengthen or 
weaken the current Medicare system.
    Many have proposed moving toward a premium support system 
based on this Federal health plan. It is an interesting 
proposal and I am glad that we can consider it today. But I am 
concerned about its reliance on private insurance plans and the 
impact that it could have on seniors' expenses.
    Medicare has experimented with private health plans to 
improve coverage already, and most recently, and this has been 
mentioned already, in the Medicare+Choice Program. We have 
contracted with HMOs to provide expanded care to our seniors, 
but these experiments have produced mixed results.
    Initially, many seniors were given the promised benefits, 
especially for prescription drug coverage. But the HMOs have 
found it difficult to sustain their businesses. Seniors are a 
high risk pool for insured, and the resources that Medicare has 
been able to apply have not met the request of the HMOs.
    This is happening in my district. They have cut--HMOs have 
cut their benefits, and increased their cost sharing, and 
actually pulled out of areas entirely. Many of my constituents 
simply have no private provider option available to them.
    HMOs and insurance companies are businesses. They need to 
maintain a profit margin. But insurance for the Medicare 
population is not kind to these profit margins. Insurance 
businesses often can only sustain themselves by reducing 
benefits, or increasing the amount a senior has to pay.
    If we share Medicare toward the FEHBP model, we have to be 
sure that seniors will not see how premiums, co-payments, and 
deductibles for fewer benefits. We have to remember that 
seniors are on a fixed income, and cannot the cost sharing that 
a Federal employee can.
    So I am very interested in listening to our witnesses 
today. Thank you for being here, and I look forward to working 
with you, Mr. Chairman, to see that our seniors get the best 
health care possible. Thank you, and I yield back the balance 
of my time.
    Mr. Norwood. Thank you very much, Ms. Capps.
    Dr. Ganske, you are now recognized.
    Mr. Ganske. Thank you, Mr. Chairman. I think the main 
reason that Medicare HMOs have enrollees is that they offer a 
prescription drug benefit.
    I also want to thank the panel for being here today. Mr. 
Butler, I know that you have talked a lot about medical savings 
accounts, of which I have been a strong proponent.
    I would love nothing more than to expand this program and 
then add a proviso that you could roll that over tax free into 
a long term care plan. I think that would be really important.
    I also think we can learn a lot from FEHBP. It has worked 
pretty well for Federal employees, and there are some lessons 
we will hear about today.
    Yet, I represent a large rural State, a State filled with 
small towns, and I have a responsibility to represent my State, 
as well as the Nation, and I will tell you that we have few if 
any Medicare+Choice plans available in Iowa, because we have a 
significant problem with what is called the average annual per 
capita cost. This is a problem that I have worked on.
    We have had some contention on this because there is such a 
large gap between certain States with low payment levels, and 
those with higher payments in urban areas and the 
Medicare+Choice plans offer prescription drug benefits that we 
do not have available in Iowa.
    Right now, as was pointed out on the front page of the New 
York Times this Sunday, and which I warned about recently at a 
hearing, they are facing I think an impending crisis on access 
to care because of low payments in the fee-for-service area 
related to hospital and physician payments in States like Iowa, 
where I am told physicians simply cannot take any more new 
Medicare patients into their practices.
    So we have to fix that, and I think we have to recognize 
that we have an increasingly elderly population that will 
require health care and there will be associated costs. So, Mr. 
Chairman, I am gratified and happy that we are having this 
hearing today.
    Finally, I would just say this. I do not want to see us end 
up with a system where all of our eggs are in one basket. I 
think there is some benefit for risk reduction, in terms of 
diversification.
    Our committee is holding a lot of hearings on Enron. A lot 
of people lost most of their life savings or their pensions 
because they had all of their investment eggs in one basket.
    There is a certain benefit to having some diversity in our 
medical health care delivery system, because I think we can 
learn from different approaches. So with that, Mr. Chairman, I 
will yield back.
    Mr. Norwood. Thank you, Dr. Ganske.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Robert L. Ehrlich, Jr., a Representative in 
                  Congress from the State of Maryland
    Mr. Chairman, thank you for holding this important hearing on the 
Federal Employees Health Benefit Program (FEHBP) and the lessons we may 
learn from it to improve Medicare.
    As members of Congress and members of this Subcommittee, in 
particular, each of us is faced daily with potential improvements to 
the Medicare system. There are a myriad of bills before the 107th 
Congress to improve Medicare for our nation's 40 million seniors. For 
instance, I am a cosponsor of legislation to allow Medicare to cover: 
Lab Diagnostic Tests (H.R. 1798), Breast Cancer Procedures (H.R. 536), 
Self-injected Biologicals (H.R. 1089), enhanced Breast Cancer Screening 
(H.R. 1328), Oral Anticancer Drugs (H.R. 1624), greater coverage for 
End-Stage Renal Disease (H.R. 2220), and increased coverage for Mental 
Health services (H.R. 599).
    Mr. Chairman, these handful of improvements are just a small sample 
of the bills currently before Congress designed to keep Medicare 
updated with cutting-edge modern medicine to provide high quality care 
for our nation's seniors. We all recognize that Medicare needs constant 
attention and improvement. Accordingly, we now have an approach in 
Congress to try to improve it piece-meal, bill by bill, making a 
political battle out of each new health service Medicare could or 
should provide to our seniors. Moving to a more competitive, private 
model like FEHBP may deliver more services at better costs to the 
government and seniors.
    I am pleased that we have this opportunity to discuss how the 
Federal Employee Health Benefits Program (FEHBP) works. FEHBP is 
employer-sponsored health care coverage that offers employees a wide 
range of fee-for-service, point of service, and managed care products. 
While beneficiaries have a host of plans from which to choose, the 
federal government pays up to 75% of a total plan's premium.
    Our colleagues in the Senate, Senators John Breaux (D-LA) and 
Senator Bill Frist (R-TN) have introduced legislation to encourage more 
competition within Medicare to improve services. Legislation commonly 
referred to as ``Breaux-Frist I'' would allow the government plan to be 
competitive with private plans to contain costs and expand benefits for 
seniors. ``Breaux-Frist II'' encourages competition among private plans 
only. Seniors would have the ability to choose between private plans or 
the government plan.
    Mr. Chairman, as we explore these difficult issues to reform 
Medicare, I appreciate this forum to learn more about the FEHBP, our 
experience with Medicare+Choice, and lessons we have learned from them 
both to improve the health care seniors deserve.
    Thank you, Mr. Chairman.
                                 ______
                                 
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Thank you, Mr. Chairman for holding this very important hearing. 
Before I begin, however, I want to recognize my good friend from the 
State of Louisiana--one of our witnesses here today--Bobby Jindal. 
Bobby, as many of you know, is the Assistant Secretary for Planning and 
Evaluation at the Department of Health and Human Services under 
Secretary Tommy Thompson. Possessing a wealth of experience on Medicare 
and Medicaid issues, he has really been a friend to this Committee. 
There are few people more qualified to testify about Medicare 
Modernization than Bobby Jindal.
    Today, we are once again looking at ways that we can improve the 
existing Medicare Program and place it on a sound financial footing. 
Sad to say, but Medicare is going broke. And unless we come to terms 
with this fact quickly, we will not be able to uphold our promise to 
the next generation of seniors.
    I would like to mention a couple of numbers that may startle you. 
And hopefully, convince everyone in this room that they need to join 
the fight and get serious about modernizing Medicare. This may be one 
of the single most important issues Congress votes on this year.
    Currently, Medicare, Medicaid and Social Security comprise about 55 
percent of the total federal budget--55 percent. By the year 2012--and 
that's not that far away--the total of these entitlement programs will 
rise to 69 percent of the federal budget. And if we fast forward to the 
year 2030--entitlement spending will grow to over 80 percent of the 
federal budget. That's over 80 percent. 30 percent of the budget alone 
will be spent on Medicare and that's before you even factor a 
prescription drug bill into the mix.
    Obviously, we can't sustain this level of spending. With an 
estimated 77 million people expected to be enrolled in Medicare by 
2030, it's pretty clear we are rapidly moving toward a financial 
crisis, unless we take some pretty dramatic steps.
    So what are those steps? What type of reforms can we act on to 
ensure that Medicare will be around for our children?
    One of the reforms that has been suggested by quite a few smart 
people, including our friend Bobby Jindal, when he was the Executive 
Director of the Bipartisan Medicare Commission, is moving to an FEHBP 
model of delivering health care benefits to seniors. This reform, if 
implemented properly, has the potential to save a modest amount of 
money over time, but also provide beneficiaries with a wide range of 
benefit choices, including managed care options, point of service 
options and fee-for-service.
    Members of Congress have excellent health care benefits and 
participate in a system that improves automatically over time. Why 
shouldn't our Nation's seniors? Why should our seniors have to wait for 
an act of Congress before adding an innovative new benefit to the 
Medicare Program? Under an FEHBP model, seniors wouldn't have to.
    I'm not going to tell you today that FEHBP is perfect and that we 
should replicate every part of that Program. But FEHBP works. And there 
are many lessons we can learn from it. For example, FEHBP reimburses a 
plan after it submits a bid and negotiates a contract with the Office 
of Personnel Management (OPM). Why can't Medicare function the same 
way? Shouldn't Medicare plans be required to assume some of the 
financial risk of providing health care to seniors? FEHBP plans do.
    Under FEHBP, plans compete against each other and have financial 
incentives to offer high-quality, low-cost products for enrollees. Why 
can't Medicare operate in this manner? Also, isn't it about time that 
government plans compete against private plans on a level playing 
field? Why should the government plan receive an unfair advantage and 
receive higher federal subsidies than a private plan? We have seen the 
disastrous results of that policy in today's Medicare+Choice system 
where private plans are often receiving 2 percent annual payment 
increases compared to fee-for-service increases of 5.5%. Private plans 
end up being under reimbursed in such a system and the health care 
marketplace becomes distorted. Is it any wonder that private plans will 
withdraw from a market if you underpay them vis-a-vis fee-for-service?
    Obviously, there are many different ways that we can replicate the 
FEHBP system. Senators Frist and Breaux have introduced two different 
pieces of legislation with varying levels of competition. We should 
look at both of those bills and examine whether the ideas behind 
Breaux/Frist I or Breaux/Frist II should be incorporated into the 
Medicare legislation we move through this Committee. Senators Breaux 
and Frist have done a great deal of work on this issue. It would 
behoove our Subcommittee to build upon that work and produce a product 
that can help turn the direction of the Medicare Program around.
    Lets face it. We can't afford to sit still this session of Congress 
and let another year go by without making structural reforms to the 
Program. Today, we only focused on one of them. Of course, we also need 
to add a prescription drug benefit to the Program, modernize the 
existing benefit package, develop a more comprehensive measure of 
Medicare's solvency and bring many other needed changes to the Program. 
The list of needed reforms is long and certainly not without 
controversy.
    But our parents, our children, and all Americans are counting on us 
to strengthen Medicare this year. We should not let them down.
    Mr. Chairman, you are exploring an incredibly important subject 
today. This is not a brand new issue, but its significance cannot be 
understated. We have high-caliber witnesses appearing before us today. 
I hope they can provide us with some guidance regarding how we can make 
an FEHBP model work for Medicare.
    Thank you.
                                 ______
                                 
  Prepared Statement of Hon. Gene Green, a Representative in Congress 
                        from the State of Texas
    Thank you Mr. Chairman for holding this hearing today.
    The Medicare program is one of the most important social health 
care programs in our country's history.
    Before Medicare was created in 1965, nearly half of seniors had no 
health insurance, and one third were living in poverty.
    Today, 97 percent of all seniors have health insurance, and the 
number of seniors living in poverty has been cut by 60 percent.
    This program is a guarantee that all seniors--who have worked their 
whole lives to make this country great--have the health care they need 
in their golden years.
    Whatever changes Congress makes to this program, we must make sure 
that we do not undermine that basic principal of the Medicare system.
    Unfortunately, some proposals--namely the ones modeled after the 
FEHBP--would shift health care costs from the federal government to 
seniors.
    There are several problems with modeling the Medicare system after 
the FEHBP.
    First of all, comparing Medicare beneficiaries to FEHBP enrollees 
is like comparing apples to oranges.
    Medicare beneficiaries are considerably older than FEHBP enrollees. 
As such, Medicare beneficiaries have medical needs that are vastly 
different from individuals in the FEHBP.
    The average 75 year-old person has three chronic medical conditions 
and regularly uses about five prescription drugs, as well as many over-
the-counter remedies. In many cases, older people are using 12 
prescriptions or more at any given time.
    More than one in four people at age 75 report at least one 
disabling condition. By the age of 80, three out of four people report 
a disabling condition.
    Age related social and psychological factors, such as retirement, 
widowhood, bereavement and isolation can compound the health care 
challenges for seniors.
    The reality is that our elderly population is expensive to care 
for.
    This is true for seniors across the country.
    But if we moved to an FEHBP model, seniors would have different 
benefits and different costs based on where they live.
    Average Medicare spending varies greatly from region to region. In 
Louisiana, average Medicare spending is over $6200 a year, but in 
Oregon it is only $2600 per year. Under some proposals, the differences 
in cost would be shouldered by the beneficiary.
    There is no guarantee that these plans would have to provide 
certain benefits or services.
    Coverage that is currently guaranteed under Medicare--such as 
diabetes testing supplies and mammograms for breast cancer--would 
evaporate under this model.
    This could create a situation where low income beneficiaries might 
be able to afford lower cost plans that doesn't provide the health care 
that they need.
    Under this proposal, wealthier beneficiaries, however, would be 
able to afford higher-cost, better quality plans.
    This creates classes of health care--something I'm sure we all want 
to avoid.
    Another problem with an FEHBP style model is that it leads to 
adverse risk selection.
    Within the FEHBP, we have seen that the plans compete to attract 
lower-cost, healthy individuals.
    As a result, higher cost, sicker individuals wind up in the fee-
for-service plan, which is traditionally more expensive.
    This places an increasing financial burden on individuals who are 
already sick and vulnerable.
    Mr. Chairman, as I mentioned earlier, the reality is that the 
elderly are an expensive population to care for.
    Converting Medicare to an FEHBP-styled model will do nothing to 
change that.
    It would simply change who pays.
    Thank you, and I yield back the balance of my time.

    Mr. Norwood. And now we would like to hear from our 
panelists.
    We have a very distinguished panel, and Mr. Jindal, if you 
would begin, please. Pull the microphone close to you.

  STATEMENTS OF HON. BOBBY P. JINDAL, ASSISTANT SECRETARY FOR 
 PLANNING AND EVALUATION, U.S. DEPARTMENT OF HEALTH AND HUMAN 
SERVICES; MARILYN MOON, SENIOR FELLOW, URBAN INSTITUTE; STUART 
  M. BUTLER, VICE PRESIDENT FOR DOMESTIC AND ECONOMIC POLICY 
  STUDIES, HERITAGE FOUNDATION; MAX RICHTMAN, EXECUTIVE VICE 
 PRESIDENT, NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY AND 
   MEDICARE; AND STEPHEN J. deMONTMOLLIN, VICE PRESIDENT AND 
               GENERAL COUNSEL, AVMED HEALTH PLAN

    Mr. Jindal. Thank you, Mr. Chairman, Representative Brown, 
and distinguished subcommittee members, I thank you for the 
invitation and the opportunity to appear before the committee 
today.
    I am delighted to have the opportunity to discuss the 
administration's goal of giving Medicare beneficiaries reliable 
and attractive health care options, and lessons that can be 
drawn from the Federal Employees Health Benefits Program about 
how to accomplish that goal.
    I also look forward to answering your questions. We believe 
that it is critical for seniors to have these options, in 
addition to the option of staying in today's fee for service 
Medicare plan, or choosing a fee for service plan with an 
improved benefit package.
    About 5 million seniors, including many with serious health 
problems, choose to enroll in a private plan today and for good 
reasons. Through these plans, Medicare beneficiaries can obtain 
drug coverage, better preventive care, innovative disease 
management programs, and other benefits even as they lower 
their out-of-pocket costs.
    Now, there has been a lot of discussion about the cost and 
the benefits of Medicare+Choice plans, but I think it is 
important to contrast these plans with fee-for-service, plus 
Medigap.
    And as we know, over 90 percent of the beneficiaries have 
some form of supplemental coverage, and I think it is important 
to look at that bigger picture when making these comparisons.
    As the members of this committee know all too well, 
however, millions of Medicare beneficiaries have only one 
health plan available to them, the traditional fee for service 
plan.
    And most seniors are only given one or two other options. 
In recent years, flaws in the payment system for Medicare's 
private plans have forced many of these plans to reduce their 
benefits or service areas, or withdraw from the program 
entirely.
    And I think you will hear a little bit more about that as 
part of the panel. While the benefits offered by the plans 
remaining still provide a better deal for many seniors than 
fee-for-service Medicare+Choice, an increasingly costly Medigap 
policy, millions of seniors who prefer private plans have been 
made worse off as a result of these changes.
    And without corrective legislation, this situation will 
only get worse, and just at the time when rapid advances in 
care will make it even more important for seniors to have these 
options.
    By contrast, Members of Congress, administration officials, 
and all other Federal employees, have long been able to choose 
from a wide variety of health plans, including not just HMOs, 
but more flexible, preferred provider organizations and point 
of service plans as well.
    Indeed, the majority of the employees in the Federal 
Employees Plan are actually in one of these two latter types of 
organizations and not in HMOs.
    This system allows each participant to choose the plan that 
best meets their health care needs, and has given them access 
to innovative benefits, as well as options for reducing their 
premiums and health costs.
    To quote the President, ``Medicare beneficiaries should 
have the same kind of reliable coverage options available to 
all Federal employees throughout the country, a system that has 
been proven to provide one of the highest levels of 
satisfaction of any health care program.''
    Of course, Medicare's failure to provide America's seniors 
with reliable health care options is just one of the ways in 
which the program has lagged behind.
    That is why the administration has also developed a 
framework for strengthening Medicare to address the many 
threats to its ability to give seniors the health service they 
need now and into the future.
    At the same time, the President's budget recognizes that it 
will take several years to implement the comprehensive 
improvements that Medicare needs, including a prescription drug 
benefit that has been mentioned today, and a more equitable 
payment system for private plans.
    Therefore, the budget also proposes urgently needed steps 
that should be incorporated in the Medicare legislation in 
order to stabilize the Medicare+Choice program. These proposals 
would modify the Medicare+Choice payment formula to better 
reflect actual health care cost increases, allocate additional 
resources in 2003 to counties that have only received minimum 
updates, and provide incentive payments for new types of plans 
to participate in Medicare+Choice, including PPOs.
    Together, these augmented payments would address the 
problem of persistently low payment updates to most 
Medicare+Choice plans, making more plan choices available and 
improving benefits for millions of seniors.
    Because these proposals would allow many plans to provide 
or to at least maintain drug coverage in their benefit package, 
they also provide another means of giving seniors prompt help 
with their drug costs so that they do not have to wait for the 
full implementation of a drug benefit.
    I have submitted my statement for the record, and it 
provides additional details about these short-term proposals, 
and about how the administration sees FEHBP as a useful example 
for Medicare for providing reliable access to the kind of 
innovative health benefits that so many seniors want and 
deserve.
    In closing, just let me say that the President remains 
fully committed to working with Congress to pass legislation 
this year that reflects his framework for strengthening 
Medicare.
    He also believes that legislation should include several 
immediate steps to help seniors, while longer term improvements 
are being implemented so that Medicare legislation can provide 
help to seniors who need help now, and not just a few years 
down the road.
    I look forward to answering your questions and working with 
you to put into place these important enhancements for Medicare 
beneficiaries. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Bobby P. Jindal follows:]
  Prepared Statement of Hon. Bobby P. Jindal, Assistant Secretary for 
    Planning and Evaluation, Department of Health and Human Services
    Chairman Bilirakis, Representative Brown, distinguished 
Subcommittee members, thank you for inviting me to appear before the 
Committee today. I am delighted to have the opportunity to discuss the 
Administration's goal of giving Medicare beneficiaries reliable and 
attractive health plan options--and the lessons that can be drawn from 
the Federal Employees Health Benefits Program about how to do so. We 
believe it is critical for seniors to have these options, in addition 
to the option in staying in today's fee-for-service Medicare plan or 
choosing a fee-for-service plan with an improved benefit package. About 
5 million seniors, including many with serious health problems, choose 
to enroll in a private plan today--and for good reasons. Through these 
plans Medicare beneficiaries can obtain drug coverage, better 
preventive care, innovative disease management programs and other 
benefits even as they lower their out-of-pocket costs.
    As the members of this committee know all too well, however, 
millions of Medicare beneficiaries have only one health plan available 
to them--the traditional fee-for-service plan--and most seniors are 
given only one or two other options. And in recent years, flaws in the 
payment system for Medicare's private plans have forced many of these 
plans to reduce their benefits or service areas or withdraw from the 
program entirely. While the benefits offered by the plans that remain 
still provide a better deal for many seniors than fee-for-service 
Medicare plus an increasingly costly Medigap policy, millions of 
seniors who prefer private plans have been made worse off as a result 
of these recent changes. And without corrective legislation this 
situation will only get worse--just at the time when rapid advances in 
care will make it even more important for seniors to have these 
options.
    By contrast, Members of Congress, Administration officials, and all 
other Federal employees have long been able to choose from a wide 
variety of health plans, including not just HMOs but more flexible 
Preferred Provider Organizations and Point-of-Service plans as well. 
This system allows each participant to choose the plan that best meets 
their health needs and has given them access to innovative benefits as 
well as options for reducing their premiums and health costs. To quote 
the President, ``Medicare beneficiaries should have the same kind of 
reliable coverage options available to all Federal employees throughout 
the country--a system that has been proven to provide one of the 
highest levels of satisfaction of any health care program.''' Of 
course, Medicare's failure to provide America's seniors with reliable 
health care options is just one of the ways in which the program has 
lagged behind. That is why the Administration developed a framework for 
strengthening Medicare to address the many threats to its ability to 
give seniors the health security they need, now and into the future.
    At the same time, the President's budget recognizes that it will 
take several years to implement the comprehensive improvements that 
Medicare needs, including a prescription drug benefit and a more 
equitable payment system for private plans. Therefore the Budget also 
proposes urgently needed steps that should be incorporated into 
Medicare legislation in order to stabilize the Medicare+Choice program. 
These proposals would modify the Medicare+Choice payment formula to 
better reflect actual healthcare cost increases, allocate additional 
resources in 2003 to counties that have received only minimum updates, 
and provide incentive payments for new types of plans to participate in 
Medicare+Choice, including PPOs. Together these augmented payments 
would address the problem of persistently low payment updates to most 
Medicare+Choice plans, making more plan choices available and improving 
benefits for millions of seniors. Because these proposals would allow 
many plans to provide or at least maintain drug coverage in their 
benefit package, they also provide another means of giving seniors 
prompt help with their drug costs--so that they do not have to wait for 
the full implementation of a drug benefit. But before I provide 
additional details about these short-term proposals I would like to 
explain how the Administration sees FEHBP as a useful example for 
Medicare in providing reliable access to the kind of innovative health 
benefits that so many seniors want and deserve.
        providing reliable health insurance options for seniors
    For more than 36 years, Medicare has been immensely successful in 
helping America's seniors achieve the promise of secure access to 
needed health care. During that time, medical practice has improved 
dramatically, but the Medicare benefit package and delivery system have 
not kept pace. Medicare's lack of prescription drug coverage is only 
one example of the ways in which the program has become outdated. 
Medicare has also lagged behind the private sector in providing 
reliable health insurance benefit options for beneficiaries that best 
meet the beneficiaries' own circumstances and preferences. Like the 
Federal government, many state gov- ernments and most large private 
employers help their employees get the care that is best suited to 
their needs by offering them several health care plans, along with 
unbiased and useful information that helps them choose the best one. 
But Medicare has failed to provide America's seniors with the same kind 
of reliable health care options that every Federal employee has 
received for decades. For many bene- ficiaries, particularly those in 
rural areas, Medicare offers only one insurance plan-- it is strictly 
one-size-fits-all. Previous legislation to address this problem, 
including the establishment of the Medicare+Choice program, has not had 
the intended effect of providing more reliable health insurance options 
for Medicare beneficiaries.
    The effects of Medicare's current shortcomings can be seen very 
clearly here in our Nation's capital (and in the figure below). Those 
of us who are Federal employ- ees living in Washington, DC, have eleven 
different health plans to choose from, in- cluding a variety of fee-
for-service plans and health maintenance organizations (HMOs). But our 
neighbors with Medicare coverage have only two choices--the tra- 
ditional fee-for-service plan and a single HMO. This pattern occurs 
throughout the country, in urban and rural areas alike. Park Rangers 
living in the most remote na- tional forests, and postal workers in 
every neighborhood, have at least seven plan choices. Overall, FEHBP 
provides health insurance coverage to 9 million workers and their 
families through contracts with almost 180 insurers and health plans.
[GRAPHIC] [TIFF OMITTED] 78505.001

    Private plans like those offered to Federal employees have 
long been the choice of millions of Medicare beneficiaries 
because these plans allow beneficiaries to receive more up-to-
date benefits than those available under traditional Medicare. 
Pri- vate plans will be the preferred option for many seniors 
for several reasons:
 Private plans often have provided innovative new 
health benefits--including pre- ventive care, prescription drug 
coverage, and dental services--without having to wait for an 
act of Congress. Private plans also invented state-of-the-art 
coordi- nated care for the many Medicare beneficiaries who have 
multiple or chronic health problems.
 Private plan options allow seniors to reduce or 
eliminate their co-payments and deductibles so that their out-
of-pocket payments are manageable--without hav- ing to purchase 
a supplemental insurance policy that provide expensive ``first 
dollar'' coverage.
 Private plan options give seniors more power. If they 
are not happy with the service they are receiving, they can 
switch to a different plan. Competition is the best way to make 
bureaucracies and health plans responsive--by giving cus-

    tomers the freedom to choose. Medicare beneficiaries should 
have the same op-

    tions as working Americans.
    For these reasons the President's framework for 
strengthening Medicare includes the principle that Medicare's 
coverage should be improved to give beneficiaries the same kind 
of reliable health care options and access to innovative 
benefits that all Federal employees and many other Americans 
enjoy. As in the Federal employees' program and other 
successful programs:

 Plans should be allowed to bid to provide Medicare's 
required benefits at a com- petitive price, and beneficiaries 
who elect a less costly option should be able to keep most of 
the savings--so that a beneficiary may pay no premium at all.
 Medicare's payment system should create a level 
playing field for all plans in areas where private plans are 
paid less today and should continue to encourage private plans 
to participate in areas where Medicare provides few choices.
 The improved choice system should give beneficiaries 
useful and timely compara- tive information on the quality and 
total cost of all of their health care coverage options. 
Administrative burdens on private plans should be reduced while 
pro- tecting patients' rights to allow good insurance plans to 
focus on providing reli- able, high-quality service for 
Medicare beneficiaries.
 In areas where a significant share of seniors choose 
to get their benefits through private plans, the government's 
share of Medicare costs should eventually re- flect the average 
cost of providing Medicare's required benefits in the private 
plans as well as the government plan. Low-income seniors should 
continue to receive more comprehensive support for their 
premiums and health care costs.
    At the same time, many Medicare beneficiaries will prefer 
to stay in the govern- ment-run, fee-for-service Medicare plan. 
The President's framework preserves the option of staying in 
the existing plan, with no changes, for seniors who prefer what 
they have now. It also provides an improved government plan 
option with better preventive coverage, better protection 
against the high costs of serious illnesses, and more 
affordable Medigap coverage.

                   STRENGTHENING MEDICARE+CHOICE NOW

    Clearly, a comprehensive set of improvements to Medicare 
will take time to imple- ment. Such improvements must include 
giving all seniors the option of subsidized prescription drug 
coverage. They must include giving all beneficiaries better 
options to reduce their costs and obtain better benefits in a 
private plan. But because so many beneficiaries value the 
benefits they obtain through Medicare+Choice--and because it is 
so important to retain these options for the future so that 
seniors have access to the valuable and innovative new benefits 
that private plans can provide-- we need to take steps now to 
encourage private plans to remain in Medicare until the new 
payment system is phased in.
    Medicare+Choice has enabled us to take advantage of private 
sector expertise to give Medicare beneficiaries more services 
for their premiums, often with lower cost sharing and more 
benefits than are available under traditional Medicare. It is 
im- portant to recognize that these plans provide many benefits 
that are valuable to seniors with serious and chronic health 
conditions. For example:

 A Medicare+Choice plan in Boston instituted a 
comprehensive disease manage- ment program for its enrollees 
with diabetes. The result has been significant increases in the 
share of enrollees who received annual retinal eye exams and 
are monitored for diabetic nephropathy and substantial 
improvements in the management of their Hemoglobin and 
cholesterol levels.
 A Medicare+Choice plan in Florida instituted a 
comprehensive disease manage- ment program to monitor, 
facilitate, and coordinate care for enrollees stricken with 
cancer. As a result, the number of acute hospital days per 
cancer case dropped by about 15% over two years and the share 
of inpatient admissions for complications with cancer has 
declined by 10 percent.
 Research has shown that individuals who receive after-
care following hospital stays for mental illness are more 
likely to be compliant with their treatment regimens and less 
likely to be readmitted to the hospital. One Medicare+Choice 
plan in New York instituted a case management program for those 
hospitalized for mental health disorders and nearly doubled the 
share of its enrollees who received follow-up care within 7 
days of their hospital discharge.
 A Medicare+Choice plan in California established a 
successful outreach program to increase influenza vaccination 
rates among their elderly and chronically ill beneficiaries in 
order to reduce mortality and morbidity among these at-risk 
populations.
    As you know, the Medicare+Choice program has changed 
significantly in the last several years. Hundreds of plans have 
left the program or reduced their service

areas affecting hundreds of thousands of beneficiaries. In 
2002, about 60 percent of all Medicare beneficiaries have 
access to a Medicare+Choice option, compared to 74 percent in 
1998. This year, more than 500,000 beneficiaries were impacted 
by orga- nizations either withdrawing from the program or 
reducing their service areas. Plans with both zero premiums and 
no significant beneficiary cost sharing have largely 
disappeared. In addition, plans are less likely to offer drug 
coverage in their basic plan and even when they do that 
coverage has become less generous. As a re- sult, the share of 
enrollees with drug coverage in their basic plan declined from 
84 percent in 1999 to 69 percent in 2001. This is because the 
annual increases in Medicare+Choice payments in the counties 
where most enrollees live have failed to reflect rising health 
care costs. Unfortunately, as a result, plans that wish to stay 
in the program are left with two options: reducing supplemental 
benefits or increas- ing beneficiary cost sharing.
    In 2001, the Administration took a number of actions to 
reduce administrative burden on Medicare+Choice plans so that 
they could focus on providing care to their enrollees. 
Secretary Thompson and Administrator Scully have testified 
about these administrative actions before this committee and 
the other committees of jurisdic- tion. The Secretary's 
regulatory reform initiative will also address the regulatory 
burden on Medicare+Choice plans. As the Secretary asked when 
announcing this initiative, ``At the very time when we are 
trying to attract more managed care plans to offer their 
services to Medicare beneficiaries, do we really need 854 pages 
of regu- lations standing in the middle of the front door to 
the program?'' Here the contrast with FEHBP--where high levels 
of enrollee satisfaction have been achieved by con- tracting 
with health plans to provide good options and using regulations 
only to the extent necessary--is also striking.
    But more must be done and that will require legislation. 
Despite our best efforts to slow the number of plan withdrawals 
through administrative actions, it is appar- ent that 
additional improvements need to be made to the Medicare+Choice 
program to encourage more plan participation and greater 
beneficiary access to Medicare op- tions. Simply put, the 
Medicare+Choice payment system must be more responsive to the 
health care marketplace, so that the program can meet 
beneficiary needs. We support a fairer payment system for 
private plans in Medicare because the current payment system is 
causing many seniors to lose access to valuable benefits--and 
if left uncorrected this problem will only get worse just as 
the need to keep up with rapid advances in medical benefits is 
growing.
    Congress has acted to increase funding for Medicare+Choice 
through legislation in recent years, but much of the increase 
was targeted to so-called ``floor'' counties. As a result, 
these counties have experienced cumulative average payment 
increases of 50 percent over the last five years. Specifically, 
the floor payment amount, which is the payment received in many 
rural areas, increased from $415 to $475 in 2001 and $500 in 
2002.
    However, payment increases for private plans have failed to 
stay anywhere close to medical cost increases in many parts of 
the country--the so-called ``non-floor'' counties that have 
accounted for the vast majority of Medicare+Choice enrollment. 
Between 1998 and 2002, private plan payments in many of these 
areas increased by just 11.5 percent while Medicare fee-for-
service payments (government plan costs) went up by about 17 
percent nationwide--about 50 percent faster. This is the reason 
many plans cite for having to cut benefits, raise copayments, 
and even pull out of the program-creating serious problems for 
the beneficiaries who depend on them.
    This year, the President's budget focuses on increasing 
payments in these ``non- floor'' counties. Under the budget 
proposal:

 For 2003, M+C payments would be increased by 6.5 
percent in counties that re- ceived the minimum update in 2002 
and by overall Medicare growth minus 0.5 percent in ``floor'' 
counties.
 For 2004 and 2005, the minimum update and floor rates 
would be increased by overall Medicare growth minus 0.5 
percent. The payment would be the greater of these rates or a 
blended rate.
 Reforms to payments for private plans for 2006 and 
beyond would be part of the comprehensive improvements in 
Medicare envisioned in the President's frame- work.
    The budget also proposes to give bonus payments to 
coordinated care plans that are the first of their type (i.e. 
HMO or PPO) to enter a service area. During their first year in 
a new service area, eligible plans would receive a 5 percent 
bonus on top of their M+C per member per month payment. The 
bonus would phase out 1 percent per year over the plan's first 
five years of operation. This proposal would expand the number 
of health plan options available to Medicare+Choice enrollees 
by broadening the variety of plans that participate in the 
Medicare+Choice program to include the types that beneficiaries 
want, and are available to Federal employees. For example, this 
proposal would give preferred provider organizations (PPOs) an 
incentive to enter service areas that already have a 
Medicare+Choice HMO.
    We believe that the investments proposed in this budget 
will encourage new plans to enter Medicare+Choice and will 
improve the coverage options available to mil- lions of 
beneficiaries. Even with all the problems caused in recent 
years by the cur- rent payment system, there are still over 5 
million Medicare beneficiaries enrolled in private plans--so 
for many seniors, private plans are the best option. Indicators 
of care quality and enrollee satisfaction in these plans are 
high. And even after the recent cutbacks in benefits, they can 
still be a better deal for seniors than enrolling in 
traditional Medicare and buying an expensive supplemental 
policy to cover the large benefit gaps.

                               CONCLUSION

    The President remains fully committed to working with 
Congress to pass legisla- tion this year that reflects his 
framework for strengthening Medicare. He also be- lieves that 
legislation should include several immediate steps to help 
seniors while longer-term improvements are being implemented--
so that Medicare legislation can provide help to seniors who 
need help now, not just a few years down the road. I look 
forward to answering your questions and to working with you to 
put into place these important enhancements for Medicare 
beneficiaries.

    Mr. Norwood. Ms. Moon, you are now recognized, please, 
Madam.

                   STATEMENT OF MARILYN MOON

    Ms. Moon. Thank you. I appreciate the opportunity to be 
here to speak to the committee, and in my testimony, I spend a 
consid- erable amount of time talking about the value of 
competition and choice.
    I should indicate that I am a trained economist, and I 
believe fairly in competition and choice, but I believe you 
also have to be very careful about the market that you are 
dealing with.
    And in the case of health care, the health care market puts 
up a number of problems that make choice not necessarily work 
quite as well. Most capitated programs that we see out there 
now have not generated the innovative ways to organize care 
that many peo- ple anticipated and hoped would happen in a 
capitated system.
    But instead they have concentrated on doing the things that 
are the easiest to do in the case of running a good program, 
and that is enrolling healthy beneficiaries, and using 
relatively crude con- trols on service use.
    In fact, if you enroll healthy beneficiaries, you can look 
right to those who enroll, because you are offering them 
terrific benefits, and you are offering them good coverage. The 
problem is that it is just not very good for society as a whole 
nor for the Medicare pro- gram because you are skimming off the 
easiest to deal with pa- tients in that setting.
    Part of that occurs because we have moved from a capitated 
sys- tem, and from a fee for service situation which does have 
problems, to one in which we simply give people a fixed payment 
and say go out and do good without a lot of oversight and 
control.
    Competition then can lead to a number of problems for bene- 
ficiaries, including instability in the case when plans leave, 
when physicians leave the program, when other problems occur, 
which is particularly a problem for the vulnerable 
beneficiaries and leaves them at risk.
    The choice of plans will also not offer many advantages for 
bene- ficiaries, particularly since this election is a big 
problem out there
and not one that we have dealt with. Mostly people talk about 
improving risk selection have problems and adding a risk 
adjustor, in terms of the promise of risk adjustment, as 
opposed to the practice.
    Competition and choice can make it difficult to protect the 
social insurance nature of the Medicare program. Now, if you 
look at some of the practical issues in moving to an FEHBP type 
approach, there are also a number of issues that I think should 
be considered very carefully if you want to move in this 
direction.
    First, I think it is important to emphasize that extra 
benefits, including prescription drugs, cannot be provided 
without substantial additional Federal resources. Flexibility 
in the payment system is simply not going to do it in an 
environment in which we already have an inadequate benefit 
package.
    It is difficult to imagine, for example, what tradeoffs 
could be done in a package of benefits that would compensate 
plans for providing prescription drug benefits if they have to 
then raise cost sharing to a very high level, and other 
services in the program.
    Rising costs have been a greater problem for FEHBP than 
Medicare as someone has already mentioned in recent years, 
likely because all of us are facing problems when we look at 
the health care system and holding down costs, and managed care 
plans are certainly no exception.
    Withdrawal of the plans from participation have also 
plagued both Medicare and FEHBP. So I think it is hard to 
imagine that we can solve some of the problems in the 
Medicare+Choice system by simply moving to FEHBP.
    And finally the costs of administering an FEHBP type system 
could be high under Medicare because of the individual 
enrollment nature of the program. You don't have the backup of 
the Federal Government with its personnel offices to help in 
many cases.
    We would need to have greater oversight for vulnerable 
beneficiaries, and a challenge of a much larger enrollee base, 
and a more complicated enrollee base, both in terms of the 
health of the enrollees, and in terms of the geographic 
variations, and the rural area problems, versus folks who live 
in cities, and trying to deal with that all under one rubric.
    So I conclude with a number of next steps for modernizing 
Medicare. I strongly believe that we must add a prescription 
drug benefit as a first step, and not a last step, in part 
because you cannot have good fee for service, good managed 
care, or a good much of anything else until you have 
prescription drugs in the benefit package.
    Much more is needed to be done on risk adjustment and that 
is the key if we want to move to more privatization, I believe. 
We need to focus on improving fee for service, even if you 
offer a number of other plans.
    Fee for service will remain very popular for Medicare 
beneficiaries for the time to come, and I think there are 
innovative ways from the private sector that you could layer on 
to the fee for service part of Medicare in terms of 
coordination of care, for example.
    Don't assume that privatization gives beneficiaries what 
they want. They all say they like to have choice, but they mean 
choice of physicians and hospitals, and they are often very 
confused and frustrated by the complications in the 
Medicare+Choice system.
    And don't assume that regulation and oversight will be 
simpler with competition, because this is a population that 
needs a lot of oversight and protections. I would urge the 
Congress to expand that with an improved Medicare+Choice, 
because I do agree that having a variation is good.
    It is healthy for some competition between the public 
sector and the private sector, but I think we should move 
slowly in this direction. And finally I think it is important 
to recognize that Medicare will need more resources in order to 
be a viable program for the future. Thank you.
    [The prepared statement of Marilyn Moon follows:]
        Prepared Statement of Marilyn Moon, The Urban Institute
    Supporters of using a Federal Employees Health Benefits Program 
(FEHBP) model for reforming Medicare often tout three major advantages: 
competition that will bring innovation and take the federal government 
out of the business of setting prices, choice for beneficiaries 
selecting plans, and savings to the federal government. Who could be 
against such a ``mom and apple pie'' proposal that achieves these 
outcomes? After all, wouldn't a private sector, capitalist approach be 
preferred over a public program such as the current traditional 
Medicare fee for service system? For a number of reasons, I argue that 
privatization of Medicare can be disadvantageous to beneficiaries of 
the program, failing to achieve all or most of these advantages and 
creating additional risks. A go-slow approach to revising the role of 
private plans in Medicare makes more sense than a rapid move to 
privatization.
    In my testimony I examine the claims regarding advantages from the 
private sector and put them in the broader context of meeting 
beneficiaries' needs. In addition to looking at the issues surrounding 
the economic incentives that are the heart of the argument for 
privatization, it is also useful to consider experience both with the 
current Medicare+Choice program and the Federal Employees Health 
Benefits Program (FEHBP). I conclude my testimony with a set of 
recommendations aimed at protecting the interests of beneficiaries as 
Medicare evolves to meet Americans' 21st Century needs.
                   the elements of an fehbp approach
    To resemble FEHBP, Medicare would have to change in a number of 
ways. Under FEHBP, all plans compete for enrollees; they each offer 
premiums that vary and some differences in deductibles, co-payments and 
other benefit characteristics. The federal government pays a portion of 
the premiums according to a formula, where the goal is to require that 
individuals who choose higher-cost plans pay a greater monthly premium 
than those choosing lower-cost plans. The idea is to encourage plans to 
compete on the basis of price and to give those enrolling a stake in 
choosing less expensive plans. Individuals can change plans once a year 
during open season; plans can also change their offerings at that time, 
if approved by the Office of Personnel Management.
    While the various characteristics of a Medicare version of this 
approach could differ, proponents usually cite a number of components 
as key. Requiring that individuals choose a plan (even those who wish 
to keep the traditional fee-for-service option) and pay more if its 
total premiums are higher than an average amount is intended to make 
Medicare beneficiaries more sensitive to differences in health care 
costs. Offering multiple plans in a geographic area, including managed 
care options, is also usually part of such proposals for Medicare. The 
key is to use economic incentives to spur competition and choice for 
beneficiaries.
                         competition and choice
    Competition and choice are so often cited as desirable, however, 
that what they mean in the context of health care is rarely even 
discussed. Thus, it is useful to consider if and why they might be 
desirable. First, the goal of competition is to raise quality and 
reduce costs so as to attract customers. In theory, this indirect 
enforcement mechanism should reduce the need for direct oversight and 
regulation in a well-functioning market since competitors effectively 
police each other. Choice is a related ``good'' because it allows the 
market to test for what consumers want and presumably, over time, 
products will change to more closely reflect consumer preferences. 
Choice also allows for differences in competing products and, hence, 
avoids the ``one size fits all'' approach that can result in a single 
product that no one likes.
    Economic incentives can influence behavior in the healthcare market 
place just as they can for other types of goods and services. But, the 
health care market does entail unique problems and constraints that 
need to be taken into account. Further, some traditional incentives may 
not be appropriate in light of other goals such as societal concerns 
about access to care and the quality of basic care.
    First, consider competition. The real issue facing Medicare's 
future is not the theoretical attractiveness of competition, but what 
it means in practice for the delivery of care. How does competition 
among private plans manifest itself? If we were dealing with a very 
standardized product, competition should only affect the quality of the 
product and its price. But when there is little standardization and few 
norms for quality--as is the case in health care--quality bears little 
relationship to competition. Furthermore, in neither Medicare+Choice 
nor FEHBP is competition focused exclusively on price. Offering 
alternative benefit packages is the major way in which Medicare+Choice 
plans compete, and this idea underpins FEHBP's structure as well. It is 
hard to lower costs while allowing a number of options to be proffered.
    But when price is an issue, good competitors look around and seek 
the easiest ways to hold down costs to lower their prices. In insurance 
plans, such as found in Medicare+Choice, the easiest path to 
profitability is to attract a healthier than average mix of patients 
(unless there is a good payment system that provides incentives to 
accept sicker patients). This happens not because plans are evil or 
cruel, but rather because they must make a profit. By seeking healthier 
enrollees, they can offer their clients a rich mix of services, do well 
by them and still make a profit. This is good for the company and good 
for their clients. It is just not good for sicker beneficiaries, for 
the Medicare program, nor for society as a whole because insurance 
companies end up getting paid too much for the clients they serve. Can 
that be altered? Creating a very strong risk adjustor could reduce, but 
probably not eliminate, the incentives to skim the cream from the 
market. Further, the existing risk adjustors are weak and progress on 
improving them has been very slow.
    The second way that plans may be able to hold down costs is by 
obtaining discounts from care providers. Further, supporters of 
competition often point to the benefits of letting insurers deal with 
the many prices that need to be set to have health care operate under 
the traditional Medicare program. Relying on private insurers does not 
solve that problem, however, but simply moves it to the plan level. 
Micromanagement would be eliminated at the federal government level, 
but would be alive and active within the insurance company.
    One way or another, the health care market has to contend with 
administered or negotiated prices. In the case of private plans, health 
care providers are now striking back with demands for higher fees. If 
plans enter into long, contentious negotiations, the network of doctors 
and other care providers participating in a plan may become smaller and 
less stable, an outcome that hurts consumers.
    A competitive environment may also reduce stability for consumers 
and providers in another way. As plans themselves move in and out of 
markets, some consumers may lose access to their physicians and other 
providers and have to learn a new set of rules if they go to another 
plan. These changes hurt the continuity of care.
    Developing innovative and effective tools for reducing unnecessary 
care is often well down the list of insurers' preferred strategies to 
reduce the costs of covering Medicare beneficiaries. In practice, such 
cost-controlling activities are hard to implement, especially for plans 
that consist of very loose networks of hospitals and doctors. It 
requires considerable effort and resources to build an infrastructure 
to coordinate care effectively. Some plans have used cruder methods--
making it hard to get appointments or routinely denying certain types 
of care--but this approach is a far cry from good management and is one 
that has helped fuel the backlash against managed care plans. Thus, one 
of the hopes for managed care--that it would use new and innovative 
strategies to better curtail unnecessary service--has not been 
achieved.
    These limitations on competition mean that private plans can hold 
down the costs of health care only modestly. Expectations by 
competition proponents that the savings achieved would be great enough 
to pay for substantial additional benefits at little or no cost to 
either the government or beneficiaries has been one of the rationales 
for supporting such an approach. But even if competition lowers costs 
somewhat from restricting provider choice and limiting care, savings 
may be insufficient to pay for expensive benefits like prescription 
drugs. Given the barriers to competition in this market, the promise of 
substantial savings has been seriously overstated.
    What about choice in health insurance? Is this so important to 
consumers that it justifies adopting a competitive, private market 
approach? Here it is important to note that choice issues tend to be 
thought of in two very different ways. For those enrolled in Medicare, 
choice is valued when it means the ability to pick one's own doctor or 
health care provider. To the health economist, choice usually refers to 
inviting competition by letting consumers choose among plans. But, the 
first type of choice is often restricted by plans, which offer limited 
supplies of providers and no guarantee that providers won't change over 
the course of a year. That aspect of choice thus offers a disadvantage 
to consumers.
    Yet, one potential advantage of choice among plans would be to 
allow individuals to seek policies that cover only the care that they 
believe they will need--for example, by excluding certain services 
(such as home health care) or offering higher deductibles and co-pays. 
But this flexibility creates a major problem since healthy people can 
choose a plan with high deductibles or no home health care, most likely 
putting them into a risk pool that does not attract those in poor 
health. And if high and low users of health care are not in the same 
risk pools, then sicker beneficiaries will have to choose among very 
high premiums costs or limited insurance coverage. And particularly if 
the risk adjustor that sets payments to plans on behalf of individuals 
of varying health status is weak, it is essential to limit choice in 
order to also limit risk selection.
    As noted above, another major problem with giving consumers choice 
of benefits is that it results in a different type of competition than 
price competition. Beneficiaries would not necessarily choose the 
lowest cost plan under such a strategy. If true competition were the 
goal, benefits would also be standardized to assure greater 
comparability and price comparisons.
    What does choice mean when benefits are standardized? Presumably 
individuals would choose among plans with fixed benefit packages. But 
on what basis can they make good choices? Plans are likely to advertise 
why they should be chosen, but they may not provide very helpful 
information. And the information that people really need, such as what 
different plans establish as ``reasonable payment levels'' or define as 
``medical necessity,'' is usually considered proprietary. But these 
seemingly technical issues determine what services are actually 
covered. Even if this information were made available, it is very hard 
even for savvy consumers to compare plans. Often, choosing the wrong 
plan becomes obvious only when the client becomes sick and needs care. 
Neutral advice and information from government can help consumers 
choose, but will that be enough to improve health coverage? And will 
the government invest in the dissemination of the objective data? 
Numerous studies have documented the problems and discomfort that many 
beneficiaries experience in trying to make such choices.
    For these reasons, I conclude there is little to be gained from 
expanding competition and choice for the beneficiary at the present. 
Competition does not offer a panacea. People need to look beyond the 
buzzwords and weigh the tradeoffs. The risks of dividing Medicare into 
the sick and the healthy in the name of competition and choice are 
high. And the potential for undermining the basic goals of Medicare as 
an entitlement program also argue against relying on private sector 
initiatives. Assuring universal access to care for those who are 
eligible is an important precept of Medicare. Splitting up the risk 
pool and relying on the private sector, which has no stake in social 
goals, make it difficult to protect the program.
                    experience with medicare+choice
    High quality plans seeking to serve patients well certainly exist, 
but Medicare+Choice is a very troubled program. Medicare has, since the 
1980s, formally allowed beneficiaries to choose private plans (paid on 
a capitated basis) instead of remaining in the traditional fee-for-
service part of the program. In 1997, the Balanced Budget Act (BBA) 
modified the private plan option to allow plans other than health 
maintenance organizations (HMOs) to participate. The new option was 
called Medicare+Choice.
    The BBA also sought to reform the payment system, which costs 
Medicare more for each enrollee than if they had remained in the 
traditional program. Serving a healthier population and lacking an 
adequate structure for establishing payments, Medicare overpaid its 
private plans for the cost of Medicare-covered services. But the new 
payment system has not solved the problems of overpayment; rather, it 
has created new ones.
    Medicare's rules require that if a plan is paid more than it costs 
to provide Medicare-covered services (and a normal profit), the plan 
must either return money to the federal government or offer additional 
benefits to plan participants. Almost all offer extra benefits; in 
fact, many plans believe that they must do so to attract enrollees. 
Thus, even after several years of lower payments from the BBA changes, 
the General Accounting Office found in 2000 that Medicare+Choice plans 
used 22 percent of their revenues to provide additional benefits beyond 
what is required by Medicare. Further, Medicare's benefit package is 
recognized as not very comprehensive, making it difficult to manage 
care without covering other benefits such as prescription drugs.
    Although Medicare's payments have been sufficient to pay for 
Medicare-covered services, plans now have fewer dollars to offer extra 
benefits than before. Over the past four years, as Medicare's 
contributions to plans have become less generous, extra benefits have 
been substantially reduced and plans have exited some markets. 
Withdrawals have left hundreds of thousands of beneficiaries scrambling 
each year to enroll elsewhere or to get Medigap coverage if they return 
to traditional Medicare. Further, plans with drug coverage have 
declined from 84 percent of all plans in 1999 to 71 percent in 2002. 
And when drug coverage has been retained, stringent caps have been 
applied or substantial premiums levied on the beneficiary. By 2002, 
almost two-thirds of enrollees in M+C plans had either no drug coverage 
or coverage limits of $500 or less.
    Both plans and beneficiaries had come to expect the extra benefits 
that could be offered under the pre-1997 payment levels, and the 
decline in benefits has disappointed and disillusioned many 
beneficiaries. In that sense, plans are correct that they are not paid 
enough to offer an ``attractive'' benefit package. Should extra federal 
dollars be used to assure such extra benefits in M+C but not in 
traditional Medicare? The 86 percent of beneficiaries in traditional 
Medicare are unlikely to favor such a policy change. But without 
further federal dollars, enrollment in Medicare+Choice will likely 
decline further.
    Are the problems noted here with Medicare likely to be present 
under any managed competition arrangement, or are they peculiar to 
Medicare+Choice? Most likely, many of the issues now facing 
Medicare+Choice will be present under any system relying on private 
plans. In particular, adverse risk selection can affect any managed 
competition arrangement that does not effectively adjust for population 
differences. It takes only a small amount of risk selection to 
destabilize the Medicare program, if a large number of beneficiaries 
have known health problems since their own choices may contribute to 
risk selection. The lack of reliable information on choices and the 
absence of good coordinated care are also likely to remain problems.
    The size and nature of the benefit package is also likely to plague 
Medicare in the future unless the basic benefit package is improved. 
Since Medicare lacks prescription drug coverage, payments to plans will 
not cover this expensive benefit, even thought it is hard to imagine 
how managed care (or fee for service) can function without such 
coverage.
    At the same time, the administered prices used in Medicare+Choice 
have create some unique problems, including payments set unnecessarily 
high or low in response to geographic differences in health care 
spending under fee for service. But no new payment system has come 
along that promises to work any better.
    Finally, regulatory reform and simplification could help to make a 
new Medicare approach more attractive to potential participants. This 
overhaul needs to be carried out in the context of recognizing the 
special vulnerabilities of some beneficiaries in Medicare, however. 
There has not been an impartial assessment of the proper balance 
between beneficiary and provider interests.
                          borrowing from fehbp
    The Federal Employees Health Benefits Plan has a number of problems 
of its own that would likely carry over if it became the new template 
for Medicare. Perhaps most important, the attractiveness of FEHBP in 
holding down the costs of care has diminished considerably since the 
mid 1990s, when that approach enjoyed greater success than Medicare. 
Since then, the rate of growth in spending on FEHBP has been very high. 
Although results vary with the period examined, traditional fee-for-
service Medicare has done considerably better than FEHBP (see Figure 
1). Further, in the past several years, deductibles and co-payments 
required by both managed care and PPO plans have risen substantially. 
These trends suggest that an FEHBP model for Medicare cannot be 
expected to lead to improved benefits without substantially higher 
payments from the federal government.
    For this reason, one of the few aspects of FEHBP that Medicare 
beneficiaries would find appealing--prescription drug coverage--would 
not magically arise without higher federal spending. The estimated cost 
of such a benefit (based on the average level of FEHBP coverage) would 
be $750 billion over ten years. Proponents of an FEHBP-type system have 
argued that it is better not to have fixed benefits, as under Medicare, 
but rather to let benefit packages evolve over time. But if the money 
is not there, benefits will not be there either. And Medicare's benefit 
package is not generous enough to allow much leeway for benefit package 
tradeoffs.
    The troubling plan withdrawals that have plagued Medicare+Choice 
have also occurred at nearly the same rate in the federal employees 
program. While FEHBP offers more plans than M+C and plan participation 
in Medicare peaked later, the withdrawal patterns look quite similar 
(Figure 2). Further, FEHBP has had risk selection problems over the 
years. A number of the plans that offered more generous benefits and 
fewer restrictions had to raise premiums so much that doing business 
became impossible. Those plans pulled out of the market, requiring 
enrollees to make new arrangements. Now, as a consequence, even though 
plans can offer varying benefits, all the packages tend to look a lot 
alike.
    Some of the characteristics of FEHBP that would be new features for 
Medicare may not be in beneficiaries' interest, even if they work well 
for federal employees. Many analysts have concluded that any major 
savings that could be achieved if Medicare were revised using an FEHBP 
model would come from the differential in the premiums charged, 
particularly for those who wish to remain in traditional fee-for-
service Medicare. If premiums for the fee-for-service option rise 
dramatically over time and become harder to afford, as some expect, 
choice for many beneficiaries would be reduced, not increased. Compared 
to federal employees in FEHBP, a much higher proportion of Medicare 
beneficiaries are low income. Although special protections for low-
income beneficiaries could be added, this would lead to an even more 
complicated Medicare system, and even then, many needing help would not 
qualify.
    A related factor is the cost of administration. An FEHBP-type model 
entailss administrative costs both at the federal and plan level. The 
federal government would need to oversee plan participation, 
enrollment, payment and quality of care. Insurance offered to 
individuals includes substantial administrative costs to pay for 
marketing and management. Unlike FEHBP, Medicare has no employer base 
to help cover many of these functions. Thus, any savings generated by 
competition will be at least partially offset by higher administrative 
costs.
    And, in another way, an FEHBP model might not always work well with 
Medicare and the population it serves. Under the FEHBP payment 
approach, plans negotiate with the federal government for the premiums 
that they will charge. FEHBP, as an employer-sponsored insurance 
program, resembles other insurance plans for workers and gives FEHBP a 
benchmark for assessing the reasonableness of the premiums. Since there 
is no full market for health insurance for people 65 and older for the 
government to use to compare premiums, it will be difficult for 
negotiators for Medicare to know what is reasonable in a given 
geographic area. Moreover, Medicare covers 40 million people, at least 
one-third of whom have substantial health problems. Sheer numbers and 
geographic variability make negotiation a major challenge.
    Geographic variation for Medicare is also much greater than under 
FEHBP. For one thing, large numbers of beneficiaries reside in rural 
areas. Accordingly, concerns about how high to set payment levels and 
whether viable competition can be fostered in rural areas need 
attention.
    Private plans would likely favor the less regulated environment of 
FEHBP. Any new Medicare private plan option should reduce unnecessary 
regulation and control, but it will still be important to keep plans 
accountable to both the government and beneficiaries. Medicare 
beneficiaries do not have workplace benefit managers to help resolve 
disputes with plans and vulnerable beneficiaries could be placed at 
considerable risk unless there is adequate oversight.
    Considerable attention is needed to improve Medicare for the 
future. But switching to an FEHBP model offers neither a magic bullet 
nor a quick fix. Indeed, it might create more problems than it solves.
                   next steps in modernizing medicare
    Whatever the structure of reform, a number of modernization issues 
need to be addressed:

 Add a prescription drug benefit as a first step. Prescription 
        drugs are essential to the delivery of care, particularly in 
        efforts to effectively manage care and to prevent higher costs 
        over time. Fee for service, competition and managed care 
        approaches cannot work if the benefit package lacks this 
        crucial ingredient.
 Do more work on risk adjustment. Without a good mechanism for 
        rewarding insurers for taking sick patients, plans will 
        continue to serve the healthy and won't focus on better ways to 
        provide care to the most vulnerable beneficiaries.
 Improve fee for service. For a very long time to come, fee for 
        service Medicare will serve most beneficiaries. New and 
        innovative ways of coordinating this care need to be found. The 
        demonstrations under way are one positive step, but more needs 
        to be done on a small scale to compensate physicians and other 
        current care providers to do basic coordination of care.
 Don't assume that privatization gives beneficiaries what they 
        want. The complexity and confusion that arise from choice of 
        plans annoys and frustrated many older Americans. They do not 
        respond well to price competition and they do not want to 
        rethink their insurance coverage every year. The one-third of 
        all beneficiaries in poor health especially need uninterrupted 
        care.
 Don't assume that regulation and oversight will be simpler 
        under an FEHBP approach. The more flexibility and variability 
        allowed by private plans, the more important it will be to 
        offer protections for vulnerable beneficiaries. Geographic 
        variation in availability of plans would likely mean different 
        systems in place depending upon the level of competition that 
        emerges. And substantial resources would need to be devoted to 
        improving education and support for beneficiaries who must make 
        choices.
 Experiment with and improve Medicare+Choice. The payment 
        system needs to be reformed and adding drugs to the benefit 
        package would add some resources. But do not assume that 
        private plans can do everything, particularly until better risk 
        adjustment is more than a promise.
 Recognize that Medicare will need more resources. No reform 
        can succeed if too much pressure is placed on it to generate 
        large savings. As an important program serving one in every 
        seven Americans, Medicare will soon serve one in every five. We 
        need to be willing as a society to provide for this vital 
        program's future.
        [GRAPHIC] [TIFF OMITTED] 78505.002
        
        [GRAPHIC] [TIFF OMITTED] 78505.003
        
    Mr. Norwood. Mr. Butler, you are now recognized.

                  STATEMENT OF STUART M. BUTLER

    Mr. Butler. Thank you, Mr. Chairman, for the opportunity to 
testify on the FEHBP as a model for Medicare reform. As you 
know, in recent years, there has been a good deal of interest 
in Congress regarding the way in which FEHBP operates, and I 
share the view that it provides important design lessons for 
reforming Medicare.
    In my remarks, I would like to highlight some important 
differences between the FEHBP and the Medicare program, and 
then suggest aspects of the FEHBP that Congress should consider 
as part of the Medicare reform.
    The FEHBP and Medicare are of course both run by the 
government. FEHBP is not privatized any more than Medicare is 
privatized, because it actually pays private doctors, and for 
many years it incorporated private plans, many of which of 
course provide benefits that are unavailable in the fee-for-
service sector.
    But these two programs are run by the government in very 
different ways. For one thing, the FEHBP does not require plans 
to offer a comprehensive standard benefits package. Instead the 
law requires broad classes of benefits to be included.
    And only under the Clinton administration did the 
government add a significant number of required benefits, 
prompting I should point out a number of plans to leave since 
1996 which has been mentioned.
    And yet over the years the typical plan offered to 
enrollees has kept up with a comprehensive plan in the private 
corporate sector. There are two reasons for this. The first 
reason is that the plans are forced by competitive pressure and 
consumer demand in the FEHBP to keep improving their products.
    All FEHBP plans contain drug benefits, drug coverage, and 
catastrophic protection, for instance. Not because they are 
required to, but because customers would not select them if 
they did not contain these common benefits.
    The second reason for the range of excellent plans, 
however, is that the Office of Personnel Management which runs 
the FEHBP, negotiates benefits and premiums with the plans, as 
well as marketing areas and other features of plans.
    This process, which is also shaped by the realities of the 
marketplace, leads to a range of prices and plan benefits. What 
OPM does not do in contrast to Medicare is to set down a 
detailed standardized benefits package and provide a payment 
formula.
    There are several other differences between the way in 
which these two programs are run by the government, affecting 
such things as information distribution and payment 
arrangements. I discuss these in my written testimony.
    But there is one final thing that I want to emphasize about 
OPM's role in the FEHBP. Unlike CMS, OPM does not directly 
manage one of the competing plans. OPM does keep its focus on 
establishing the best possible system of information and plan 
choices for beneficiaries.
    How could the affected features of the FEHBP be applied to 
Medicare. I believe in at least three ways which I would urge 
the committee to consider. First, Congress could create a new 
Medicare Board as several people have proposed.
    This would be within HHS, and it would focus on the broad 
operation of Medicare, including such things as customer 
information and the broad environment in which the managed care 
plans and the fee-for-service program would compete.
    But the board would not directly run the fee-for-service 
system or any plan. That function would remain within CMS, 
which could then focus more intensively on that task, and the 
CMS staff would be given greater flexibility to run that part 
of the program.
    Second, the Medicare board could be given powers to 
negotiate the plans over premiums and services as OPM does with 
FEHBP plans. This process would give Medicare far greater 
flexibility to balance costs and service goals than is 
available to CMS today.
    With so many plans and doctors pulling out of Medicare, I 
believe that Congress urgently needs to introduce more flexible 
negotiating powers in this way. Third, Congress could consider 
a modified version of the FEHBP's process of fostering gradual 
benefit evolution.
    I suggest two parallel steps. The first would be for 
Members of Congress to try to get out of the business of trying 
to be experts on medical procedures. You could do this by 
setting broad categories of required medical benefits for each 
plan, and perhaps a minimum package of services, rather than 
legislating a detailed comprehensive package.
    Detailed benefits should be negotiated between a board that 
I have proposed and the plans. The second step would be to 
create an expert board or council charged with proposing each 
year refinements to the basic package required in managed care 
plans, as well as the more comprehensive benefits package 
offered by the traditional fee-for-service program.
    This council or board could be given a budget and general 
guidelines by Congress, but its recommended revised package 
could only be accepted or rejected by an up and down vote in 
Congress with that amendment.
    In this way the oversight and broad policy role of Congress 
would be retained, but the Members of Congress would be able to 
avoid becoming embroiled in the frustrating task of trying to 
determine a detailed benefits package.
    I have no doubt that the first proposed package from such a 
benefits board would include a realistic drug benefit.
    Mr. Chairman, the FEHBP is a remarkably successful Federal 
health program.
    It is successful because of the way that it is designed, 
and because of the way that OPM is permitted to run it. I would 
strongly urge Congress to look very carefully at the central 
features of the program as elements to include in the long term 
reform of Medicare. Thank you.
    [The prepared statement of Stuart M. Butler follows:]
 Prepared Statement of Stuart M. Butler, Vice President, Domestic and 
            Economic Policy Studies, The Heritage Foundation
    My name is Stuart Butler. I am Vice President for Domestic and 
Economic Policy Studies at The Heritage Foundation. I must stress, 
however, that the views I express are entirely my own, and should not 
be construed as representing the position of The Heritage Foundation.
    It is wise of the Committee to explore the applicability of the 
Federal Employees Health Benefits Program (FEHBP) as a model for reform 
of the Medicare program. The FEHBP, which is run by the Office of 
Personnel Management (OPM) is an interesting contrast to Medicare. Both 
are large health care programs run by the federal government. But there 
the similarity ends. The FEHBP is not experiencing the severe financial 
problems faced by Medicare, and nor are there complaints that it lacks 
important benefits, such as drug coverage. It is run by a very small 
bureaucracy, which, unlike Medicare's staff, does not try to set prices 
for doctors and hospitals. It offers choices of modern benefits and 
private plans to federal retirees (and active workers) that are 
unavailable in Medicare. It provides comprehensive information to 
enrollees. And it uses a completely different payment system, blending 
a formula and negotiations.
    It is time for Congress to examine closely the system they are 
enrolled in themselves and incorporate key features of the program into 
Medicare.
                          how the fehbp works
    Created by Congress in 1959, the FEHBP offers about 200 competing 
private plans to active and retired Members of Congress and 
congressional staff, as well as active and retired federal and postal 
workers and their families--altogether almost 9 million people. 
Enrollees in any location have a choice of several plans, including 
national plans. The FEHBP population is by no means an ideal insurance 
pool. For one thing, the average age of the FEHBP population of active 
employees is rising, as is the proportion of higher-cost federal 
retirees in the program. In addition, plans may not impose ``waiting 
periods'' or limitations or exclusions from coverage for pre-existing 
medical conditions, nor can they base premiums on medical risk.
    Federal workers and retirees can choose from a variety of health 
plans, ranging from traditional fee for service plans to insurance 
plans sponsored by employee organizations or unions, to managed care 
plans. HMOs in FEHBP have benefits that are especially attractive to 
the elderly, including catastrophic coverage and mental health 
coverage. Almost all cover care in an ``extended care facility,'' some 
with no dollar or day limits. And unlike Medicare, most FEHBP plans 
cover prescription drugs and include a wide range of dental services. 
Furthermore, the elderly can choose plans with specialized items, such 
as diabetic supplies.
    How The Elderly Pick Plans. Each year, in preparation for the fall 
annual ``Open Season,'' when retirees and regular employees pick plans 
for the following year, OPM sends beneficiaries an FEHBP Guide, which 
includes a standardized health plan comparison chart. There is also an 
excellent website that allows plan comparisons to be made. Health plans 
also provide retirees with information on benefits and premiums in a 
variety of ways, including advertising. Perhaps the most valued 
consumer resource for federal employees and retirees is Checkbook's 
Guide to Health Insurance Plans for Federal Employees, published by a 
consumer organization. The popular Guide compares plans, gives 
employees and retirees general advice on how to pick a plan, outlines 
plan features and special benefits, presents detailed cost tables 
(including the out-of-pocket limits for catastrophic coverage), and 
presents ``customer satisfaction surveys'' on the performance of plans. 
The Guide also provides specialized advice for federal retirees, 
including retirees with and without Medicare and information on HMO 
options and Medicare.The Guide's ``customer satisfaction surveys'' are 
quite detailed, rating plan performance in such areas as access to 
care, the quality of care, the availability of doctors, the willingness 
to provide customer information and advice by phone, the ease of 
getting appointments for treatments or check-ups, typical waiting times 
in the doctor's office, access to specialty care, and the follow-
through on care. The surveys also review patient experience with such 
things as an explanation of care, the degree to which the patient is 
involved in decisions relating to care, the degree to which the plans' 
doctors take a ``personal interest'' in the patient's case, advice on 
prevention, the amount of time available with the doctor, the available 
choice of primary care physicians and access to specialists, and the 
speed with which the patient can contact the plan's service 
representative.
    Beyond this valuable information, organizations representing 
enrollees also provide information. For example, federal retirees can 
receive additional guidance from the National Association of Retired 
Federal Employees (NARFE), a private organization representing 
approximately 500,000 current and retired federal employees. With a 
network of over 1,700 chapters throughout the country, NARFE works 
closely with the OPM in answering questions and resolving problems 
related to health insurance and retirement matters. In preparation for 
``Open Season,'' NARFE publishes its annual Federal Health Benefits and 
Open Season Guide. Most important of all, NARFE actually rates plans on 
benefit packages that would be most attractive to the elderly.
    The Role of the Office of Personnel Management. OPM is given 
authority in the FEHBP statute to: contract with health insurance 
carriers; prescribe ``reasonable minimal standards'' for plans; 
prescribe regulations governing participation by federal employees, 
retirees and their dependents, as well as to approve or disapprove plan 
participation in the FEHBP; set government contribution rates in 
accordance with federal law; make available plan information for 
enrollees; and administer the FEHBP trust fund, the special fund 
containing contributions from the government and enrollees and from 
which all payments to health plans are made.
    Unlike Medicare, OPM does not impose price controls or fee 
schedules, or issue detailed guidelines to doctors or hospitals or 
standardize benefits. By law, private plans within the FEHBP must meet 
``reasonable minimal'' standards regarding benefits. But the law 
creating FEHBP does not specify a comprehensive set of standardized 
benefits. Congress merely defines the ``categories'' or ``types'' of 
benefits that are to be provided; the level or duration of medical 
treatments or procedures is largely left to negotiation and the choice 
of enrollees in a dynamic market.
    The Premium Negotiation Process. OPM sends out a ``call letter'' in 
the Spring of each year to insurance carriers, inviting them to discuss 
rates and benefits for the following calendar year. In these 
confidential discussions, OPM outlines its expectations on rates and 
benefits to the carriers, and the carriers invariably respond by 
offering proposals for packages and premiums. Government managers 
negotiate premiums before they are posted for the open season. This is 
a largely successful mixture of discussion and jawboning.
    For HMO and point of service (POS) plans, OPM typically starts its 
negotiations based on the local market for these plans--it does not, as 
in the case of Medicare, apply a formula based on the local fee-for 
service market. In the case of fee-for-service and preferred provider 
organization (PPO) plans, OPM negotiates a fixed profit per subscriber. 
Thus the plans make money through negotiated service contracts rather 
than traditional profits. While these plans must accept market risk, 
they must lodge revenue surpluses in special reserve accounts.
    To some extent this negotiation system means the government 
exercises ``price maker'' power. But the plans still must design and 
price their product shrewdly in strong competition with each other for 
enrollees if they are to remain in business. Significantly, OPM devotes 
most of its negotiating energy with the large plans that determine the 
government's maximum contribution, and largely ignores the pricing of 
other plans. It is not clear that the government's jawboning function 
in the FEHBP is as important in holding down costs than this 
competition for price-sensitive enrollees. But what is clear is that 
OPM bargaining with competing plans is far more successful at holding 
down costs than CMS issuing edicts to hospitals and physicians.
    Other OPM Functions. In setting the government contribution to 
retirees health benefits, OPM make its calculations according to a 
formula established by law, under which OPM pays a percentage of the 
premium chosen by the enrollee up to a maximum dollar amount linked to 
the costs of certain comprehensive plans. Whatever the plan chosen, the 
government's premium is sent directly to the plan. The enrollee's 
premium contribution normally is deducted from the enrollee's paycheck 
(for workers) or annuity (for retirees) and also sent by OPM directly 
to the chosen plan. OPM also helps retirees and employees settle 
disputed claims.
    OPM prepares kits outlining rates and benefits for the coming 
calendar year, disseminating information on the plans. Beneficiaries 
then pick a plan during open season. OPM maintains an ``Open Season 
Task Force'' to help in making decisions, and a hot line that retirees 
(or regular workers) can call during open season.
           applying fehbp's structure to the medicare program
    Congress could introduce key features of the successful FEHBP 
program into Medicare by taking several important steps.
1) Remove from CMS the function of managing a competitive market of 
        managed care plans and the traditional fee-for-service program 
        and instead place this function under a new Medicare Board with 
        powers to negotiate prices and services with plans.
    CMS currently is responsible for operating the traditional fee-for-
service program. But is also responsible for establishing and managing 
the market for managed care plans that compete directly with its fee-
for-service program. This mixed role or umpire and competitor conflicts 
with a basic principle of economic organization in a market--those 
responsible for setting the rules of competition, and providing 
consumers with information on rival products, should have neither an 
interest in promoting any particular product nor even a close 
relationship with one of the competitors. That is why the Securities 
and Exchange Commission maintains a wall of separation between itself 
and individual companies. It is why Consumers' Reports accepts no 
advertising from products it evaluates. Entangling the running of a 
market with the management of any of the competing providers is a 
recipe for problems. Significantly, OPM does not run a plan itself.
    This separation is not only necessary to avoid a conflict of 
interest, it is also necessary because the managerial cultures are very 
different for staff engaged in these two very different functions. 
Managers charged with dispassionately operating a market must display 
evenhandedness and pay close attention to the information that 
consumers need to make wise decisions. On the other hand, those 
managers engaged in marketing a particular plan, including a 
government-sponsored plan, must be highly competitive and concerned 
with the long-term viability of their particular product and the 
continued satisfaction of their customers. The cultural difference is 
much like that separating a judge from a trial attorney.
    The Breaux-Thomas Medicare Commission recognized this inherent 
conflict when a majority of members voted to establish a board to take 
over many of the marketing functions, and the management of private 
plans, now undertaken by CMS. To establish such a Board, Congress 
should create within the Medicare program a body that is the functional 
equivalent of the Office of Personal Management within the FEHBP. The 
function of this body, and the focus of the staff within it, should be 
to structure and operate a market of competing plans, including the 
traditional fee-for-service plan, and to provide Medicare beneficiaries 
with the information they need to make the wisest choice possible.
    The new Board should answer directly to the Secretary of the HHS, 
and would have similar functions to those of OPM within the FEHBP. It 
would take over many of the Medicare functions currently assigned to 
CMS, leaving CMS's Medicare staff to focus on the administration of the 
fee-for-service Medicare program. Among the Board's functions:

 Setting standards for all plans being offered to Medicare 
        beneficiaries, and certifying that all plans meet those 
        standards. The Board should be responsible for setting the 
        ``ground rules'' for inclusion in Medicare, including solvency 
        requirements and information requirements. The standard setting 
        should apply to the traditional fee-for-service program as well 
        as the new choice programs created by Congress.
 Negotiating with competing plans regarding benefits and 
        prices. Just as OPM negotiates with individual plans before 
        they are offered to federal employees during open season, so 
        the Board should be given latitude by Congress to negotiate 
        premiums with managed care plans. This would be a marked 
        improvement on the current formulas established by Congress, 
        which lead to payment levels that are out of line with local 
        markets. Under a system of premium/payment negotiation the 
        Board would be able to balance the government's cost and the 
        availability of plans in an area, something it is hampered from 
        doing today.
 Organizing payments to chosen plans. The Medicare Board would 
        be responsible for the payments to plans.
 Providing data and information to consumers. The Board would 
        take on the function of providing consumer and benefits 
        information to seniors and guidance on how to make wise 
        choices. This function would include examining techniques to 
        measure quality and incorporating prudent techniques into the 
        information made available to beneficiaries.
    In order to carry out its mission effectively, the Board itself 
should contain certain elements. One of these should be an Advisory 
Council, mainly representing consumers but also organizations with a 
general interest in creating a market for high quality health care. 
However, the Board, and the Advisory Council, should receive policy and 
technical advice on issues affecting the market for Medicare plans from 
an outside advisory body with experience of other health care markets. 
I would suggest the Medicare Payment Advisory Commission (MedPAC), with 
an expanded staff, could play this role.
    In addition, the Board would need a full staff to undertake its 
broad functions. Some of these staff could be recruited from current 
CMS personnel. But it would be wise to recruit some staff from outside 
HHS in order to introduce new skills and experience. Some individuals 
might be recruited from OPM, and others from the private sector.
2) To enable the basic benefits package to be revised and improved 
        steadily over time, the current politicized process for 
        changing benefits should be replaced with a Benefits Board and 
        other steps.
    The current discussion about the need to add an outpatient drug 
benefit to Medicare simply underscores two related failings in the 
design of the program. The first is that ever since its inception, the 
Medicare benefits package has slipped further and further behind what 
would be acceptable in typical plans for the working population. The 
second is that the program will be constantly out of date as long as it 
takes an act of Congress to accomplish benefits changes in Medicare 
that in the private sector would be made in a few routine management 
meetings.
    The main reason that the benefits package is out-of-date despite 
general acceptance it needs to include such items as a drug benefit is 
that all major changes in benefits require an act of Congress. 
Consequently, discussions about changing benefits are necessarily 
entangled in the political process. Providers included fight hard and 
usually effectively to block hard attempts to scale back outdated 
coverage for their specialty. Meanwhile, talk of upgrading the Medicare 
benefits package unleashes an intense lobbying battle among other 
specialties seeking to be included in Medicare benefits. Invariably, 
the final result depends more on shrewd lobbying and political polling 
than on good medical practice.
    A long-term reform of Medicare must end the structurally 
inefficient and politicized system of changing or modifying benefits 
over time. The best way to do this involves three steps:

 Set only broad benefit categories in Congress. Rather than set 
        detailed benefits in legislation, Congress should confine 
        itself to describing the broad categories of benefits that 
        private plans competing in Medicare should provide (such as 
        emergency care, drug benefits, etc.). This is the approach 
        Congress has taken with the FEHBP program. In addition, 
        Congress could establish the minimum ``bare bones'' benefits 
        each plan must have--leaving the Medicare Board to negotiate 
        additional benefits plan-by-plan.
 Create a Medicare Benefits Board. Instead of Congress or the 
        Administration specifying detailed benefits for the fee-for-
        service program (or the minimum benefits for managed care 
        plans), Congress should create a Benefits Board to propose 
        specific incremental changes in these core benefits. Such an 
        independent board would have members selected for specific 
        terms by the Administration and Congress. The package 
        recommended by the Benefits Board would then be subject to an 
        up or down vote by Congress. This would reduce political 
        pressures on benefit decisions and take lawmakers out of the 
        process of making detailed medical decisions, and yet it would 
        give Congress the final say in any benefits changes. 
        Essentially the practical logic for establishing a board to 
        function in this way is the same as the logic for creating the 
        Base Closing Commission in the 1980s.
      The first task for the proposed Benefits Board should be to 
        determine the best way to introduce a drug benefit into the 
        traditional fee-for-service segment of Medicare. With a Board 
        in place, Congress could instruct it to develop a modified 
        benefits package, including drug coverage, within a specified 
        budget. To work within the budget constraints, the Board might 
        develop a plan to make small changes in a number of features of 
        the benefits package to achieve a well-balanced package that 
        achieved Congress' objectives. The plan would be sent to 
        Congress for an up-or-down vote without amendment. Should it 
        fail to win approval, the Board would develop a modified 
        version until agreement could be reached.
3. Empower the traditional fee-for-service program to compete.
    Because of the statutory basis of the fee-for-service benefits 
package, and the many requirements Congress places on CMS, it is 
currently very difficult for the agency to make sensible improvements 
in the fee-for-service program to more it competitive and modern.
    The Breaux-Thomas Medicare Commission discussed giving CMS more 
flexibility to enable the fee-for-service program to compete more 
effectively. This makes sense--though, for the reasons discuses 
earlier, only if the agency is relieved of the power to set the rules 
for competition.
    Congress should address this inflexibility by giving CMS the same 
ability to compete as states and local governments routinely give ``in-
house'' public agencies when they are subject to competitive bids from 
the private sector. There is no reason why public enterprises cannot be 
competitive and entrepreneurial. In virtually every state of the union 
we see such innovation, from the delivery of municipal services to 
public education.
    More specifically, Congress should give CMS greater flexibility to 
run the traditional fee-for-service program in ways that would make it 
an aggressive competitor to managed care plans and other emerging 
private sector health care options in the next century. Whenever a 
competitive market is introduced, the government-provided service must 
be given every opportunity to redesign itself to compete effectively. 
This should be so in Medicare. Thus CMS should be granted greater 
discretion to introduce innovations into the management of traditional 
fee-for-service Medicare. It should be allowed, for instance, to make 
extensive use preferred provider organizations of those physicians and 
hospitals giving the best value for money. It should also be allowed to 
further contract out the management of the traditional program in areas 
where that might improve Medicare.
4) Amend the plan payment system to make it more like that used in the 
        FEHBP.
    A form of ``premium support'' financing much like that in the FEHBP 
is the best way to achieve the goals of a high-quality Medicare system 
that is affordable to taxpayers as well as seniors. Under an FEHBP-
style payment system, Medicare beneficiaries would receive a percentage 
contribution to the cost of their chosen plan, up to a maximum dollar 
amount. But this mechanism can be adjusted so that the elderly and 
disabled are not at risk for long term changes in the cost of their 
health coverage. In fact, a premium support arrangement can be modified 
in several ways to address variety of policy goals and to protect 
enrollees. For example:

 The maximum contribution could be adjusted each year--or 
        indexed--to cover the market price of major plans providing 
        comprehensive benefits. In that way the elderly would continue 
        to have an entitlement and know that the costs of comprehensive 
        coverage would be assured, but the premium support approach 
        means they would also have a strong incentive to choose a cost 
        effective plan.
 A minimum amount of premium support could be established and 
        this could be adjusted by income, so the low-income senior 
        would have a larger amount of financial assistance for any 
        given plan.
 The minimum and maximum amount could be adjusted (i.e. 
        indexed) to account for the higher costs of certain medical 
        conditions warranting more elaborate coverage.

    Mr. Norwood. Thank you, Mr. Butler.
    Mr. Richtman, you are now recognized.

                    STATEMENT OF MAX RICHTMAN

    Mr. Richtman. Good morning, Mr. Chairman, and ranking 
member Brown, and members of the subcommittee. Thank you for 
holding this important hearing on the issue of Medicare 
modernization and for inviting me to speak this morning.
    I am the Executive Vice President of the National Committee 
to Preserve Social Security and Medicare, a seniors, grass-
roots, education and advocacy organization, with millions of 
members and supporters around the country.
    We are extremely concerned that any Medicare modernization 
ensures seniors continued access to a defined benefits package, 
reasonable premiums, and out-of-pocket-expenses, and access to 
the physician of their choice.
    Cost to the beneficiary is one of our main concerns. While 
Medicare has made significant advances over the past 35 years 
in improving the health and lives of seniors, seniors still pay 
a significant portion of their health costs out-of-pocket, in 
part because they use more services as a result of their health 
care needs and in part because Medicare does not cover many 
important preventive benefits, including prescription drugs.
    Seniors have been asking policymakers to determine ways to 
reduce their burdensome out-of-pocket expenses. We must ensure 
that the costs to beneficiaries does not escalate as a result 
of any Medicare modernization plan.
    The most important and critical improvement needed in the 
Medicare program is to provide a prescription drug benefit. The 
typical senior fills 18 prescriptions a year, and at an average 
cost of $1,650.
    Yet, one-third of beneficiaries have no prescription drug 
coverage at all. With regard to choice, and this has been 
mentioned a number of times this morning, seniors do want 
options and choice, but they want a choice of physicians and 
not of plans.
    Seniors need a defined benefit package they can count on. 
It is not clear that in the FEHBP and in premium support models 
that there will be a defined benefit.
    Seniors need predictable benefits that don't decrease over 
time and costs that don't drastically increase for basically 
the same benefits, nor vary from region to region.
    Benefits should remain portable so that the senior moving 
from one State to another State will have the same benefits. We 
have serious concerns about applying the FEHBP model to 
Medicare, because the age of the current population is so 
different.
    The average Federal employee is 45 years old. Most on 
Medicare are at least 65. Naturally the health care costs for 
seniors will be much higher. On the issue of cost, premiums in 
FEHBP have increased steadily over the last 5 years.
    How can this be a model for cost savings for Medicare, 
particular because we know that seniors' medical costs are much 
higher as I just mentioned.
    Medicare must continue to be we feel a social insurance 
program with a traditional fee for service plan that is 
available to everyone who needs it. Seniors often fear private 
insurance companies because they have seen how Medicare+Choice 
Plans have treated them.
    Many seniors have been adversely affected when the plans 
they have enrolled in elect to withdraw from their communities, 
decrease benefits, or increase premiums and co-pays.
    Seniors need and deserve stability, dependability, and 
affordability. Mr. Chairman, and members of the subcommittee, 
we ask that you consider the cost to seniors as you deliberate 
Medicare modernization.
    On behalf of millions of our national committee members and 
supporters around the country, and seniors across the Nation, 
we request that you ensure all current and future Medicare 
beneficiaries that have access to a reliable, predictable, 
affordable, defined benefit, fee-for-service program. Thank you 
very much.
    [The prepared statement of Max Richtman follows:]
  Prepared Statement of Max Richtman, Executive Vice President of the 
      National Committee to Preserve Social Security and Medicare
    Good Morning Chairman Bilirakis, Ranking member Brown and members 
of the committee. Thank you for holding this important hearing on the 
issue of Medicare Modernization and for inviting me to speak. I am 
executive vice president of the National Committee to Preserve Social 
Security and Medicare, a senior's grass root's education and advocacy 
organization with millions of members and supporters.
    We are extremely concerned that any Medicare modernization ensures 
seniors continued access to a defined benefit package, reasonable 
premiums and out of pocket expenses, and access to the physician of 
their choice. Cost to the beneficiary is one of our main concerns. 
While Medicare has made significant advances over the past 35 years in 
improving the health and lives of seniors, seniors still pay a 
significant portion of their health costs out of pocket, in part 
because they use more services as a result of their health care needs 
and in part because Medicare does not cover many important preventive 
treatments including prescription drugs. Seniors have been asking 
policymakers to determine ways to reduce their burdensome out-of-pocket 
expenses. Therefore, we must ensure that the cost to beneficiaries do 
not escalate as a result of any Medicare modernization plan.
    The most important and critical improvement needed in the Medicare 
program is to provide a prescription drug benefit. The typical senior 
fills 18 prescriptions per year at an average cost of $1,650. Yet, one 
third of beneficiaries have no prescription drug coverage.
    With regard to health care providers, seniors do want options and 
choice. However, they report wanting a choice of physicians, not a 
choice of plans. Seniors need a defined benefit package they can count 
on. It is not clear than in FEHBP and in premium support models there 
will be a defined benefit. Seniors need predictable benefits that don't 
decrease over time and costs that don't drastically increase for the 
same benefits, nor vary from region to region. Benefits should remain 
portable so that the senior moving from state to state will have the 
same benefits.
    We have serious concerns about applying the FEHBP model to Medicare 
because the age of the covered population is so different. The average 
federal employee is 45; most on Medicare are at least 65. Naturally, 
the health care costs for seniors will be much much higher.
    On the issue of cost, premiums in FEHBP have increased steadily 
over the last 5 years. How can this be a model for cost savings for 
Medicare? Particularly, because we know seniors' medical costs are much 
higher.
    Medicare must continue to be a social insurance program with a 
traditional fee for service plan that is available to everyone who 
needs it. Seniors often fear private insurance companies because they 
see how Medicare Plus Choice plans have treated seniors. Unfortunately, 
many seniors have been adversely affected when the plans they have 
enrolled in elect to withdraw from their communities, decrease benefits 
and/or increase premiums and copays. Seniors need stability, 
dependability and affordability.
    In FEHBP, all plans are on an equal playing field; this is not a 
good model for Medicare. Fee for service cannot be on an equal playing 
field with private insurance plans. The oldest, sickest, poorest, most 
costly seniors will have to remain in fee for service. This will drive 
up the cost of the fee for service program. However, the oldest, 
sickest, poorest seniors should not pay more in cost sharing. This is 
the principle of social insurance. Fee for service must be protected 
and guaranteed.
    Mr. Chairman and members of the committee we ask that you consider 
the cost to seniors as you deliberate on any Medicare modernizations. 
On behalf of our millions of National Committee members and seniors 
across the nation, we request that you ensure all current and future 
Medicare beneficiaries have access to a reliable, predictable and 
affordable defined benefit traditional fee for service program.
    Thank you.

    Mr. Norwood. Is it deMontmollin?
    Mr. deMontmollin. Yes, sir.
    Mr. Norwood. Mr. deMontmollin, you are now recognized.

              STATEMENT OF STEPHEN J. deMONTMOLLIN

    Mr. deMontmollin. Mr. Chairman, Ranking Member Brown, and 
members of the subcommittee, my name is Steve deMontmollin, and 
I am the Senior Vice President and General Counsel of AvMed 
Health Plan, Florida's oldest and largest not-for-profit HMO, 
representing nearly 30,000 Medicare beneficiaries, 20,000 
Medicaid, and 15,000 Federal employees, and tens of thousands 
of well satisfied Medicaid, FEHBP, State employees, and other 
commercial members, who have benefited by the leadership of 
Chairman Bilirakis, I can assure you, in the areas of southwest 
Florida.
    I am also testifying on behalf of the American Association 
of Health Plans, which represents more than 1,000 health plans 
serving 170 million Americans, and its membership includes most 
Medicare+Choice organizations.
    I appreciate the opportunity to testify regarding Medicare 
reform and the urgent need to act on short term measures to 
stabilize the Medicare+Choice program as longer term reform 
strategies are developed and implemented.
    Mr. Chairman, unless immediate action is taken to address 
the funding crisis confronting Medicare+Choice, we will lose 
the foundation of private plans needed to help fulfill long 
term goals related to providing seniors more choices in a 
reformed Medicare program.
    AAHP members will support Medicare reform proposals based 
on the following principles. First, Medicare reform must expand 
choices for beneficiaries. Second, Congress should include all 
aspects of Medicare in any reform proposal.
    It is particularly important that Congress create a level 
playing field between Medicare+Choice and fee-for-service 
Medicare. Next, reform should permit flexibility and benefit 
design, while requiring all plans to offer a core set of 
benefits.
    Government payment must be sufficient to allow individuals 
to have a reasonable level of choice among plans, and to ensure 
that choices remain available over time. Finally, a fair 
balance must be found between the need for regulatory oversight 
and the promotion of quality health care for all Medicare 
beneficiaries.
    If Congress examines options for reforming Medicare, it is 
important to consider competitive models similarly to that used 
by the Federal Employees Health Benefits Program. For example, 
FEHBP establishes a level playing field for all coverage 
options.
    Both managed care plans and fee-for-service plans are 
governed by the same regulatory structure, and are paid under 
the same payment structure. This approach contrasts sharply 
with the competitive bidding demonstration projects that were 
pursued unsuccessfully under the previous administration.
    Health plans also believe that an affordable prescription 
drug benefit should be a part of a reform Medicare program. 
This benefit should be flexible and financially sustainable.
    As you know, many Medicare+Choice plans have been providing 
prescription drug coverage, serving as a critical source of 
prescription drugs for low income beneficiaries.
    Plans are well positioned to help Congress make drug 
coverage available to beneficiaries while containing rising 
drug costs. While we are pleased that health plans are featured 
prominently in visions of Medicare reform, absent funding 
relief, however, business realities will force more plans to 
leave the program, and by the time that longer term reforms are 
enacted, policymakers may find that the infrastructure that 
they were counting on no longer exists.
    But for the wisdom of Chairman Bilirakis and this 
subcommittee in establishing the minimum floor rate, the 
current infrastructure may not be in place as it is today.
    In addition to its importance for reform, Medicare+Choice 
is a valuable option for beneficiaries. Medicare+Choice plans 
provide high quality, affordable health care coverage, 
emphasizing coordinated care and preventive services.
    Studies show that Medicare+Choice plans do a better job of 
delivering services to the chronically ill and serve as a 
crucial safety net for many low income beneficiaries. In the 
context of the Medicare+Choice Program, I have a few basic 
points that I would like to raise.
    First, Medicare+Choice payments are not keeping up with 
rising health care costs. Compounding that problem, health 
plans are not receiving funds that Congress targeted to the 
Medicare+Choice program.
    Most of the flow through funds that the Congressional 
budget office expected to reach Medicare+Choice through the BBA 
adjustment packages did not materialize because of the blend 
component of the Medicare+Choice payment methodology was not 
implemented.
    Over the next 3 months, health plans must decide whether 
they will participate in the Medicare+Choice program in 2003. 
If Congress does not act soon, those decisions will be based on 
current program realities.
    And in that event, members should expect that additional 
beneficiaries will lose the health plan choices they value. No 
one wants that to happen. To that end, AAHP and its members 
stand ready to assist in addressing the serious problems in the 
Medicare+Choice program.
    Thank you for this opportunity to testify and I look 
forward to answering your questions.
    [The prepared statement of Stephen J. deMontmollin 
follows:]
   Prepared Statement of Stephen J. deMontmollin, Vice President and 
General Counsel, AvMed Health Plan on Behalf of American Association of 
                              Health Plans
                            i. introduction
    Chairman Bilirakis and members of the subcommittee, my name is 
Stephen J. deMontmollin. I am Vice President and General Counsel of 
AvMed Health Plan. Based in Gainesville, Florida, AvMed is Florida's 
oldest and largest not-for-profit HMO, serving some 300,000 members, 
including approximately 30,000 Medicare members and 10,000 federal 
employees and their dependents. AvMed contracts with close to 7,000 
physicians and 126 hospitals, is federally qualified and is accredited 
by both the National Committee for Quality Assurance (NCQA) and the 
Joint Commission on Accreditation of Healthcare Organizations (JCAHO).
    AvMed appreciates the opportunity to testify regarding Medicare 
reform and the urgent need to act on short-term measures to stabilize 
the Medicare+Choice program as longer-term reform strategies are 
developed and implemented. Our company is committed to making high 
quality health insurance coverage available to the people of Florida. 
It is our hope that your Committee will act early in the year to make 
the changes needed to Medicare+Choice to allow us to sustain and expand 
our commitment to Florida's Medicare beneficiaries.
    I am also testifying today on behalf of the American Association of 
Health Plans, of which AvMed is a member. AAHP and its member plans 
have a longstanding commitment to Medicare and to the mission of 
providing high quality, affordable, patient-centered health coverage to 
beneficiaries. AAHP represents more than 1,000 HMOs, PPOs, and similar 
network health plans, and its membership includes most Medicare+Choice 
organizations. Together, AAHP member plans provide coverage for more 
than 170 million Americans nationwide.
    My testimony addresses three components of the Medicare reform 
debate. First, I will set forth basic framing principles for 
consideration in any debate over comprehensive reform of the underlying 
Medicare program. Next, I will talk about some of the policy issues 
that should be considered in the context of adding a new outpatient 
prescription drug benefit to Medicare. Finally, I will identify the 
immediate changes that must be made to stabilize Medicare+Choice in 
order to ensure that it will continue to exist by the time 
comprehensive reform and a new drug benefit are implemented. I cannot 
emphasize strongly enough that unless immediate action is taken to 
address the funding crisis confronting Medicare+Choice, the foundation 
of private plans needed to help fulfill long term goals related to 
providing seniors more choices in a reformed Medicare program will not 
exist, and Medicare beneficiaries' access to quality health care 
choices will be denied.
                   ii. comprehensive medicare reform
    I commend the Committee for its continuing work to protect and 
preserve the Medicare program for future generations. AAHP and its 
members look forward to working with the Committee to develop 
competitive approaches to Medicare reform, based on a level playing 
field for all Medicare options, to ensure that the program remains a 
reliable source of high quality health care in the years to come. We 
are committed to participating constructively to advance Medicare 
reform proposals based on the following principles:

 Expand Choices for Beneficiaries: Ensuring a strong Medicare 
        program requires offering beneficiaries an expanded range of 
        options. Consumers in the private sector have benefited from 
        the widespread availability of health plan options, which has 
        promoted access to affordable, comprehensive coverage. Congress 
        endorsed the principle of expanded choice in creating the 
        Medicare+Choice program in the Balanced Budget Act of 1997 
        (BBA). Medicare+Choice was designed to include not only health 
        maintenance organizations and point-of-service plans that 
        participated under the Medicare risk program, but also 
        provider-sponsored organizations, preferred provider networks, 
        and private fee-for-service plans.
      Expanded choice will be rendered meaningless, however, unless 
        these choices are available in the market and affordable to 
        beneficiaries. Any Medicare reform proposal, including 
        proposals based on competitive bidding models, should seek to 
        ensure that the coverage options from which beneficiaries can 
        choose include some options that cost beneficiaries no more 
        than options available under the current Medicare program.
 Include All Aspects of Medicare in Reform Proposal: Although 
        millions of beneficiaries have chosen to enroll in a 
        Medicare+Choice plan, the overwhelming majority of Medicare 
        beneficiaries remain in the fee-for-service program. No serious 
        reform proposal can proceed without tackling the problems 
        confronting fee-for-service as well as Medicare+Choice, and as 
        fundamental Medicare reforms are enacted, it is particularly 
        important that Congress create equivalent rules for all 
        Medicare options. This will allow beneficiaries broad choice 
        within a consistent set of performance standards.
 Promote Greater Choice For Beneficiaries By Permitting 
        Flexibility in Benefit Design: All options should offer a core 
        set of benefits. Generally health plans offer beneficiaries a 
        choice of additional benefits, such as prescription drugs and 
        lower cost sharing in exchange for a selective provider panel. 
        Any Medicare reform proposal should recognize that granting 
        plans benefit flexibility enables them to design additional 
        benefits and to structure cost-sharing requirements in a manner 
        that maximizes beneficiaries' coverage choices and that allows 
        plans to provide benefits that coincide with the level of 
        government payment. Adequate payment for the core set of 
        benefits is fundamental, without which health plans cannot 
        offer the supplemental benefits valued by enrollees.
 Provide a Government Contribution that Adequately Funds 
        Choice: Determining the amount of the government contribution 
        will be a critical decision in the design of any Medicare 
        reform proposal. This amount should be sufficient to allow 
        individuals to have a reasonable level of choice among plans 
        within an area and to ensure that choices remain available and 
        stable over time. Additionally, the contribution amount should 
        preserve choices available in currently successful markets and 
        support expansion of choices in the rest of the country.
 Develop an Improved Regulatory Framework: Health plans and 
        other options participating in a reformed Medicare program 
        should be administered under a new framework designed to 
        achieve a fair and sound balance between the need for 
        regulatory oversight and the promotion of quality health care 
        for all Medicare beneficiaries. The new framework should seek 
        to minimize the potentially conflicting objectives evident 
        under the Centers for Medicare and Medicaid Service's (CMS) 
        current roles as a purchaser, regulator, and competitor.
FEHBP Model Offers Useful Lessons
    As Congress examines options for reforming Medicare, it is 
important to consider competitive models similar to that used by the 
Federal Employees Health Benefits Program (FEHBP).
    A competitive system modeled after FEHBP would have characteristics 
that offer considerable potential for expanding beneficiary choices and 
encouraging private health plan participation in the Medicare program. 
While the FEHBP model would have to be modified in a number of areas 
before it could be applied to the Medicare program, this approach has 
many worthwhile features. For example, FEHBP establishes a level 
playing field for all coverage options--both managed care plans and 
fee-for-service plans are governed by the same regulatory structure and 
paid under the same payment structure. This approach contrasts sharply 
with the competitive bidding demonstration projects that were pursued 
unsuccessfully under the previous Administration.
    If adequately funded and sensibly regulated, a Medicare program 
based on competition could prove to be an effective approach to meeting 
the health care needs of Medicare beneficiaries. Still, it is important 
for Congress to recognize that the beneficiary populations served by 
Medicare and FEHBP are very different and that it would not be 
appropriate to simply impose the FEHBP model on the Medicare program 
without modifications to fit the senior and disabled population.
                    iii. prescription drug coverage
    As the Energy and Commerce Committee continues to tackle the range 
of difficult issues associated with Medicare reform, health plans 
continue to believe that creating an affordable prescription drug 
benefit under Medicare should be a primary goal. In establishing the 
Medicare program thirty-six years ago, our nation made a commitment not 
only to the elderly and disabled who directly benefit from the program, 
but also to their families whom otherwise would bear the overwhelming 
costs of their health care. As more prescription drugs have become 
available and have taken a more critical role in medical treatment, 
especially to the chronically ill, the absence of an outpatient 
prescription drug benefit in the Medicare program has become 
problematic for many Medicare beneficiaries and their families.
    AAHP and its member plans strongly support making a well-designed, 
flexible and financially sustainable drug benefit available to Medicare 
beneficiaries.

 Many Medicare+Choice plans have been providing prescription 
        drug coverage. Health plans have been a primary source of 
        coverage for vulnerable beneficiaries. For several years now, 
        Medicare+Choice plans and their predecessors, Medicare risk 
        plans, have been a critical source of prescription drug 
        coverage for many seniors and the disabled. A majority of 
        Medicare beneficiaries without drug coverage paid for by 
        Medicaid or by a former employer choose our plans as their 
        source of prescription drug coverage. Furthermore, 
        Medicare+Choice enrollees have expressed consistently high 
        levels of satisfaction with their plans 1. AAHP 
        members stand ready to offer their knowledge and experience as 
        Congress considers ways to provide a prescription drug benefit 
        for senior citizens. Because Medicare+Choice plans completely 
        integrate outpatient pharmaceutical coverage into the Medicare 
        coverage they offer, Medicare+Choice plans are--and continue to 
        be--well positioned to offer beneficiaries an effective 
        coverage option.
---------------------------------------------------------------------------
    \1\ Medicare risk and Medicare+Choice enrollees have consistently 
expressed overall satisfaction with their quality of care at percentage 
rates in the mid-to-high nineties. See MedPAC Reports to Congress dated 
March 2000 (p. 34) and June 1998 (p. 133).
---------------------------------------------------------------------------
 Medicare+Choice is a Critical Source of Prescription Drugs for 
        Low-Income Beneficiaries without Subsidized Supplemental 
        Coverage. While Medicaid provides coverage for the lowest 
        income beneficiaries and other beneficiaries may have 
        supplemental insurance subsidized by a former employer, 
        supplementing Medicare for drugs and other treatments can be 
        prohibitively expensive, particularly for those on fixed 
        incomes. An AAHP analysis of HCFA data from 1997 demonstrated 
        that Medicare plans serve many financially vulnerable 
        beneficiaries, principally those without subsidized 
        supplemental coverage and those with limited or modest incomes 
        who are not eligible for Medicaid.2 A recent Health 
        Affairs study confirms this.3
---------------------------------------------------------------------------
    \2\ AAHP, ``Financially Vulnerable Medicare Beneficiaries Rely on 
HMOs for Prescription Drug Coverage,'' May 2000.
    \3\ Laschober, MA et al. Trends in Medicare Supplemental Insurance 
and Prescription Drug Coverage, 1996-1999. Health Affairs Web 
Exclusive, February 27, 2002.
---------------------------------------------------------------------------
 Medicare+Choice organizations can help Congress make drug 
        coverage available to beneficiaries while helping control 
        rising drug costs. Members of Congress face two competing 
        policy objectives: making a comprehensive prescription drug 
        benefit available to Medicare beneficiaries while 
        simultaneously controlling the program's escalating costs. 
        Health plans are well positioned to help Congress achieve its 
        policy goals.
      Medicare+Choice organizations use advanced pharmacy management 
        techniques integrated with medical and surgical benefits. It is 
        important to recognize, however, that even with the use of 
        state-of-the-art pharmacy management tools pioneered by private 
        health plans, prescription drug expenditures are escalating 
        rapidly. To function properly in this environment, any 
        prescription drug benefit must be backed by adequate funding 
        that is sustained over time. Moreover, any new prescription 
        drug program should be designed to allow for the continued 
        evolution of pharmacy management strategies that promote 
        affordability and accessibility of prescription drugs. A new 
        drug benefit should permit formulary management, generic 
        substitution, and integrated retail and mail service for drug 
        delivery. Lastly, any new regulatory framework that accompanies 
        a prescription drug benefit should pave the way for the 
        successful implementation of the program and its evolution as 
        the program matures.
                    iv. stabilizing medicare+choice
    Health plans feature prominently in the longer-term visions of 
comprehensive Medicare reform and a new outpatient prescription drug 
benefit articulated by this and previous Administrations and by Members 
of Congress. However, steps must be taken immediately to ensure that 
private plans are able to continue to participate in the Medicare 
program. If the current cycle of underpayment is not halted, health 
plans will continue to wrestle each year with the difficult decision of 
whether it is possible to continue to remain in the Medicare+Choice 
program. Although the historical pattern of administrative 
inflexibility in Medicare+Choice is improving, additional changes are 
needed. Absent funding relief, business realities will force more and 
more plans to leave the program, and by the time longer-term reforms 
are ready to be enacted, policymakers may find that the infrastructure 
they were counting on no longer exists.
    Health plans applaud President Bush for recommending a 6.5% payment 
increase for health plans that have been receiving the minimum payment 
update as a good first step. We call upon Congress to act quickly this 
year to build on the President's proposal to ensure that Medicare 
beneficiaries continue to be able to access the choices they value.
    In the context of the Medicare+Choice program, I have six basic 
points I would like to raise.

 Prior to 1997, Health Plan Choices for Medicare Beneficiaries 
        Were Expanding. Under the Medicare risk contract program that 
        preceded Medicare+Choice, beneficiaries responded favorably to 
        the high quality, affordable, and comprehensive health coverage 
        offered by Medicare HMOs. Between 1993 and 1997, enrollment in 
        Medicare HMOs increased at an average annual rate of 30 
        percent, reaching a level of 5.2 million by 1997.
 The Balanced Budget Act Has Had Unintended Consequences. While 
        the Balanced Budget Act of 1997 (BBA) clearly achieved its 
        objective of limiting spending throughout the entire Medicare 
        program, this accomplishment has been achieved at the expense 
        of another important objective--expanding health care choices 
        for Medicare beneficiaries. In many areas where large numbers 
        of beneficiaries have chosen Medicare+Choice options, health 
        plans are absorbing cost increases of 10 to 13 percent annually 
        and, at the same time, receiving payments that are increasing 
        by only two percent annually (and three percent in 2001). The 
        unintended consequences of the BBA have diminished health care 
        choices for Medicare beneficiaries, as many health plans have 
        been forced to withdraw from the program due to inadequate 
        funding and excessive regulatory burdens.
 Medicare+Choice Is a Valuable Option for Beneficiaries. 
        Medicare+Choice plans provide high quality, comprehensive, 
        affordable health coverage--with a strong emphasis on 
        coordinated care and preventive health care services--that is 
        not available in the Medicare fee-for-service program. Research 
        studies show that Medicare+Choice plans do a better job of 
        delivering services to the chronically ill and serve as a 
        crucial safety net for many low-income beneficiaries.
 Medicare+Choice Funding is Inadequate. Most of the ``flow-
        through'' or ``indirect'' funds that the Congressional Budget 
        Office (CBO) attributed to the Balanced Budget Refinement Act 
        of 1999 (BBRA) and the Benefits Improvement and Protection Act 
        of 2000 (BIPA) did not reach the Medicare+Choice program in 
        either 2001 or 2002. This is because the ``blend'' component of 
        the Medicare+Choice payment methodology was not implemented in 
        these years. As a result, Medicare+Choice plans will receive 
        only $2.3 billion in reimbursement from BBRA and BIPA in the 
        three-year period of 2000-2002, rather than the $5.8 billion 
        that was scored by CBO. This amount represents only 12 percent 
        of the $19.2 billion in estimated cuts from Medicare+Choice due 
        to the BBA in this same three-year period.
 The Medicare+Choice Program Has Been Hampered Since Its Early 
        Years by Administrative Burdens. CMS often has failed to 
        consider whether the costs of regulatory requirements outweigh 
        their benefits and, at the same time, forced health plans to 
        spend scarce resources on compliance activities of sometimes 
        questionable value--leaving plans with fewer resources to spend 
        on patient care. Instead of setting priorities for ensuring 
        beneficiary rights and plan accountability, the agency has 
        created an inflexible regulatory environment that places 
        equal--but arbitrary--emphasis on every requirement. Plans 
        applaud recent CMS efforts to control the growth of the 
        regulatory burden, but the volume of regulation is nevertheless 
        overwhelming.
 Action Is Urgently Needed to Protect Health Care Choices for 
        Medicare Beneficiaries. Efforts to stabilize the 
        Medicare+Choice program should focus on: (1) providing adequate 
        funding; (2) correcting flaws in the program's risk adjustment 
        process; (3) repealing the Medicare+Choice enrollment ``lock-
        in'' requirement; and (4) continuing improvement in the 
        regulatory environment.
Medicare Managed Care Was Highly Successful Prior to 1997
    In 1982, Congress enacted new rules under which HMOs could serve 
Medicare beneficiaries through a Medicare risk contract program. Under 
this program, HMOs provided beneficiaries with a growing number of 
highly popular health care choices. Much like the Medicare+Choice plans 
of today, the Medicare HMOs that emerged in the mid-1980s offered a 
different approach to health care than beneficiaries experienced under 
the Medicare fee-for-service program. Medicare beneficiaries responded 
favorably to the high quality, affordable, and comprehensive health 
coverage offered by Medicare HMOs. Enrollment in Medicare HMOs reached 
one million by 1987, 1.8 million by 1993, and 5.2 million by 1997.
    While the Medicare risk contract program created valuable health 
care choices for many beneficiaries, in many areas of the country 
beneficiaries did not have access to Medicare HMOs largely because of 
variations in the program's payment rates. Under the Medicare risk 
contract program, HMOs were paid a set amount for each beneficiary 
based on 95 percent of the average per capita costs of providing 
covered services in the Medicare fee-for-service program in the 
beneficiary's county of residence. Because there are wide geographic 
variations in fee-for-service payments, there were also wide geographic 
variations in Medicare HMO payments. In addition, the willingness of 
health care providers to contract with health plans varied 
significantly across geographic areas--just as it does today. As a 
result of these factors, Medicare HMOs were plentiful in some areas, 
but unavailable in others. Concerns about this issue, combined with 
other factors, led to major legislative developments in 1997.
The Balanced Budget Act of 1997 Has Had Unintended Consequences
    The Balanced Budget Act of 1997 (BBA) repealed the Medicare risk 
contract program and replaced it with a new Medicare+Choice program. 
One of the BBA's stated goals was to provide the benefits of the 
Medicare risk contract program to beneficiaries in more areas of the 
country. In addition, the BBA placed a strong emphasis on strictly 
limiting future Medicare spending, for both managed care coverage and 
fee-for-service coverage, as part of a broader effort to balance the 
federal government's budget.
    At the time the BBA was enacted, the Congressional Budget Office 
(CBO) estimated that the BBA's Medicare+Choice provisions would achieve 
$22.5 billion in budget savings over five years (1998-2002). Moreover, 
the Clinton Administration announced in January 1999 that it intended 
to cut Medicare+Choice funding by an additional $11.2 billion over five 
years (2000-2004) through the approach it had chosen for implementing a 
new risk adjuster. The Bush Administration has since signaled that it 
will take a different approach to implementing the risk adjuster. Even 
if the Bush Administration chooses to implement a budget neutral risk 
adjuster, significant savings has already been squeezed from the 
Medicare+Choice program during the transition from the Medicare risk 
contract program.
    While the BBA clearly achieved its objective of limiting spending 
throughout the entire Medicare program, this accomplishment has been 
achieved at the expense of another important objective--expanding 
health care choices for Medicare beneficiaries. The unintended 
consequences of the BBA have diminished health care choices for 
Medicare beneficiaries as many health plans have been forced to 
withdraw from the program due to inadequate funding and excessive 
regulatory burdens.
    Following the enactment of the BBA, Medicare beneficiaries paid a 
heavy price as two major problems--underfunding and over-regulation--
forced many health plans to either withdraw from the Medicare+Choice 
program or reduce their service areas. As a result, approximately 
407,000 Medicare+Choice enrollees had to change health plans or switch 
from Medicare+Choice coverage to Medicare fee-for-service coverage in 
January 1999. Although the enactment of BBRA and BIPA helped preserve 
Medicare+Choice coverage for some beneficiaries in some geographic 
regions, additional beneficiaries were affected by withdrawals and 
service area reductions in subsequent years due to continuing 
instability in the Medicare+Choice program. Coverage disruptions were 
experienced by 327,0000 beneficiaries in January 2000, by 934,000 
beneficiaries in January 2001, and by another 536,000 beneficiaries in 
January 2002. In total, over 2.2 million enrollees have experienced 
coverage disruptions.
    Many of the beneficiaries affected by plan withdrawals have been 
able to enroll in another Medicare+Choice plan in their area. However, 
a significant number have been left with only one option--enrolling in 
the Medicare fee-for-service program, which offers less comprehensive 
coverage and requires higher out-of-pocket costs than the typical 
Medicare+Choice plan. Millions more have experienced a reduction in 
benefits or an increase in out-of-pocket costs, including premiums, 
even though they were able to keep their Medicare+Choice plans. These 
benefit changes are a direct result of the underfunding of the 
Medicare+Choice program.
    To underscore the inadequacy of government payments to 
Medicare+Choice plans, it is useful to compare Medicare+Choice to 
broader trends in health care spending. Unless Congress acts, CMS 
projects that in 2003 all Medicare+Choice enrollees will be covered by 
health plans whose payments will increase by only 2 percent over 2002 
payments. In contrast, the Department of Health and Human Services 
(HHS) has projected that private sector spending by U.S. consumers on 
all health care services will increase by 9.4 percent in 2002 and that 
spending increases on prescription drugs are expected to be in the 
double digits through 2011.
Medicare+Choice Plans Are an Important Option for Beneficiaries
    Despite the problems the Medicare+Choice program has experienced in 
recent years, Medicare+Choice plans have demonstrated that they can 
provide high quality, comprehensive, affordable health coverage--with a 
strong emphasis on coordinated care and preventive health care 
services--that is not available in the Medicare fee-for-service 
program. This coverage serves as a crucial safety net for many low-
income beneficiaries who cannot afford the high out-of-pocket costs 
they would incur under the Medicare fee-for-service program. For all 
beneficiaries, regardless of their income, this coverage provides 
access to high quality health care. Beneficiary surveys consistently 
show that Medicare+Choice enrollees tend to be highly satisfied with 
their health coverage
    Medicare+Choice plans are continually looking for new and better 
ways to improve the delivery of health care services. By adopting 
innovative approaches that place a strong emphasis on prevention, 
Medicare+Choice plans are helping beneficiaries enhance their quality 
of life.
    Medicare+Choice enrollees are benefiting from disease management 
programs that health plans have designed to improve care for 
beneficiaries with chronic conditions. A recent AAHP survey, based on 
responses from 131 health plans, found that 97 percent had implemented 
disease management or chronic care programs for diabetes, 86 percent 
had programs for asthma, and 83 percent had programs for congestive 
heart failure. Health plans also are developing disease management 
programs for end-stage renal disease, depression, and cancer. Other 
plans have improved health care for their Medicare beneficiaries 
through innovations focused on nutrition screening, the relationship 
between literacy and health, osteoporosis treatment and prevention, 
overcoming cultural barriers, and promoting clinical guidelines.
    Another reason Medicare+Choice plans are popular among 
beneficiaries is that they typically offer additional benefits not 
covered by Medicare fee-for-service. According to an analysis by 
Mathematica Policy Research, 66 percent of Medicare+Choice plans offer 
some prescription drug coverage in 2002. Last year, other additional 
benefits available to Medicare+Choice enrollees included physical exams 
(99.7 percent), vision benefits (94 percent), hearing benefits (79 
percent), podiatry benefits (30 percent), preventive dental benefits 
(27 percent), and chiropractic benefits (5 percent). The lack of 
adequate funding for the Medicare+Choice program has forced many health 
plans to scale back additional benefits in recent years.
Medicare+Choice Funding is Inadequate
    In both 1999 and 2000, Congress enacted legislation aimed at 
stabilizing the Medicare+Choice program. At the time these laws were 
enacted, the Congressional Budget Office (CBO) estimated that the 
Balanced Budget Refinement Act of 1999 (BBRA) and the Benefits 
Improvement and Protection Act of 2000 (BIPA) would restore a portion 
of the funds that previously were cut from the Medicare+Choice program.
    To better understand how the additional Medicare+Choice funding 
provided by BBRA and BIPA compares to the deep Medicare+Choice cuts 
that were made by BBA, it is useful to review the three-year period of 
2000-2002. Estimates by CBO indicate that BBRA and BIPA were expected 
to restore 30 percent, or $5.8 billion, of the $19.2 billion that was 
estimated by CBO to have been cut from the Medicare+Choice program by 
the BBA for this period. For several reasons, however, the 
Medicare+Choice program has not received all of these funds.
    One important reason is that, according to CBO's estimates, more 
than half the additional Medicare+Choice funding provided by BBRA and 
BIPA was to result from the interaction between Medicare+Choice 
payments and Medicare fee-for-service payments. Because the growth 
percentage used in calculating Medicare+Choice payments is linked to 
growth in Medicare fee-for-service spending--albeit not as directly as 
under the county-by-county link that existed in the old Medicare risk 
contract program--Medicare+Choice payments are affected by increases or 
decreases in Medicare fee-for-service spending. This interaction is 
sometimes referred to as the ``flow-through'' effect. Since Medicare 
fee-for-service spending was increased by both BBRA and BIPA, this 
``flow-through'' effect was estimated to cause an indirect increase in 
Medicare+Choice payments.
    CBO estimated that the ``flow-through'' effect would increase 
Medicare+Choice payments by a total of $3.6 billion for the three-year 
period of 2000-2002. According to research by PricewaterhouseCoopers, 
approximately $100 million of these funds were received by 
Medicare+Choice plans receiving floor payments. However, the remaining 
$3.5 billion was not received because the ``blend'' component of the 
Medicare+Choice payment methodology was not implemented in 2001 or 
2002. Due to the BBA's budget neutrality requirement and the low 
Medicare+Choice growth rates of recent years (which are ``corrected'' 
annually to account for errors in previous estimates), the ``blend'' 
has been implemented in only one year (2000) since the BBA was enacted, 
and it will not be implemented in 2003 under current law.
    As a result, Medicare+Choice plans will receive only $2.3 billion 
from BBRA and BIPA in the three-year period of 2000-2002, rather than 
the $5.8 billion that was scored by CBO. This amount represents only 12 
percent of the $19.2 billion estimated to have been cut from 
Medicare+Choice by the BBA in this same three-year period.1Other 
factors raise questions about whether even these funds are reaching the 
Medicare+Choice program. For example, the Medicare+Choice payment 
provisions of BBRA and BIPA placed a heavy emphasis on targeting funds 
toward rural areas where managed care plans are not well-established 
and where health care providers sometimes are reluctant to contract 
with health plans. These provisions have had limited success in 
increasing the availability of Medicare+Choice options in rural areas. 
As a result, the additional Medicare+Choice spending that CBO 
anticipated in these areas has not materialized.
    Moreover, significant increases in the fees charged by hospitals 
and other health care providers have absorbed much of the funding that 
Congress intended to add into the Medicare+Choice program. A related 
factor is that providers contracting with Medicare+Choice plans face 
administrative burdens that are both costly and time-consuming, such as 
the collection of encounter data, that they do not have to deal with in 
the Medicare fee-for-service program or in the private sector.
    The Complexity of the Medicare+Choice Payment Formula Makes It 
Difficult to Weigh the Merits of Legislative Options. Congressional 
efforts to stabilize the Medicare+Choice program have been frustrated 
by the complexity of the Medicare+Choice payment formula. The various 
components of this formula--the ``floor,'' the ``blend,'' the minimum 
update, the ``carve-out'' of graduate medical education funds, the 
budget neutrality requirement, and the risk adjustment process--
interact with each other and, more importantly, with prospective 
estimates of Medicare fee-for-service growth rates (and retrospective 
corrections of these growth rates). This interaction makes it 
impossible to precisely determine how specific payment changes will 
affect Medicare+Choice payments on a county-by-county basis in future 
years.
    In order to be helpful to Members of Congress, AAHP has tried to 
provide county rates that would result from specific legislative 
proposals, using highly sophisticated techniques and the best data 
available. However, our models are unable to account for one critical 
factor: Medicare+Choice payments are affected by CMS' estimates of the 
national growth rate of Medicare fee-for-service spending for every 
year after 1997, and CMS is authorized to revise these estimates on an 
annual basis to correct forecast errors from prior years. Because we 
currently have no way of knowing how much CMS will revise these 
estimates next year, accurately determining the county rates that will 
result from specific legislative changes Congress may enact this year 
is difficult. This is a serious problem because, although CMS can 
retroactively adjust payment increases, Medicare+Choice plans cannot 
retroactively adjust costs.
    To understand the degree to which this problem is undermining 
legislative efforts to provide predictable and stable payments, please 
consider the following example. In determining Medicare+Choice payments 
for 2003, CMS revised the Medicare fee-for-service growth rate for 2000 
by ``1.1 percentage points, by ``1.6 percentage points in 2001, and by 
``1.9 percentage points in 2002, thus causing the Medicare+Choice 
growth rate for 2003 to be ``2.9 percent. When Congress was considering 
Medicare+Choice payment provisions the previous year, lawmakers had no 
way of knowing that CMS later would make revisions that would have such 
a dramatic impact in limiting Medicare+Choice payments. Congressionally 
mandated payment increases are undermined by a CMS ``clawback'' due to 
this forecast error ``correction.''
    New Funding Is Stabilizing the Medicare+Choice Program in Some 
Areas, but Counties with Many Medicare+Choice Enrollees Need More Help. 
AAHP estimated that 67 percent of the Medicare+Choice funding provided 
by BIPA in 2001 went to counties where plans were receiving the floor 
payment for large urban areas. In most cases, Medicare beneficiaries 
are better off in these areas because their health care choices and 
benefits have been stabilized by BIPA. This clearly demonstrates that 
legislative efforts to strengthen the Medicare+Choice program are 
worthwhile when plans actually receive the funds Congress intends to 
provide.
    Although BIPA was good news for beneficiaries in large urban areas 
where counties are now receiving the monthly floor payment, a large 
majority of Medicare+Choice enrollees have not benefited significantly 
from BIPA. Currently, more than 66 percent of Medicare+Choice enrollees 
live in counties where plans received payment increases of only two 
percent this year. Many of these same plans had received minimum 
payment increases in each of the past three years (1998-2000) and, 
unless Congress takes action this year, all counties will receive a 
payment increase of only two percent in 2003.
    Therein lies the problem afflicting the Medicare+Choice program. In 
the areas where most Medicare+Choice enrollees live, health plans are 
absorbing cost increases of 10 to 13 percent annually and, at the same 
time, receiving payments that are increasing by only two percent 
annually. No organization can survive on a long-term basis when costs 
continue to outpace income year after year. It is precisely for this 
reason that many health plans have been forced to withdraw from the 
Medicare+Choice program, reduce benefits, or increase premiums.
    Any serious attempt to stabilize the Medicare+Choice program must 
directly address the fact that many counties across the nation with 
large numbers of Medicare+Choice enrollees are in desperate need of 
additional funding. By acting on the President's recommendation and 
targeting assistance to these areas, Congress can lay the foundation 
for broader private sector participation in the Medicare program. If 
the program is stabilized in these counties, health plans will then be 
in a stronger position to offer coverage in other counties where 
choices are not yet widely available.
    Claims that Medicare+Choice Plans are Overpaid are Based on Flawed 
Methodology. The General Accounting Office (GAO), among others, has 
claimed that Medicare+Choice enrollees are significantly healthier than 
enrollees in the Medicare fee-for-service program and, therefore, that 
Medicare+Choice plans are overpaid. AAHP has long disputed the GAO's 
methodology in arriving at these conclusions. This methodology uses 
pre-managed care enrollment fee-for-service expenditures (i.e., ``prior 
use'') as a proxy for the health status of beneficiaries who are 
enrolled in Medicare+Choice plans. AAHP has been concerned about the 
GAO's reliance on this methodology because it includes no information 
about Medicare+Choice enrollees' use of medical services once enrolled 
in a Medicare+Choice plan. As a result, the measure used in this 
methodology bears little relationship to health plan enrollees' actual 
health status and health care needs.
    Specifically, the GAO studies examined inpatient hospital data for 
Medicare+Choice enrollees to measure health status. This approach can 
be misleading since care patterns in Medicare+Choice plans emphasize 
preventive care in order to obviate disruptive and costly inpatient 
hospitalizations where appropriate. In addition, the cost-sharing 
requirements in the Medicare fee-for-service program, especially for 
those beneficiaries without Medicare supplemental insurance, may be 
high enough to prohibit some beneficiaries from seeking care until they 
join a Medicare+Choice plan. Indeed, MedPAC found in its June 2000 
report that, in 1998, 26 percent of first-year Medicare+Choice 
enrollees who switched from fee-for-service did not have supplemental 
coverage in 1997. By contrast, only 13 percent of beneficiaries who 
lived in a county with a Medicare+Choice plan and who remained in fee-
for-service Medicare in 1998 were without supplemental coverage in 
1997. Thus, those joining a Medicare+Choice plan may be more likely to 
have pent-up demand for medical services when joining a Medicare+Choice 
plan, making them appear healthier than they truly are under the GAO's 
methodology.
    Notwithstanding AAHP's objections to the GAO's methodology, 
empirical evidence questions the GAO's finding that Medicare+Choice 
beneficiaries remain significantly healthier than fee-for-service 
beneficiaries. Research prepared for CMS found that ``the impression 
that the Medicare fee-for-service population is, on average, in much 
worse health then the Medicare managed care population is not borne 
out.'' (Pope, G.S., M. Griggs, and N. McCall, Comparison of the Health 
Status of Medicare Fee-for-Service and Managed Care Enrollees Using the 
Health Outcomes Survey, prepared for the Health Care Financing 
Administration, November 16, 2000.)
Administrative and Regulatory Burdens Are Hampering the Medicare+Choice 
        Program
    Another serious problem contributing to the instability in the 
Medicare+Choice program is that CMS often has failed to consider 
whether the costs of regulatory requirements outweigh their benefits. 
CMS has forced health plans to spend scarce resources on compliance 
activities of sometimes questionable value--leaving plans with fewer 
resources to spend on patient care. Instead of setting priorities for 
ensuring beneficiary rights and plan accountability, the agency has 
created an inflexible regulatory environment that places equal--but 
arbitrary--emphasis on every requirement.
    The Bush Administration has taken important first steps toward 
improving administration of the Medicare+Choice program. For example, 
by creating a new Center for Beneficiary Choices, the Administration 
has consolidated all Medi-care+Choice oversight responsibilities at 
CMS' central office into one single office led by a senior official who 
reports directly to the administrator of CMS. The CMS regulatory forum 
held in Phoenix this week, examining the regulatory burdens confronting 
Medicare+Choice, is also a very positive development.
    Additional measures are needed to address other regulatory and 
administrative issues that are highly problematic for Medicare+Choice 
plans and enrollees. Equally important, the agency needs to take 
further steps to eliminate remaining layers of micromanagement and 
continue to place a strong emphasis on building a reliable business 
partnership with health plans.
    Efforts to solve the crisis in the Medicare+Choice program should 
include provisions to repeal the Medicare+Choice enrollment ``lock-in'' 
requirement and to permanently delay the adjusted community rate (ACR) 
filing deadline. The Energy and Commerce Committee is to be 
congratulated for having taken the lead last year in including 
provisions to move the ACR deadline and delay implementation of the 
lock-in in the regulatory relief bill passed by the House last 
December. I hope you will continue your work this year to alleviate 
these administrative burdens undermining the potential of the 
Medicare+Choice program.
Stabilizing the Medicare+Choice Program Requires Urgent Action By 
        Congress
    I cannot stress strongly enough that Congress should act early in 
the session to make the changes needed to stabilize the Medicare+Choice 
program. Health plans are encouraged that President Bush recommended 
the 6.5% funding increase for minimum update counties in his budget--a 
good first step. Plans are also encouraged that you are holding this 
hearing and we ask that you move quickly to mark up and pass a 
legislative package.
    Keep in mind that the regulatory cycle governing the 
Medicare+Choice program is not consistent with the cycle of 
congressional activity. Health plans have to make decisions in the next 
3 months regarding their participation in the Medicare+Choice program 
in 2003. If Congress does not act on needed reforms before then, health 
plans will have no choice but to make their decisions based on current 
program realities. In that event, Members should expect that additional 
beneficiaries may lose the health plan choices they value.
    No one wants that to happen. To that end, AAHP and its member plans 
stand ready to assist you as you work to address the serious problems 
in the Medicare+Choice program. Thank you for this opportunity to 
appear before you today.

    Mr. Bilirakis. Well, we have your written testimony, and I 
apologize for not being here to hear it orally. They make 
appointments for us, unfortunately, and so we have to go and 
see these people.
    I will start the questioning. Mr. Jindal, some opponents of 
competition suggest that under an FEHBP model that we are 
simply herding people into managed care plans. And yet in 
reality, FEHBP maintains at least six fee-for-service plans in 
all regions of the country.
    Are you aware of any proposal, including the most 
aggressive, being discussed that would force beneficiaries into 
managed care plans?
    And an additional question in that regard is do the 
President's principles leave that option solely up to the 
beneficiary?
    Mr. Jindal. Mr. Chairman, thank you for the question. One 
of the differences, as I noted in my testimony, is that the 
majority of employees in the Federal Employees Plan are 
actually not in HMO type plans, but rather are in the types of 
plans that aren't even available to the vast majority of 
Medicare beneficiaries today.
    So what the administration is proposing is to increase the 
numbers and types of choices available to Medicare 
beneficiaries.
    For example, in this year's budget, there is a proposal for 
the first types of plans to enter new areas so that 
beneficiaries can have access to preferred provider 
organizations, point of service plans, and other types of 
choices that routinely are available to Americans below the age 
of 65.
    So there is absolutely no proposal that we are supporting 
that would require or force, or even likely result, in the 
majority of Medicare beneficiaries being enrolled in HMO type 
plans.
    So you are absolutely right to note that the greater 
diversity of choices in the Federal employees plan and also to 
note the administration's support to giving seniors those types 
of choices.
    Mr. Bilirakis. Any other comments regarding that particular 
point?
    Mr. Butler. Maybe I could make a comment on that, please.
    Mr. Bilirakis. Mr. Butler, please.
    Mr. Butler. I think one thing that is often misunderstood 
actually about the fee for service plan within Medicare is that 
it is in effect a giant managed care plan. The Federal 
Government, through CMS, and manages doctors directly, and not 
all doctors are in it.
    In fact, my father-in-law just lost his doctor, and he is 
in his late eighties, and he has many medical problems, because 
that doctor withdrew simply because of the paperwork and costs 
associated with it.
    So in fact it manages, it regulates, and it directly 
manages doctors. So it is not true to say that even under the 
existing Medicare system that somehow this perfect world of 
complete choice of doctor over here, and then these horrible 
plans over here.
    In fact, there is plenty of bureaucracy within the system 
on all parts of the program.
    Mr. Bilirakis. A good point. Ms. Moon.
    Ms. Moon. I think that there are a number of things that it 
is important to remember. One is that we are concerned in the 
case of Medicare with the level of the premium that individuals 
would have to pay, and the amount of cost sharing.
    And a number of the plans that are not managed care plans 
in FEHBP now have very large amounts of cost sharing. A number 
of those plans that are not managed care plans also are closed 
to all but the people who belong.
    The Mail Handlers Plan, for example, no one else can join 
the plan except for the mail handlers. And finally the out of 
network benefits for some that are available are quite 
different than under Medicare.
    It's true, because under Medicare if a doctor takes you in, 
and most doctors do, about 97 percent, then those doctors agree 
largely to stick within the amounts that are paid for by 
Medicare.
    There is a little bit of out of network use, but not very 
much, in terms of balanced billing. In the case of a lot of 
other plans, my point of service plan, for example, I pay a 60 
percent co-pay when I go to my out-of-network physician because 
the plan puts such a low level of usual, and reasonable, and 
customary amounts on it that less than half of the costs are 
paid for.
    Mr. Bilirakis. Mr. Butler is shaking his head.
    Mr. Butler. No, I would just like a small correction on 
what Marilyn said, which is that there certainly are plans, 
fee-for-service plans, in the FEHBP that are restricted, but 
certainly not the Mail Handlers Plan, which is open to non-
union members.
    Indeed, I think there are many members of this current 
administration that are in Mail Handlers, and I can assure you 
that they are not members of the Mail Handlers Union.
    Mr. Bilirakis. Mr. deMontmollin.
    Mr. deMontmollin. Mr. Chairman, on behalf of the health 
plans, I would concur with Mr. Butler, and Mr. Jindal, and say 
that the health plans themselves have no interest whatsoever in 
there being a lack of choice.
    We think that is a critical component of reform in 
Medicare. We know from our commercial product that if an 
employer makes us the exclusive provider, we are less likely to 
be considered a good plan by the members, than if that employer 
offers a number of different opportunities.
    I think the subcommittee needs to be aware that from 1993 
to 1997 the Medicare+Choice or the HMO risk program was growing 
by 30 percent per year. Medicare beneficiaries were very 
interested in it.
    But at no time did it ever get over 15 percent of the total 
Medicare population. That is to say, 85 percent were always in 
the fee for service program, and that may be a very good idea.
    The concern that we have now is that we are going in the 
wrong direction. Not only are there only 13.3 percent in 
Medicare+Choice plans currently today, as of February, but we 
also know recently from the CBO that those numbers are likely 
to go down into the 8 percent range if some changes aren't make 
in terms of the payment of adequate amounts in Medicare+Choice.
    There is not a member on this subcommittee I respectfully 
would suggest that cares any more about the 5 million Medicare 
beneficiaries who are in Medicare+Choice plans than those plans 
themselves.
    Mr. Bilirakis. All right. Now, my time has expired right at 
this moment. Depending on how many people we have here, and how 
our time goes, and that sort of thing, and we do have another 
vote coming probably within another half-an-hour or so, we may 
have a second round.
    Hopefully we will, because I certainly want to address Mr. 
deMontmollin regarding my district. I also had another basic 
question regarding the subject we were on. Mr. Brown to 
inquire.
    Mr. Brown. Thank you, Mr. Chairman. Listening to the five 
of you and your testimony, and looking at your written 
testimony, it occurs to me that this hearing really isn't 
exactly about Medicare versus FEHBP. It is about making a 
fundamental change in the program.
    It seems that it is about turning Medicare from a defined 
benefit program, where every senior across the country, whether 
from Maryland, or from New Jersey, or Georgia, or Indiana, or 
Florida, or Mr. Strickland's and my State, Ohio, where every 
beneficiary knows exactly what he or she can count on in 
Medicare, no matter where they live and what their status, and 
how much those benefits will cost.
    But going from retired benefit into retired contribution, 
or rather a defined benefit into a defined contribution plan, 
or voucher plan, where the government gives seniors a voucher 
and says good luck, Dr. Moon, talk about what such a radical 
plan change, and what a proposed change from the defined 
benefit, where people really know what they are getting, to a 
defined contribution, would mean?
    What would a voucher mean for out-of-pocket costs, and what 
would it mean in defining an affordable plan? What kind of 
radical change into a voucher program mean for beneficiaries?
    Ms. Moon. First, the issue I think is what would make it a 
voucher plan, and one of the things that is important to think 
about is how does something move from defined benefit to 
defined contribution.
    It can be done either directly or it could be subtly, and 
one of my concerns about the FEHBP type approach that it may be 
very tempting to move subtly toward a voucher. By, for example, 
requiring beneficiaries to pay substantial premiums above some 
average amount.
    And if that is the case, then it will certainly be a 
voucher for people who cannot afford to supplement the plan, 
and they will face very restricted plans that they can choose 
from.
    The other issue I think with the voucher type approach is 
whether or not it passes all of the risks on to the 
beneficiary. If the Federal Government decides that it wants to 
set up a system and allow it to grow at 5 percent a year, for 
example, but the cost of health care are growing at 10 percent 
a year, the problem is that all of that will go on to the 
beneficiary, and it will be leveraged in a way in which the 
premiums could very easily double over a short period of time.
    Mr. Brown. You mentioned a second ago that people won't be 
able to afford a certain plan. The proponents of FEHBP, or the 
proponents of vouchers, often argue that it saves the 
government money.
    It seems to me that it saves the government money by 
shifting many of the costs on to seniors, correct?
    Ms. Moon. I think most of the analyses that have been done 
have indicated that that is the only way it is going to 
particularly save money.
    There will be some small adjustments for efficiencies, but 
we have not seen plans come in substantially lower, for 
example, than what was anticipated it would cost the program to 
operate.
    In fact, that is one of the problems with Medicare+Choice 
Plans, is that they have not been able to generate enough 
efficiencies to keep the extra benefits that they had promised.
    Mr. Brown. Well, certainly the Medicare+Choice advocates 
certainly argued years ago as managed care has become a bigger 
part, or at least for a while became a bigger part as you 
suggested of Medicare, and that a big reason for it was to save 
money, and yet they come with their hand out.
    And yet the only money in the President's budget that goes 
to providers who we read about having a more and more difficult 
time is for those 15 percent Medicare+Choice providers for 
those beneficiaries.
    Let me shift to Mr. Richtman for a moment. You know, I hear 
my friends on the other side of the aisle always use the word 
choice, and it just puzzles me that seniors--they say that 
seniors get more choice from managed care.
    They can choose among this whole menu of plans that offer 
all kinds of different opportunities and different benefits, 
and different physicians, and plugged into different lists of 
physicians and hospitals, and other providers.
    And I don't quite get it, because there is no more choice 
than fee-for-service Medicare. You choose your doctor, and your 
choose your health facility. What do seniors want?
    I mean, is it the plans that they want to choose from, or 
is it the doctors, or the hospitals? Talk about that if you 
would.
    Mr. Richtman. Well, at the National Committee to Preserve 
Social Security and Medicare, we conduct a lot of town 
meetings, often with Members of Congress, democrats and 
republicans, and I don't think I have ever heard of a senior at 
a meeting talk about wanting more choices, in terms of plans.
    I have heard them talk often about wanting to make sure 
that the choice of doctors is something that is preserved. That 
is something that is very important. It is important to all of 
us, especially to somebody that is older and used to seeing the 
same doctor.
    A member of the subcommittee who is not here at the moment 
mentioned earlier that seniors are not satisfied with what they 
get out of Medicare, and that is true to a point. But they are 
not unsatisfied, I think, because they are denied a choice of 
plans.
    They are unsatisfied because they are still paying a lot 
out-of-pocket for one thing. The Medicare beneficiary today 
pays more out-of-pocket for health care as a percent of their 
income than before we even had Medicare.
    It is a pretty amazing figure, and they are not satisfied 
because they would like benefits to include more preventive 
care, dental, eyeglasses, hearing aids, immunization, and that 
is why they are not satisfied.
    And, of course, the big issue is prescription drugs, but 
for the most part seniors are happy with Medicare.
    Mr. Bilirakis. Please finish up if you would, sir.
    Mr. Richtman. Yes.
    Mr. Bilirakis. Are you finished? I didn't mean to cut you 
off. I just wanted you to finish up, because time has expired.
    Mr. Richtman. Well, I'm finished, Mr. Chairman.
    Mr. Bilirakis. Dr. Norwood to inquire.
    Mr. Norwood. Thank you very much, Mr. Chairman. This 
hearing really is about us taking a look at some alternatives 
to the Medicare program, FEHBP being one of the thoughts, and I 
don't want us to get away from that.
    Mr. Richtman, I agree with you that at townhall meetings 
that senior citizens do say they would like to have a choice of 
physicians. They also say we would like to have everything 
free.
    We would like to have all the health care there possibly is 
at no cost to us. They do say that. But I am not sure if you 
ask them rightly that it is a correct thing to say that they 
wouldn't like to consider choice of plans.
    They don't want to be put in a position where they have to 
choose plans. They want to be put in a position that if they 
want to stay with fee-for-service, fine. Nobody will bother 
them.
    But they would not mind looking at other plans. So the 
talking point today of they want choice of physicians and not 
plans is not exactly correct. I have a lot of townhall 
meetings, too, and that is a pretty strong statement to make to 
simply say that nobody wants to have a choice. I wanted to get 
that out.
    Mr. Jindal, you said that there are flaws today in the 
payment to private plans, and I submit that there are also 
flaws in the payment system for fee-for-service. In view of the 
fact of whether we like it or not, there is a limited amount of 
money out there, and Medicare needs to get some more money in 
my opinion.
    Wouldn't we be better off to deal if we had a limited 
amount of money and putting that into fee-for-service for which 
86 percent of the American people use, versus putting it into 
private plans, or Medicare+Choice, or HMO, or managed care, or 
whatever you want to call it, which services about 14 percent 
of the people.
    Now, the answer of course is that we want enough money to 
put it in both, but I am concerned that we have got a lot of 
billions of dollars here that we are talking about putting into 
managed care plans that service the least number of people, 
simply because frankly managed care was not able to turn up the 
efficiencies that they said to the government they would in 
1973 when we put them into the marketplace basically.
    How do you feel about that? Do you think that if we have 
limited dollars had we ought to spend it on fee-for-service, 
where most of the people are, or should we put it all into 
where the fewest number of people are?
    Mr. Jindal. Well, Congressman, certainly the administration 
has proposed a comprehensive approach looking at all of the 
gaps in Medicare, and not only the prescription drug issue, but 
also the lack of a catastrophic benefit in the fee-for-service 
benefit.
    As well as some of the cost sharing that we believe should 
be updated, as well as the addition of preventive benefits 
without cost sharing and without deductibles, without applying 
the deductibles, in the fee for service programs.
    And the administration has proposed a comprehensive 
approach, and you are absolutely right that----
    Mr. Norwood. But the budget doesn't. The budget says let's 
put 4 billion into managed care plans, and none into fee-for-
service.
    Mr. Jindal. Well, you are right in noting that seniors do 
want their choices of plans. When you look in recent years and 
if you look at the non-floor counties and those counties where 
plans have gotten the minimum update, you have seen since 1998 
that some of those plans have grown about 11 percent.
    Whereas, fee-for-service in those same counties has grown 
at 17 percent. So the idea behind the short term money was to 
simply put a Band-Aid, and not as a permanent fix, but to 
stabilize the choices so that as we do the comprehensive 
approach, and that includes $190 billion for prescription drugs 
and for addressing the gaps in the overall program, there would 
still be choices for seniors.
    But the President is committed to addressing all those 
issues. It is not an either or. He does want to add the 
preventive benefits into the new fee-for-service program.
    Mr. Norwood. Well, you could literally say that the $1.25 
billion that is being taken out of the fee-for-service is the 
money that is being put into the managed care plans where the 
least number of people are.
    I mean, frankly, it just makes no sense to me, but let me 
go on to another thing. We have got so many things that we need 
to talk about.
    Many of you talk about a prescription drug benefit, and the 
Lord knows that it makes sense to have one, in terms of just 
economic efficiency frankly, and thinking with your brain 
rather than your heart.
    Now, the problem with this is that somebody also has to be 
concerned about what that costs. That is irresponsible to the 
greatest degree in my view to simply say let's just put 
anything we need to put into the Medicare program to bet a 
prescription drug benefit because it sounds good.
    And I assure you there is nobody in any townhall meeting 
who wouldn't say, yeah, you ought to spend it all. Now, 
presently today Medicare takes up 12 percent of the budget. I 
view that as a lot.
    We do suspect that in the year 2030, without a prescription 
drug benefit, Medicare is going to take up 30 percent of the 
budget, one-third of the budget. With a prescription drug 
benefit, we are guessing at what that might be, but probably 35 
percent of the budget.
    I would simply like for those of you who said we have got 
to a full prescription drug benefit. Tell me how you think we 
can sustain that, Ms. Moon, and Mr. Richtman.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Norwood. I will wait for the next round to get that 
answer. Just hang on. I'm coming back.
    Mr. Bilirakis. You all may be thinking about that. Mr. 
Green.
    Mr. Green. Thank you, Mr. Chairman. Dr. Moon, do vouchers 
mean that some beneficiaries will find that they cannot afford 
a plan that benefits and that meets their needs if we actually 
do a voucher plan?
    What will it mean if the government gives seniors a voucher 
and seniors are left to pay the rest of the cost out-of-pocket? 
Will all the seniors be able to afford a plan with the benefits 
that they need?
    Ms. Moon. I think it depends upon the generosity of the 
payment that the Federal Government establishes. And the 
difficulty of a voucher is that then the temptation is to say 
let's hold the line on costs, and be very tough about this so 
that we don't over-budget for needs.
    It is very difficult in addition to find a way in which the 
vulnerable beneficiaries will be able to find good plans, 
because without good risk adjustors, then you will have 
vulnerable beneficiaries going into plans where they know they 
need additional services, and that will become even more 
expensive.
    So I think the problem of affordability is going to stretch 
well beyond low income individuals, and well into people that 
are 200 percent or more of the poverty level, as well as people 
who have substantial health care problems.
    So I think that the issue of worrying about the costs of 
Medicare is totally appropriate, but that we should also worry 
about the costs of Medicare to the beneficiaries themselves, 
and we already know what they are paying about 22 percent of 
their incomes, and could pay as much as 30 percent of their 
incomes on out-of-pocket costs even if policies do not change 
in the future.
    Mr. Green. Secretary Jindal, in your testimony, you 
mentioned that some of the benefit plans in private plans had 
drug coverage, better preventive care, innovative disease 
management programs, and other benefits.
    Some of us on our panel, especially in the case of 
prescription drugs, believe that these should be fundamental 
parts of the Medicare system as we know it today, but fee-for-
service and the private plans alike.
    If we were to adopt the FEHBP style option, what steps 
would the administration take to strengthen the fee for service 
to include these type benefits?
    Mr. Jindal. Well, the President has come out in support, as 
part of his broad comprehensive approach, of addressing the 
gaps in Medicare, and he has come out in support of providing 
access to a subsidized drug benefit for beneficiaries both in 
the new fee-for-service option, as well as those in private 
plans.
    So we would certainly be open to working with you on the 
details. Obviously there are differences as has been noted by 
other panelists between the FEHB and Medicare programs, and are 
aware of those differences, and want to incorporate relevant 
policy solutions.
    For example, there are special low income protections in 
the Medicaid program that we think need to continue. We also 
understand that there is significant private spending on behalf 
of prescription drug coverage for Medicare beneficiaries today.
    And we would not want to displace, for example, all 
employer provided coverage with government spending. We want to 
find a way to preserve and to maximize the spending that exists 
today on behalf of beneficiaries.
    Mr. Green. And I agree that the President has talked about 
it, but the difference though is what we see in the budget. And 
I guess it is $750 billion for prescription drug benefit, as 
compared to less than $200 billion for the whole Medicare 
reform effort. So that is a big gap in there to negotiate on.
    Dr. Moon, one of the problems associated with our Federal 
plan is that frequent withdrawal from the plans from the 
program, and not unlike our choice plans that we have now, and 
the fact that enrollees must choose plans each year.
    For example, one of my staff had three different plans in 4 
years that she has been in the system, and how does this 
changing of plans affect the health of the enrollees? And isn't 
continuity of care particularly important in the Medicare 
population?
    Ms. Moon. Studies have shown that continuity of care is 
important, and actually continuity of care lowers costs. People 
that don't change their physicians very often, for example, 
don't have to redo tests, and go through a lot of the other 
kinds of adjustments that often raise costs in the program.
    So I think that is a particular concern, and the stability 
of plans and the ability of plans to move in and out of the 
market is very important.
    One of the aspects of competition that people celebrate is 
entrance of plans. We don't usually celebrate withdrawal of 
plans. But that is a natural part of competition, and something 
that would happen under any well-functioning competitive 
system.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Buyer to inquire. We have a series of 
votes, four votes as I understand it coming up. So after Mr. 
Buyer, we will break.
    And God only knows how much time, but probably a good hour, 
because two of those are motions to adjourn.
    Mr. Norwood. Why would we have a motion to adjourn and 
waste our time?
    Mr. Brown. It's probably because the Rules Committee didn't 
give us any amendments.
    Mr. Bilirakis. And that helps?
    Mr. Norwood. And that is going to fix it, right?
    Mr. Bilirakis. It really makes a difference. Yes, that 
fixes it. Mr. Buyer, please inquire.
    Mr. Buyer. Mr. deMontmollin, I took to heart your comment 
about when we did the Balanced Budget Act in 1997 and the goal 
to get to 25 percent by 2002, and actually we are going in the 
opposite direction. Does your company participate in FEHBP?
    Mr. deMontmollin. It does indeed. We have about 15,000 
members.
    Mr. Buyer. Is there some counsel that you could give us 
with regard to some of the structures and services within that 
FEHBP model that could be advantageous if replicated with 
Medicare?
    Mr. deMontmollin. Certainly I think that the--and as Mr. 
Jindal has already said, that the idea of having the same 
regulations, all of the same programs under the same umbrella 
if you will, and under the same rubric of this program, so that 
seniors can make informed decisions.
    I suggest that the idea of one solution for all is not 
going to satisfy the baby boom generation of which I guess I am 
in the first year, or the vanguard. We are going to want to 
feel good, and we are going to want to look good.
    And this Congress is going to have to decide if you are 
going to pay for the looking good part, and I am suggesting 
that the only way we are going to pay the feel good part, the 
medical piece, is to adequately fund the entire Medicare 
program, and offer choice in the way of Medicare+Choice 
programs.
    And not just for prescription benefits, but I may want to 
avoid the iatrogenic disease of too many doctors giving me too 
many things, and we would want to have someone that is 
available to coordinate that care for me.
    I may want to have a disease management program that will 
keep me out of the hospital with congestive heart failure 
because I know that if I go in twice with that diagnosis that I 
will be dead within 6 months according to the medical 
statistics.
    I think that they are clearly different programs. I would 
have to say to Mr. Brown, however, that the suggestion that the 
FEHBP program is young and healthy is simply wrong. It is a 
program where we worked just as assiduously to try to keep them 
healthy, because we see them as the elderly or the most 
seriously ill persons in 20 years.
    At the average age of 45 now, we are trying to intervene at 
this level so that we don't have to take care of some of these 
chronic illnesses later.
    Mr. Buyer. In your testimony, you said that you hoped the 
committee will develop competitive approaches to Medicare 
reform based on a level playing field for all Medicare options.
    If Congress were to move and implement any of the FEHBP 
style, should the government plan be competitive with that of 
private plans, and should the government plan premium levels be 
included as part of a weighted average with private plans?
    Mr. deMontmollin. Yes, it should, and it should because as 
some have suggested, that 87 percent of Medicare seniors 
deserve the same high quality care that the 13.3 percent are 
getting in the Medicare+Choice Plans.
    So the answer is, yes. I think that the HEDIS scores should 
be incumbent upon the fee-for-service plan as well. The disease 
management, and the things that Mr. Green suggested, that we 
are doing in the managed care arena because we know that they 
contribute to improving the health of our seniors.
    Mr. Buyer. Give me your 30 second gut check reaction to the 
Breaux-Frist proposal. Have you had any chance to review it or 
look at it?
    Mr. deMontmollin. Well, I have, and I have some opinions 
about it, but when I am sitting at a table with Bobby Jindal, I 
will tell you that I am embarrassed to even offer any thoughts, 
if you would permit me.
    Mr. Buyer. Okay. We call that a punt.
    Mr. deMontmollin. I punted. I told him this morning that I 
am going to find myself saying a lot what Bobby said.
    Mr. Buyer. All right. That's quite all right, and I yield 
back. Thank you.
    Mr. Bilirakis. All right. I think it is probably a good 
time to break, and maybe give you all a chance to grab a bite 
to eat. I can not imagine that we would be back before one 
o'clock, but just as soon as we have cast that last vote, 
hopefully Mr. Brown and I, at least will immediately return. 
Thank you.
    [Whereupon, at 12:10 p.m., the subcommittee recessed, to 
reconvene at 1:12 p.m the same day.]
    Mr. Bilirakis. Well, I am going to start with Mr. Brown's 
permission. Steve, I would like for you to tell us why AvMed 
left the Tampa Bay area, and are they interested in coming back 
into the Tampa area to serve Medicare beneficiaries.
    If so, what steps could Congress take to ensure your 
reentrance and expansion in Florida. And if we were able to 
help make these adjustments law that you might suggest, could 
you commit that AvMed would be willing to come back into the 
Tampa area?
    Now, before you go into that, I think it is important--and 
we don't have Mr. Brown, or any of the minority here, but--that 
we hear about vouchers and things of that nature. And maybe 
some of these choice ideas, the FEHBP type of a concept. 
Frankly an awful lot of senior citizens approach me and say, 
hey, give us what you have got basically.
    And that's why we talk about the FEHBP type of a model, but 
regardless of whether this is the result, I think Medicare was 
in trouble long before the majority tax cuts to which Mr. Brown 
keeps referring.
    And I am sure that he is the first one to admit that. But 
is it not wise that we not prejudge, and is it not wise that we 
be open-minded to the possibility of new concepts or new ideas?
    Would any of us be a party to doing anything regarding 
Medicare that would hurt the quality of medical care for our 
Medicare beneficiaries? I think not.
    So, it is really more the case of trying to be open-minded 
and looking at new ideas, and that sort of thing. I don't think 
we should have any preconceived positions on these ideas.
    I will ask this question again before I go to Mr. 
deMontmollin. And maybe, Steve, we can start with you on that. 
When we do, with the cooperation of the Minority, and open-
mindedness on the part of the Members of Congress, we will 
finally do prescription drugs for Medicare beneficiaries.
    Now, is it going to be all that we would rather it be? It 
probably won't be, but it will be a darn good start. I am not 
talking about the President's discount card sort of thing.
    But will it be something that will help an awful lot of 
people in the meantime? I would like to think so. We could have 
done a lot of good things over the years if we maybe were not 
so political and concerned about all or nothing.
    We could have had some good approaches on the uninsured a 
few years ago, for instance, and we could have had an expansion 
of Medicare into prescription drugs, and things of that nature.
    I know that is always a concern on the part of my very good 
friend, and we are good friends. I know that we all throw those 
words around about each other while we attack each other, but 
the truth of the matter is that we are good friends, and I am 
very proud of that.
    But my good friend and others might be concerned that if we 
do something that is not quite what they would completely like, 
that we would stop at that point and not improve upon it.
    Well, we are elected every 2 years by the people, and I 
should like to think that we would continue on and try to 
improve as the years go on. In the meantime, why deprive many 
of the people, particularly the needy, and mainly the poor, 
from some sort of a benefit that they could have, and I would 
like to think, virtually now?
    But I would like to raise a question. If we do--and I keep 
saying if, and I don't really mean if, because my intent, and 
the intent of all of us and the President's intent, is that we 
have prescription drugs this year.
    But what would that do to Medicare+Choice? We keep talking 
here about Medicare+Choice, and we keep talking about the 
different plans, the FEHBP, and the choice in terms of 
Medicare+Choice, and of managed care plans.
    But what would that do to that? I mean, my opinion, Max, 
and when I talk to people, and you know how much time I spend 
with the elderly in my district, of which I am one now, is that 
their care is about prescription drugs principally, and if we 
give them prescription drugs, will they continue in managed 
care?
    Or would they just shift into fee-for-service? Do you have 
any opinions on that? Very quick opinions though, because I do 
want to answer the long----
    Mr. deMontmollin. I promise, and let me suggest, Mr. 
Chairman, that the American Association of Health Plans wants 
to be a part, only a part, of an overall bipartisan solution. I 
had the privilege of working for 6 years on the Hill for a 
member of the minority party, who was Chairman of the House 
Committee on Science and Technology.
    In 1987, the Democratic Leadership Council, then with 
Governor Clinton, and then Senator Gore, and then Senator 
Chiles, for whom I also worked in 1990 when he was Governor of 
the State of Florida, they came up with a concept called 
managed competition.
    And they were willing to give that an opportunity to work 
in the marketplace. For some reason according to what I have 
gleaned from this meeting today, that has been thrown out the 
window as a viable political alternative for the minority 
party. I will say this. That in 2 weeks before the----
    Mr. Bilirakis. Excuse me, Steve, but did you want to 
respond before you leave, because you did tell me that you had 
another meeting that you had to go to?
    Mr. Brown. As does Dr. Moon.
    Mr. Bilirakis. Yes, Marilyn has already said that to me. Do 
you mind yielding?
    Mr. deMontmollin. Please let me defer. No, absolutely.
    Mr. Bilirakis. Go ahead, sir.
    Mr. Jindal. I apologize to both the committee and the 
chairman, but I am going to have to leave. I didn't mean to 
interrupt the gentleman from Florida's remarks. I do want to 
offer in response to the chairman's comments and questions two 
thoughts.
    First of all, we certainly do believe that with the 
President's overall reforms that it will stabilize the market, 
and one of the reasons that we are proposing these changes are 
to increase the numbers of choices available to seniors.
    And as you had asked before, certainly that is not to 
compel seniors to do something, but rather to give them 
choices, and we don't believe this is either a voucher program, 
or as you asked, we don't believe it is a defined contribution 
program.
    Our predecessors, there was some allusions to other 
proposed concepts, and the last administration also had 
proposed a defined benefit competition model. So we do think 
there are some important safeguards, and some important 
protections for seniors that differentiate what we are talking 
about doing with some of the concerns that folks have about 
pure voucher programs or pure defined contribution programs.
    And I do look forward to coming back and talking to the 
committee in greater detail. I do apologize for having to leave 
today, but thank you, Mr. Chairman, for the opportunity to 
come.
    Mr. Bilirakis. The intent always is that we would have the 
current benefits at least be a floor so that every plan--it 
would be a defined benefit type of a plan, in terms of the 
benefits?
    Mr. Jindal. That's right. We are not proposing to erode the 
value of the current benefits, and certainly we are hopeful, 
and I think the experience has been that those plans are more 
likely to reduce the cost sharing faced by beneficiaries, and 
we think it is important to give some constrained amount of 
flexibility, in terms of cost sharing.
    But, no, we are not proposing to reduce or dilute the value 
of the benefits. The President is talking about adding a 
prescription drug benefit, and preventive care benefits, and 
reforming cost sharing.
    Mr. Bilirakis. Thank you very much for your time.
    Mr. Jindal. Thank you, Mr. Chairman, and thank you members 
of the committee.
    Mr. Bilirakis. Ms. Moon.
    Ms. Moon. I would just say that for purposes of fairness 
and it makes sense to have a prescription drug benefit offered 
across the board, and I think that would lead to higher 
payments to managed care plans, which would solve one of their 
problems.
    And that is that they cannot, they believe, offer such 
benefits without additional payments. And they are sort of 
caught between a rock and a hard place, where they are being 
paid enough for Medicare covered services, but the Medicare 
covered services are not enough to do a good managed care 
benefit when you leave things like prescription drugs out.
    So I think that could help managed care plans be more 
competitive and come to a better financial footing if we did 
that, but for fairness reasons, I think it has to be done 
across the board.
    Mr. Bilirakis. Thank you. And again thanks for your 
contributions today, and also over the years.
    Mr. Norwood. Can I ask a quick question?
    Mr. Bilirakis. Well, if she has the time, by all means.
    Mr. Norwood. Just very quickly. When I left off and didn't 
get answers, my basic question was those of you who stated that 
we needed to have a prescription drug plan across the board for 
everybody.
    Ms. Moon, should we as Members of Congress be concerned at 
all that a third of the budget in 2030 will be going to 
Medicare if we do that?
    Ms. Moon. Yes, I think we should always be concerned about 
that. Medicare though has been a program that has always been 
on the verge of bankruptcy. It is actually in the best shape it 
has been in since almost the beginning of the program, in terms 
of how well it is situated.
    I believe though that a prescription drug benefit is 
essential to having reasonable benefits. I think the 
beneficiaries are going to have to pay more, and I think 
taxpayers are going to have to pay more.
    And I think we are going to have to be very serious about 
finding ways to contain costs. Let me give you just one 
example. Maine is doing some very creative things with its low 
income benefits program for prescription drugs by restricting 
access to some of the drugs.
    You have to have prior authorization for things like 
Celebrex and Vioxx. You have to have a good reason for that. 
But then they turn around and cover the over-the-counter drugs 
that can be used in their place, like ibuprofen.
    I think they are doing some creative things there. I think 
if you do it intelligently that you can have very stiff 
controls, but on the basis of good medical care, and not just 
on the basis of price.
    Mr. Norwood. Well, would a creative thing be that you don't 
add Ross Perot in the list of recipients of Medicare 
prescription drugs?
    Ms. Moon. That is a toughie though because Medicare has 
been such a powerful program, and so popular because it is 
universal.
    And if there were lots of Ross Perots out there, I would be 
on your side. I am not theoretically opposed to some kind of 
income relation to the benefit or asking higher premiums, or 
whatever.
    But it tends to lead to lots of expense for taking just a 
few people off the rolls, unless you go way down. And in the 
case of Medicare, $15,000 or $20,000 of income, which are not 
poor Medicare beneficiaries, as they are people who are sort of 
almost into the middle class the way we talk about them, cannot 
afford prescription drugs these days.
    Mr. Norwood. So your answer is that it would be all right 
with you if a third of the entire budget of the United States 
went to Medicare and prescription drugs?
    Ms. Moon. I don't think that is the way that it will turn 
out because those projections are based on the way that we 
define its progress.
    Mr. Norwood. What is it did?
    Ms. Moon. Well, if it did, it would say that we will have 
doubled the number of people who are covered by this program 
over that period of time, and so we should increase the 
Medicare program to some extent as a share of the budget.
    Mr. Norwood. And if we double the number of people that are 
covered, what happens to the number of people that are paying 
in?
    Ms. Moon. They go down, but they also get healthier. The 
size of the pie will be larger, and so the slice that we can 
use for it will be okay.
    Mr. Bilirakis. Mr. Brown, would you like to address 
anything of Ms. Moon?
    Mr. Brown. Yes, I would like to follow up on that. You put 
a chart out that I think we have all seen that compares the 
cost increases of Medicare since 1998, and up through the year 
2002 with the cost of premiums with FEHBP. And I share Mr. 
Norwood's concern of entitlements, social security, Medicare 
especially.
    And taking money from the next generation if you will, and 
particularly the young, and we have done so very well in this 
country relatively with the elderly, and not so well with the 
young.
    And I think that we all share that concern for investment 
in the future, but I think that one answer to that is what in 
fact we do about it, and we found ways, and sometimes overdone, 
to rein in the class of Medicare.
    And we have not done so well with FEHBP as it says, and I 
think that comes back to what are we as a society going to do.
    And I want to enter in the record if I could, Mr. Chairman, 
one article that is written by Paul Krugman in the New York 
Times about how physicians, commenting on physicians, a 5.4 
percent cut with physician payments and all that has happened 
with the 15 percent cut for home health care, and all that we 
are facing that way.
    And how it seems that in Washington we are starving the 
public sector with tax cuts and other ways so that we don't 
have the kind of resources available to have the right kind of 
health care in other systems.
    And if I could, Mr. Chairman, ask for unanimous consent to 
enter in the record Mr. Dingell's statement also.
    Mr. Bilirakis. Without objection.
    Mr. Brown. And the testimony of Janice Lachance, former OPM 
Director, and the Alliance for Retired Americans statement, and 
also there is a chart comparing what beneficiaries get in 
FEHBP.
    Mr. Bilirakis. Without objection, that will be the case, 
and of course per usual, all members have the opportunity to 
have their opening statement made a part of the record.
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    Mr. Bilirakis. Ms. Moon, I know that you have to leave. 
Thank you again.
    Ms. Moon. Thank you.
    Mr. Bilirakis. All right. I am just going to continue on 
with the previous question that I asked Mr. deMontmollin.
    Mr. deMontmollin. In September of the year 2000, a 
representative of John Podesta's domestic policy shop in the 
White House said at a Medicare and Medicaid conference 
sponsored by the American Association of Health Plans, that we 
found it necessary to engineer a failure of the Medicare+Choice 
program to make it more palatable to have a publicly funded 
program for prescription drugs.
    We think that is a failed and a bad policy. And to answer 
your question directly, however, we believe that there is more 
than enough room in the Medicare program to adequately fund and 
stabilize the funding for Medicare+Choice plans, which will 
also be offering prescription drugs for the very salient reason 
that it began probably 7 or 10 years ago.
    And that is that we recognize the important role that 
pharmaceuticals play in health care today. So we saw this as a 
value added. We saw it as something that we needed to do from a 
quality standpoint.
    Two weeks before the 1998 election, the Florida Insurance 
Commissioner and the Florida Attorney General announced an 
investigation into the reasons for the withdrawal by several 
Medicare plans, including my own, of their products in selected 
counties.
    Interestingly, the press release issued by the Florida 
Attorney General acknowledged that Medicare HMOs provide 
Florida's senior citizens, quote, convenient, affordable health 
care and any threat to their ability to obtain such care, that 
is, managed care, is a threat to their fundamental well-being.
    And I would suggest that it was ironic at best that the 
managed care companies that had been the whipping boys for more 
than 4 years suddenly became or suddenly their availability was 
a fundamental right of seniors.
    And I think that is the question that Congress is going to 
have to answer. We in managed care may very well be the 
dinosaurs of the health care system. But I don't think that we 
should go away quietly. I think we should make the case on 
quality, and make the case on increasing access to health care.
    There are 40 million of Americans that I believe that I am 
speaking for right now. Make the case on moderating the cost of 
health care expenditures in this country. If we don't have a 
system of managed care, we are going to go back to a system of 
unmanaged care, uncontrolled care, and we think that our 
citizens are going to be poorer for it.
    Mr. Bilirakis. Of course, Mr. Butler indicated that our 
fee-for-service plan is in fact managed care, and so there is 
some management there. What is it that the President has 
proposed, a 6.5 percent increase, or $4 billion?
    Mr. deMontmollin. 6.5 percent increase and $4 billion. Let 
me answer it this way, Mr. Bilirakis. We hated to leave all of 
the counties that we have had to leave in Florida.
    We are Florida's, as I have already said, oldest and 
largest not for profit HMO. We see as our mission serving the 
Medicaid population, and the Medicare population, and we do a 
good job of serving both of those populations when we are given 
adequate funds to do that.
    In Florida, Chapter 641 of the Florida statutes, require 
every health plan to make at least a 2 percent profit and to 
have at least 110 percent of assets, as compared to its 
liabilities.
    AvMed Health Plan has lost $32 million directly associated 
to the Medicare+Choice reductions from the Balanced Budget Act, 
and I will be happy to demonstrate that to every member of this 
subcommittee, and to your staffs.
    I have already invited the staff to please come to my 
health plan to find out that we offer a heck of a lot more than 
just simply a pharmaceutical program, although we are going to 
continue to do that, and the best predictor of future behavior 
is past behavior.
    Mr. Bilirakis. For instance, in terms of the fee-for-
service that would be available to these same beneficiaries, 
what do you offer?
    Mr. deMontmollin. My mother was 89 years old and in the 
South Miami Hospital, and a doctor wrote in her medical chart 
iatrogenic disease. Too many doctors. It is the same finding 
that the Institute of Medicine found when they said that more 
is not necessarily better.
    The existence of coordination and arrangement of health 
care is just as important as the financing of health care in 
our opinion. She was not able to be a part of our congestive 
heart failure program, where as soon as we identify a patient, 
every one of our patients--and there was a recent study that 
was issued with respect to diversity.
    And I am saying every single one of our patients is placed 
into, or has the opportunity to be placed into the congestive 
heart failure program. We buy a scale that allows for 
interactive response to a computer at our health plan from all 
of these members, and they get up in the morning, and they get 
up on the scale.
    And we are able to check from their responses whether or 
not they are compliant with their medications. If they are not, 
we can send a nurse out to administer an injection of the 
medication.
    But we are following those members on a one-to-one basis. 
It is those kinds of programs; the HEDIS measures, and the fact 
that we credential all of our physicians.
    You don't have to worry about whether or not there is an 
external grievance appeal process in place in the health plans 
because Mr Norwood and other right-thinking people in this 
legislature in our opinion have made sure that those external 
and internal appeals processes are available for members in the 
Medicare+Choice program, and we take them very seriously.
    If you will have a staffer come in and put on the 
headphones, and listen to our conversations with some of our 
members, and find out if we are trying to probe them, and find 
out if there are additional resources or services that we can 
provide them that they are simply not aware of.
    Mr. Bilirakis. All right. So I guess what I am interpreting 
is that in response to my question, if we offer prescription 
drugs as part of Medicare, would the seniors continue on in 
managed care plans?
    Mr. deMontmollin. I am speaking for our almost 30,000 
members in Florida when I say that they don't see these 
increases--for instance, BBA, and BBRA, and BIPA--as being 
monies that go to the health plan.
    As I have already said, we have lost $32 million since the 
Balanced Budget was passed, and what they see is those funds 
being denied to them because they know that they are being 
passed on to them.
    Mr. Bilirakis. Well, time is a factor here, but we will of 
course have a lot of written questions, and give you an 
opportunity to really go into details.
    Mr. deMontmollin. Thank you.
    Mr. Bilirakis. Mr. Strickland.
    Mr. Strickland. Thank you, Mr. Chairman, and Mr. Chairman, 
I apologize to you and the other members, but this has been one 
of those days when I have not been able to be here as much as I 
would like to be because of other responsibilities.
    I am going to ask a question that I suspect has been 
touched on already, but I would like especially to get your 
reaction, Mr. Richtman, to this question. Currently 
participants in Medicare basically pay the same premium, and 
share the same costs, and are entitled to the same benefits 
under Medicare, regardless of where they live.
    But under a premium support plan, premiums for different 
health plans would vary perhaps widely across the country. For 
example, a Federal Employee's share of the monthly premium for 
Aetna USA Health Care is $56 per month for a Federal worker in 
Arizona, and $73 in Virginia, and $100 in Pennsylvania.
    So these geographic variations could create serious equity 
problems. And I would just like your response, Mr. Richtman, as 
to what sorts of problems do you think this kind of disparity 
in possible premium costs and even possible benefit levels 
could pose to seniors?
    Mr. Richtman. Well, seniors, probably more than any other 
population, need predictability, and dependability. And they 
have that in Medicare as you just pointed out. The benefits 
follow them wherever they go, and the premiums follow them 
wherever they go.
    And that is something that is very important to seniors. We 
have seen the upheaval that seniors have been subjected to when 
some of the HMOs over the last few years have shoved them out 
or raised their rates to the point where they had to leave.
    And that is what we really worry about on behalf of our 
membership and other seniors; that that degree of 
predictability and dependability is maintained in the Medicare 
program.
    And I wonder if I could respond to Congressman Norwood's 
point that he made. I thought it was to both Marilyn Moon and 
myself, and I will probably get into trouble having this much 
time to think about the answer.
    But there are a lot of things that can be looked at in 
terms of paying for a benefit, a meaningful prescription drug 
benefit. First of all, I don't think it is accurate to say that 
seniors want all these things for free.
    Most of the people that we have talked to, and in the 
surveys that we have done, and we have done a lot of polling on 
this issue, when it comes to prescription drugs, I think that 
seniors for the most part recognize that they are going to have 
to pay something.
    Now, can they afford to pay double what their current 
Medicare Part B premium is? Probably not, and they probably 
would not avail themselves of the benefit. But they recognize 
that this is not going to be free to them, and I think that 
they accept that.
    Mr. Norwood. What would they accept as a co-payment?
    Mr. Richtman. Some of the numbers that we have talked to 
our members about, and it seems to be a number that they can 
accept and they will be able to afford, are $25 and $35 a 
month.
    Medicare Part B now is $54 and so that is adding on a 
considerable amount of money. But that is a number that seems 
to be a number that a lot of them do fine acceptable. In 
addition, I think you have to look at not just how you pay for 
it, but what it costs.
    There are proposals out there that do deal with the cost of 
prescription drugs, and I am sure that you are all aware of 
some of them. We have just signed on to Senator McCain's 
proposal in the Senate.
    I don't know that there is a bill in the house, but it 
would make it harder for the loopholes to be used now by the 
pharmaceutical companies in denying generics the ability to put 
those on the market. That saves money.
    Then there is a whole other issue which I don't think I 
want to get into here, but of priorities, and the tax cut that 
was passed was a pretty big tax cut. It may be that some feel 
that a part of that could be delayed and some of those revenues 
could be used to finance a prescription drug benefit.
    I think that Congressman Waxman said earlier today that a 
lot of candidates, and I know that this is true for Congress in 
the last election cycle, talked about prescription drugs.
    I think almost all of them did, and there are going to be a 
lot of disappointed seniors around the country if nothing 
happens I feel.
    Mr. deMontmollin. Mr. Strickland, could I response to that 
just briefly?
    Mr. Bilirakis. Do you have----
    Mr. Strickland. I guess, but I have not had a chance to ask 
a question.
    Mr. Bilirakis. No, you haven't really.
    Mr. deMontmollin. I just wanted to respond to the $30 or 
$35 per month. It is important to understand that in the 
alternative.
    Mr. Bilirakis. But that is in addition to what hey 
currently pay for Part B?
    Mr. deMontmollin. Absolutely. And what I am trying to 
suggest is that the current alternative to Medicare+Choice and 
the additional supplemental benefits that we provide is a 
Medigap policy.
    If a senior was to buy currently the J-Medigap policy, 
which is the most rich in terms of a Medicare prescription 
benefit, it is a $3,000 max. And it is 50 percent coverage.
    It would be necessary for a senior to spend $6,250 in order 
to get, because of the deductibles and the other things, the 
$3,000 in that benefit.
    In Texas, that premium costs between $2,100 and $5,700 per 
year for that policy, and that would then make them responsible 
for cost sharing to the tune of $6,250 to get a $3,000 drug 
benefit.
    Mr. Strickland. Mr. Chairman, can I just make a statement?
    Mr. Bilirakis. Please do.
    Mr. Strickland. I don't have much time.
    Mr. Bilirakis. Don't worry about the time, but we do have 
to finish up some time or another.
    Mr. Strickland. Sure. I just want to make a statement, 
because Mr. Richtman touched on something that I think is 
relevant. When we went to fight the war on terrorism, the 
President said to the country and the country embraced the 
idea, that we would do whatever it took to protect us from 
terrorism.
    Now, the polling that I have done in my last several 
campaigns quite frankly, have indicated that prescription drug 
coverage is if not at the top, near the top of the concern of 
the people in this country, and I think that we are talking 
about an economic issue here.
    And we are also talking about a value issue, and some 
people don't want to here this. But I just wonder what we could 
have done with $1.3 trillion that we decided to use for a tax 
cut.
    We could have had a prescription drug benefit, I think, and 
it is a matter of how we use our resources here, and that 
depends on our values.
    Mr. Brown. Will the gentleman yield for 1 second?
    Mr. Strickland. I will yield to my friend.
    Mr. Brown. I don't think we have ever been in wartime in 
this country's history when we have cut taxes on rich people, 
and you look at some of that effort and I don't think ever in 
our history have we done that.
    I think that says something about our values as a country 
and what we ought to be doing in prescription drugs, and where 
we go.
    Mr. Strickland. Mr. Chairman, thank you for you graciously 
allowing me to exceed my time limit.
    Mr. Bilirakis. Most of your time was exceeded not by you, 
but by the rest of us. But let's finish up though.
    Mr. Norwood. Okay. I will try. Just to make a point. The 
reason that the taxes were cut is that the people who pay taxes 
demanded that they be cut, and to define rich is an interesting 
thing to do.
    Frequently it means anybody with a job. So it was time that 
the people who paid the taxes had a little attention. Now, back 
to the prescription drug thing, and I have more questions than 
I can get out.
    Mr. Bilirakis. Well, we have an opportunity to put it in 
writing.
    Mr. Norwood. We are talking about Part B of 54 bucks today, 
and 20 percent per event co-pay. And you say that the people 
that you talked to are okay with paying some of it. Now, what 
we expect is, and I think that legitimately that $54 is going 
up to a hundred or better in the coming years.
    We are looking at least at a $35 premium, and that is 
probably low for prescription drug benefit. They are okay so 
far at your townhall meetings. How much are they willing to pay 
per prescription co-pay?
    Mr. Richtman. Well, I really can't answer that, and in 
isolation, the $35----
    Mr. Norwood. But if you know they are willing to pay, 
somebody has got to decide what are they willing to pay.
    Mr. Richtman. Well, we are working on that, and I don't 
have the answer to what the premium should be, the co-pay, the 
deductible, I don't have that. If I had the answer, I would 
tell you, but I don't.
    Mr. Norwood. So you are concerned about this thing that I 
keep bringing up of 35 percent of our entire budget going to 
Medicare in the year of 2030, and you believe that Members of 
Congress ought to be concerned about that?
    Mr. Richtman. I do, and I think that some of the costs can 
be controlled. That's why I mentioned that there are a lot of 
proposals in the House and in the Senate to try to contain the 
cost of prescription drugs. Then it would not be that high of a 
percent.
    Mr. Norwood. I asked you and Ms. Moon this question, that 
you made a blanket statement in your opening statement that we 
need to have prescription drug coverage. And it is a heck of a 
lot more complicated than just saying that we need to have a 
prescription drug program.
    We all agree, too, that we want to, but unhappily we have 
the problem of figuring out how do you get that done. Steve, 
real quick, if I could. You have been with your company for how 
long?
    Mr. deMontmollin. For 10 years.
    Mr. Norwood. For 10 years. Have you ever been with other 
managed care companies?
    Mr. deMontmollin. No, sir.
    Mr. Norwood. So most of the statements that you make today 
are statements that you perceive for your company?
    Mr. deMontmollin. That's true, although the Speaker of the 
House in Florida, John Mills, was part of the DLC effort that I 
referred to, and I have been following the issue since 1987. 
But the answer to your question is yes.
    Mr. Norwood. And so what I am after here is that we can't 
just take what you saw to mean that is what is happening in 
managed care in the United States, and what is happening in 
managed care in Tampa?
    Mr. deMontmollin. No, sir. I am here speaking on behalf of 
the American Association of Health Plans, which represents some 
170 million members, and have been very active with them over 
these years. And I hopefully have some foundation upon which we 
can talk broadly.
    Mr. Norwood. Just so you know that I am one of those 
people, and I said it earlier, that I think choice is probably 
the way to go, and managed care is one of the ways to have 
choice.
    My problem is that giving people choice and there is no 
oversight. That's where I have been all these years, and we 
can't leave you to your own devices, because whether you are 
doing great in Tampa or not, there are places that aren't.
    You made a statement----
    Mr. Bilirakis. Well, they aren't doing, period.
    Mr. deMontmollin. Mr. Norwood, I wish I could have a plan 
in your district, and Mr. Strickland's district, and I think 
you would have a slightly different view of what we do in 
Medicare+Choice.
    Mr. Norwood. You made a statement, and I am challenging it, 
too, that you do a better job in delivery of care to 
chronically ill.
    Mr. deMontmollin. Yes, sir.
    Mr. Norwood. I don't question that with your company, 
because I don't know. But I question that in general.
    Mr. deMontmollin. I know, and we are going to provide you 
as soon as you asked that question with a report, or the 
studies upon which I base that remark.
    Mr. Norwood. I know that I have got a study that says that 
you are wrong. You see, that is the problem. You can make a 
study say anything that you want it to say. I can make one say 
that you are the worst in the world for treating chronically 
ill patients.
    Mr. deMontmollin. My mama would be awfully embarrassed if I 
came up here and told you about a report that maybe somebody 
that wasn't credible had done, but you will have to decide that 
yourself.
    Mr. Norwood. Well, I have. I have been there the last 7 
years deciding the way that I felt about that.
    Mr. Bilirakis. Again, we have the opportunity in writing. 
So we do have to finish up.
    Mr. Norwood. Now, you asked or you wanted a level playing 
field between HMOs, managed care, and fee-for-service.
    Mr. deMontmollin. Yes, sir.
    Mr. Norwood. And my understanding is that you want a 
hundred percent reimbursement, the same as fee-for-service. My 
understanding also is that what got you into this, and what 
started managed care, and why the taxpayers funded it through 
the earlier years in the seventies to get it off the ground is 
that you were supposed to be more efficient.
    Why aren't you more efficient and why should we pay you the 
exact same thing as we do for fee-for-service? I don't 
understand why you aren't so efficient that it can't be less?
    Mr. Bilirakis. Last question, and if it can't be answered 
briefly, Steve, feel free to answer it in writing, where you 
might have the opportunity to explain it in much more detail.
    Mr. deMontmollin. Thanks for that offer, Mr. Chairman. We 
have a very good explanation. I will be happy to provide it to 
Mr. Norwood and the committee.
    Mr. Bilirakis. Let's do it that way. Is that all right with 
you?
    Mr. Norwood. Oh, sure. I have no doubt that they have a 
good excuse.
    Mr. Bilirakis. All right. Mr. Butler, we have not heard 
from you in a while, and I don't know whether you had anything 
that you wanted to add very briefly.
    Mr. Butler. I would just sort of make two points really.
    Mr. Bilirakis. Please do.
    Mr. Butler. One is the cost comparisons between FEHBP and 
Medicare have to be looked at very carefully. You can very 
easily take the last 3 or 4 years of FEHBP and Medicare, during 
which time FEHBP by law and by administrative decision by the 
Clinton administration, had 44 new benefits added to it.
    And at the same time as Congress recognized that it 
ratcheted it down too far in the Medicare side. So I think 
there is a pretty simple explanation.
    If you look at what the Congressional Research Service has 
shown, however, is that over the last 14 years, and it looks at 
a much longer period, it shows the FEHBP, when adjusted for 
age, for all the other kinds of factors, have come in 
consistently below the Medicare. I think that is a very 
important point.
    The second point I will just make in closing is that as I 
think as everybody said, nobody argues that there should not be 
a drug benefit for seniors, and that the benefits package 
should not be modernized. Nobody argues that.
    The point is that you have to ask yourself I think why is 
it that you are in this situation of saying let's add a simple 
benefit, and not even catastrophic, but just a drug benefit to 
Medicare.
    And why are you year after year having to do this? Maybe it 
has got something to do with the way in which Medicare is run 
and the relationship between Congress to Medicare. That is one 
of the most important lessons to learn from the FEHBP I think.
    The FEHBP is not micromanaged by Congress, and that is a 
critical difference between the two systems as you all know, 
and you have drug benefits, and you have catastrophic, and you 
have new benefits every year. If you were in Medicare, you 
would be facing a totally different situation.
    Mr. Richtman. Mr. Chairman, can I make one sentence, one 
statement for the record. When you started the afternoon 
session, you talked about your commitment to seniors, and this 
is kind of a plug.
    But we at the National Committee recognize your commitment 
to seniors, which is why we came down to Florida to your 
district a few years ago and gave you what I like to call a 
Coveted National Committee Friends of Seniors Award, and so we 
thank you for everything that you had done.
    Mr. Bilirakis. Thank you very much for that, Max. I am glad 
that I allowed you to offer one sentence. Look it is a tough 
job, and--to not go into thing open-minded is--well, this 
doesn't mean that one side is more right than the other or 
anything of that nature. I don't mean that.
    But to not go into these things open minded, I think is a 
real mistake. The easiest thing, Max, would be obviously to 
just leave Medicare as it now is, and just add to it, add 
prescription drugs to it if you will.
    I mean, a lot of us feel strongly about Alzheimer's, for 
instance. I think that was probably one of my first causes, a 
real big cause when I came to the Congress. I found out in no 
time at all that I could not find a Member of Congress who knew 
anything at all about Alzheimer's.
    There were not a lot of medical providers that knew much 
about Alzheimer's back in the early eighties. We grew hard 
calling it hardening of the arteries, and that sort of thing.
    So we want to do the right thing, but I don't know. I mean, 
the easiest thing to do is to do exactly what Mr. Brown and the 
others want to do, roll back taxes if you will, and have 
Medicare as it now is, and add a couple, but would that be the 
right thing to do? I doubt it.
    Mr. Brown. Was I that convincing today?
    Mr. Bilirakis. You weren't convincing, but I take very 
seriously the comments made by people and the witnesses we have 
here. Thank you very much. I appreciate it, and again I 
appreciate your consideration and understanding because of the 
breaks that we have had.
    [Whereupon, at 1:51 p.m., the subcommittee was adjourned.]
    [Additional materal submitted for the record follows:]
     Prepared Statement of Advanced Medical Technology Association
    The Advanced Medical Technology Association (AdvaMed) is pleased to 
submit this comment for the record, in the important deliberations of 
the House Energy & Commerce Committee, Subcommittee on Medicare. 
AdvaMed is the world's largest association of medical technology 
manufacturers, with over 800 corporate members with operations 
worldwide. Our members manufacture technologies that are integral to 
nearly every aspect of healthcare, from diagnosis and treatment of 
disease, to managing disability and serious long-term illnesses.
    Health care in the United States benefits from the most efficient, 
scientifically advanced therapies in the world, yet unfortunately these 
advances are not always available to the patients who need them most--
America's seniors covered under the Medicare program. The Medicare fee-
for-service program today continues to pose barriers to access for many 
of the advanced therapies available to privately insured patients. 
While private insurers rapidly incorporate and pay for new therapies as 
covered benefits, the basic Medicare program can delay appropriate 
payment for new services for up to five years, depending on the 
treatment and setting of care.
    AdvaMed supports efforts to improve the existing Medicare coverage 
and payment processes, but we believe that comprehensive Medicare 
reform based on a competitive market-based system is necessary to 
ensure adequate and timely patient access to new technologies and 
therapies. Under a competitive market based system, innovative new 
technologies would be made available to patients based on the clinical 
value of the therapy and physician and patient demand.
             more choices through competitive health plans
    AdvaMed believes that it is essential to restructure Medicare to 
ensure that beneficiaries have access to high quality health care that 
provides prompt availability of the most innovative technologies 
without needless bureaucratic delays. We support the creation of a 
system that would provide Medicare beneficiaries with a broader choice 
of competing health plans.
    The dynamic and creative forces of the marketplace and competition 
will lead to innovative alternatives and the individual options and 
choices that Medicare beneficiaries need. Private insurers in the U.S. 
are able to provide access to new technologies far more rapidly than 
Medicare, and are able to derive flexible solutions to address specific 
patient needs. Given clear choices, Medicare beneficiaries will chose 
the best quality and value offered in a competitive, patient-oriented 
health care system. The Centers for Medicare and Medicaid Service's 
(CMS's) role in such a system should be to administer Medicare's fee-
for-service system, which should continue to be available to 
beneficiaries, managed by the current network of local contractors. 
Specific recommendations for long-term reform are as follows:

 Use of a framework of competing private sector plans to offer 
        more competitive choices for Medicare beneficiaries.
 Development of a transparent process to determine minimum 
        covered benefits and accountability for both private plans and 
        fee-for-service contractors to provide such benefits in a 
        consistent fashion.
 Flexibility for competing private plans to define benefits 
        beyond a minimum benefit package, including coverage of 
        experimental therapies. Competing private plans also should be 
        able to establish market-based pricing for services, rather 
        than government established fees.
 Full disclosure of coverage policies by both competing private 
        plans and Medicare fee-for-service contractors.
 Implementation of competing market-based plans before any 
        expansion of purchasing authority of the current Medicare fee-
        for-service program, so that market based plans are able to 
        compete during their start-up phase.
 Retention and emphasis on local decisionmaking for the vast 
        majority of coverage determinations in the fee-for-service 
        program for new therapies and technologies, among a diverse 
        range of contractors.
    In conclusion, while the Medicare program faces the challenge of a 
rapidly growing aged population, it is presented with the opportunity 
of unprecedented advances in innovation. AdvaMed looks forward to 
working with key policymakers to help advance a Medicare agenda that 
fosters access to the most modern, efficient care possible, while still 
ensuring the highest quality.
                                 ______
                                 
         Prepared Statement of The Alliance to Improve Medicare
    The Alliance to Improve Medicare (AIM) is the only organization 
focused solely on fundamental, non-partisan modernization of the 
Medicare program to ensure more health care coverage choices, better 
benefits (including prescription drug benefits), and access to the 
latest in innovative medical practices, treatments and technologies 
through the Medicare system. AIM coalition members include 
organizations representing seniors, hospitals, small and large 
employers, insurance plans and providers, doctors, medical researchers 
and innovators, and others.
    AIM recently approved the attached recommendations on expanding 
health care coverage choices for senior citizens who opt to participate 
in the Medicare+Choice program. AIM's recommendations call for 
strengthening the program by ensuring adequate payment levels for plans 
and providers, adopting different payment structures for different 
Medicare+Choice plan types, improving Medicare's regulatory framework, 
and increasing availability of Medicare beneficiary education 
materials.
    Building and ensuring a strong Medicare+Choice program requires 
that beneficiaries have a range of options similar to those available 
to Members of Congress, federal employees and retirees, and million of 
working Americans under age 65 years of age who are covered by private 
plans. AIM believes the Federal Employee Health Benefit Program can 
serve as an example of flexible plan design and benefit structures to 
offer senior citizens nationwide a choice of health plans. The success 
of the FEHB program, and its continued availability in rural areas, 
should serve as model for efforts to strengthen and improve the 
Medicare+Choice program.
    We applaud the Energy & Commerce Committee, and Health Subcommittee 
Chairman Michael Bilirakis, for their leadership on this issue and look 
forward to working together to strengthen and improve the Medicare 
program.
 Expanding Health Care Coverage Choices for Seniors through Improving 
                            Medicare+Choice
    AIM is a coalition of organizations representing seniors, doctors, 
hospitals, small and large businesses, medical researchers and 
innovators, insurance plans and providers and others dedicated to 
improving and strengthening Medicare for all Americans. AIM seeks to 
ensure that all senior citizens have more health care coverage choices, 
better benefits (including prescription drug coverage), and access to 
the latest in innovative medical practices and treatments. These 
recommendations address problems specifically confronting Medicare's 
managed care program, Medi-care+Choice.
    In the Balanced Budget Act of 1997, Congress took the important 
step of creating the Medicare+Choice program as a health insurance 
benefits option to Medicare beneficiaries. This option was designed to 
offer more choices for beneficiaries, and to provide beneficiaries with 
the ability to obtain additional benefits not covered under traditional 
Medicare, such as prescription drug benefits. Many beneficiaries who 
have selected Medicare+Choice plans are pleased with their ability to 
select these plans, and believe they have benefitted significantly from 
the comprehensive integrated benefits. Indeed, most Americans under age 
65, especially those utilizing employer-provided health care, have 
managed care coverage choices similar to those offered in the 
Medicare+Choice program, and as more baby boomers become Medicare 
eligible, they will expect those same plan choices under Medicare.
    AIM believes the principles of beneficiary choice inherent in the 
Medicare+Choice program can serve as a foundation for strengthening and 
improving the Medicare program. Building and ensuring a strong 
Medicare+Choice program requires that beneficiaries have an expanded 
range of options similar to those available to Members of Congress, 
federal employees and retirees, and millions of working Americans under 
65 years of age who are covered by private plans. The Medicare+Choice 
program was envisioned to include a variety of health maintenance 
organizations, private fee-for-service plans, provider-sponsored 
organizations, and preferred provider networks but has been unable to 
attain that goal. Inadequate payments and excessive regulation of 
private sector plans and providers participating in Medicare+Choice 
have seriously constrained the ability to expand coverage areas and 
have caused numerous plans to withdraw from coverage areas where 
reimbursement was inadequate to cover even the costs of basic care. As 
a result, millions of beneficiaries are at risk of losing their access 
to these plans and the additional benefits they have offered.
    (1) Ensure Adequate Payment Levels for Health Plans and Providers--
Currently, Medicare pays one set fee per month for each beneficiary 
enrolled in a Medicare+Choice plan based on a payment formula in the 
Balanced Budget Act of 1997 and regardless of the number of services 
the beneficiary may require. This payment formula has resulted in 
inadequate payment levels for Medicare+Choice plans in many parts of 
the country. For example, payments to health plans in many counties 
have been capped at two percent (three percent in 2001) annual 
increases over the past several years, despite growth rates in local 
health care costs that are as much as 8 to 12 percent. This has 
resulted in significant disparities between Medicare+Choice payments 
and local fee-for-service costs in some areas and contributed to many 
plans withdrawing from the program and reducing service areas. AIM 
supports an immediate increase in funding levels in order to save the 
program.
    (2) Adopt Different Payment Structures for Different Plan Types--
The current one-size-fits-all Medicare+Choice program payment structure 
sets many plans up for failure, especially in rural areas, and is 
unworkable if the program is to succeed and provide a variety of 
coverage options for Medicare beneficiaries nationwide. For example, 
building rural health plan and provider networks is difficult given 
less conducive health care market economics. Plans in many rural areas 
have difficulties negotiating payments because of higher-than-average 
Medicare volumes and because the cost of bearing full risk for a 
potentially small population is relatively high when plans cannot 
spread costs over a larger pool of insured individuals.
    The Federal Employee Health Benefit Program (FEHBP) provides an 
example of flexible plan design and benefit structures. The FEHBP 
allows qualifying participants to choose from among a minimum of 10 
plans nationwide, varying in plan type, benefit structure, and cost. 
FEHB program offerings currently include PPOs, HMOs, and indemnity 
plans which do not participate in the Medicare+Choice program because 
of inadequate payment levels caused by the program's inflexible payment 
structure.
    AIM supports Medicare+Choice program improvements that will ensure 
a competitive market-based system of health plan options similar to 
that available to private sector Americans and federal employees and 
retirees. Congress and CMS should ensure that beneficiaries have a 
choice of plan types similar to those available to FEHBP participants. 
Allowing flexibility in the Medicare+Choice program payment structure 
to accommodate different plan types would encourage creativity in the 
market and could encourage more participation by a wider variety of 
plans.
    (3) Improve Medicare's Regulatory Framework--AIM members believe 
that excessive regulation present in the Medicare+Choice program 
reduces innovation and consumer choice. AIM believes Medicare 
administrators must reduce excessive program complexity and bureaucracy 
caused by the more than 110,000 pages of federal rules, regulations, 
guidelines and directives. AIM supports the elimination of real fraud 
and abuse in Medicare but our members believe this can be achieved 
without relying on unnecessarily complex and heavy-handed regulation. 
Providers and plans must not be forced to divert resources from patient 
care in order to respond to ever-changing regulation.
    CMS has had a fragmented approach to Medicare+Choice program 
oversight in the past. AIM members are pleased that CMS Administrator 
Scully has recognized this problem and begun to address it with the 
announcement of the new Center for Beneficiary Choices to focus on 
Medicare beneficiaries in private plans. This will allow for greater 
efficiencies and streamline requirements that now may be developed 
within different offices. We recognize and applaud the efforts of the 
Bush administration and Congress to begin to streamline many burdensome 
procedures and we encourage the administration and CMS to consider 
these additional actions:

 Publish Guidelines for Beneficiary Materials: End efforts to 
        standardize written materials for Medicare beneficiaries. The 
        current requirement for CMS approval of all documents and CMS's 
        long term objective for standardizing many more communications 
        is problematic. Health plans need to tailor their 
        communications to their own programs. CMS should provide a 
        checklist for plans of the information required to send to 
        beneficiaries and develop marketing and communications 
        guidelines.
 Create a Medicare Office of Technology and Innovation: 
        Important new medical technologies and services must go through 
        three sequential stages of Medicare decision-making--initial 
        coverage, procurement code assignment, and payment level 
        determination--before they are available to Medicare patients. 
        This process has suffered from a lack of coordination and 
        created long delays in patient access to new technologies.
    (4) Increase Availability of Beneficiary Education Materials--In a 
survey of Congressional Medicare caseworkers, AIM found that many 
beneficiaries are unaware of existing opportunities for assistance from 
such organizations as State Health Insurance Assistance Programs and 
other medical hotlines or simply lack access to opportunities such as 
the Internet (www.Medicare.gov) and the 800 Medicare hotline. 
Additionally, some beneficiaries currently have difficulty comparing 
benefits available through Medicare fee-for-service with benefits 
available through Medicare+Choice plans.
    Medicare beneficiaries should have easy access to good information 
and benefit comparisons on the types of plans available. Beneficiaries 
need adequate, easy to understand information and clearly identified 
customer service representatives and insurance agents who can provide 
assistance by explaining coverage and benefit information and options. 
CMS can assist beneficiaries by recognizing that, because some 
beneficiaries desire more information on available plans, there is a 
need for a range of resources varying in scope and detail. The 
www.medicare.gov web site currently offers differing layers of 
information not elsewhere available to beneficiaries. These materials 
should be available to all beneficiaries, not just those with web 
access. CMS has begun to address this problem by increasing its ability 
to mail comparative information to beneficiaries who contact the 
Medicare hotline but who do not have Internet access.
    Beneficiaries also need additional assistance understanding 
Medicare claims and appeals procedures for denial of payment for 
services. CMS should expand efforts to clearly explain claims and 
appeals procedures should be provided to beneficiaries and providers.
                                 ______
                                 
       Prepared Statement of the American Psychiatric Association
    Chairman Bilirakis, Representative Brown, and members of the 
Subcommittee on Health, this testimony for today's hearing on using the 
Federal Employees Health Benefit Program (FEHBP) as a possible model 
for Medicare reform is presented on behalf of the American Psychiatric 
Association (APA).
    The American Psychiatric Association (APA) is the medical specialty 
association representing more than 38,000 psychiatric physicians 
nationwide. Our members are the frontline specialists in medical 
treatment of mental illness, and practice in all settings, including 
private practice, group practice, hospital-based services, nursing 
facilities, and community-based care, along with health programs under 
the auspices of the Federal Government such as the Public Health 
Service, the Indian Health Service, and the Department of Veterans' 
Affairs (VA health system). In addition, psychiatrists serve as 
academic faculty and practice in academic medical settings, and are at 
the forefront of research into the sources of and new treatments for 
mental illness.
    Our statement will focus on issues related to mental disorders in 
the elderly population, including the scope of such disorders and 
particularly ongoing barriers to access to medically necessary 
treatment for mental illness in the Medicare program. We urge your 
Subcommittee in the strongest possible terms to address the substantial 
shortcomings in the Medicare program's coverage of treatment for mental 
illness in the elderly. Bluntly, if Congress does not eliminate long-
standing statutory discrimination against Medicare patients seeking 
treatment for mental illness, we will face a serious crisis in the 
program.
    APA therefore commends the Subcommittee for holding a hearing on 
the possible use of the FEHBP as a model for Medicare coverage of 
mental illness treatment, since, as we will discuss below, federal 
employees have since January 2001 enjoyed ``parity'' for mental health 
and substance abuse treatment. While some questions remain about the 
scope of the parity coverage, the FEHBP program shows that federal 
policymakers can and should eliminate current statutory discrimination 
against seniors and other Medicare beneficiaries seeking treatment for 
mental illness, including substance abuse disorders.
               i. scope of mental illness in the elderly:
    In 1999, then-U.S. Surgeon General David Satcher, M.D., Ph.D. 
released a landmark study on mental illness in this country. The 
Surgeon General's report is an extraordinary document that details the 
depth and breadth of mental illness in this country. According to Dr. 
Satcher, ``mental disorders collectively account for more than 15 
percent of the overall burden of disease from all causes and slightly 
more than the burden associated with all forms of cancer.'' The burden 
of mental illness on patients and their families is considerable. The 
World Health Organization reports that mental illness (including 
suicide) ranks second only to heart disease in the burden of disease 
measured by ``disability adjusted life year.''
    Some 35 million Americans are presently age 65 and older. America's 
elderly population will increase rapidly as our Baby Boom population--
76 million strong--reach age 65 between 2010 and 2030. By 2030, older 
Americans will constitute 20 percent of the population, and our oldest 
old (85 and up) will comprise the most rapidly growing segment of all. 
The percentage of ethnic minority elderly will increase rapidly as 
well.
    Mental disorders are highly prevalent in the elderly population. 
The Surgeon General's report on mental illness found that 20 percent of 
the population age 55 and older experience mental disorders that are 
not part of what should be considered as normal aging. Common disorders 
include Alzheimer's disease, depression, anxiety, cognitive impairment, 
drug misuse and abuse, and alcoholism.
    The impact of mental illness on older adults is considerable. 
Prevalence in this population of mental disorders of all types is 
substantial. 8 to 20 percent of older adults in the community and up to 
37 percent in primary care settings experience symptoms of depression, 
while as many as one in two new residents of nursing facilities are at 
risk of depression.
    Older people have the highest rate of suicide in the country, and 
the risk of suicide increases with age. Americans age 85 years and up 
have a suicide rate of 65 per 100,000, twice the national average. 
Older white males, for example, are six times more likely to commit 
suicide than the rest of the population. There is a clear correlation 
of major depression and suicide: 60 to 75 percent of suicides of 
patients 75 and older have diagnosable depression. Put another way, 
untreated depression among the elderly substantially increases the risk 
of death by suicide.
    Mental disorders of the aging are not, of course, limited to major 
depression with risk of suicide. The elderly suffer from a wide range 
of disorders including declines in cognitive functioning, Alzheimer's 
disease (affecting 8 to 15 percent of those over 65) and other 
dementias, anxiety disorders (affecting 11.4 percent of adults over 
55), schizophrenia, bipolar disorder, and alcohol and substance use 
disorders. Some 3 to 9 percent of older adults can be characterized as 
heavy drinkers (12 to 21 drinks per week). While illicit drug use among 
this population is relatively low, there is substantial increased risk 
of improper use of prescription medication and side effects from 
polypharmacy.
                 ii. access to specialty medical care:
    Given the demographic factors cited above, including the 
substantial increase in the numbers of the elderly between now and 2030 
and the prevalence of mental disorders in this population, it is clear 
that there is a pressing need to ensure ready access to treatment for 
the Medicare population.
    Despite the pressing need for delivery of mental health services to 
elderly patients, some studies show that as low as one-half of older 
adults acknowledging mental health problems actually receive treatment, 
and a relatively small percentage of those receive care from a 
specialized provider. At least half of all elderly patients receive 
their mental health care from primary care practitioners rather than 
specialty providers.
    The proper assessment and treatment of mental disorders in late 
life is complicated by the prevalence of comorbid medical conditions 
and related disabilities in the elderly population. Thus, proper care 
of the elderly who seek treatment for mental illness requires 
specialized knowledge and clinical skills that enable the practitioner 
to assess complex interactions between medical illness, psychiatric 
disorders, the general processes of aging, together with the cultural, 
social, ethnic, and environmental factors that impact the patient.
    Thanks to strong support from the National Institute of Mental 
Health, the field is increasingly able to rely on a rapidly growing 
body of scientific knowledge specific to mental disorders in the 
elderly. APA has responded directly to the needs of elderly patients by 
proposing and successfully enabling the establishment of geriatric 
psychiatry as a subspecialty. Current program requirements for 
residency education in geriatric psychiatry are extensive, and 
administered by the Accreditation Council for Graduate Medical 
Education. The training period is 12 months, and must occur following 
satisfactory completion of an ACGME-accredited residency in general 
psychiatry.
    The educational program must include a wide range of clinical 
experience, including Geriatric Psychiatry Consultation (inpatient, 
outpatient, and emergency services); Long-Term Care, and Other Medical 
Specialty Experience (e.g., neurology, physical medicine and 
rehabilitation, geriatric medicine or geriatric family practice). The 
specialty content of the ACGME requirements is very extensive, 
underscoring the complexity of treating mental disorders in the elderly 
population, and emphasize the critical role played by psychiatric 
physicians and particularly by geriatric psychiatrists in the proper 
diagnosis and treatment of mental illness among the elderly.
                  iii. medicare barriers to treatment:
    As noted, mental disorders are substantial in the Medicare elderly 
population but the Federal Government itself creates major barriers to 
treatment. These include the following:
Medicare Discriminatory 50 Percent Copayment:
    Medicare law now requires patients to pay a 20 percent copayment 
for Part B services. However, the 20 percent copayment is not the 
standard for outpatient psychotherapy services. For these services, 
Section 1833(c) of the Social Security Act requires patients to pay an 
effective discriminatory copayment of 50 percent.
    This bears repeating: If a Medicare patient has an office visit to 
an endocrinologist for treatment for diabetes, or an oncologist for 
cancer treatment, or a cardiologist for heart disease, or an internist 
for the flu, the copayment is 20 percent. But if a Medicare patient has 
an office visit to a psychiatrist or other physician for treatment for 
major depression, bipolar disorder, schizophrenia, or any other illness 
diagnosed as a mental illness, the copayment for the outpatient visit 
for treatment of the mental illness is 50 percent. The same 
discriminatory copayment is applied to qualified services by a clinical 
psychologist or clinical social worker. This is quite simply 
discrimination.
190-Day Lifetime Reserve:
    In a similar vein, Medicare law limits to 190 days in a patient's 
lifetime the number of covered days to which beneficiaries are entitled 
if they seek treatment in a freestanding public or private psychiatric 
hospital. The 190-day lifetime reserve does not apply to hospital care 
for non-psychiatric illness in general hospitals, nor does it apply to 
treatment received for psychiatric illness in psychiatric wards in 
general hospitals. Yet if patients seek treatment in hospitals that 
specialize in the diagnosis and care of patients with mental illness, 
they are covered only for 190 days in their lifetime. Again, this is 
statutory discrimination against patients with a specific diagnosis 
receiving treatment in a particular facility.
Intermediate Services:
    Medicare coverage lags well behind private sector development of a 
range of psychiatric services that are less intensive than hospital-
level services but more intensive than outpatient services. These 
include, for example, crisis residential programs and mental illness 
residential treatment programs, group homes, residential detoxification 
programs, residential centers for substance abuse treatment, 
psychiatric rehabilitation, intensive case management, day treatment, 
ambulatory detoxification, and so on. The currently available 
``intermediate'' level of service, partial hospitalization, is 
effectively on hold due to shortcomings in the statutory authorization 
of the program.
QMB Discriminatory Payment Reduction:
    A related problem is the doubly discriminatory treatment of low-
income patients who are eligible for both Medicare and Medicaid. Under 
current law, state Medicaid programs are required to make Medicare 
cost-sharing assistance to such patients, known as ``QMBs'' (for 
qualified Medicare beneficiaries). In brief, states are required to buy 
into the Medicare program for QMBs (who are by definition poor 
individuals), paying the Part A and Part B premiums, along with 
deductibles and copayments. In 1992, the then-HCFA Medicaid Director 
issued a directive that states were no longer obligated to pay a 
portion of the payment for psychiatric outpatient services subject to 
the underlying discriminatory Medicare 50 percent copayment 
requirement, since that portion was held not to be an incurred 
beneficiary expense. That finding put HCFA in the position of saying 
that for Medicare purposes, the 50 percent copayment was an incurred 
beneficiary expense, but for Medicaid--and QMB--purposes, a portion of 
the copayment was not. The direct result of the finding was that most 
states stopped paying for the full amount of the copayment, creating an 
enforced substantial ``discount'' for services provided to one group of 
Medicare patients, and a significant disincentive to treat such 
patients along with the discount.
    Mr. Chairman, taken together, the examples cited above spotlight 
significant disincentives inherent in federal programs funding delivery 
of services to the elderly. The examples also underscore the dramatic 
need for sweeping changes to Medicare and other federal programs to 
eliminate statutory discrimination against patients seeking treatment 
for mental disorders. The underlying discrimination is compounded by 
problems such as regulatory hassles and the extraordinarily unwise 5.4 
percent reduction in the Medicare update.
    Regardless of the specific mental disorder diagnosed, it is 
absolutely clear that mental illness in the Medicare population causes 
substantial hardships, both economically and in terms of the 
consequences of the illness itself. As Dr. Satcher put it in his 
landmark report, ``mental illnesses exact a staggering toll on millions 
of individuals, as well as on their families and communities and our 
Nation as a whole.''
    Yet there is abundant good news in our ability to effectively and 
accurately diagnose and treat mental illnesses. Mental illness 
treatment works. Unfortunately, today, a majority of Medicare patients 
who need treatment for mental illness do not seek it or do not get it 
from specialty providers. Much of this is due to statutory 
discrimination that compels patients seeking treatment for psychiatric 
illness to pay more out of their own pockets.
    Congress would be outraged and rightly so if federal law forced a 
Medicare cancer patient to pay half the cost of his or her outpatient 
treatment, or a diabetic 50 cents of every dollar charged by his or her 
endocrinologist. So why is it reasonable to tell the 75-year-old that 
she must pay half the cost of treatment for major depression? Why 
should a schizophrenic patient incur a 20 percent copayment for 
visiting his internist, but be forced to pay a 50 percent copayment for 
visiting a psychiatrist for the treatment of his schizophrenia? Why 
also should patients not have access to the full range of services now 
available to treat their disorders?
                     iv. fehbp and other solutions:
    APA has always urged Congress to end these discriminatory 
inconsistencies in Medicare coverage as part of any major effort to 
overhaul the Medicare program. Certainly, as the House moves forward 
this year with a possible Medicare overhaul, repeal of the 50 percent 
copayment requirement and other discriminatory features of Medicare's 
coverage of mental illness should be addressed.
    As noted, the FEHBP offers a possible model for the road to travel 
to achieve non-discriminatory coverage of treatment of mental illness 
in the Medicare program. Prior to 1999, the Office of Personnel 
Management, via the annual FEHBP ``call letter'' process, had 
negotiated enhanced mental health coverage in the program. For example, 
OPM successfully eliminated lifetime and annual maximums for mental 
health care, moved gradually away from contractual day and visit 
limits, and covered medical visits and testing to monitor drug 
treatments for mental conditions under the same terms as pharmaceutical 
disease management.
    Following the White House Conference on Mental Health in June 1999, 
President Clinton announced that the Federal Government would implement 
mental health parity in the FEHBP program. Following the issuance of 
several policy guidelines (June 1999, April 2000, and July 2000), the 
parity requirements were implemented effective January 1, 2001. In a 
memorandum dated July 13, 2000, then-OPM Director Janice LaChance noted 
that ``Parity in the FEHBP Program means that coverage for mental 
health, substance abuse, medical, surgical, and hospital services will 
be identical with regard to traditional medical care deductibles, 
coinsurance, copays, and day and visit limitations. Historically, 
health plans have applied higher patient cost sharing and shorter day 
and visit limitations to mental health and substance abuse services 
than they did to services for physical illness or injury. Beginning 
January 1, 2001, this practice will stop when patients use network 
providers and comply with authorized treatment plans.''
    Indications are that, to-date, parity implementation is effective, 
has been smooth, and has resulted in little if any dislocations. In 
testimony before the Senate Committee on Health, Education, Labor, and 
Pensions (July, 2001), William E. Flynn, III, then-Associate Director 
for Retirement and Insurance at OPM, reported that ``Early indications 
are that parity implementation is going well. In the few cases where 
coverage or access problems have arisen, we were able to address them 
quickly to ensure that federal enrollees are receiving the benefits to 
which they are entitled under their plans.''
    In addition to the APA support for the moral imperative of ending 
discriminatory coverage of treatment of mental illness, the cost data 
on FEHBP parity is also favorable, showing clearly that parity is 
achievable for modest costs. According to Mr. Flynn's 2001 testimony, 
``parity implementation has resulted in an . . . aggregate (premium) 
program increase of 1.3 percent for 2001. In terms of the impact on 
individuals, those with a self-only enrollment pay $0.46 for parity 
every two weeks, while family enrollees pay $1.02''
    APA has long advocated for and supported legislation such as H.R. 
599 in the current Congress that would eliminate Medicare's historic 
discriminatory 50 percent copayment requirement for outpatient mental 
health services. The legislation would simply require Medicare patients 
receiving such services to pay the same 20 percent copayment they pay 
for all other medical care today. Based on the FEHBP experiment, we 
certainly believe that parity is achievable in the Medicare program. 
Can anyone suggest the modest costs--25 cents per week by enrollees and 
1.3 percent aggregate premium effect--are not worth the elimination of 
long-standing discrimination against Medicare patients seeking 
treatment for mental illness?
                             v. conclusion:
    Mr. Chairman and members of the Subcommittee, the American 
Psychiatric Association joins in saluting you for your foresight in 
holding this important hearing on options to overhaul the Medicare 
program. The problems are particularly acute for elderly patients 
seeking treatment for mental disorders, who must cope not only with the 
need to seek care, but also with the unfortunate fact that they are 
required to pay more for such care when they are able to seek it. 
Whether through consideration of an FEHBP-style benefit option or 
adoption of H.R. 599, we urge you to end the discrimination against our 
Medicare patients when they seek medically necessary care for mental 
illness.
    Thank you.
                                 ______
                                 
    Response for the Record of Stuart M. Butler, Vice President for 
     Domestic and Economic Policy Studies, The Heritage Foundation
    Question #1: Does CMS publish a guide to the Medicare plan that is 
similar to the FEHBP guide? How would such a guide be helpful for 
beneficiaries? Is the information on provider quality and plan 
responsiveness helpful for elderly beneficiaries in the FEHBP program? 
Some have stated that beneficiaries might not be able to evaluate plan 
comparison information. Do you believe that beneficiaries find the 
information in these guides confusing and/or overwhelming?
    A: Yes. CMS publishes a guide for Medicare beneficiaries entitled 
Medicare and You. The CMS also has a web site. The Committee can 
examine relevant GAO reports and recent testimony before the House 
Subcommittee on Health of the Ways and Means Committee on the CMS 
products to get a flavor of the difficulties facing Medicare 
beneficiaries. In short, these products are neither user-friendly nor, 
in the web version, easy to access or understand for comparative 
purposes. In his February 28, 2001 testimony before the House Ways and 
Means Subcommittee on Health, health care economist Walton Francis, an 
expert on FEHBP and the Medicare program, observed:
        ``The version (of Medicare and You 2001) for DC, Delaware, 
        Maryland and Virginia has about 85 numbered pages of 
        information. Of these, 17 pages provide plan specific 
        information on Medicare+Choice plans and the remaining pages 
        other information about Medicare (Telephone numbers take up 7 
        pages, even more than in 1999). The 17 printed pages of 
        information, however, provide only 9 specific facts about each 
        of the 13 covered plans: company name, plan name, telephone 
        number, service area, premium, whether or not any prescription 
        drug coverage, percent rating their care highly, percent of 
        women receiving mammograms, and percent dis-enrollment. All of 
        this information for all of these plans could have fit on one 
        typewritten page. In sum, HCFA uses 85 pages to produce one 
        page of plan comparison information.'' 1
---------------------------------------------------------------------------
    \1\ Walton J. Francis, Hearing on Medicare Reform, testimony before 
the Subcommittee on Health of the House Committee on Ways and Means, 
February 28, 2001, p. 4.
---------------------------------------------------------------------------
    For enrollees in the FEHBP program, there is superior clarity in 
the presentation of comparative health information from both government 
and private sector sources. OPM annually publishes a Guide to FEHBP 
plans. This is a simple, detailed and plain English comparison of 
plans, rates and benefits. The 2001 edition of the Guide was 55 pages 
in length.
    Beyond the OPM Guide, prominent private sector organizations 
publish comparative information on plans and guides to FEHBP plans for 
active employees and retirees. Each year, the National Association of 
Retired Federal Employees (NARFE) publishes Federal Health Benefits and 
Open Season Guide, which is oriented specifically to federal retirees 
and rates plans on benefit packages. The Washington Consumers Checkbook 
publishes Checkbook's Guide to Health Insurance Plans for Federal Plans 
for Federal Employees. These guides are written in plain English. They 
provide excellent comparative information on price, benefits and 
service.
    In the case of the Checkbook guide, there are detailed plan 
comparisons and ratings on the quality of services and are based on 
annual surveys of all plan enrollees, including retirees. In the FEHBP, 
retirees make up 40 percent of all enrollees in the FEHBP program. The 
ratings cover the following topics: the overall quality of the health 
care provided by the plan, and access to personal physicians and 
specialists; the percentage of complaints; the ability to get needed 
care; the ability to get care quickly; how well doctors communicate 
with beneficiaries; the courtesy and helpfulness of the doctors' office 
staff; the plan's claims processing; the performance in getting 
referrals to specialists; the ability to get a personal doctor one is 
``happy with''; the ability to deliver the care the beneficiary or the 
beneficiary's doctor believed was necessary; the ability to get 
approval for care ``promptly; getting advice or help from the doctor's 
office when one calls; enrollees impression of the plan's customer 
service; getting an appointment as soon as needed for illness or 
injury; getting explanations one could understand from one's doctors, 
getting enough time with doctors.
    This information is clearly helpful to beneficiaries. The Checkbook 
ratings, particularly on quality and service (including the 
responsiveness of physicians and specialists, or the ease in dealing or 
communicating with physicians and specialists) are particularly helpful 
to elderly beneficiaries. There is nothing confusing about percentage 
rankings of plans' performance on the very relevant topics of patient 
care covered in the survey. In 2001, for example, federal retirees 
residing in Idaho and interested in the Idaho Group Health Cooperative, 
an HMO, would be able to find out that 93 percent had a positive 
assessment of how well that plan's doctors communicated with patients.
    Beyond the published guides, the Committee should also be aware of 
the growth of FEHBP comparative information on the Internet. According 
to PlanSmartChoice, a company providing comparative Internet 
information to FEHBP, enrollees reported to OPM that users of the web 
site registered satisfaction levels of 90 percent or more.2 
The report to OPM also included samples of positive responses from 
retirees, negative comments, and suggestions for improvement of the web 
site.3 Another prominent on line site in the FEHBP is 
www.guidetohealthplans.org There is no reason why 21st retirees, 
including the first wave of the 77 million Baby Boom generation, should 
not be able to take advantage of rapidly advancing information 
technology for periodic health plan comparisons.
---------------------------------------------------------------------------
    \2\ PlanSmartChoice: Fall 2000 Open Enrollment: A Report to the 
Office of Personnel Management, prepared by PlanSmart Choice Inc., 
Research Triangle Park, North Carolina, June 25, 2001, p. 1.
    \3\ PlanSmart Choice, op. cit., pp. ii-vi
---------------------------------------------------------------------------
    Question #2: Is it possible to have multiple plans in some of the 
more rural areas of the country?
    A: Yes. In the FEHBP, every enrollee, rural or urban, has a 
multiple choice of health plans. Today, there are 11 health plan 
options available to all enrollees nationwide. In 2001, FEHBP had 15 
health plan options available to all enrollees. Normally, these 
national plans are ``fee for service'' or preferred provider 
organizations. The FEHBP rules governing the participation of HMOs are 
very different. HMOs participate at the state, and the number of 
participating HMOs, which today cover roughly 40 percent of all FEHBP 
enrollees, varies from year to year. There is no reason, of course, why 
a reform of Medicare could not establish a similar structure for plan 
options for future Medicare enrollees.
    Question #3. Your testimony states that OPM prescribes ``reasonable 
minimal standards'' for plans. Can you explain how those standards are 
developed? Do you believe that a separate Medicare Board could work in 
a similar fashion?
    A: Under Section 8902 of Title 5 of the U.S. Code, OPM--may 
prescribe reasonable minimum standards' for health benefits plans and 
for carriers. As the Congressional Research Service (CRS) has observed 
in its comprehensive 1989 analysis of the FEHBP, the legislative 
language authorizing the FEHBP gave OPM ``broad powers'' to administer 
the FEHBP, and OPM has thus had ``wide latitude to institute changes it 
felt were needed . . .'' 4 Under Section 890.201 of The Code 
of Federal Regulations,5 OPM has thus set forth rules to 
admit and negotiate with health plans that comply with the provisions 
of Chapter 89 as amended. Under OPM rules, competing plans have to 
accept enrollment of employees and retirees without discriminating 
against them on such grounds as age, race, sex or health status; 
provide health benefits to enrollees, ``wherever they may be''; provide 
for guaranteed renewability of coverage for enrollees; provide 
enrollees an identification card; provide a standard rate structure for 
individuals and family coverage; maintain statistical records for the 
plan covering federal employees separate from other insurance business; 
provide for ``a special reserve fund'' for the plans operations and 
reinvest any fund income into the fund; provide for continued 
enrollment of persons during the contract period; provide for coverage 
without reference to pre-existing physical or mental conditions; and 
provide for enrollment without a waiting period for a covered persons.
---------------------------------------------------------------------------
    \4\ The Federal Employees Health Benefits Program: Possible 
Strategies for Reform: A Report prepared by the Congressional research 
Service for the Committee on Post Office and Civil Service, US. House 
of Representatives, 101st Cong., 1st Sess. (Committee Print 101-5), May 
24, 1989, p. 238.
    \5\ Code of Federal Regulations, Title 5, Volume 2, Parts 700 to 
1199, revised as of January 1, 2001, pp.410-412.
---------------------------------------------------------------------------
    Under its statutory authority, OPM is to contract with those plans 
that are licensed in the states; that are reinsured with other 
companies which elect to participate under an ``equitable formula''; 
that offer detailed statements of benefits with definitions of 
limitations and exclusions that OPM considers ``necessary or 
desirable''; that charge rates that ``reasonably and equitably'' 
reflect the costs of the benefits; and that agree to provide benefits 
or services to persons entitled, as OPM determines, under the terms of 
its contract. OPM is also authorized to levy a surcharge on plans of up 
to 3 percent of premiums to establish a contingency reserve fund for 
the payment of unforeseen claims.
    Under Section 8902 of Title 5, the terms of any contract between 
OPM and a competing plan pre-empt any state or local law governing 
health insurance or health plans.
    There is no reason why a Medicare Board, or similar agency, could 
not perform the very same functions as OPM in a reformed Medicare 
program. The Board could be an independent body within the executive 
branch, like OPM, or it could be a special agency within HHS.
    Question #4: How does the current Medicare program make it more 
difficult for beneficiaries to have reasonable access to cutting edge 
treatments?
    A: Medicare's current structural obstacles delay patients access to 
cutting edge medical services and technologies that are routinely 
available to patients in the private sector. There are many particular 
examples. In a general study of this question for the Advanced Medical 
Technology Association, the Lewin Group, a major Virginia-based 
econometrics firm that models health policy changes, found that it 
takes anywhere between 15 months to five years for a medical technology 
to be available to Medicare patients.6 The reason for this 
is the complicated CMS process for making coverage decisions, which can 
take anywhere from 1 to 5 years, then procedural coding for the new the 
technology, which can last anywhere from 15 to 27 months, and the 
process for setting payment, which can take 24 months or 
more.7
---------------------------------------------------------------------------
    \6\ Advanced Medical Technology Association, ``Medicare Overview: 
Improving patient Access to Innovative Technology, presented in 2001-
2002 Medical Technology: An Agenda for Innovation and Patient Access 
(Washington DC, 2002).
    \7\ Ibid.
---------------------------------------------------------------------------
    Beyond the internal CMS process for making coverage, coding and 
payment decisions, there is also the manner in which CMS prices medical 
technologies or cutting edge treatments. Medicare uses an 
administrative pricing system, which may have little or nothing to do 
with the actual market price of a treatment or medical technology. 
While the technology or treatment may be technically covered by the 
Medicare program, a Medicare patient has to find a doctor or provider 
willing to offer it at Medicare's often artificially low price. This 
also can make it more difficult for Medicare patients to get access.
    Congress has tried, with limited success, to improve Medicare 
patient access to cutting edge technologies and treatments with the 
enactment of the Benefits Improvement and Protection Act of 2000.
    Question #5: Can you expand slightly on the FEHBP trust fund? 
Specifically, do you believe that it would be important to have a 
similar trust fund to monitor the solvency, or financial stability of 
any modernized Medicare program?
    A: All premium contributions, including the premium payments from 
federal employees and federal retirees, as well as federal agency 
contributions, are deposited in the Federal Employee Health Benefits 
Trust Fund.
    For federal retirees, OPM administers their enrollment, provides 
for an automatic deduction of their portion of the premium from their 
monthly federal retirement checks, adds the applicable government 
contribution and deposits that money in the FEHBP Trust Fund. For 
active federal employees, their employing agency withholds the 
employees' contribution toward the premium from their paychecks, adds 
the government contribution, and that amount is credited to the FEHBP 
Trust Fund. Congress, of course, each year appropriates the projected 
amounts for the FEHBP Trust fund for federal retirees, as part of the 
Treasury Postal Appropriations process. For federal employees, the 
agency funds for FEHBP payment, like salaries and expenses, are 
included in routine federal agency appropriations.
    The FEHBP trust fund is administered by OPM, but it is formally a 
part of the United States Treasury. The Secretary of the Treasury, in 
consultation with OPM, has the legal authority to invest the assets of 
the trust fund in federal government securities, and interest income 
from these government securities is also credited to the trust fund. 
During the contract year, payments to health insurance plans or 
carriers are made directly from the U.S. Treasury and those payments 
are charged to the FEHBP Trust Fund. OPM's administrative expenses are 
also charged to the FEHBP Trust Fund.
    In contrast to the Medicare program, with the Hospital Insurance 
(HI) and the Supplemental Medical Insurance (SMI) trust funds, financed 
on entirely different bases, the FEHBP Trust Fund is comparatively 
simple. In the FEHBP, both the government contribution and the 
beneficiary premium payments for all medical services are combined, and 
there is no open-ended draw on general revenues, as there is today in 
the SMI portion of Medicare. The Medicare ``solvency'' debate often 
revolves around how one measures the fiscal health of the Medicare 
program. In my view, the issue is not confined to the health of the 
Hospital Insurance trust fund. Rather, the problem is the growing gap 
between the projected benefit costs and the revenues dedicated to the 
Medicare program.
    Premium Income and disbursements in the FEHBP Trust Fund are easily 
tracked. The income for the Fund itself is routinely dependent upon 
congressional action. If, for any reason, there is a need for a 
supplemental appropriation for the FEHBP trust fund, then Congress can 
easily provide for it. In this respect, the FEHBP Trust fund model is 
superior as a mechanism for monitoring the solvency and ensuring the 
financial stability of a modernized Medicare system.
                                 ______
                                 
  Responses for the Record of Max Richtman, Executive Vice President, 
      National Committee to Preserve Social Security and Medicare
                questions of chairman michael bilirakis
    Question 1. Are any of your members involved in Medicare+Choice 
plans? I understand that Medicare+Choice is not located in all areas: 
however, do you know if beneficiaries that live in areas with 
Medicare+Choice have the same level of out-of-pocket costs as those 
seniors not enrolled in a Medicare+Choice plan in the same area?
    Answer. Yes, some of our members are involved in Medicare+Choice 
plans. We do not know if persons in Medicare+Choice plans in an area 
have the same level of out of pocket costs as those not in such plans. 
We know that House hearing have revealed that indeed in some areas, out 
of pocket costs in Medicare+Choice does exceed those in traditional 
Medicare.
    We also know that beneficiaries in Medicare+Choice often complain 
that their out of pocket costs are constantly increasing. ``Extra'' 
benefits are often decreasing, particularly prescription drug coverage. 
Many beneficiaries say they joined the plans because they offered some 
prescription drug coverage, but the coverage has been stopped 
altogether or greatly decreased.
    Question 2. You state that premiums have escalated steadily in 
FEHBP over the last five years. Do you have any data to support this 
notion? If so, do you know how much the increase has been? Also, are 
you aware of any access problems for FEHBP participants in gaining 
access to cutting edge medical care?
    Answer. The statement that premiums have increased steadily over 
the last five years is from the Congressional Research Services Report 
for Congress, Health Insurance for Federal Employees and Retirees, 
January 2, 2002, by Carolyn L. Merck. She states in the summary that 
FEHBP premiums in 2002 will be about 13.3% higher than in 2001. She 
goes on to say ``On average, annual premiums increases have exceeded 9% 
since 1998 bringing cumulative increases since then to nearly 50%.'' In 
only 5 years premiums have doubled.
    In 2001, total annual FEHBP premiums for self-only policies 
averaged about $3,100. This is not a good model for Medicare. Most 
seniors, with annual incomes around $15,000 cannot afford this type of 
premium. Seniors pay $600.00 in premiums for Medicare.
    That report also stated FEHBP covers only 8.6 million people. 
Medicare covers 40 million so the programs may be incomparable based on 
size.
    No problems of access to technology have been reported to the 
NCPSSM.
              questions from congressmen dingell and brown
    Question. You were asked in the hearing to specifically state what 
benefit seniors support in terms of how much of a premium and cost 
sharing they would be willing to pay and still find a drug benefit 
attractive and affordable. While you mentioned a $25-$35 premium, could 
you elaborate on the other considerations in a drug benefit? Do you 
believe that either the President's Budget or the House Budget 
Resolution provides adequate funding for a Medicare prescription drug 
benefit?
    Answer: Our members have told us the same information that is 
reported in polls, surveys and focus groups: seniors want a 
prescription drug benefit that is affordable for them and is 
comprehensive. Seniors, and their children, do the ``kitchen table 
test.'' They will sit down with paper and pencil and calculate the 
premium, deductible, cap, and copay. Based on this they will decide if 
the benefit is affordable and therefore, if they will enroll. For these 
reasons we too must look at the benefit as a whole to determine what is 
affordable. A monthly premium of $20.00 doesn't make a benefit 
affordable if the plan has a $650.00 deducible.
    The President's budget allocation of $190 billion for Medicare 
reform and prescription drugs is not enough to fund a benefit that is 
affordable and comprehensive. Even the $350 billion the House included 
in their budget is not enough. During the hearing many mentioned the 
advantages of the FEHBP program. The main advantage of the FEHBP 
program and one that needs to be adopted immediately for seniors is 
that it does include prescription drugs. Congress has reported that a 
FEHBP type prescription drug benefit for seniors would cost $750 
billion over 10 years. Therefore, this is the amount that needs to be 
allocated for prescription drugs alone. Seniors expect a benefit equal 
to FEHBP, this is what they got during their working lives and this is 
what retiree health plans offer. Seniors expect about a 20% copay or 
cost sharing.
                                 ______
                                 
   Responses for the Record of Stephen J. deMontmollin, Senior Vice 
            President and General Counsel, AvMed Health Plan
    Question 1. Why was AvMed forced to leave the Tampa area? Are you 
interested in coming back into the Tampa area to serve Medicare 
beneficiaries? If so, what steps could Congress take to ensure your re-
entrance and expansion in Florida? If I were able to help make these 
adjustments law, could you commit that AvMed would be willing to come 
back into the Tampa area?
    Response 1. AvMed is Florida's oldest and largest not for profit 
HMO and its mission includes the desire to serve the Medicare and 
Medicaid populations in Florida. AvMed currently serves fewer than 
30,000 Medicare members down from more than 75,000 beneficiaries at the 
time of the passage of the Balanced Budget Act. AvMed would very much 
like to return to the Tampa area as a Medicare+Choice organization and 
would do so if adequate and stable funding were made available in the 
program. Current law projects an increase of only 2% for the Tampa area 
for M+C beneficiaries in 2003 despite broad agreement that the actual 
increase in medical costs for the area is approximately 11% and 
prescription drug costs are rising at an even higher rate. The Federal 
Employees Health Benefit Program is projecting premium increases of at 
least 13% and the CALPERS rates were recently renegotiated at an 
increase of more than 25%. It is hard for the Medicare beneficiaries 
who want a choice in their health plan to understand why they are being 
treated in such a disparate fashion. AvMed has sustained losses of some 
$60 million since 1997 related directly to the draconian reductions in 
M+C funding and is now struggling with meeting the statutory surplus 
requirements of the Florida Department of Insurance.
    In the Balanced Budget Act of 1997, Congress reduced the projected 
rate of growth of revenues to hospitals contracting with HCFA over five 
years by more than 20 percent and reduced the projected rate of growth 
of payments to Medicare HMO risk contractors by some 17 percent over 
the same period. The hospitals which were facing the reductions in 
future revenue rate growth, immediately began discussions with HMOs to 
renegotiate contracts to make up some of the projected shortfall. In 
fact, over 60% of the AvMed hospital network insisted on rate 
renegotiations regardless of where the hospitals were in the 
contracting cycle. That is, most hospital contracts are terminable with 
sixty days notice and 60% of the hospital network threatened to 
terminate the agreements unless new rates were put in place. From 1997 
to 1999, three hospitals of one system in North Dade county insisted on 
rate increases of 57%, 49% and 26% respectively. A Tampa hospital is 
currently demanding a 23% increase in its inpatient rates for 2003. 
Accordingly, Medicare HMOs experience the ``double whammy'' of 
reductions in their own revenue growth projections as well as the 
likelihood of higher provider contract rates.
    Specifically, AvMed lost $2,415,000 in Hillsborough County in 1998 
and $1,948,000 in 1999 before having to institute significant cost 
sharing to its members through premiums and benefit reductions to 
reduce the loss to $444,000 in 2000. AvMed lost $961,000 in 2001 and 
was projected to lose $79.57 per member per month in 2002. Confronted 
with the certainty of significant losses in 2002, AvMed had no choice 
but to withdraw from the County. Mr. Chairman, we very much want to 
serve the seniors in southwest Florida but can no longer continue to 
incur such tremendous losses. We are a Florida not for profit 
corporation but unless we have an adequate net margin, we can not 
achieve our mission.
    Despite the tremendous losses generated by the Balanced Budget Act, 
AvMed is committed to doing everything in its power to remain in the 
Medicare+Choice program and to continue serving seniors in Florida. 
AvMed is very hopeful that increased and stable funding will be 
achieved and that it will be able to re-enter the Tampa area market. 
Certainly, the 200,000 seniors in the Coalition for Medicare Choices 
have made it clear that Medicare beneficiaries want choices in 
selection of their health care plan.
    Question 2. President Bush has proposed a 6.5% payment increase in 
2003 for M+C plans that have been limited to the minimum payment update 
in recent years. Do you believe that this payment increase will 
encourage are hopefully guarantee that plans will remain in the 
Medicare+Choice program? Are there other issues that need to be 
addressed for plans to increase participation in the program?
    Response 2. Yes, President Bush's proposed 6.5% payment increase 
would provide an immediate and necessary infusion of funds into health 
plans serving counties that have received only minimum payment updates 
since 1997. Keep in mind that between 1998 and 2002, payment in these 
counties increased only 11.5 percent overall, compared to increases in 
fee-for-service spending of over 21 percent over the same time frame 
and annual medical inflation of between 9 and 10 percent. The 
Administration's 6.5% increase is an extremely important first step for 
those counties that have consistently received only the minimum update. 
However, since those counties have lagged so far behind actual real-
world increases in medical spending, a multiple-year fix will be needed 
to help plans continue to participate in the Medicare+Choice program. 
Plans need predictability and sustainability in subsequent years to 
ensure continued participation.
    Question 3. What role do Medicare+Choice plans play in serving low-
income beneficiaries? Can you address the argument by opponents of 
Medicare+Choice that plans pick the healthier beneficiaries and leave 
the sicker beneficiaries to fee-for-service?
    Response 3. Medicare+Choice plans play an important role in 
providing health coverage to beneficiaries who are financially 
vulnerable. Many low-income beneficiaries rely heavily on 
Medicare+Choice plans to provide comprehensive coverage not available 
under the Medicare fee-for-service program. The American Association of 
Health Plans (AAHP) has conducted research on this issue, focusing 
specifically on beneficiaries who have supplemental coverage (i.e., 
coverage for services not covered by the Medicare fee-for-service 
program) that is not subsidized (i.e., not paid for by Medicaid or a 
prior employer).
    According to AAHP's research, among unsubsidized Medicare 
beneficiaries in the urban West who had supplemental coverage and who 
had annual incomes below the federal poverty level, 76 percent had 
selected Medicare HMOs. This finding shows that Medicare HMOs serve 
many beneficiaries who have modest incomes, but do not qualify for 
Medicaid assistance. AAHP's research also indicates that, among 
beneficiaries in the urban Northeast, 41 percent of beneficiaries who 
had unsubsidized supplemental coverage were enrolled in Medicare HMOs 
while only 5 percent of beneficiaries who had subsidized supplemental 
coverage were enrolled in Medicare HMOs. This finding demonstrates that 
Medicare HMOs serve many beneficiaries who do not receive supplemental 
health coverage that is paid for by Medicaid or prior employers.
    Another key finding of AAHP's research is that among Medicare 
beneficiaries who receive unsubsidized supplemental coverage for 
prescription drugs, 54 percent obtained such coverage through Medicare 
HMOs. This finding highlights the important role Medicare+Choice plans 
play in providing prescription drug coverage to beneficiaries who do 
not receive such coverage through Medicaid or a prior employer. In 
addition, the BlueCross BlueShield Association (BCBSA) recently 
released a study showing that low-income Medicare beneficiaries, as 
well as African-Americans and Hispanics, are more likely to enroll in 
the Medicare+Choice program than other beneficiaries.
    This study focuses specifically on the choices made by Medicare 
beneficiaries who live in areas where Medicare+Choice plans are 
available and who do not receive Medicaid coverage or employer-
sponsored coverage. Noting that 13 million Medicare beneficiaries meet 
these criteria, the study identifies these beneficiaries as ``active 
choosers.'' The following findings were reported for these 
beneficiaries:

 in southern California, 78 percent of ``active choosers'' with 
        incomes between $10,000 and $20,000 are enrolled in 
        Medicare+Choice plans;
 in Philadelphia, 67 percent of ``active choosers'' with 
        incomes between $10,000 and $20,000 are enrolled in 
        Medicare+Choice plans;
 in southern Florida, 51 percent of ``active choosers'' with 
        incomes between $10,000 and $20,000 are enrolled in 
        Medicare+Choice plans;
 nationwide, 40 percent of ``active choosers'' with incomes 
        between $10,000 and $20,000 are enrolled in Medicare+Choice 
        plans; and
 nationwide, 56.1 percent of Hispanic ``active choosers'' and 
        40.3 percent of African-American ``active choosers'' are 
        enrolled in Medicare+Choice plans.
    This study also concludes that if the Medicare+Choice program was 
no longer available, a total of 1.5 million current Medicare+Choice 
enrollees would choose to go without supplemental coverage. Indicating 
that 42 percent of African-Americans currently enrolled in 
Medicare+Choice plans would rely on the Medicare fee-for-service 
program only (with no supplemental coverage), the study cautions that 
``ending access to Medicare+Choice would have a disproportionate effect 
on African-American beneficiaries.''
    It is not true, as some claim, that Medicare+Choice plans attract 
only healthy beneficiaries. This charged is based largely on a report 
the General Accounting Office (GAO) issued in August 2000 claiming that 
Medicare+Choice plans attract a disproportionate share of healthier and 
less expensive beneficiaries relative to fee-for-service (FFS) 
Medicare. In reaching this conclusion, the GAO used a flawed 
methodology that examined beneficiaries' costs based on their prior use 
of services in the FFS program to estimate beneficiaries' costs once 
enrolled in Medicare+Choice plans.
    AAHP has long been concerned about this approach, since it includes 
no information about beneficiaries' use of services once they are 
enrolled in Medicare+Choice plans. As a result, the measure used in 
GAO's methodology bears little relationship to health plan enrollees' 
actual health status and health care needs. The GAO's methodology 
overlooks the reality that beneficiaries in FFS who have no 
supplemental coverage face substantial financial barriers to care due 
to Medicare's high cost-sharing requirements and, therefore, use 
substantially fewer medical services than their counterparts with 
supplemental coverage. The GAO's methodology erroneously would classify 
these individuals as healthier, when in fact, they likely could not 
afford to receive necessary care in the FFS program.
    Question 4. I understand that many Medicare+Choice Plans have 
implemented disease management programs for congestive heart failure, 
diabetes, and other chronic conditions. How do enrollees benefit from 
these programs? Were you operating these types of programs in the Tampa 
area? If so, do those patients have access to the same quality of 
services since you have left?
    Response 4. M+C enrollees benefit greatly from disease management 
programs offered by their plans. A study by CMS and the National Cancer 
Institute (NCI) found that Medicare HMO enrollees were less likely than 
fee-for-service patients to have their breast cancer diagnosed at late 
stages. Only 7.6 percent of Medicare HMO enrollees had a late-stage 
diagnosis compared to 10.8 percent of fee-for-service patients. 
(G.Riley, Journal of the American Medical Association, Vol. 281, Feb. 
24, 1999) A large-scale study comparing quality of care for elderly 
heart attack patients covered by Medicare HMOs and Medicare fee-for-
service coverage found that HMOs offer care equal to or better than 
fee-for-service coverage. All indicators of timeliness and quality of 
care for elderly patients with acute myocardial infarction were higher 
or similar under HMO coverage compared with fee-for-service coverage. 
HMO patients were more likely to receive betablocker therapy (73 
percent vs. 62 percent). (S. Soumerai, Archives of Internal Medicine, 
Vol.159, 1999)
    Another study found that Medicare HMO enrollees were more likely to 
have had a mammogram in the previous year compared to fee-for-service 
beneficiaries (62 percent vs. 39 percent). (L. Nelson, Access to Care 
in Medicare Managed Care, Nov. 1996) Research also has shown that 
Medicare HMO patients were diagnosed at considerably earlier stages, 
and therefore more treatable stages, than fee-for-service patients for 
four types of cancer: breast, cervix, melanoma, and colon. Among 
patients with cervical cancer, 76 percent of HMO enrollees were 
diagnosed at early stages compared to 55 percent of fee-for-service 
patients. (G. Riley, American Journal of Public Health, Oct. 1994)
    Medicare+Choice plans are continually looking for new and better 
ways to improve the delivery of health care services. The following 
examples provide a glimpse of the many innovations Medicare+Choice 
plans are implementing on behalf of their beneficiaries:
    AvMed Health Plan has designed disease management programs to 
improve care for beneficiaries with congestive heart failure, diabetes, 
end-stage renal disease and other chronic conditions. Group Health 
Cooperative offers exercise and fitness programs to improve 
beneficiaries' health and, additionally, provides a ``road map'' to 
physicians to assist them in delivering appropriate care to patients 
with chronic conditions. United Healthcare has established a ``Care 
24'' program that gives beneficiaries access--24 hours a day, seven 
days a week--to registered nurses, counselors, attorneys, and a health 
information library.
    Other plans have improved health care for their Medicare 
beneficiaries through innovations focused on: nutrition screening; the 
relationship between literacy and health; the impact of non-medical 
needs on medical outcomes; educational classes on osteoporosis 
treatment and prevention; overcoming cultural barriers; promoting 
clinical guidelines; and other opportunities for improving 
beneficiaries' health.
    Another reason Medicare+Choice plans are popular among 
beneficiaries is that they typically offer additional benefits not 
covered by the Medicare fee-for-service program. According to a recent 
analysis by Mathematica Policy Research, 67 percent of Medicare+Choice 
enrollees are receiving some form of prescription drug coverage through 
their health plans in 2001. Other additional benefits currently 
available to Medicare+Choice enrollees include physical exams (99.7 
percent), vision benefits (94 percent), hearing benefits (79 percent), 
podiatry benefits (30 percent), preventive dental benefits (27 
percent), and chiropractic benefits (5 percent). Significantly, the 
lack of adequate funding for the Medicare+Choice program has forced 
many health plans to scale back additional benefits in recent years. 
For example, Mathematica reports that 84 percent of Medicare+Choice 
enrollees had prescription drug coverage in 1999--compared to 67 
percent in 2001. The availability of most other additional benefits 
also has declined in recent years. I am enclosing a copy of Innovations 
in Medicare+Choice Managed Care for your information and hope that you 
will note the AvMed immunization program described at page 3 of the 
report.
                                 ______
                                 
       Responses for the Record of Marilyn Moon, Urban Institute
    Question 1. How well have private plans done at controlling cost 
increases overtime compared to Medicare? Is there any reason to believe 
that private plans are the solution to increasing Medicare costs? 
Aren't all payers/purchasers of health care facing the same problems?
    Response 1. For several years in the mid 1990s, private insurers' 
premiums grew at a slower rate than Medicare per capita spending, but 
in the last five years Medicare has substantially outperformed the 
private sector in this regard. And viewed over an even longer period, 
Medicare has done better than the private sector in holding down the 
costs of care since 1970. All payers are having the same problems in 
coping with high health care spending. Improvements in technology and 
treatments are a prime cause of the growth in health care costs over 
time.
    Question 2. Would moving Medicare to a system of competing private 
plans like that envisioned by Breaux-Frist necessarily mean that yearly 
cost increases would be lower than we see today in Medicare? Could the 
program find itself hostage to the private plans' premium increases 
with little ability to control costs without an act of Congress.
    Response 2. I believe that a system of competing private plans 
would not hold down the costs of care. Savings to the federal 
government from such an approach would likely be achieved only if costs 
are shifted off onto beneficiaries in the form of higher premiums or 
cost sharing. Consolidation of plans has occurred quite rapidly in the 
U.S., often leading to only one or two insurers dominating the market 
in various locations. Such dominance would give them a great deal of 
leverage since it would be very disruptive to allow them to pull out of 
serving Medicare beneficiaries once they cover a majority of people in 
a particular area. In those circumstances they face few incentives to 
hold down costs.
    Question 3. Stuart Butler mentioned in his testimony that the 
government should get out of the business of making decisions about 
benefits and setting prices and instead act as a referee for private 
plans. If the government doesn't develop provider payment mechanisms 
and fee-schedules, will the need to do this work go away? What would it 
mean for doctors and other providers to faced with a myriad of 
different payment systems developed by private plans?
    Response 3. The complexity of the current health care system 
undoubtedly contributes to costs since in addition to the 
administrative expenses facing insurers, doctors, hospitals and other 
providers of care must deal with multiple rules and billing 
requirements. Costs are also high on beneficiaries to keep track of 
these issues. Changing Medicare to rely on private plans would likely 
increase these costs (unless one insurer comes to monopolize the 
market, a circumstance that creates a number of key problems on its 
own). Moreover, if plans are allowed to compete on benefits and other 
key characteristics of coverage, this will likely increase adverse 
selection and lead to greater confusion among beneficiaries than 
currently exists.
    Question 4. Medicare spends more than $240 billion per year on 
health care for 14% of the population. As a result of the aging of the 
baby boomers, Medicare spending and the Medicare population is only 
expected to grow. On the other hand, the Federal Employee Health 
Benefits Program (FEHBP) spends $21 billion a year for only 9 million 
people. Do you think that it is wise for Congress to step aside and let 
private plans make all the decisions about coverage, cost-sharing and 
other issues for the Medicare population?
    Response 4. It would be very unwise for the federal government to 
take a hands-off approach to the provision of health care even if it 
relied more on private plans. Consumers often need help in dealing with 
insurers. FEHBP often uses its muscle to help its enrollees, and 
benefit officers in various agencies also intervene. Medicare 
beneficiaries would need even more support. Private aid from consumer 
groups and others would likely not be able to handle the volume of 
issues without strong government oversight.
    Question 5. Mr. Butler also suggests there is an inherent conflict 
of interest in the way the Centers for Medicare and Medicaid services 
operates because it both oversees the M+C program and operates a fee-
for-service (FFS) plan. Could you comment on this? Is there really a 
conflict?
    Response 5. There is no necessary conflict of interest. Many 
private companies, for example, offer an indemnity program that they 
self-insure as well as contracting with HMOs to serve their employees. 
The goal of traditional Medicare (or a private company's self-insured 
plan) should not be to make a profit, but rather to serve the people it 
covers.
    Question 6. Mr. DeMontmollin mentioned a number of times in the 
healing that Medicare fee-for-service and M+C should be forced to 
compete on equal footing. FFS should have to submit bids just like 
private plans and sink or swim. Could you comment on what this could 
mean for the availability of fee-for-service across the country? Could 
you comment on what this might mean for beneficiaries? Under such 
circumstances would fee-for-service be available and affordable for all 
beneficiaries all across the country?
    Response 6. If we actually unleashed traditional Medicare to use 
its power in the marketplace, private plans could not compete with 
Medicare FFS. Moreover, it makes little sense to force Medicare FFS to 
reorganize like an insurance company. If it did, what would happen if 
the bid was too low? Would traditional Medicare pull out? Would it stop 
paying providers of care? Would it freeze enrollment of new 
beneficiaries? Would it have to create enormous reserves if 30 million 
or more beneficiaries choose to remain in Medicare FFS? Medicare FFS 
needs to be the default plan for beneficiaries and, as such, cannot be 
treated as just another plan. Thus, there should not be a presumption 
that traditional Medicare must compete with private plans.
    Question 7. One of the problems with M+C is that plans get 
different payments across the country. Members of Congress and 
beneficiaries are upset because of the differences they see. If we move 
to a voucher system, does that solve the problem of geographic 
disparities in the cost of health care or would it leave the same 
problems in place or even potentially exacerbate the problems we see 
today? Do we have a good way to account for such geographic differences 
in the cost of health care today? How will these differences affect the 
premiums beneficiaries see in different areas of the country under a 
voucher model as well as the availability of fee-for-service versus 
private plans?
    Response 7. The geographic differences are a problem whatever the 
organization of Medicare. A voucher system makes the differences even 
more visible, however. In addition, the theory behind having private 
plans manage care for beneficiaries was that this would lead to less 
variation across the country as a national norm of care would emerge. 
The fact that plans want to be paid according to the costs of fee for 
service in an area may be a tacit admission that they have not been 
very successful in actually managing care.
    Question 8. On May 24th, 1089, the Congressional Research Service 
(CRS) issued a report to the House Committee on Post Office and Civil 
Service on the Federal Employees Health Benefits Program. In this 
report beginning on page 9, CRS wrote, ``Choice in FEHBP has led to 
`risk segmentation' . . . Plans have an incentive to limit benefits 
attractive to older participants, because they are required to raise 
premiums . . . Some plans have adopted aggressive marketing tactics 
that seem intended to appeal to younger people . . . Plans also have 
little incentive to incorporate cost control mechanisms if plan 
administrators perceive them to result in participant dissatisfaction 
and migrate to another plan.'' Please comment on what this model, with 
its risk segmentation, avoiding older beneficiaries by limiting 
benefits that are attractive to them and selective marketing, and no 
incentives to control costs, would mean for the Medicare system.
    Response 8. The most troubling aspect of a managed competition 
system is the possibility of permanently fragmenting the risk pool and 
leading to a separation of beneficiaries into the sick and the healthy. 
The easiest way for companies to hold down their costs is to attract a 
healthier than average mix of enrollees. If they do, they can offer 
good service and make a profit. But this is not a good system for those 
who are left out. Risk adjusters--which could help--remain more a wish 
than a reality. Moreover, since older persons have demonstrated that 
they do not like to make changes in their health plans each year, they 
may stay in an option that becomes inordinately expensive over time. We 
would be penalizing the sickest beneficiaries who are reluctant to make 
changes when they need care by allowing the market to work in this way.
    Question 9. Proponents of a voucher model point to FEHBP as the 
ideal because they say it gives people a wide range of health plan 
choices. What can you tell me about what has happened to Plan choices 
in FEHBP over the past few years and how this compares to M+C? What 
does this say about the dependability and stability of a model based on 
competition and private plans?
    Response 9. Health plans in FEHBP that offered generous benefits in 
one year have often had to pull back when they find they are attracting 
sicker patients. This occurred with mental health benefits in some of 
the plans, for example. Thus, the plans tend to offer very similar 
benefit packages with only small variations in cost sharing and other 
details. These details also can change from year to year in confusing 
ways. Similarly, Medicare+Choice plans have reduced the extra benefits 
they have traditionally offered. They have done so in part because of 
slower growth in Medicare payments, but more important is the fact that 
these plans cut benefits in ways to discourage enrollment by sicker 
beneficiaries. That is, they place caps on drug coverage rather than 
adding deductibles.
    Question 10. Many of those who want fundamental reform of the 
Medicare program believe it is necessary because, over the next few 
decades, Medicare spending will consume an increasing percentage of 
gross domestic product (GDP). Isn't a significant portion of this 
increase due to the fact that the number of Medicare beneficiaries is 
projected to double from 40 million to 78 million in the coming years? 
How will the voucher model deal with the fact that the number of 
Medicare beneficiaries will double in the coming years? If Congress was 
to use vouchers to limit the government's spending in Medicare, 
wouldn't this just shift costs to beneficiaries?
    Response 10. Much of the increase in projected costs will be due to 
serving both greater numbers of beneficiaries and a larger overall 
share of the population. We should expect the share of GDP devoted to 
this program to rise and begin to make plans for increasing the 
resources to do so. Another source of increase in costs will be higher 
health care spending driven by technological improvements. Do we want 
to freeze the quality and type of care that beneficiaries receive by 
establishing fixed limits on what the government will pay (i.e. through 
a voucher)? As a popular and important program, I believe it is crucial 
to continue to offer mainstream medical care to our most vulnerable 
citizens.
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