[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                  STRENGTHENING AND IMPROVING MEDICARE

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 9, 2003

                               __________

                           Serial No. 108-22

                               __________

       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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                            WASHINGTON : 2003
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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                      Ranking Member
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
CLIFF STEARNS, Florida               EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio                RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania     RICK BOUCHER, Virginia
CHRISTOPHER COX, California          EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina         SHERROD BROWN, Ohio
  Vice Chairman                      BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia             BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois               BART STUPAK, Michigan
HEATHER WILSON, New Mexico           ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING,       GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                THOMAS H. ALLEN, Maine
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
LEE TERRY, Nebraska                  HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho

                  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                   Ranking Member
JAMES C. GREENWOOD, Pennsylvania     HENRY A. WAXMAN, California
NATHAN DEAL, Georgia                 RALPH M. HALL, Texas
RICHARD BURR, North Carolina         EDOLPHUS TOWNS, New York
ED WHITFIELD, Kentucky               FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
  Vice Chairman                      BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           GENE GREEN, Texas
JOHN B. SHADEGG, Arizona             TED STRICKLAND, Ohio
CHARLES W. ``CHIP'' PICKERING,       LOIS CAPPS, California
Mississippi                          BART GORDON, Tennessee
STEVE BUYER, Indiana                 DIANA DeGETTE, Colorado
JOSEPH R. PITTS, Pennsylvania        CHRISTOPHER JOHN, Louisiana
ERNIE FLETCHER, Kentucky             JOHN D. DINGELL, Michigan,
MIKE FERGUSON, New Jersey              (Ex Officio)
MIKE ROGERS, Michigan
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Berenson, Robert A., Senior Consultant, Academy Health.......    19
    Buddy, Robert................................................    50
    Foster, Richard S., Chief Actuary, Center for Medicare and 
      Medicaid Services..........................................     8
    Grealy, Mary R., President, Healthcare Leadership Council....    41
    Kennelly, Barbara B., President, National Committee to 
      Preserve Social Security and Medicare......................    46
    Moon, Marilyn, Senior Fellow, The Urban Institute............    28
    Rawlings, Susan, Head, Retiree Markets, Aetna Inc............    23
Material submitted for the record by:
    Alliance to Improve Medicare, prepared statement of..........    76

                                 (iii)

  

 
                  STRENGTHENING AND IMPROVING MEDICARE

                              ----------                              


                        WEDNESDAY, APRIL 9, 2003

                  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, Barton, Deal, 
Norwood, Shadegg, Buyer, Brown, Pallone, Stupak, Engel, Green, 
Strickland, and Capps.
    Staff present: Steve Tilton, health policy coordinator; 
Kathleen Weldon, professional staff; Eugenia Edwards, 
legislative clerk; Amy Hall, minority professional staff; 
Bridgett Taylor, minority professional staff; and Karen Folk, 
minority special staff.
    Mr. Bilirakis. Good morning. I now call this hearing to 
order.
    Obviously, the rule regarding opening statements and 
deferring opening statements, etcetera, is in place.
    Our hearing yesterday focused on designing a prescription 
drug benefit as part of Medicare. Today, the Health 
Subcommittee will consider ways to strengthen and improve 
Medicare with the goal of improving the financial health of the 
program and ensuring that future beneficiaries will be able to 
enjoy the security Medicare has provided millions of Americans 
for almost 40 years.
    Today there are 34 million Americans over the age of 65, 
5.5 million people with disabilities, and 240,000 people with 
end stage renal disease that participate in the Medicare 
program. The Federal Government spends nearly $250 billion 
annually to provide health care benefits to these people. It is 
estimated that Medicare will serve 77 billion Americans by 
2030.
    Medicare was established in 1965 by Congress and was 
structured around an acute patient care model to cover 
hospitalization and physician visits. As we all know, the 
program has had great difficulty keeping up with advances in 
medicine over the past 38 years, with the most glaring example 
being the fact that traditional fee for service Medicare does 
not provide prescription drug coverage.
    Medicare also does not cover preventative services in any 
rational fashion. While Medicare does cover preventative 
services for 10 different diseases and conditions, it does not 
offer other preventative benefits that would seem like common 
sense aspects of a modern, comprehensive health insurance 
product.
    That is why it is essential for Congress to find ways to 
strengthen and improve Medicare, so it is truly a 21st century 
benefit and to ensure its continued financial viability. As we 
will hear from Rick Foster, the chief actuary for the Center 
for Medicare and Medicaid Services, the Hospital Insurance 
Trust Fund will go bankrupt in the year 2026 under the current 
benefit structure, with HI Trust Fund revenues falling short of 
program expenditures beginning in 2013.
    In addition, it will take significant increases in 
beneficiary premiums to subsidize the Supplemental Medical 
Insurance Trust Fund, which pays for Medicare Part B services. 
We are shirking our responsibility to continue to argue that 
the solution to our problems with Medicare is to tack on 
trillion dollar benefits with no hint of meaningful reforms.
    As Congress continues to debate the future of Medicare, 
this program and other entitlements are eating up a larger and 
larger share of our gross domestic product. This is an 
unsustainable rate of growth, and no amount of partisan 
rhetoric on either side of the aisle is going to change that.
    We have seven excellent witnesses here today. I hope that 
members take advantage of them and keep the grand-standing to a 
minimum. I know at the end of the day we all share the same 
goal--and that is heartwarming; we all share the same goal--and 
that is protecting Medicare's future while finding ways to 
provide comprehensive health care coverage for our seniors and 
people with disabilities.
    I am now pleased to recognize the gentleman from Ohio for 
an opening statement. Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman, and I apologize for 
being a few minutes late.
    I want to welcome my former colleague, Ms. Kennelly. Nice 
to see you. And Ms. Moon--thank you, Dr. Moon, for joining us, 
and all of you on the panel.
    If yesterday's hearing is any guide, there will be 
discussion in addition to discussions about strengthening and 
improving Medicare, about whether we can afford to strengthen 
and approve this program or even maintain the program the way 
that it is. Let us dispense with that issue first.
    During yesterday's hearings, several colleagues expressed 
concern that Medicare is simultaneously barrelling toward 
insolvency and jeopardizing the Nation's economy by absorbing 
so much of our GDP. How can a program partially funded out of 
general revenues be barreling toward insolvency? Does the fact 
that we just increased the tax dollars devoted to the 
Department of Defense mean that we rescued it from the brink of 
insolvency?
    Taxes are a flexible funding mechanism. The President 
clearly recognizes that taxes are not set in stone. He hasn't 
hesitated to propose tax cuts, even when those cuts produce 
budget deficits or perhaps they produce insolvencies. But 
surely neither the President nor my friends on the other side 
of the aisle would propose tax cuts if we truly believe that 
Medicare is at risk.
    In his State of the Union address, the President called 
Medicare the binding commitment of a caring society. I am sure 
the President wouldn't say that and then turn around and cut 
trillions from Federal revenues while Medicare withers on the 
vine.
    This Nation can afford Medicare. The President's tax cuts 
will cost between 2.3 percent and 2.7 percent of GDP over the 
next 75 years. The combined deficit in Medicare and Social 
Security--the combined deficit in Medicare and Social Security 
will cost one-third to one-half of that.
    To paraphrase Jeanie Lambrew, a witness at one of last 
year's Medicare hearings, this isn't about dollars. It is about 
priorities. The question then becomes: how do we strengthen and 
improve Medicare? Some of my Republican colleagues believe we 
should abandon the traditional Medicare program. Seniors would 
be better off, they say, choosing between and among private 
health plans.
    The premise that insurance is like a car, that seniors 
would be better off customizing their coverage to fit their 
health care needs, is the biggest fallacy of the privatization 
campaign. People generally don't attempt to customize their 
health insurance based on their unique health care needs, 
because people generally can't anticipate their unique health 
care needs.
    When people do try to pick and choose coverage based on 
known health care, you know, based on known health conditions, 
it is called adverse selection. Creating a system characterized 
by multiple benefit packages and adverse selection means 
creating a system that is unstable and unfair. Some plans will 
be overpaid, some underpaid. Some enrollees will bear 
disproportionate risk, others will get off easy.
    A reliable risk adjuster would help mitigate the problem, 
but we don't have a reliable risk adjuster, and God knows we 
have tried. The fact is there is no incremental benefit to 
multiple benefit designs, the relative value of which is 
impossible for a prospective enrollee to assess.
    We all need health insurance that covers medically 
necessary care delivered by the health care providers we trust. 
Sounds a lot like Medicare. And we all need coverage that 
lasts. Disappearing health plans and shrinking benefits are 
hallmarks of the privatization efforts, the Medicare+Choice 
Program.
    Instead of alleviating uncertainty, these plans breed it. 
No one really wants coverage like that. Proponents of 
privatization argue that Federal employees have a choice of 
private health plans. The fact that FEHBP features a plethora 
of private health plans does not mean FEHBP is a better system 
than Medicare or the best system out there.
    FEHBP programs grew 11 percent in 2003. Senior social 
security income grew by less than 4 percent. Last year seniors 
earned about $14,000 on average. There is not much cushion 
there for unpredictable premium increases.
    Some privatization proponents argue that plan choice makes 
sense, not because health needs vary but because income does. 
The premise that we are seeing is that wealthier individuals 
should be able to choose less generous coverage because they 
can afford to pay any balance out of pocket. But as we know 
from the under 65 market, it won't be individuals, it won't be 
wealthy individuals who will go without comprehensive health 
insurance.
    Lower income beneficiaries would be the ones relegated to 
inferior health plans, if we abandon traditional Medicare. It 
is difficult to imagine how creating a two-tier health system 
featuring health plans that may or may not provide lasting 
coverage, and may or may not provide reliable coverage, that 
they possibly qualify as a strategy for strengthening and 
improving Medicare.
    We keep coming back to the same question: are we 
considering Medicare privatization because there is merit to it 
or because my friends on the other side of the aisle don't like 
government programs?
    The Heritage Foundation launched a Mediscare campaign in 
1995. The goal was to privatize Medicare. This seems to be the 
culmination of those efforts. Medicare, the President said, is 
the binding commitment of a caring society. Should ideology or 
should common sense guide its future?
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman. Mr. Buyer for an 
opening statement. I know you are chomping at the bit. Go 
ahead.
    Mr. Buyer. No, I just--I can't believe I work in the same 
institution as Mr. Brown.
    Mr. Bilirakis. Well, you do.
    Mr. Buyer. I mean, I remember in April 1995 getting a 
letter from the Medicare trustees, many of whom were on 
President Clinton's cabinet, of whom said Medicare was going to 
go bankrupt. So let us don't advance this 6 years later and 
then say someone else made it up. That just--boy, I don't 
understand that.
    I like to have a clean record, and that really bothered me, 
Mr. Brown. You just can't make it up as you go. And I know 
sometimes we get excited in the rhetoric, but, please, I would 
invite you to look at the April letter of 1995 from the 
Medicare trustees.
    I will yield back, so I can retain the rest of my time.
    Mr. Bilirakis. The gentleman yields. Ms. Capps. Let us see, 
no, Mr. Pallone.
    Ms. Capps. I am going to waive.
    Mr. Bilirakis. You are going to waive?
    Ms. Capps. I have an opening statement to submit.
    Mr. Bilirakis. Mr. Pallone.
    Mr. Pallone. Thank you, Mr. Chairman. I am opposed to 
privatizing Medicare, both in general as well as for purposes 
of providing a prescription drug plan. And my fear, Mr. 
Chairman, is that the Republicans will propose a voucher-type 
system under which private health plans compete with one 
another as well as with traditional Medicare.
    And such a proposal raises several problems for me, Mr. 
Chairman. First, it is likely that healthier beneficiaries will 
be the ones to sign up for private plans, and this leaves the 
sicker beneficiaries in a traditional Medicare program. This 
will inevitably drive up the costs of traditional Medicare, and 
as a result the per person cost of the traditional Medicare 
program will escalate, putting people who need health care the 
most at greater risk of higher expenses and fewer benefits.
    Also, private health plans have abandoned hundreds of 
thousands of seniors for Medicare+Choice plans, and yet the 
Republican proposals seem to rely on private health plans for 
Medicare restructuring. In the last 2 years, over 100 plans 
dropped out of the Medicare+Choice system all together, and 
over 100 plans reduced their service areas. And many other 
plans increased premiums and reduced benefits.
    Compared to private health insurance plans, Medicare has 
done a much better job at controlling per person health care 
costs. Therefore, there is no reason to turn Medicare over to 
the private sector. Empirical data has shown over the last 30 
years that per person private health insurance quotes have 
increased faster than Medicare. Therefore, protecting 
Medicare's solvency should not depend on private health plans. 
I don't understand the rationale.
    Some of the Republican proposals give unwarranted credence 
to the Federal Employees Health Benefit Plan as the model for 
restructuring Medicare. But that system has not moderated costs 
better than Medicare. It serves a much smaller population that 
is younger, healthier, wealthier, and more attractive to 
private insurers. And the number of HMOs offering health 
coverage to Federal employees and retirees declined from 476 in 
1996 to 277 in 2000.
    My point, Mr. Chairman, is that the Medicare program is 
popular and effective. It has served seniors well for 37 years, 
and proposals to restructure the program seem unreliable and 
likely to deliver less services to seniors at essentially 
greater cost.
    Most private health plans that provide services for seniors 
have unimpressive records of covering prescription drugs. 
Seniors should not have to rely on private health plans as 
proposed by President Bush to receive crucial prescription drug 
coverage.
    In summary, Mr. Chairman, of course this is the same thing 
I essentially said yesterday. Whether you are talking about 
Medicare restructuring in general, or you are talking about 
trying to provide a prescription drug plan, there is no 
empirical evidence based on what we have seen in the last few 
years to suggest that privatization or competition with 
privatization is going to improve the situation, either in 
terms of an overall restructuring of Medicare or in providing 
prescription drugs.
    And I don't understand how either the President or the 
Republicans think that somehow they are going to drive--they 
are going to operate on the experience of the last few years to 
improve the system using private plans. It doesn't make sense.
    Mr. Bilirakis. The gentleman's time has expired. Had you 
finished?
    Mr. Pallone. Yes, thank you.
    Mr. Bilirakis. Okay. Dr. Norwood.
    Mr. Norwood. Mr. Chairman, I am still breathless from Mr. 
Brown's opening statement, so I will waive my time and ask for 
a lengthy 8 minutes in questioning.
    Mr. Bilirakis. Let us see. Who is--Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and I will give my 
opening statement because I am getting ready to go to a markup 
in the Telecom Subcommittee. But I appreciate your continuing 
effort on having these hearings, particularly yesterday, and I 
would like to welcome a fellow Texan.
    The Houstonian, Robert Buddy, who is on the panel today, 
lives just northwest of our district, I know in Congressman 
Brady's district. And I have up until 1960 there, so you are 
just northwest of us.
    I think we all agree, especially after yesterday's hearing 
on Medicare prescription drug benefit, that there is little 
doubt that the Medicare program needs improvement. The most 
obvious need is to modernize Medicare to include prescription 
drug benefit, although additional improvements in the area of 
disease management, care coordination, and prevention service 
should also be discussed.
    I have two pieces of legislation. One, the first, the 
Geriatric Care Act of 2003, would make sure we have enough 
geriatricians physicians to treat our elderly. There is an 
artificial ceiling in the law, and right now there are only 
9,000 certified geriatricians. And that number is expected to 
decline over the years, so we need to address that.
    The other bill is the access to diabetes screening services 
for Medicare coverage for recipients. Diabetes is so important, 
not only in Medicare but also to our whole population, but we 
need to do better on screening for diabetes, particularly with 
senior citizens.
    These two bills are examples of how we can make traditional 
fee for service Medicare respond to the needs, and should be 
considered in the context of Medicare reform.
    Unfortunately, there are far too many people who disregard 
ideas of reform fee for service Medicare, because they want to 
keep Medicare program outdated to justify the desire to turn it 
into a premium support or defined contribution program. By 
shifting to a defined contribution rather than defined benefit, 
we can limit the amount the Federal Government will spend on 
health care. And we are concerned about that, but we also know 
with our elderly population increasing we are going to spend 
more money.
    Mr. Chairman, I would like to read from an editorial in The 
Houston Chronicle just this last Monday. And I will ask 
unanimous consent for both my statement and the editorial to be 
placed into the record.
    Mr. Bilirakis. Without objection.
    Mr. Green. It talks about, ``Take Care, President's 
Promise, One Health Policy and Proposes Another One. Under the 
President's plan, full coverage of prescription drugs should be 
withheld from Medicare patients who do not agree to join 
managed care plans. Such plans sometimes provide affordable 
health care precisely because they limit patient choice, 
discourage expensive or innovative treatment, and reserve for 
company bean counters many decisions once made by patients' 
doctors.''
    ``Competition among private insurance plans intended to 
keep the Medicare program from going broke in 2030 or before. 
Unfortunately, competition is just as likely to produce 
insurance company losses leading to lost of disrupted coverage 
and the care for patients. That is the case in Houston where 
several HMOs pulled out of the market, leaving thousands of 
Medicare patients without a doctor and scrambling to make 
alternative arrangements. Nowadays many doctors--their eyes are 
fixed on the bottom line--refuse to see new elderly patients.''
    I would like to put the whole editorial into the record. 
And thank you, Mr. Chairman.
    Mr. Bilirakis. Without objection.
    Mr. Green. I yield back my time.
    Mr. Bilirakis. The Chair thanks the gentleman. Mr. 
Strickland for an opening statement.
    Mr. Strickland. I would like to have 8 minutes for 
questioning. So thank you, Mr. Chairman.
    Mr. Bilirakis. You have that right. Thank you.
    Without objection, of course, the opening statement of all 
members of the subcommittee will be made a part of the record. 
We will now go into----
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Thank you, Mr. Chairman for holding this very important hearing. 
The Medicare program is a critical part of our health care system, 
providing
    health insurance for 40 million aged and disabled beneficiaries. 
Yet this program suffers from a number of shortcomings. Because the 
program has not been significantly updated since its creation in the 
1960s, it does not provide many of the benefits that are now 
commonplace in the private health insurance sector, most notably 
prescription drugs.
    When it was created in 1965, the Medicare program mirrored the type 
of insurance that was available in the private sector. But because each 
significant change to Medicare requires an act of Congress, the program 
has not adapted to the changing healthcare marketplace as quickly as 
private sector plans, leaving beneficiaries without coverage that is 
commonplace in other forms on insurance.
    Medicare also faces some very serious long-term fiscal challenges. 
As the President notes in his budget, the present value of Medicare's 
unfunded liabilities totals $13.3 trillion--that's the excess of 
benefits promised to future retirees over the expected tax revenues 
dedicated to Medicare. We clearly need to add a prescription drug 
benefit to Medicare to meet the needs of our seniors. But we must also 
remain cognizant of the fiscal burden we are placing on our children 
and grandchildren by expanding entitlement spending.
    Currently, Social Security, Medicare, and Medicaid comprise more 
than 40 percent of the federal budget. According to the General 
Accounting Office, these three programs alone could consume nearly 
three-quarters of the federal budget by 2030 if no changes are made. 
Such a scenario will leave little room for spending on other 
priorities.
    Looking at these numbers another way, in 2000, spending on these 
three entitlement programs was 7.6 percent of our nation's gross 
domestic product (GDP). If no changes are made in these programs, by 
2030 they will consume nearly 14 percent of GDP, and by 2075, more than 
20 percent of our nation's resources--one-fifth of our economic 
output--will be going to government entitlement programs. This is 
simply not sustainable.
    Consider also that since World War II, federal tax revenues have 
generally been between 17 and 20 percent of GDP. If entitlement 
programs alone are consuming more than 20 percent of GDP by 2075, we 
will either be experiencing an unprecedented level of taxation to pay 
for these programs--while maintaining other discretionary spending--or 
else all other functions of the federal government will have ceased to 
exist.
    If we allow our entitlement programs to simply continue on their 
current course, without any changes, we will have one of two options. 
We will either have to raise taxes on working families, making it 
harder for those families to make ends meet, provide for their 
children, send their kids to college, and save for their own 
retirement. Or we will have to cut back on the other services the 
government provides, such as education funding, medical research, 
defense, and homeland security. These are stark choices.
    Therefore, as we address the short-term concerns we have with 
Medicare, we must also consider the long-term implications of our 
actions. Simply adding to the costs of our entitlement programs, 
without enacting reforms to strengthen these programs for the future, 
will increase the burden we leave for our children and grandchildren.
    As the Energy and Commerce Committee takes up its Medicare 
modernization legislation, we will do our best to balance the needs of 
both beneficiaries and taxpayers. We will be looking to improve the 
Medicare benefit package, increase the choices available to our 
seniors, put the program on a sound financial footing, and bring 
Medicare into the 21st century.
    Thank you. I look forward to hearing from all of our witnesses.

    Mr. Brown. Mr. Chairman, can I ask unanimous consent to 
place in the record this chart from the trust fund report? It 
shows that the 1995-96, the Medicare trust fund's life 
expectancy in response to Mr. Buyer, was only 5 years. Now it 
is 23 years, and I would just like to put that----
    Mr. Bilirakis. Without objection, that will be the case.
    All right. I want to, again, thank the witnesses for being 
here. Your written statement that you have submitted is a part 
of the record. We would hope that what you would do is 
supplement or complement it. And start off with, I think 
probably rightly so, with Mr. Foster.
    Mr. Rick Foster is the Chief Actuary of the Center for 
Medicare and Medicaid Services. I am going to introduce all of 
you here at one time I guess, if I may. Dr. Robert Berenson is 
Senior Consultant with Academy Health, located here in 
Washington, D.C. Ms. Susan Rawlings is Head of the Retiree 
Markets with Aetna Inc. Marilyn Moon, Dr. Marilyn Moon is 
Senior Fellow at The Urban Institute. Ms. Mary Grealy is 
President of Healthcare Leadership Council. Ms. Barbara 
Kennelly, a former colleague of ours, long-time colleague of 
ours--welcome, Barbara----
    Ms. Kennelly. Thank you.
    Mr. Bilirakis [continuing] is President of the National 
Committee to Preserve Social Security and Medicare. And Mr. 
Robert Buddy is a Medicare recipient, as I understand it.
    Mr. Buddy, I hope you hear all of this rhetoric up here. We 
talk about wanting to improve things. We don't say what plan we 
want. Nowhere in my opening statement did I talk about a 
particular plan privatizing or anything of that nature, but we 
still try to get the job done in spite of the fact that a lot 
of the grand-standing that I had hoped we would not have has 
taken place. Please don't get too discouraged.
    In any case, let us start off, Mr. Foster. Please proceed, 
sir. You have 5 minutes.

  STATEMENTS OF RICHARD S. FOSTER, CHIEF ACTUARY, CENTER FOR 
  MEDICARE AND MEDICAID SERVICES; ROBERT A. BERENSON, SENIOR 
  CONSULTANT, ACADEMY HEALTH; SUSAN RAWLINGS, HEAD OF RETIREE 
  MARKETS, AETNA INC.; MARILYN MOON, SENIOR FELLOW, THE URBAN 
  INSTITUTE; MARY R. GREALY, PRESIDENT, HEALTHCARE LEADERSHIP 
COUNCIL; BARBARA B. KENNELLY, PRESIDENT, NATIONAL COMMITTEE TO 
    PRESERVE SOCIAL SECURITY AND MEDICARE; AND ROBERT BUDDY

    Mr. Foster. Thank you. Chairman Bilirakis, Representative 
Brown, distinguished members of the subcommittee, thank you for 
inviting me to testify today about the financial outlook for 
the Medicare program. I will briefly summarize the most 
important findings from the 2003 Annual Report of the Medicare 
Board of Trustees.
    Let me emphasize that the purpose of the trustees' report 
is to evaluate the financial status of the Medicare trust 
funds. Specifically, are the trust fund income and assets 
provided under current law sufficient to enable the payment of 
benefits and administrative expenses?
    This is a fundamentally important question, because the 
existence of a positive trust fund balance provides the 
statutory authority to pay benefits. But it is not the only 
question. One can also ask about the long-range financial 
sustainability of Medicare.
    Mr. Bilirakis. Can you pull that mike closer, Mr. Foster? I 
am not sure how much help it might be, but----
    Mr. Foster. Sure. Is that any better?
    Mr. Bilirakis. Yes. Can you hear back there? That is the 
point. It is a little better, yes.
    Mr. Foster. You can also ask about the financial impact of 
Medicare on the Federal budget. These issues are very 
different, but they are often confused and treated 
interchangeably, which they should not be.
    I will focus on the financial status of Medicare, and, in 
particular, I will note that the two Medicare trust funds are 
financed by completely different approaches. The Hospital 
Insurance Trust Fund, or Part A of Medicare, is financed 
primarily by a portion of the FICA and SECA payroll taxes on 
workers' earnings. And the Hospital Insurance or HI tax rate is 
fixed into law. It won't change without further legislation.
    In contrast, supplementary medical insurance, or Part B of 
Medicare, is financed about 25 percent by beneficiary premiums 
and about 75 percent by Federal general revenues. And under the 
law, these amounts are, in fact, changed, updated every year, 
to match the current level of costs.
    Now, by law, these two trust funds are distinct financial 
entities. There is no provision for interchanging amounts back 
and forth between them, and that is why you have to look at the 
financial status of the two funds separately.
    The projections that the trustees make are made assuming 
that current law continues without change indefinitely. These 
projections are necessarily uncertain, especially over very 
long time horizons like the trustees' 75-year projection 
period. So the projections are useful for informing policy 
development, but they should be used only with the full 
awareness of their limitations and their uncertainty.
    I don't think I need to tell any of you that the basic 
challenge in financing health care, not only Medicare but 
health care generally, relates to the fact that expenditures 
tend to grow by the increases in health care prices, 
utilization, and the intensity or the average complexity of 
health care services. And the collective growth in these 
factors is almost always greater than the increase in workers' 
earnings or the economy.
    Moreover, for Medicare of course we are facing the well-
known problem associated with the retirement of the baby boom, 
such that in the future the number of beneficiaries will 
increase much more rapidly than the number of workers. Together 
these factors give us the following projection--that total 
Medicare costs, as a percentage of GDP, would increase from 
about 2.6 percent today to over 5 percent by 2035, and over 9 
percent by the end of the 75-year period.
    The Hospital Insurance Trust Fund itself is in reasonably 
good shape for the near future. The income to the trust fund is 
projected to be adequate to cover expenditures for roughly the 
next 15 years. Thereafter, assets would have to be drawn down 
to cover the trust fund deficits. And as Chairman Bilirakis 
mentioned, the assets would be exhausted in 2026 under the 
trustees' intermediate projections without corrective 
legislation.
    At the end of the 75-year period, the scheduled tax revenue 
for hospital insurance would be sufficient to cover only a 
little less than one-third of the projected benefits.
    For the Supplementary Medical Insurance Trust Fund, 
remember, the fundamental difference from hospital insurance. 
Namely, we reset the financing every year, so SMI Trust Fund 
income will keep pace with expenditures, and the trust fund 
will not go broke. That is the good news.
    However, there are significant adverse implications that 
continue in rapid growth in SMI expenditures, both for 
beneficiaries and for the Federal budget. A good example 
occurred--or a bad example--in 2002 when SMI costs increased 
11.6 percent. We can talk about the reasons for that if time 
permits. That growth rate, together with the consolidated 
appropriations resolution that was recently enacted increasing 
physician payments, together will imply that this year we 
expect to run a deficit in SMI of about $7.4 billion.
    So we will have to raise beneficiary premiums and general 
revenues for next year by over 12 percent to match this new 
higher level of expenditures.
    Based on these projections, the Board of Trustees 
recommends prompt attention to the financial challenges facing 
Medicare, and I pledge the Office of the Actuary's continuing 
assistance, with the efforts by Congress and the 
administration, to develop effective solutions to these 
challenges.
    [The prepared statement of Richard S. Foster follows:]

  Prepared Statement of Richard S. Foster, Chief Actuary, Centers for 
                      Medicare & Medicaid Services

    Chairman Bilirakis, Mr. Brown, distinguished Subcommittee members, 
thank you for inviting me to testify today about the financial outlook 
for the Medicare program as shown in the recently released 2003 annual 
report of the Medicare Board of Trustees. I welcome the opportunity to 
assist you in your efforts to ensure the future financial viability of 
the nation's second largest social insurance program--one that is a 
critical factor in the income security of the aged and disabled 
populations.
    The Trustees Report focuses on the financial status of the Medicare 
trust funds under current law--that is, whether these funds have 
sufficient revenues and assets to enable the payment of Medicare 
benefits and administrative expenses. This analysis compares each trust 
fund's statutory income, from all sources, to its expenditures and 
determines whether the fund is operating with a surplus or a deficit in 
a given year. Most of my testimony is based on this traditional ``trust 
fund perspective.'' I will also comment briefly on a ``budget 
perspective,'' that is, the impact of Medicare on the Federal budget.
    The financial outlook for the Medicare program presents a mixed 
picture. Over the next 10 years, the Hospital Insurance (HI) and 
Supplementary Medical Insurance (SMI) trust funds are adequately 
financed and meet the Trustees' formal tests for short-range financial 
adequacy. However, HI and SMI expenditures are projected to continue to 
grow more rapidly than workers' earnings or the economy. HI tax 
revenues are projected after 2012 to fall increasingly short of program 
expenditures, eventually covering less than one-third of estimated 
costs by the end of the Trustees' 75-year projection period. The 
depletion of the HI trust fund, which had been projected for 2030 in 
last year's Trustees Report, is now projected to occur in 2026. For 
SMI, continuing rapid expenditure growth would place growing financial 
burdens both on beneficiaries and on the Federal budget. The SMI trust 
fund would remain in financial balance indefinitely, however, due to 
the annual redetermination of program financing.

Background
    Roughly 41 million people were eligible for Medicare benefits in 
2002. HI, or ``Part A'' of Medicare, provides partial protection 
against the costs of inpatient hospital services, skilled nursing care, 
post-institutional home health care, and hospice care. SMI (``Part B'') 
covers most physician services, outpatient hospital care, home health 
care not covered by HI, and a variety of other medical services such as 
diagnostic tests, durable medical equipment, and so forth.
    Only about 22 percent of HI enrollees received some reimbursable 
covered services during 2002, since hospital stays and related care 
tend to be infrequent events even for the aged and disabled. In 
contrast, the vast majority of enrollees incur reimbursable SMI costs 
because the covered services are more routine and the annual deductible 
for SMI is only $100.
    The two parts of Medicare are financed on totally different bases. 
HI costs are met primarily through a portion of the FICA and SECA 
payroll taxes.1 Of the total FICA tax rate of 7.65--percent 
of covered earnings, payable by employees and employers, each, HI 
receives 1.45--percent. Self-employed workers pay the combined total of 
2.90 percent. Following the Omnibus Budget Reconciliation Act of 1993, 
HI taxes are paid on total earnings in covered employment, without 
limit. Other HI income includes a portion of the income taxes levied on 
Social Security benefits, interest income on invested assets, and other 
minor sources.
---------------------------------------------------------------------------
    \1\ Federal Insurance Contributions Act and Self-Employment 
Contributions Act, respectively.
---------------------------------------------------------------------------
    SMI enrollees pay monthly premiums ($58.70 in 2003) that cover 
about 25 percent of program costs. The balance is paid by general 
revenue of the Federal government and a small amount of interest 
income.
    The HI tax rate is specified in the Social Security Act and is not 
scheduled to change at any time in the future under present law. Thus, 
program financing cannot be modified to match variations in program 
costs except through new legislation. In contrast, SMI premiums and 
general revenue payments are reestablished each year to match estimated 
program costs for the following year. As a result, SMI income 
automatically matches expenditures without the need for legislative 
adjustments.
    Each part of Medicare has its own trust fund, with financial 
oversight provided by the Board of Trustees. My discussion of 
Medicare's financial status is based on the actuarial projections 
contained in the Board's 2003 report to Congress. Such projections are 
made under three alternative sets of economic and demographic 
assumptions, to illustrate the uncertainty and possible range of 
variation of future costs, and cover both a ``short range'' period (the 
next 10--years) and a ``long range'' (the next 75 years). The 
projections are not intended as firm predictions of future costs, since 
this is clearly impossible; rather, they illustrate how the Medicare 
program would operate under a range of conditions that can reasonably 
be expected to occur. The projections shown in this testimony are based 
on the Trustees' ``intermediate'' set of assumptions.

Short-range financial outlook for Hospital Insurance
    Chart 1 shows HI expenditures versus income over the last 10 years 
and projections through 2012. For most of the program's history, income 
and expenditures have been very close together, illustrating the pay-
as-you-go nature of HI financing. The taxes collected each year are 
intended to be roughly sufficient to cover that year's costs. Surplus 
revenues are invested in special Treasury securities.
    During 1990-97, HI costs increased at a faster rate than HI income. 
Expenditures exceeded income by a total of $17.2 billion in 1995-97. 
Prior to the Balanced Budget Act of 1997, this trend was expected to 
continue, with costs growing at about 8 percent annually, against 
revenue growth of only 5 to 6 percent. The 1995-97 shortfalls were met 
by redeeming trust fund assets, but in the absence of corrective 
legislation, assets would have been depleted in about 2001. The 
Medicare provisions in the Balanced Budget Act were designed to help 
address this situation. As indicated in chart 1, these changes--
together with subsequent low general and medical inflation and 
increased efforts to address fraud and abuse in the Medicare program--
resulted in lower HI--expenditures during 1998-2000 and trust fund 
surpluses totaling $61.8 billion over this period.
    The Board of Trustees has recommended maintaining HI assets equal 
to at least one year's expenditures as a contingency reserve. As 
indicated in chart 2, HI assets at the beginning of 2003 represented 
about 150 percent of estimated expenditures for the year. The HI trust 
fund is estimated to continue to experience significant surpluses for 
roughly the next 15 years. After 2017, however, expenditures are 
projected to again exceed income. As shown in chart 2, assets would 
initially accumulate rapidly but then be drawn down to cover the 
resulting shortfalls. The trust fund would be exhausted in 2026 under 
the Trustees' intermediate assumptions.
    The depletion date estimated in the 2003 Trustees Report represents 
a significant deterioration compared to last year's estimate (2030). 
The change arises both from lower projected payroll tax revenues and 
higher projected inpatient hospital expenditures. The lower payroll 
taxes are the result of a downward revision by the Bureau of Economic 
Analysis to their estimates of historical wage and salary 
disbursements. The higher inpatient hospital cost projections result 
from more inpatient hospital admissions in 2002 than previously 
estimated and a greater increase in the average complexity of 
admissions. Overall, Medicare payments for inpatient hospital care 
increased by almost 10--percent in 2002--significantly above normal 
rates of growth.

Long-range financial outlook for Hospital Insurance
    The interpretation of dollar amounts is very difficult over 
extremely long time horizons like the 75-year projection period used in 
the Trustees Report. For this reason, long-range tax income and 
expenditures are expressed as a percentage of the total amount of wages 
and self-employment income subject to the HI payroll tax (referred to 
as ``taxable payroll''). The results are termed the ``income rate'' and 
``cost rate,'' respectively. Projected long-range income and cost rates 
are shown in chart 3 for the HI program.
    Past income rates have generally followed program costs closely, 
rising in a step-wise fashion as the payroll tax rates were adjusted by 
Congress. Income rate growth in the future is minimal, due to the fixed 
tax rates specified in current law. Trust fund revenue from the 
taxation of Social Security benefits increases gradually, because the 
income thresholds specified in the Internal Revenue Code are not 
indexed. Over time, an increasing proportion of Social Security 
beneficiaries will incur income taxes on their benefit payments.
    Past HI cost rates have generally increased over time but have 
periodically declined abruptly as the result of legislation to expand 
HI coverage to additional categories of workers, raise (or eliminate) 
the maximum taxable wage base, introduce new payment systems such as 
the inpatient prospective payment system, etc. Cost rates decreased 
significantly in 1998-2000 as a result of the Balanced Budget Act 
provisions together with strong economic growth. The cost rate 
increased somewhat in 2001 and 2002 as a result of the Benefit 
Improvement and Protection Act of 2000 and the 2001 economic recession. 
In general, HI costs are expected to increase faster than taxable 
payroll, because increases in the prices, utilization, and intensity of 
health care services collectively exceed increases in workers' 
earnings. After 2006, cost rates are projected to increase steadily for 
these reasons and to accelerate significantly with the retirement of 
the baby boom, beginning in 2010. By the end of the 75-year period, 
scheduled tax income would cover less than one-third of projected 
expenditures.
    The average value of the financing shortfall over the next 75 
years--known as the actuarial deficit--is 2.40 percent of taxable 
payroll. This deficit could be closed by an immediate increase of 1.2 
percentage points in the HI payroll tax rate, payable by employees and 
employers, each. (The projected deficit could also be eliminated by 
many other revenue increases and/or expenditure reductions.) Note, 
however, that such a change would correct the deficit only ``on 
average.'' Initially, HI revenue would be significantly in excess of 
expenditures, but by the end of the period, only about one-third of the 
projected deficit would be eliminated.
    The effect of the baby boom's retirement on Social Security and 
Medicare is relatively well known, having been discussed at length for 
nearly 30 years. Basically, by the time the baby boom cohorts have 
retired, there will be nearly twice as many HI beneficiaries as there 
are today. When the HI program began, there were 4.5 workers in covered 
employment for every HI beneficiary. As shown in chart 4, this ratio 
for 2002 is just under 4.0 workers per beneficiary. With the advent of 
the baby boom's retirement, the number of beneficiaries will increase 
more rapidly than the labor force, resulting in a decline in this ratio 
to 2.4 in 2030 and 2.0 in 2077, based on the intermediate projections. 
Other things being equal, there would be a corresponding increase in HI 
costs as a percentage of taxable payroll.
    There are other demographic effects beyond those attributable to 
the varying number of births in past years. In particular, life 
expectancy has improved substantially in the U.S. over time and is 
projected to continue doing so. The average remaining life expectancy 
for 65-year-olds increased from 12.4 years in 1935 to 17.5 years 
currently, with an estimated further increase to about 22--years at the 
end of the long-range projection period. Medicare costs are also 
sensitive to the age distribution of beneficiaries. Older persons incur 
substantially larger costs for medical care, on average, than younger 
persons. Thus, as the beneficiary population ages over time they will 
move into higher-utilization age groups, thereby adding to the 
financial pressures on the Medicare program.

Financial outlook for Supplementary Medical Insurance
    Chart 5 presents estimates of the short-range outlook for SMI and 
is generally similar to the information presented in chart 1 for the HI 
trust fund. Two key differences are evident: First, the income and 
expenditure curves for SMI are nearly indistinguishable in the future. 
As noted previously, SMI premiums and general revenue income are 
reestablished annually to match expected program costs for the 
following year. Thus, the program will automatically be in financial 
balance, regardless of future program cost trends. The second 
difference is that--in contrast to the decline in HI expenditures 
during 1998-2000--SMI expenditures increased at an average rate of 6.9 
percent over this period.
    As with HI, the 2002 SMI expenditures were significantly higher 
than expected, having increased 11.6 percent for the year. Preliminary 
data indicate that the rapid growth was due in part to (i) the 
continuing transfer of certain home health services from HI to SMI as 
specified in the Balanced Budget Act of 1997, (ii) a 7-percent increase 
in spending on physician services, despite a negative 5.4-percent 
payment update, (iii) a 20-percent increase in durable medical 
equipment spending, and (iv) a 25-percent rise in physician-
administered drug spending. These cost increases, together with the 
recent enactment of legislation increasing Medicare payment rates to 
physicians effective March 1, 2003, will result in an estimated SMI 
trust fund deficit of $7.4 billion in 2003.2 Program 
financing for 2004 and later will be established at levels sufficient 
to cover the higher expenditures. As a consequence, the monthly SMI 
premium is estimated to increase from $58.70 in 2003 to about $66 in 
2004, with general revenue transfers increasing at a correspondingly 
rapid rate.
---------------------------------------------------------------------------
    \2\ Financing for calendar year 2003 was set in September 2002, 
before data showing the full extent of the 2002 expenditure increase 
were available and before the Consolidated Appropriations Resolution, 
2003 was enacted.
---------------------------------------------------------------------------
    Chart 6 shows projected long-range SMI expenditures and premium 
income as a percentage of GDP. Under present law, beneficiary premiums 
will continue to cover approximately 25 percent of total SMI costs, 
with the balance drawn from general revenues. In the long run, 
expenditures are projected to increase at a significantly faster rate 
than GDP, for largely the same reasons underlying HI cost growth.
    Although SMI is automatically in financial balance, the program's 
continuing rapid growth in expenditures places an increasing burden on 
beneficiaries and the Federal budget. In 2002, for example, about 6.8 
percent of a typical 65-year-old's Social Security benefit was withheld 
to pay the monthly SMI premium of $54.00, and another 8.9 percent was 
required to cover average deductible and coinsurance expenditures for 
the year, for a total of 15.7 percent. Twenty years later, under the 
intermediate assumptions, the same beneficiary's premium and copayment 
costs would average 23 percent of his or her benefit.3 
Similarly, SMI general revenues in fiscal year 2002 were equivalent to 
7.8 percent of the personal and corporate Federal income taxes 
collected in that year. If such taxes remain at their current level, 
relative to the national economy, then SMI general revenue financing in 
2070 would represent 30 percent of total income taxes.
---------------------------------------------------------------------------
    \3\ The growth in average copayment costs over this period is 
reduced significantly by (i) the fixed $100 deductible applicable to 
SMI services, and (ii) the gradual correction of an excessive level of 
beneficiary coinsurance on outpatient hospital services, as provided 
for in the Balanced Budget Act of 1997 and subsequent legislation.
---------------------------------------------------------------------------
Combined HI and SMI expenditures
    The financial status of the Medicare program is appropriately 
evaluated for each trust fund separately, as summarized in the 
preceding sections. By law, each fund is a distinct financial entity, 
and the nature and sources of financing are very different between the 
two funds. This distinction, however, frequently causes greater 
attention to the HI trust fund--its projected year of asset depletion 
in particular--and less attention to SMI, which does not face the 
prospect of depletion. It is important to consider the total cost of 
the Medicare program and its overall sources of financing, as shown in 
chart 7. Interest income is excluded since, under present law, it would 
not be a significant part of program financing in the long range.
    Combined HI and SMI expenditures are projected to increase from 2.6 
percent of GDP to about 9.3 percent in 2077, based on the Trustees' 
intermediate set of assumptions. In past years, total income from HI 
payroll taxes, income taxes on Social Security benefits, HI and SMI 
beneficiary premiums, and SMI general revenues was very close to total 
expenditures. Over the next 10 years, such Medicare revenues are 
estimated to slightly exceed program expenditures, reflecting the 
automatic financing of SMI plus an expected excess of HI tax income 
over expenditures. Thereafter, however, overall expenditures are 
expected to exceed aggregate revenues. Again, the growing difference 
arises from the projected imbalance between HI tax income and 
expenditures--since throughout this period, SMI revenues would continue 
to approximately match SMI expenditures.
    Over time, SMI premiums and general revenues would continue to grow 
rapidly, since they would keep pace with SMI expenditure growth under 
present law. HI payroll taxes are not projected to increase as a share 
of GDP, primarily because no further increases in the tax rates are 
scheduled under present law. Thus, as HI sources of revenue become 
increasingly inadequate to cover HI costs, SMI premiums and general 
revenues would represent a growing share of total Medicare income.
``Trust fund'' versus ``budget'' perspectives
    Medicare's financial operations can be considered from two 
different viewpoints: a ``trust fund perspective'' and a ``budget 
perspective.'' The Trustees Report reflects the perspective of the 
trust funds, since its purpose is to determine the financial status of 
these funds by assessing whether they have sufficient revenues and 
assets to enable the payment of Medicare benefits and administrative 
expenses. From this trust fund perspective, all types of income are 
equivalent, and their collective adequacy in covering expenditures is 
paramount.
    In particular, the existence of trust fund assets provides the 
statutory authority to make benefit payments and cover other 
expenditures. Medicare benefits can be paid if and only if the relevant 
trust fund has sufficient assets. Congress established the trust fund 
mechanism for financing Medicare (as well as Social Security and 
certain other Federal programs) in part for the financial discipline it 
imposes and also to serve as an early warning if program financing and 
expenditures fall out of balance.
    In contrast, the Federal budget focuses on taxes and other amounts 
received by the government from the public and on amounts paid to the 
public in the form of benefits, government purchases from the private 
sector, wages to Federal employees, etc. If aggregate receipts from the 
public exceed total outlays to the public, then the Federal government 
has a budget surplus; the opposite relationship results in a Federal 
budget deficit. In the context of the Federal budget, amounts paid from 
the general fund of the Treasury to a Federal trust fund, referred to 
as ``intragovernmental transfers,'' have no impact on the overall 
budget surplus or deficit and consequently are excluded from 
consideration.
    In the budget context, one can look at the public receipts and 
outlays associated with Medicare and determine the program's impact on 
the Federal budget--that is, whether Medicare is making a net 
contribution to the budget or is drawing from the budget. Whether the 
HI or SMI trust fund is running a surplus or deficit may have little or 
nothing to do with whether Medicare is contributing to a Federal budget 
surplus or deficit. Due in part to the similar terminology, however, 
people have sometimes confused these two different issues.
    The differences between the trust fund and budget perspectives can 
be clarified by examining how Medicare revenues are treated under each 
approach. The following table shows estimated Medicare income by 
category for 2003 under the Trustees' intermediate assumptions and 
compares these amounts with expenditures under the two perspectives.

 Estimated Medicare trust fund operations in calendar year 2003: ``Trust
            fund perspective'' versus ``budget perspective''
                              (In billions)
------------------------------------------------------------------------
                                               HI        SMI      Total
------------------------------------------------------------------------
Income:
Receipts from the public:
  Payroll taxes...........................    $155.6        --    $155.6
  Income taxes on Social Security benefits       6.3        --       6.3
  Premiums................................       1.6     $27.4      29.0
  Other...................................       0.7        --       0.7
                                           -----------------------------
    Subtotal..............................     164.1      27.4     191.5
Intragovernmental transfers:
  Interest on trust fund assets...........      15.3       2.0      17.3
  General revenues........................       0.4      86.2      86.6
                                           -----------------------------
    Subtotal..............................      15.7      88.2     103.9
Total trust fund income...................     179.8     115.6     295.4
Expenditures..............................     156.1     123.0     279.2
Trust fund surplus or deficit \1\.........      23.7      -7.4      16.3
Net impact on Federal budget \2\..........       8.0     -95.7     -87.7
------------------------------------------------------------------------
\1\ Total trust fund income less expenditures.
\2\ Total receipts from the public less expenditures.

    As indicated in the table, all revenue categories are counted for 
determining trust fund financial status, and the HI trust fund is shown 
to have an estimated surplus of $23.7--billion in 2003. As noted 
previously, income from all sources to the SMI trust fund is projected 
to fall short of expenditures in 2003 by $7.4 billion, requiring the 
redemption of $7.4 billion in trust fund assets to cover the deficit.
    From the budget perspective, in contrast, only tax receipts and 
beneficiary premiums are counted, since interest earnings and general 
revenue payments represent intragovernmental transfers. HI is projected 
to have total receipts from the public in 2003 that exceed payments to 
the public by $8.0 billion. For SMI, the only receipts from the public 
are the beneficiary premiums, which total $95.7 billion less than SMI 
expenditures. Accordingly, HI can be thought of as making an estimated 
net contribution to the Federal budget of $8.0 billion in 2003, while 
SMI is expected to draw $95.7--billion from the budget. Medicare, 
overall, is thus projected to draw a net amount of $87.7 billion from 
the budget.
    Each viewpoint--the trust fund perspective and the budget 
perspective--is appropriate for its intended purpose. One point of view 
cannot be used to answer questions related to the other, however. Trust 
fund surpluses or deficits reveal nothing about the impact of Medicare 
on the Federal budget, and the impact of Medicare on the Federal budget 
offers no insight into whether a trust fund has sufficient assets to 
permit payment of benefits.
Conclusions
    In their 2003 report to Congress, the Board of Trustees emphasizes 
the continuing financial pressures facing Medicare and urges the 
nation's policy makers to take further steps to address these concerns. 
They also argue that consideration of further reforms should occur in 
the relatively near future. The earlier that solutions are enacted, the 
more flexible and gradual they can be. In addition, the Trustees note 
that early action increases the time available for affected individuals 
and organizations--including health care providers, beneficiaries, and 
taxpayers--to adjust their expectations.
    I concur with the Trustees' assessment and pledge the Office of the 
Actuary's continuing assistance to the joint effort by the 
Administration and Congress to determine effective solutions to the 
remaining financial problems facing the Medicare program. I would be 
happy to answer any questions you might have on Medicare's financial 
issues.

[GRAPHIC] [TIFF OMITTED] T7482.001

[GRAPHIC] [TIFF OMITTED] T7482.002

[GRAPHIC] [TIFF OMITTED] T7482.003

    Mr. Bilirakis. Thank you very much, Mr. Foster.
    Dr. Berenson.

                 STATEMENT OF ROBERT A. BERENSON

    Mr. Berenson. Thank you, Chairman Bilirakis, Representative 
Brown, and members of the committee. I very much appreciate the 
opportunity to provide comments on the important topic of 
strengthening and improving Medicare.
    I have enjoyed a diverse professional experience from which 
I am basing my views about the future of Medicare. I practiced 
internal medicine for over 20 years, including 12 in a private 
practice in the Capitol Hill community about seven blocks from 
here.
    I served 10 years as a co-founder and medical director of 
the National Capital PPO, a broker model PPO that was serving 
nearly 150,000 people when I left in 1996. In the last 3 years 
of the Clinton Administration, I had the privilege of serving 
as Director of the Center for Health Plans and Providers in the 
agency then known as HCFA. In that position I had the honor of 
testifying before this subcommittee on a few occasions. Today I 
am speaking only for myself.
    In preparing my remarks, I relied on the White House press 
release of March 3, 2003, titled, ``21st Century Medicare: More 
Choices, Better Benefits, a Framework to Modernize and Improve 
Medicare,'' which provides a glimpse of the President's ideas 
for Medicare restructuring.
    I am troubled by the framework's clear preference for 
private health insurance options to the detriment of the 
traditional Medicare program that has served the public so well 
for over 35 years. It appears that the fundamental assumption 
underlying the President's framework is that the traditional 
Medicare program is incapable of controlling costs, assuring 
access, and improving quality.
    I believe strongly that that assumption represents an 
ideological position, not based on objective review of the 
evidence. Further, unless the administration proposes a 
draconian defined contribution type model that shifts 
substantial costs onto the backs of beneficiaries, there is no 
reason to believe that greater reliance on private plans will 
actually reduce expenditures or put the program on sounder 
financial footing.
    The framework seems designed more as part of an ongoing 
attack on the government's role in health care in the face of 
evidence showing that Medicare has been a remarkably successful 
social insurance program.
    The framework's option 2, enhanced Medicare, calls for 
massive expansion in private health insurance options that are 
mere variations on indemnity insurance approaches. In my 
opinion, this option will add costly administrative expense to 
Medicare and will further segment detrimentally the beneficiary 
insurance pool.
    Private plans will become financial winners if they design 
benefits that attract healthier than average beneficiaries, 
while the costs of maintaining the fallback traditional program 
could become unsustainable. In thinking about Medicare reform, 
it is important to understand crucial but rarely appreciated 
differences between the challenges faced by private and public 
employers in arranging health insurance for their employees and 
covered retirees and by the Medicare program.
    In distinct contrast to Medicare, even the largest national 
employers have limited market shares in most of the markets in 
which their employees reside. As a result, these employers need 
to rely on managed care products, which increasingly are PPOs, 
primarily as a way to get physicians, hospitals, and other 
providers to agree to negotiated contractual payment rates.
    In short, PPOs and many IPA model health maintenance 
organizations carry out one function and one function only for 
employers. They negotiate prices with providers. But the 
traditional Medicare program has no need for private plans to 
negotiate prices on its behalf.
    The problem private health plans have setting up provider 
networks in rural areas illustrates the point about the 
different challenges employers in Medicare face. 
Medicare+Choice has private fee for service plans only because 
Congress decided to allow these private plans to impose 
traditional Medicare prices on providers.
    Similarly, all coordinated care, Medicare+Choice plans, get 
to use Medicare payment rates for out-of-network coverage. The 
Center for Studying Health System Change and MedPAC have 
documented that overall traditional Medicare pays providers 
substantially less than private plans do.
    The point is that Medicare has no need for private plans if 
all they are really doing is negotiating payment rates with 
providers. And unfortunately, that is basically all that many 
private plans actually do.
    Some assert that beneficiaries, when aging into Medicare, 
want the same set of insurance choices that they had as 
employees or retirees covered under employer plans. I 
respectfully disagree. What beneficiaries aging into Medicare 
want most is the ability to keep the same physicians from whom 
they have been receiving care, not the same insurance 
arrangements.
    If the traditional Medicare program's benefits were 
improved to provide prescription drugs, catastrophic expense 
protection, and other enhancements that the President would 
provide only in private plans, beneficiaries would be able to 
have the kind of choice of professionals and providers that 
they want.
    As I noted earlier, the President's framework implicitly 
belittles the documented successes of the traditional Medicare 
program. Actually, the history of Medicare is replete with 
innovation, many of which have been adopted by commercial 
market plans and payers.
    Although many of us casually but inaccurately refer to the 
traditional program as fee for service Medicare, in fact most 
payment systems are now prospective--many paying per episodes 
of care. They are not fee for service. The physician fee 
schedule stands out as the exception, and that payment system 
similarly should be reformed.
    Recently, I co-authored a Health Affairs article 
recommending payment innovations in the traditional program to 
improve the care provided to the large majority of Medicare 
beneficiaries who have long-standing----
    Mr. Bilirakis. Will you please summarize, Doctor?
    Mr. Berenson. Pardon me?
    Mr. Bilirakis. Please summarize, if you would.
    Mr. Berenson. Okay. Basically, there are a number of tools 
that traditional Medicare could use to innovate, to hold down 
costs, and perhaps a little later we will have an opportunity 
to talk about what some of those area. The bottom line is I see 
no need to privatize Medicare.
    Mr. Bilirakis. Well, we certainly are very interested in 
those ideas. If you don't get it across during the inquiry, by 
all means submit it to us in writing.
    Mr. Berenson. Very good.
    [The prepared statement of Robert A. Berenson follows:]

 Prepared Statement of Robert A. Berenson, Senior Consultant, Accademy 
                                 Health

    Chairman Bilirakis, Mr. Brown, and members of the committee. I 
appreciate the opportunity to provide comments on the important topic 
of ``Strengthening and Improving Medicare.'' I have enjoyed a diverse 
professional experience from which I am basing my views about the 
future of the Medicare program. I practiced Internal Medicine for over 
20 years, including twelve in private practice in the Capitol Hill 
community, about seven blocks from here. I served ten years as a co-
founder and medical director of the National Capital PPO, a broker 
model preferred provider organization (PPO) that was serving nearly 
150,000 people when I left in 1997. And in the last three years of the 
Clinton Administration, I had the privilege of serving as Director of 
the Center for Health Plans and Providers in the agency then known as 
the Health Care Financing Administration (HCFA). In that position I had 
the honor of testifying before this subcommittee on a few occasions.
    My job at HCFA gave me an unusual perspective on the issues being 
discussed here today, as I had responsibility for contracting with 
Medicare + Choice (M+C) plans, as well as for payment policies in the 
traditional Medicare program. I was able to gain insights about the 
relative strengths and weaknesses of the two sides of Medicare, and I 
will reflect on some of those today.
    In preparing my remarks, I relied on the White House press release 
of March 3, 2003, titled ``21st Century Medicare: More Choices--Better 
Benefits. A Framework to Modernize and Improve Medicare,'' which 
provides a glimpse of the President's ideas for Medicare restructuring. 
I am troubled by the framework's clear preference for private health 
insurance options to the detriment of the traditional Medicare program 
that has served the public so well for over 35 years.
    It appears that the fundamental assumption underlying the 
President's Framework is that the traditional Medicare program is 
simply incapable of controlling costs, assuring access, and improving 
quality. I believe strongly that that assumption represents an 
ideological position, not based an objective review of the evidence. 
Further, unless the Administration proposes a draconian defined 
contribution model that shifts substantial costs onto the backs of 
beneficiaries, there is no reason to believe that greater reliance on 
private plans will actually reduce expenditures or put the program on a 
sounder financial footing. The Framework seems designed more as part of 
an ongoing attack on government's role in health care, in the face of 
the evidence showing that Medicare has been a remarkably successful 
social insurance program.
    The Framework's ``Option 2--Enhanced Medicare'' calls for massive 
expansion in private health insurance options that are mere variations 
on indemnity insurance approaches. In my opinion, this Option will add 
costly administrative costs to Medicare and will further segment 
detrimentally the beneficiary insurance pool. Private plans will become 
financial winners if they design benefits that attract healthier than 
average beneficiaries, while the costs of maintaining the ``fallback'' 
traditional program could become unsustainable.
    In thinking about Medicare reform, it is important to understand 
crucial, but rarely appreciated, differences between the challenges 
faced by private and public employers in arranging health insurance for 
their employees and covered retirees and by the Medicare program. In 
distinct contrast to Medicare, even the largest national employers have 
limited market shares in most of the markets in which their employees 
reside. As a result, these employers need to rely on managed care 
products, which increasingly are PPOs, primarily as a way to get 
physicians, hospitals, and other providers to agree to negotiated, 
contractual payment rates. Without these insurance products that 
aggregate insured lives to provide negotiating leverage, many employers 
would be paying the highly inflated charges that individuals without 
insurance or insurers without provider contracts face.
    In short, PPOs and many Individual Practice Association--model 
(IPA) health maintenance organizations (HMOs) carry out one function, 
and one function only, for employers--they negotiate prices with 
providers. When I was in charge of the M+C program, PPOs made it clear 
that they wanted to be exempt from quality improvement activities and 
even from basic quality reporting requirements. They told me they had 
no ability to affect quality, and Congress accommodated their wishes. 
In short, the array of indemnity-type insurance products envisioned 
under the Enhanced Medicare Option would offer additional choices, but 
not choices that add value to the Medicare program.
    But the traditional Medicare program has no need for private plans 
to negotiate prices on its behalf. The program already has market 
power, and it has used its authority to set administered prices that 
providers accept. In setting these rates, the program has a fundamental 
obligation to find a reasonable balance between assuring continued 
access for beneficiaries and restraining provider prices. Guided by 
MedPAC, the General Accounting Office and the health services research 
and policy community, the Congress and the Centers for Medicare and 
Medicaid Services (CMS), for the most part, have done a good job of 
finding that balance.
    The problem private health plans have setting up provider networks 
in rural areas illustrates the point about the different challenges 
employers and Medicare face. Medicare + Choice has private fee for 
service plans only because Congress decided to allow these private 
plans to impose traditional Medicare prices on providers. Similarly, 
all coordinated care, M+C plans get to use the Medicare payment rates 
for out-of-network coverage. Further, The Center for Studying Health 
System Change and MedPAC have documented that, overall, traditional 
Medicare pays providers substantially less than private plans do. The 
point is that Medicare has no need for private plans if all they are 
really doing is negotiating payment rates with providers. And, 
unfortunately, that is basically all that many private plans do.
    Some assert that beneficiaries when aging into Medicare want the 
same set of insurance choices that they had as employees or retirees 
covered under employer plans. I respectfully disagree. What 
beneficiaries aging in to Medicare most want is the ability to keep the 
same physicians from whom they have been receiving care, not the same 
insurance arrangements. If the traditional Medicare program's benefits 
were improved to provide prescription drugs, catastrophic expense 
protection, and other enhancements that the President would provide 
only in private plans, beneficiaries would be able to have the kind of 
choice of professionals and providers they want.
    As I noted earlier, the President's Framework implicitly belittles 
the documented successes of the traditional Medicare program. Actually, 
the history of Medicare is replete with innovation, many of which have 
been adopted by commercial market plans and payers. Although many of us 
casually, but inaccurately, refer to the traditional program as ``fee 
for service Medicare,'' in fact, most payment systems are now 
prospective, many paying for episodes of care. They are not fee for 
service. The physician fee schedule stands out as the exception, and 
that payment system similarly should be reformed.
    Recently, I co-authored a Health Affairs article recommending 
payment innovations in the traditional program to improve the care 
provided to the large majority of Medicare beneficiaries who have long-
standing, chronic conditions. Currently, CMS is monitoring 
demonstrations of disease management programs in Medicare. If these 
demonstrations prove successful, traditional Medicare can contract with 
disease management vendors just as managed care plans do.
    In addition, to help rationalize and limit expenditures, CMS should 
be given authority to use selected managed care tools in its 
administration of the program, as well as the requisite administrative 
resources to function as a value purchaser. Examples of tools the 
program should be allowed to use include promoting centers of 
excellence, providing incentives for beneficiaries with multiple 
chronic conditions to have a ``medical home,'' and using prior 
authorization for select high cost, elective procedures.
    For the most part, managed care failed in its execution of what 
were and still are potentially useful care delivery innovations. 
Further, managed care plans rarely provided the kind of transparency 
that patients and contracting professionals rightly expect and deserve. 
Of course, given its market power and the fact that it is the 
government, there is justifiable concern about how CMS and its 
administrative agents would function as a value purchaser. 
Nevertheless, from my experience, I believe that requirements for 
public rule-making, a commitment to fair process and disclosure, and, 
in general, program accountability to the Congress and the public 
suggest that the traditional Medicare program is actually better 
positioned than most managed care plans to actually deliver on the 
unrealized promise of managed care to provide high quality, affordable 
health care.
    There should be a prominent place in Medicare for innovative 
private health plans, particularly group and staff model HMOs, that 
offer true alternative delivery systems from that offered under 
traditional Medicare. Those plans can and should be accommodated in a 
modified Medicare + Choice program. However, at a time when the managed 
care industry has lost its credibility and when plans have reverted to 
being passive insurance companies, making money by charging high 
premiums and generating investment income on their reserves, I do not 
understand why Congress would want to privatize Medicare.

    Mr. Bilirakis. Ms. Rawlings.

                 STATEMENT OF SUSAN E. RAWLINGS

    Ms. Rawlings. Thank you. Mr. Chairman and members of the 
subcommittee, my name is Susan Rawlings. I am Head of Retiree 
Markets and Vice President for Aetna Incorporated. I am very 
pleased to be here today.
    Aetna has a long history of serving the Medicare program. 
As a matter of fact, we processed the first Medicare claims in 
1965. I am very pleased to be here to share with you our 
thoughts on Medicare, Medicare+Choice, and how private plans 
can participate successfully with you.
    I should also note for you that our chairman and chief 
executive, Dr. Jack Rowe, is a geriatrician by training and is 
also a commissioner on MedPAC and is very interested in the 
evolution of the program.
    I have submitted some written testimony for the 
subcommittee, and I would like to summarize that for you now.
    Mr. Bilirakis. Please.
    Ms. Rawlings. Aetna believes very strongly that we should 
work together to involve----
    Mr. Bilirakis. Hold the mike a little--maybe down a little 
bit----
    Ms. Rawlings. Down a little bit?
    Mr. Bilirakis. [continuing] toward your----
    Ms. Rawlings. Is that better?
    Mr. Bilirakis. That is better.
    Ms. Rawlings. Okay. Aetna believes we must work together to 
evolve the program and modernize it. As we all know, the 
population is growing and living longer. There is greater 
technology available, and there are more choices available for 
beneficiaries. We believe very strongly that the expertise and 
learnings of the private sector should be fully leveraged.
    We work together successfully in many capacities today in 
serving other parts of the Federal Government programs such as 
the FEHBP, Tricare, and Medicare, as well as Medicare+Choice 
programs today.
    Aetna believes there are five key foundational blocks to 
building and evolving the program. We think we are starting 
from a reasonably comprehensive place at the moment. But we 
believe as we evolve we should consider five things, key 
things.
    The first one is adequate funding. This is critical to the 
stability and sustainability of any program long term, and we 
believe it is critical we keep that in mind as we proceed. We 
also believe that the government must fund Medicare programs 
commensurate with its promises to its beneficiaries.
    Second, we do support fully the addition of pharmacy 
benefits into the Medicare program. We believe medication 
coverage is imperative for improving and maintaining health 
status, and we want to work with the Federal Government to help 
that become available.
    Third, we believe access is critical for the program for 
beneficiaries. It should be available all over the country, 
which it is today, and choices should likewise be available. 
Health care is delivered locally. Beneficiaries need to have 
access to the care in their local community's choices and the 
ability to address their own financial resources with the 
choices that are available for them.
    And finally, we believe very strongly in the aspect of 
coordination of care, which is something we believe most 
Medicare+Choice programs and other private plans have been able 
to provide over time. This particular population is very care-
needy. And as people age, as we all know, we become typically 
more chronically ill rather than acute.
    We believe promoting self-care and promoting--focusing on 
preventive benefits we believe we have additional benefits for 
beneficiaries to maintain quality of life as well as to keep 
costs consistent.
    I would like to highlight a few things we believe the 
private plans bring to value today to the government and to the 
beneficiaries. The first one is that we provide richer benefits 
than the traditional program. As a matter of fact, in 2002, 72 
percent of Medicare+Choice beneficiaries actually had access to 
prescription drugs.
    We provide affordable access for low income and minority 
beneficiaries. Forty percent of African-Americans with no group 
or Medicaid coverage, as well as 52 percent of Hispanics and 40 
percent of the people with incomes between $10,000 and $20,000 
per year, are in Medicare+Choice today.
    We provide better quality than traditional fee for service. 
This is not necessarily because fee for service is not a 
wonderful program. It is because we take a different approach. 
Traditional fee for service is an indemnity-style program. The 
Medicare+Choice programs and the private plans typically focus 
on more preventive care and a holistic approach, preventive 
services, and comprehensive benefits.
    Today we also offer better choice. We have HMO options, PPO 
options, private fee for service options. As a matter of fact, 
Aetna is participating in the PPO demonstration project that 
was launched January 1 in 21 counties in three States.
    Medicare is at a crossroads as government tries to sort out 
the best public and private sector roles going forward. It is 
Aetna's view that the private sector role must be expanded or 
the program will fail to grow sufficiently to keep pace with 
the demands of a growing and longer living population.
    It wasn't too long ago that the prior--the previous program 
Medicare Plus--previous program to Medicare+Choice, the 
Medicare Risk Program, was able to offer very competitive 
comprehensive benefits, including pharmacy benefits, at no 
cost. This is something we should strive for. This semblance of 
quality and coverage we should strive for together.
    Aetna is committed to serving Medicare beneficiaries and is 
ready and willing to partner with the Federal Government to 
develop workable solutions for this population. We appreciate 
the opportunity to testify today.
    [The prepared statement of Susan E. Rawlings follows:]

  Prepared Statement of Susan E. Rawlings, Vice President and Head of 
                      Retiree Markets, Aetna Inc.

    Mr. Chairman and members of the Subcommittee, I am Susan Rawlings, 
vice president and head of retiree markets for Aetna. Thank you for the 
opportunity to testify before you today.
    Aetna believes that a modernized Medicare program must leverage the 
expertise and build upon the learnings of the private sector. The 
Medicare+Choice program--is one example of the level of quality, 
choice, and affordability that could be available to Medicare 
beneficiaries if the private sector is fully leveraged by the Medicare 
program. Despite a critical shortfall in government funding, about five 
million Medicare-eligible seniors and disabled choose to participate in 
Medicare+Choice, enjoying access to extra benefits--including 
prescription drug coverage, preventive care, wellness and disease 
management programs. These benefits are not available under Original 
Medicare.
    Medicare+Choice provides Medicare beneficiaries with better 
benefits, better quality and better choices than the fee-for-service 
program. But, as I said, it is only one example of what can be 
accomplished when the private and public sectors work together to 
develop solutions for Medicare beneficiaries. Based on our experiences 
with this program and our knowledge of the population that it serves, 
we ask you to consider a number of important issues critical to the 
successful modernization of the Medicare program.
    These issues include:

 Adequate funding. Increased funding is necessary for stability 
        and sustainability of private offerings of comprehensive 
        benefits packages year after year. The government must fund its 
        programs commensurate with the promise made to its Medicare 
        beneficiaries.
 Prescription drug benefits. Medication coverage is imperative 
        for improving and maintaining the health status of 
        beneficiaries. A funded prescription benefit allows treatment 
        of the many chronic conditions of seniors in the ambulatory 
        setting, thus avoiding unnecessary inpatient acute care stays. 
        It simply doesn't make sense for the program to cover heart 
        disease surgery, but not the medication that could have 
        prevented the need for surgery.
 Nationwide accessibility. Health care services must be 
        available to all beneficiaries. Flexibility in patterns of 
        health care delivery must be created to include network and 
        non-network private offerings--with the protection of the 
        Medicare allowable fee schedules--to avoid excessive out-of-
        pocket spending by Medicare beneficiaries.
 Choice of plan design. Multiple private plan designs are 
        necessary to meet the needs of seniors in terms of benefits 
        requirements, benefits choices and financial resources.
 Coordination of care. Medicare beneficiaries are a care-needy 
        population. In order to meet the multiple chronic care needs 
        and acute care needs of beneficiaries, there must be 
        coordination and communication across settings such as 
        inpatient acute care, rehabilitation care to restore function, 
        skilled nursing care and home care to improve health status. 
        This coordination should be focused on promoting self-care and 
        avoiding duplicative and redundant diagnostic and treatment 
        protocols.
    While we ask that you consider all of these issues as part of your 
efforts to modernize the program, we'd also like you to take a step 
back and consider the myriad successes experienced by the 
Medicare+Choice program. We hope that you will agree that these 
successes provide further proof of the importance of involving the 
private sector in this public program.

         PRIVATE SECTOR MEDICARE PLANS PROVIDE RICHER BENEFITS

    The Original Medicare program does not provide a number of benefits 
that are commonly covered in private sector health plans. Every 
Medicare+Choice plan, for example, provides enrollees with the FFS 
benefits package and additional benefits. According to an analysis by 
Mathematica Policy Research, 72 percent of all beneficiaries in 
Medicare+Choice plans had access to a prescription drug benefit in 
2002. Last year, health plans also provided added benefits not covered 
by FFS Medicare, including physical exams (100 percent of all enrollees 
in Medicare+Choice), vision benefits (87 percent), and hearing aid 
benefits (54 percent).
    In addition, Medicare+Choice plans also offer a number of chronic 
care, wellness and preventive benefits that are so important to keeping 
older and disabled Americans healthy. These services often include 
patient education, disease management programs, calls from nurse case 
managers to remind patients of optimal care, phone calls from the 
health plan to remind members to keep their appointments and to have 
the screenings necessary to avoid complications, caregiver education, 
and reminders and reports to physicians about their patients' status 
and the services they have received or missed.
    Aetna, for example, has a program to conduct health risk 
assessments for all of our Medicare+Choice members. Members who are 
identified in their health risk assessment as being at high or moderate 
risk will be contacted by an Aetna nurse case manager to determine if 
case management can be of assistance in helping to maintain or improve 
their health status. This program allows us to proactively identify 
health issues and work with members, their physicians and other 
community resources to help confirm that the member is both engaged in 
the right programs, and motivated to actively participate in them.
    Studies demonstrate that these extra benefits reduce out-of-pocket 
costs for beneficiaries. According to the Kaiser Family Foundation, 
``M+C HMOs have typically charged lower premiums than Medigap plans and 
offered coverage for a variety of services that Medicare does not, 
potentially lowering overall costs for enrollees.'' (Snyder, et al. 
January 2003) The Kaiser study also found that total out-of-pocket 
spending was reduced considerably for beneficiaries in Medicare+Choice 
plans compared to enrollees in FFS Medicare and Medigap plans.
    Medicare+Choice plans play an important role in providing health 
coverage to low-income and minority beneficiaries who cannot afford the 
high out-of-pocket costs they would incur under the Original Medicare 
program. A recent study reports that ``about 40 percent of African-
Americans with no group or Medicaid coverage are in M+C plans, as are 
52 percent of Hispanics and 40 percent of those with incomes between 
$10,000 and $20,000 regardless of race or ethnicity.'' (M. Gold, Health 
Affairs Web exclusive, April 2003) According to an April 2002 study by 
Kenneth Thorpe for the Blue Cross Blue Shield Association, if the 
Medicare+Choice program did not exist, 42 percent of Medicare-enrolled 
African-Americans currently in Medicare+Choice plans would be forced to 
go without coverage for prescription drugs and other supplemental 
benefits. Aetna has a corporate initiative to reduce health care 
disparities, which have been documented to exist based upon race and 
ethnicity, and our efforts have been recognized and supported by the 
Department of Health and Human Services.

          PRIVATE SECTOR MEDICARE PLANS PROVIDE BETTER QUALITY

    Medicare+Choice plans offer a different approach to health care 
than beneficiaries experience under the Original Medicare program. 
Instead of focusing almost exclusively on treating beneficiaries when 
they are sick or injured, Medicare+Choice plans place a strong emphasis 
on preventive health care services that help to keep beneficiaries 
healthy, detect diseases at an early stage, avoid preventable 
illnesses, and improve quality of life.
    Aetna, for example, has a program to proactively reach out to each 
member over the age of 50 to remind them to receive influenza and 
pneumococcal pneumonia immunizations and colorectal cancer screenings. 
These simple but important steps in preventive care can help Medicare 
beneficiaries avoid serious, life-threatening illnesses.
    Research studies show that enrollees in Medicare+Choice plans 
receive care that is comparable to, or better than, beneficiaries 
enrolled in Medicare FFS:

 An analysis of data published in the Journal of the American 
        Medical Association (Jencks, et al. JAMA, January 15, 2003) and 
        data compiled by the National Committee for Quality Assurance 
        finds that Medicare+Choice plans outperform Medicare fee-for-
        service in five of seven key HEDIS quality measures: beta 
        blockers after heart attacks; annual flu vaccines; breast 
        cancer screenings; diabetes testing; and diabetes lipid 
        screening. (AAHP 2003)
 A study by CMS and the National Cancer Institute (NCI) found 
        that Medicare managed care enrollees were less likely than fee-
        for-service patients to have their breast cancer diagnosed at 
        late stages. Only 7.6 percent of Medicare managed care 
        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, February 24, 1999)
 A large-scale study comparing quality of care for elderly 
        heart attack patients covered by Medicare managed care plans 
        and Medicare fee-for-service coverage found that health plans 
        offer access to 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 Medicare managed care coverage compared with 
        fee-for-service coverage. Enrollees in Medicare managed care 
        plans were more likely to receive beta blocker therapy (73 
        percent vs. 62 percent). (S. Soumerai, Archives of Internal 
        Medicine, Vol. 159, 1999)
 Another study found that Medicare managed care 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, 
        November 1996)
 Research also has shown that Medicare managed care enrollees 
        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 Medicare managed 
        care enrollees were diagnosed at early stages, compared to 55 
        percent of fee-for-service patients. (G. Riley, American 
        Journal of Public Health, October 1994)
    In recognition of the value that Medicare+Choice plans provide, the 
Medicare program has developed initiatives that reward Medicare+Choice 
plans that meet certain goals. For example, CMS has implemented a 
program that provides ``Extra Payment in Recognition of the Costs of 
Successful Outpatient Congestive Heart Failure Care.'' Under this 
program, qualifying Medicare+Choice organizations that meet CMS 
performance criteria receive extra payments for enrollees with CHF who 
were not hospitalized as a result of effective management of their 
disease. Aetna supports this initiative and recommends that CMS 
consider similar programs for other disease states. Aetna participates 
in the Congestive Heart Failure initiative and has successfully 
maintained members in the ambulatory setting with appropriate medical 
services, medication and disease management.

          PRIVATE SECTOR MEDICARE PLANS PROVIDE BETTER CHOICES

    Consumers in the private sector have benefited from the widespread 
availability of health plan options, which has promoted access to 
affordable, comprehensive coverage. Despite the chronic underfunding of 
the Medicare+Choice program, Medicare+Choice plans are currently 
offering many Medicare beneficiaries innovative health plans that are 
targeted to meet specific needs. Almost 60 percent of all Medicare 
beneficiaries have access to Medicare+Choice plans. These include 
coordinated care plans (HMO), preferred provider organizations (PPOs), 
private fee-for-service plans, and plans specifically targeted to the 
needs of frail elderly and disabled beneficiaries.
    Aetna is currently participating in the Centers for Medicare and 
Medicaid Services' (CMS) Preferred Provider Organization (PPO) 
demonstration project. Through this demonstration project, which began 
operating in January of this year, Aetna is offering new choices to 
Medicare beneficiaries in 21 Maryland, New Jersey and Pennsylvania 
counties. Our Aetna Golden Choice Plan is an HMO-based point-of-service 
plan that allows members to receive care within or outside the Aetna 
provider network, without obtaining referrals or selecting a primary 
care physician. Notably, the plan also provides coverage for 
prescription drugs, which are not covered under Original Medicare. 
Aetna Golden Choice Plan members receive generic drug coverage with no 
annual dollar limit, paying only a $15 copay per prescription.
    Medicare is at a crossroads as government tries to sort out the 
best public and private sector roles. Going forward it is Aetna's view 
that the private sector role must be expanded or the program will fail 
to grow sufficiently to keep pace with the demands of a growing and 
longer-living population. At one time `` before the now infamous 
Balanced Budget Act of 1997 `` Aetna provided Medicare beneficiaries 
with a comprehensive benefits package that included vision and dental 
coverage, preventive, wellness and disease management programs, and 
prescription drug coverage `` all for a zero-dollar premium. 
Competitive markets and adequate funding allowed for this, and 
returning to some semblance of this level of quality coverage should be 
our mutual goal.

                               CONCLUSION

    Aetna is committed to serving Medicare beneficiaries, and ready and 
willing to partner with the federal government to develop workable 
solutions for this population. However, we need to recognize that, in 
order to provide a strong foundation of expanded choices for 
beneficiaries, private sector Medicare programs must be adequately 
funded.
    Since 1998, many Medicare+Choice beneficiaries have been enrolled 
in health plans to which payments increased by only the minimum annual 
update--which has been set at two percent since 1998 (but was 
temporarily increased to three percent in 2001 only). To underscore the 
inadequacy of government payments to Medicare+Choice plans, it is 
useful to compare Medicare+Choice to other government health programs 
and private sector health coverage. In 2003, funding for the health 
benefits of all Medicare+Choice enrollees increased by only two 
percent. The following facts highlight the inadequacy of this increase:

 The Office of Personnel Management (OPM) has estimated that, 
        on a per-enrollee average, total premiums collected by health 
        plans in FEHBP increased by 10.5 percent in 2001 and by 13 
        percent in 2002;
 PricewaterhouseCoopers has estimated that health insurance 
        premiums increased by an average of 13.7 percent for large 
        employers between 2001 and 2002; and
 The William M. Mercer consulting firm has released survey 
        findings showing that spending for employer-sponsored health 
        coverage increased by an average of 11.2 percent in 2001 and 
        14.7 percent in 2002.
    Any effort to modernize the Medicare program must directly address 
these concerns by committing a significant level of additional funds to 
support the health benefits of Medicare enrollees. Over the past two 
years, more than 120 Members of Congress `` including 79 Democrats and 
43 Republicans `` have cosponsored bills or signed letters indicating 
their support for legislation to address the Medicare+Choice funding 
crisis. The Bush Administration has also proposed additional funding to 
stabilize the Medicare+Choice program. Building upon this strong base 
of bipartisan support, it is critically important for Congress to pass 
legislation to provide additional funding to protect the health care 
choices and benefits of Medicare+Choice enrollees.
    Aetna appreciates this opportunity to testify before the 
subcommittee today. Private sector Medicare plans provide benefits, 
quality and choices that are not available to enrollees in Original 
Medicare. This is why we believe that a modernized Medicare should be 
built upon increased private sector involvement in the program. We are 
pleased that Congress is considering expanding the range of choices 
available to Medicare beneficiaries. As Congress moves forward it 
should ensure that the government will provide funding sufficient to 
allow individuals a reasonable level of choice within an area, and that 
the choices should remain available and stable over time.
    Any Medicare reform proposal should also include prescription drug 
benefits, nationwide accessibility, choice of plan design and 
coordination of care.
    Finally, Congress should also ensure that a reformed Medicare 
program is administered under a framework designed to achieve a fair 
and sound balance between the need for regulatory oversight and the 
promotion of innovative, quality coverage solutions for all Medicare 
beneficiaries.

    Mr. Bilirakis. Thank you very much, Ms. Rawlings.
    Dr. Moon.

                    STATEMENT OF MARILYN MOON

    Ms. Moon. Thank you, Mr. Bilirakis, Mr. Brown, members of 
the committee. I am very pleased to be here today to be able to 
testify on this very important issue. My testimony essentially 
makes five points, and I am going to talk primarily about one 
of them, because I think a number of the other issues have been 
raised already today.
    First, the drivers of health care costs for Medicare 
beneficiaries are essentially the same drivers of health care 
costs for people in the private sector. We know that technology 
and the improvements in health care that have come along have 
not come cheaply in the United States, and this is true for 
Medicare beneficiaries as well as for anyone else.
    It is not Medicare's problem. It is Medicare's problem, but 
it is not Medicare's fault that health care costs on a per 
capita basis are rising for the most part.
    Second, and where I want to put much of my emphasis, is on 
alternative measures of affordability, and when people talk 
about whether or not Medicare is affordable over time. I would 
underscore Rick Foster's testimony that the trust funds and 
part of Medicare are separate. Part A and Part B are separate 
and need to be thought of that way. We need to be very careful 
not to inappropriately put them together in looking at issues.
    Part A is better off than many people have believed and has 
been for the last few years. I served as a public trustee for 5 
years, just after 1995, and to the year 2000. I would like to 
argue that I am responsible for the great improvements in the 
trust fund, but that is not the case.
    What happened is that the Congress and other factors going 
on in the economy conspired to help the Medicare program look a 
lot better. We had strong economic growth, which is crucial, 
and we had efforts, continuing efforts to change the program 
over time, which is also a crucial factor in terms of looking 
at how things will do well over time.
    I would also point out that over the next 10 years revenues 
are expected to exceed what the spending will be in Part A by 
over $500 billion--a much better track record than we are 
seeing for much of the activities of the Federal budget at the 
moment.
    But I also understand people's interest and desire to look 
at Medicare in terms of the full cost of the program. It is 
important to think about both Part A and Part B and not focus 
just on one part of the program. And there are ways in which 
people have done that--sometimes to look at the worker-to-
retiree ratio, sometimes to look at the share of GDP.
    Those are both valuable measures, but they don't capture 
the fact that over time the share of the pie will have to rise 
to support Medicare. That is absolutely right. But that pie is 
going to be much larger.
    We will have the resources to provide that support. The 
question is: will we have the willingness to do so?
    If you control for inflation and look into the future of 
the Medicare program, you will find that on a per worker basis 
GDP, using the assumptions in the 2003 trustees report, that 
GDP will rise after controlling for inflation by about 54 
percent, 54.9 percent over the next 35 years, or until 2035 at 
least. It is not quite 35 years.
    And what that means is that workers, on average, will have 
command of resources 1\1/2\ times greater than today, even 
after controlling for inflation. If you take out of that the 
burden that Medicare will mean for workers over time, and 
treat, then, what the resulting net growth will be, it will 
have fallen because Medicare will have risen as a share of GDP, 
but only to 51 percent.
    This is an affordable program. The question is: are we 
willing to put the resources into that? And if so, how will we 
do so?
    The third point that I make in the testimony is that we do 
need to have change in Medicare, but that it is not necessarily 
private sector changes that will do a good job of that. And I 
think that Bob Berenson's testimony bears credit for a lot of 
that, and I would refer you to him.
    Fourth, we do need to have change in the basic Medicare 
program. And I think that that program should change in ways 
that many people have talked about. Certainly, prescription 
drugs are very important, and that is a key factor. It should 
be a factor for traditional Medicare as well as for the program 
as a whole in terms of use and reliance on the private sector.
    But I would like to see the private sector used for 
presumably what the private sector is supposed to be good at, 
and that is coordination of care, which we have seen them do 
very little of in practice. If they were doing a good job, I 
think then we would have a very different story.
    Finally, traditional Medicare also needs to look at a lot 
of ways to improve coordination of care. It is going to be the 
default mechanism for many years to come, and it needs to 
change as well and we need to be creative there.
    Thank you very much.
    [The prepared statement of Marilyn Moon follows:]

    Prepared Statement of Marilyn Moon,\1\ Senior Fellow, The Urban 
                               Institute
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    \1\ The material presented in this testimony represents the 
opinions of the author and not of the Urban Institute, its officers or 
funders. Much of the research reported here was funded by the 
Commonwealth Fund and the Henry J. Kaiser Family Foundation.
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    Mr. Chairman and Members of the Committee: Thank you for inviting 
me to testify at this hearing.
    The long term financing challenges facing Medicare are formidable. 
Largely because of advances in medicine and technology, spending on 
both the old and the young has grown at a rate faster than spending on 
other goods and services. Combining a population that will increasingly 
be over the age of 65 with health care costs that will likely continue 
to rise over time is certain to mean an increasing share of national 
resources devoted to this group. In order to meet this challenge, the 
nation must plan how to share that burden and adapt Medicare to meet 
new demands.
    But this should not lead to the conclusion that Medicare cannot 
continue nor that it must be dramatically altered. Medicare's future 
will require additional financing, but the demands on society are 
within our resources. The bigger long term challenge will be in 
deciding how the rising costs of healthcare for this population need to 
shared.
    In my testimony today, I raise five major issues:

 First, the drivers of healthcare costs are not unique to 
        Medicare, and it is important to recognize that Medicare needs 
        to grow in concert with changes in the healthcare system as a 
        whole.
 I offer an alternative measure of affordability to illustrate 
        that even with no changes in the basic program, the burdens 
        from Medicare are not excessive in the context of reasonable 
        expectations about economic growth in the future.
 While society can afford to spend more on healthcare for older 
        and disabled persons, passing greater costs onto older and 
        disabled Americans must be done with caution.
 Change in Medicare will be needed but the answer may not rest 
        with turning the program over to the control of the private 
        sector. Medicare actually has a better track record over the 
        last thirty years than does private insurance.
 Traditional Medicare can and should remain a major part of the 
        overall program; but it too needs a number of changes.

                        REASONS FOR RISING COSTS

    Projections from the 2003 Medicare Trustees Report indicate that 
Medicare's share of the Gross Domestic Product (GDP) will reach 4.75 
percent in 2030, up from 2.56 percent in 2002. Although this is a 
substantial increase, it is actually smaller than what was being 
projected just a few years ago. In 1996, for example, the projection 
for 2030 was 7.39 percent of GDP--or 56 percent higher than the 
projection made this year. This slowdown in growth does not eliminate 
the need to act, but it does allow time for study and deliberation 
before putting substantial changes into place.
    Projected increases in Medicare's spending arise because of growing 
numbers of people eligible for the program and the high costs of health 
care. The beneficiary population is rising because of increased life 
expectancy (in part reflecting the success of the Medicare program) and 
that growth will be accelerated in the future by the retirement of the 
baby boom. The number of younger disabled beneficiaries is also 
expected to remain high. This creates challenges for Medicare and 
represents a major component of spending projection increases. By 2030, 
for example, the number of beneficiaries will reach 79 million--nearly 
double today's number.
    Technological advances that raise the costs of care are the primary 
reason for higher per capita spending over time, and this phenomenon 
occurs systemwide, not just in Medicare. The problems driving Medicare 
costs upward are not unique to the public sector. They are found 
throughout our nation's healthcare system, and the crisis of rising 
healthcare costs affects all payers: individuals, businesses, and 
governments. And just as Medicare is influenced by the overall 
healthcare system, the opposite is true as well. Medicare has been a 
leader in experimenting with options for curbing the costs of care, 
both in terms of increasing prices and use of services. Further, while 
costs continue to rise, efforts through time to hold down these costs 
have led to a better outlook than was the case in the mid-1990s. 
Similar re-evaluation of the program to make changes where needed will 
be an important part of Medicare's future.

                 MEASURING MEDICARE'S FINANCIAL BURDENS

    Medicare is currently financed in a variety of ways. Part A relies 
mainly on payroll taxes with a modest contribution from part of the 
taxes imposed on Social Security benefits. Part B, on the other hand, 
is financed by enrollee premiums set at 25 percent of the costs of Part 
B benefits for elderly beneficiaries and by general revenue 
contributions sufficient to cover the remaining costs.
    Medicare's financial health can be viewed from several 
perspectives. The appropriate question over time is whether, as a 
society, we can afford to support Medicare. But the measures often used 
actually focus on a narrower issue of solvency, particularly that of 
the Part A Trust Fund. That measure does point to the need for some 
type of policy change in the future, but that could simply mean 
increasing the revenues going into the trust funds, for example.
Solvency Measures
    Solvency, as measured by the date of exhaustion of the Part A Trust 
Fund, is one of the most commonly reported statistics about 
Medicare.1 This is just one of many measures reported in the 
Medicare Board of Trustees annual reports on Medicare's financial 
outlook. Critics of Medicare often emphasize the solvency of the Part A 
Trust Fund as an indicator of affordability as well as solvency. This 
implicitly treats the Part A Trust Fund as establishing a limit on what 
can be spent on Part A.
---------------------------------------------------------------------------
    \1\ Although there is also a Part B Trust Fund, it serves a much 
different purpose and is intentionally kept at a small positive level.
---------------------------------------------------------------------------
    The Part A Trust Fund was designed to assure that the specified 
payroll tax contribution would be used specifically for Part A 
spending. As dedicated revenues, payroll and other revenue sources that 
exceed the amount necessary to cover Part A benefits go into the Trust 
Fund and collect interest. When the trust fund forecasts indicate a 
declining balance, this serves as an early warning of the need for an 
adjustment either in revenue contributions or spending on the program. 
Over the next ten years, Medicare revenues will exceed spending by over 
$500 billion.
    Projections of the Medicare Part A trust fund in the most recent 
Trustees' Report indicate that it will maintain a positive balance 
through 2026. Considered in historical context, the date of projected 
insolvency historically is far into the future as compared to what it 
has been in earlier years (Figure 1). The trust fund is expected to 
grow until 2014, after which the trust fund's balances will begin to 
decline. At that point, payroll tax and other receipts are insufficient 
to cover all expenditures. After 2014, Part A of Medicare must 
supplement tax revenues with funds accumulated in the Part A Trust 
Fund.
    Another solvency measure that was contained in the Administration's 
budget documents for this year indicated that there was a $13.3 
trillion unfounded liability facing Medicare over the next 75 years. 
But this is based on very misleading figures. The text implies that 
payroll taxes are the only revenue source from which Medicare is 
allowed to draw to cover its costs. While Part A is largely funded by 
payroll taxes, Part B by law has always relied on general revenues. 
Including its costs in an analysis of the adequacy of the current 
payroll tax has as much validity as treating any other expenditure 
covered by general revenues (such as defense) as having large unfounded 
liabilities as well. If done correctly, the ``unfounded promises'' 
under Medicare would be much lower, more in the range of $5 trillion.
    That is not to say that this is not a large amount, but rather that 
the size is more manageable than the $13.3 trillion implies. It is 
important to note, for example, that in the next ten years, Part A 
revenues will exceed Part A spending by over $500 billion.
Affordability Measures
    Assessing affordability using the solvency of the Part A Trust Fund 
as the measure is analogous to individuals arguing that they cannot pay 
all their bills because the balance in one of their checking accounts 
is too low. Affordability is a broader issue that turns on whether we 
as a society can support Medicare into the future. The need for 
healthcare for this segment of the population will not go away simply 
because we decide to cut back on government's contribution. But the 
ability of Medicare beneficiaries to absorb higher healthcare costs if 
no new revenues are forthcoming would be in serious doubt.
    The Medicare Trustees Annual Report offers two broader measures of 
affordability described below, although each are limited in scope. 
Thus, an alternative measure presented here proposes a more 
comprehensive way to examine affordability.
    The Worker-to-Beneficiary Ratio. The ratio of workers contributing 
to Medicare at any point in time compared to the number of 
beneficiaries shows that the number of younger persons relative to 
older ones will decline in the future given the aging of society. This 
declining ratio of workers to retirees indicates that each worker will 
have to bear a larger share of the cost of providing payroll tax-
financed Medicare benefits.
    Between 2002 and 2030 (about the time when most Baby Boomers will 
have become eligible for Medicare), the ratio of workers to 
beneficiaries will fall from 3.9 to 2.4. Indeed, this is one of the 
statistics commonly cited by those who claim the program is 
``unsustainable.'' This measure does signal the need for more revenues 
per worker--a legitimate issue for debate. However, it fails to assess 
the level of burden relative to ability to pay from each future worker, 
ignoring any improvement in the economic circumstances of workers over 
time due to per capita economic growth.
    Medicare Spending as a Share of GDP. A second measure is the sum of 
Part A and B spending as a share of GDP. In 2002, Medicare's total 
share was 2.56 percent and is projected to rise to 4.75 percent in 
2030. This represents a doubling of the GDP share. Such an increase 
reflects the fact that health care costs per capita are expected to 
continue rising, and the number of people covered will double over that 
time period. But again, this measure is not as helpful in the debate on 
Medicare's future because it does not consider how well off we will be 
as a society as the level of GDP grows. Some goods and services, like 
health care, may appropriately grow as a share of GDP in response to 
higher living standards and preferences of the population. What is 
needed is more information to be able to understand the consequences of 
devoting a higher share of society's resources to Medicare.
    A More Comprehensive Measure of Affordability. Another way to look 
at affordability is to focus not just on the number of workers that 
contribute to payroll and income taxes or on aggregate GDP, but instead 
on how the Medicare per capita burden will affect workers over time. 
While the share of the pie (GDP) going to Medicare is likely to rise, 
if the pie (on a per capita basis) is also much larger, then an 
increasing share is less of a burden. If the future leads to increased 
national well-being, additional resource sharing would be affordable. 
Thus, another way to examine affordability is to focus on whether 
taxpayers of the future will be better off even after they pay higher 
amounts for Medicare.
    This approach measure begins with computing per worker GDP over 
time, resulting in a measure of the nation's output of goods and 
services divided across the working population. This provides the base 
for assessing Medicare's burden on workers, who pay for the bulk of 
support for the program. Per worker GDP--even after adjusting for 
inflation--rises substantially, from $69,000 per worker in 2002 to just 
under $107,000 in 2035 (in 2003 dollars).2 This is an 
increase of 54.9 percent in per worker GDP, a substantial increase in 
financial well-being.
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    \2\ The figure used here is based on the intermediate projections 
from the 2002 Trustees Report, which assumes a 1.1 percent real growth 
in per worker wages each year. Over the past 50 years, productivity has 
been higher than this amount, averaging over 1.5 percent per year.
---------------------------------------------------------------------------
    What about Medicare's costs over this period? The burdens from 
Medicare spending on each worker are projected to rise at a faster rate 
than per capita GDP because both numbers of beneficiaries and their 
inflation-adjusted spending will rise over time. But because per worker 
GDP is a much larger dollar amount than the dollars of Medicare 
burdens, the reduction in well-being that this entails for workers is 
modest.
    To calculate this per worker burden from Medicare, several 
adjustments are necessary. First, each worker will bear an increasing 
share of Medicare over time because of the change in the ratio of 
workers to retirees. Further, per capita Medicare costs are expected to 
rise by 90 percent in real terms by 2035, also increasing the real 
dollar burden on workers. But not all of Medicare's costs are borne by 
workers. Thus, costs are adjusted downward by the contributions that 
will be made by beneficiaries themselves. The Part B premium accounts 
for about 10 percent of Medicare's costs. In addition, beneficiaries 
make further contributions because some of the taxation of Social 
Security benefits goes into Part A and older and disabled persons also 
pay income taxes that help support Part B. Thus, those costs need to be 
netted out.
    The resulting real per worker burden estimates range from $1,556 in 
2002 to $4,993 in 2035 (in 2002 dollars). In Figure 2, the bar graph 
indicates per worker GDP in inflation-adjusted dollars, and the line 
graph indicates how much would be left after accounting for the 
Medicare burden.
    From 2002 to 2035, the increase in net (after subtracting Medicare) 
per worker resources would be 51.0 percent as compared to the 54.9 
percent increase in per worker GDP. That is, workers would still be 
substantially better off than today, even after paying the full 
projected costs of Medicare. The pie will indeed have gotten larger, 
making it possible to absorb Medicare's higher costs. Essentially our 
estimates indicate that Medicare's greater burdens would ``consume'' 
about 7 percent of increased well-being for workers over that period. 
There will, of course, be other demands on these resources as well, but 
this approach puts demands from Medicare into a broader perspective. 
This measure for examining affordability takes into account Parts A and 
B of Medicare, and it puts the issue of the burdens of the program into 
a per worker context.
    This more comprehensive measure of net per worker output also 
suggests that, as a society, we will be able to afford Medicare without 
an inordinate burden on workers or taxpayers once even modest estimates 
of productivity growth over time are taken into account. A greater 
challenge will be for society to decide whether it is willing to share 
these costs.

             HOW MUCH SHOULD BENEFICIARIES BE ASKED TO PAY?

    The burdens of higher health care costs in the future will likely 
need to be shared between beneficiaries and younger taxpayers in some 
manner deemed reasonable. The numbers above already give a sense that 
future workers will be in a reasonable position to pay more. What about 
beneficiaries?
    Options for passing more costs of the program onto beneficiaries, 
either directly through new premiums or cost sharing or indirectly 
through options that place them at risk for health care costs over 
time, need to be carefully balanced against beneficiaries' ability to 
absorb these changes. Just as Medicare's costs will rise to 
unprecedented levels in the future, so will the burdens on 
beneficiaries and their families. Even under current law, Medicare 
beneficiaries will be paying a larger share of the overall costs of the 
program and more of their incomes in meeting these health care 
expenses. In 2003, beneficiaries will spend about 23 percent of their 
incomes on average for acute health care. In a study I did with 
Stephanie Maxwell and Misha Segal, we projected per capita out-of-
pocket spending based on projected Medicare growth into the future and 
found that the average beneficiary in 2025 would likely have to pay 
nearly 30 percent of her income on health care because the costs of 
care grow faster than incomes over time. Figure 3 also indicates how 
these burdens would grow for other groups of the Medicare population.
    Thus, a difficult question to answer will be how much more can be 
shifted onto beneficiaries over time? If incomes rise faster than 
anticipated and health care spending moderates, there will certainly be 
room for greater contributions. But a full shifting of additional costs 
does not seem to be a viable option. Moreover, it will be very 
important to take special care with the most vulnerable beneficiaries.
    In addition, options to increase beneficiary contributions to the 
cost of Medicare further increase the need to provide protections for 
low-income beneficiaries. The current programs to provide protections 
to low-income beneficiaries are inadequate, particularly if new premium 
or cost-sharing requirements are added to the program. Participation in 
the Medicare Savings programs is low, likely in part because these 
programs are run by Medicaid and are thus tainted by association with a 
``welfare'' program. Further, states, which pay part of the costs, tend 
to be unenthusiastic about these extra program and likely discourage 
participation.

    WOULD RELYING ON THE PRIVATE SECTOR MAKE MEDICARE A MORE VIABLE 
                                PROGRAM?

    Much of the debate over how to reform the Medicare program has 
focused on broad restructuring proposals, moving the management and 
oversight increasingly under the control of private insurance. What are 
the tradeoffs from increasingly relying on private plans to serve 
Medicare beneficiaries? Most important, there is little evidence to 
suggest even modest savings to Medicare from increased competition and 
the flexibility that the private sector enjoys. Further, the effort 
necessary to create, in a private plan environment, all the protections 
needed to compensate for moving away from traditional Medicare seems 
too great and too uncertain.
    Claims for savings from options that shift Medicare more to a 
system of private insurance usually rest on two basic arguments: first, 
it is commonly claimed that the private sector is more efficient than 
Medicare, and second, that competition among plans will generate more 
price sensitivity on the part of beneficiaries and plans alike. 
Although seemingly credible, these claims do not hold up under close 
examination.
    Looking back over the period from 1970 to 2000, a recent study I 
completed with Cristina Boccuti found that Medicare's cost-containment 
performance has been better than that of private insurance even after 
controlling for coverage of comparable services. Starting in the 1970s, 
Medicare and private insurance plans initially grew very much in 
tandem, showing few discernible differences (See Figure 4). By the 
1980s, per capita spending had more than doubled in both sectors. But 
Medicare became more cost-conscious than private health insurance in 
the 1980s, and cost containment efforts, particularly through hospital 
payment reforms, began to pay off. From about 1984 through 1988, 
Medicare's per capita costs grew much more slowly than those in the 
private sector.
    This gap in overall growth in Medicare's favor stayed relatively 
constant until the mid 1990s when private insurers began to take 
seriously the rising costs of health insurance. At that time, growth in 
the cost of private insurance moderated in a fashion similar to 
Medicare's slower growth in the 1980s. Thus, it can be argued that the 
private sector was playing ``catch up'' to Medicare in achieving cost 
containment. Private insurance thus narrowed the difference with 
Medicare in the 1990s, but as of 2000, there was still a considerable 
way for the private sector to go before its cost growth would match 
Medicare's achievement of lower overall growth. When comparison is made 
on rates of growth for comparable benefits, Medicare's cumulative rate 
is 19 percent below that of private insurance.
    Technological change and improvement represents a major factor 
driving high rates of expenditure growth. To date, most of the cost 
savings generated by all payers of care has come from slowing growth in 
the prices paid for services and making only preliminary inroads in 
reducing the use of services or addressing the issue of technology. 
Reining in use of services will constitute a major challenge for 
private insurance as well as Medicare in the future, and it is not 
clear whether the public or private sector is better equipped to do 
this.
    Reform options such as the premium support approach also seek 
savings by allowing the premiums paid by beneficiaries to vary such 
that those choosing higher cost plans pay substantially higher 
premiums. The theory is that beneficiaries will become more price 
conscious and choose lower cost plans. This in turn will reward private 
insurers that are able to hold down costs. And there is some evidence 
from the federal employees system and the Calpers system in California 
that this has disciplined the insurance market to some degree. Studies 
that have focused on retirees, however, show much less sensitivity to 
price differences. Older persons may be less willing to change doctors 
and learn new insurance rules in order to save a few dollars each 
month. Thus, what is not known is how well this will work for Medicare 
beneficiaries.
    For example, for a premium support model to work, at least some 
beneficiaries must be willing to shift plans each year (and to change 
providers and learn new rules) in order to reward the more efficient 
plans. Without that shifting, savings will not occur. In addition, 
there is the question of how private insurers will respond. (If new 
enrollees go into such plans each year, some savings will be achieved, 
but these are the least costly beneficiaries, and may lead to further 
problems as discussed below.) Will they seek to improve service or 
instead focus on marketing and other techniques to attract a desirable, 
healthy patient base? It simply isn't known if the competition will 
really do what it is supposed to do.
    In addition, new approaches to the delivery of health care under 
Medicare may generate a whole new set of problems, including problems 
in areas where Medicare is now working well. For example, shifting 
across plans is not necessarily good for patients; it is not only 
disruptive, it can raise costs of care. Some studies have shown that 
having one physician over a long period of time reduces costs of care. 
And if it is only the healthier beneficiaries who choose to switch 
plans, the sickest and most vulnerable beneficiaries may end up being 
concentrated in plans that become increasingly expensive over time. The 
case of retirees left in the federal employees high-option Blue Cross 
plan and in a study of retirees in California suggest that even when 
plans become very expensive, beneficiaries may be fearful of switching 
and end up substantially disadvantaged. Thus, the most vulnerable may 
stay in plans that become inordinately expensive. Further, private 
plans by design are interested in satisfying their own customers and 
generating profits for stockholders. They cannot be expected to meet 
larger social goals such as making sure that the sickest beneficiaries 
get high quality care; and to the extent that such goals remain 
important, reforms in Medicare will have to incorporate additional 
protections to balance these concerns as described below.
    Ultimately, projected cost savings from a private insurance 
initiative arise from passing costs off onto beneficiaries through 
higher premiums or increased cost sharing requirements. If that indeed 
is the case, then this approach merely represents an elaborate way to 
avoid an honest debate about how to share future burdens.

                      CHANGES TO IMPROVE MEDICARE

    Making changes to Medicare that can improve its viability both in 
terms of its costs and in how well it serves older and disabled 
beneficiaries should certainly be pursued. Further, it makes little 
sense to look for a solution that takes policy makers permanently out 
of Medicare's future. The flux and complexity of our healthcare system 
will necessitate continuing attention to this program. At present a 
number of areas in Medicare need attention.
    What I would prefer to see instead is emphasis on improvements in 
both the private plan options and the traditional Medicare program, 
basically retaining the current structure in which traditional Medicare 
is the primary option. Rather than focusing on restructuring Medicare 
to emphasize private insurance, I would place the emphasis on 
innovations necessary for improvements in health care delivery 
regardless of setting.
    Critics of Medicare rightly point out that the inadequacy of its 
benefit package has led to the development of a variety of supplemental 
insurance arrangements which in turn create an inefficient system in 
which most beneficiaries rely on two sources of insurance to meet their 
needs. It is sometimes argued that improvements in coverage can only 
occur in combination with structural reform. And some advocates of a 
private approach to insurance go further, suggesting that the 
structural reform itself will naturally produce such benefit 
improvements. This implicitly holds the debate on improved benefits 
hostage to accepting other unrelated changes. That logic actually 
should run in the other direction. It is not reasonable to expect any 
number of other changes to work without first offering a more 
comprehensive benefit package for Medicare. In that way, payments made 
to private plans can improve, allowing them to better coordinate care. 
And the fee for service system will also be able to change in ways that 
might encourage better care delivery. For example, it is not reasonable 
to ask patients to participate in a program to reduce hypertension 
(which can save costs over the long run) without covering the 
prescription drugs that are likely to be an essential part of that 
effort. In addition, a better benefit package will also allow at least 
some beneficiaries to forego the purchase of inefficient private 
supplemental insurance. That itself should be a goal of reform.
    In addition, better norms and standards of care are needed if we 
are to provide quality of care protections to all Americans. Investment 
in outcomes research, disease management and other techniques that 
could lead to improvements in treatment of patients will require a 
substantial public commitment. This cannot be done as well in a 
proprietary, for-profit environment where dissemination of new ways of 
coordinating care may not be shared. Private plans can play an 
important role and may develop some innovations on their own, but in 
much the same way that we view basic research on medicine as requiring 
a public component, innovations in health delivery also need such 
support. Further, innovations in treatment and coordination of care 
should focus on those with substantial health problems--exactly the 
population that many private plans seek to avoid. Some private plans 
might be willing to specialize in individuals with specific needs, but 
this is not going to happen if the environment is one emphasizing price 
competition and with barely adequate risk adjustors. Innovative plans 
would likely suffer in that environment.
    A good area to begin improvements in knowledge about the 
effectiveness of medical care would be with prescription drugs. 
Realistically, any prescription drug benefit will require efforts to 
hold down costs over time. Part of that effort needs to be based on 
evidence of the comparative effectiveness of various drugs, for 
example. Establishing rules for coverage of drugs should reflect good 
medical evidence and not just on which manufacturer offers the best 
discounts. Undertaking these studies and evaluations represents a 
public good and needs to be funded on that basis.
    Within the fee-for-service environment, it would be helpful to 
energize both patients and physicians in helping to coordinate care. 
Patients need information and support as well as incentives to become 
involved. Many caring physicians, who have often resented the low pay 
in fee for service and the lack of control in managed care, would 
likely welcome the ability to spend more time with their patients. One 
simple way to do this would be to give beneficiaries a certificate that 
spells out the care consultation benefits to which they are entitled 
and allow them to designate a physician who will provide those 
services. In that way, both the patient and the physician (who would 
get an additional payment for the annual or biannual services) would 
know what they are expected to provide and could likely reduce 
confusion and unnecessary duplication of services that go on in a fee 
for service environment.
    Additional flexibility to CMS to manage and develop payment 
initiatives aimed at using competition where appropriate also could 
result in long term cost savings and serve patients well. In the areas 
of durable medical equipment and perhaps even some testing and 
laboratory services, contracting could be used to obtain favorable 
prices.
    These are only a few examples of changes, none of which promise to 
be the magic bullet, but which could aid the Medicare program over 
time.

                               CONCLUSION

    It is important to consider the broader issue of affordability in 
thinking about Medicare's future and not just the usual measures of 
solvency on which people often depend. And while Medicare at its 
current level is certainly affordable, a number of changes will need to 
be made. Over the years, the financial viability of Medicare has been 
improved by enacting a range of changes in the program. Further 
improvements in the program will be needed in the future. Nonetheless, 
we simply cannot expect as a society to provide care to the most needy 
of our citizens for services that are likely to rise in costs and to 
absorb a rapid increase in the number of individuals becoming eligible 
for Medicare without taking the financing issue head on. As a 
successful program, it makes sense to continue Medicare for the future, 
but that will require additional revenues. 

[GRAPHIC] [TIFF OMITTED] T7482.004

[GRAPHIC] [TIFF OMITTED] T7482.005

[GRAPHIC] [TIFF OMITTED] T7482.006

[GRAPHIC] [TIFF OMITTED] T7482.007

    Mr. Bilirakis. Thank you very much, Dr. Moon.
    Ms. Grealy.

                   STATEMENT OF MARY R. GREALY

    Ms. Grealy. Chairman Bilirakis, Congressman Brown, members 
of the subcommittee, thank you for your invitation to testify 
today. And thank you for the commitment and energy you are 
bringing to this very necessary goal of strengthening and 
improving Medicare.
    The Health Care Leadership Council is a coalition of chief 
executives of some of our Nation's most important and 
innovative health care companies and institutions. Our members 
share a commitment to a patient-centered health care system 
that is characterized by innovation, value, and constantly 
improving quality. We believe these are words that should be 
used to describe our Nation's Medicare program.
    I think we can all agree upon certain goals for the health 
program that serves older and disabled Americans. Medicare 
should have a prescription drug benefit. In fact, we support 
President Bush's budget request for a drug benefit. Medicare 
should offer a high level of health care quality and innovation 
to its beneficiaries. Medicare should offer good value to both 
beneficiaries and to taxpayers.
    We believe that Medicare can be improved in both financial 
and health care quality terms by moving toward a delivery model 
that utilizes competition and invests beneficiaries with the 
power of consumer choice. This model works well today for tens 
of millions of people who are either in large employer-
sponsored health plans or in the Federal Employees Health 
Benefit Program.
    These programs deliver better benefits, including 
prescription drugs, lower out-of-pocket costs, and the ability 
to choose a plan that is best suited to individual needs.
    This morning I would like to make three critical points 
about what can be gained from a competitive Medicare model. 
First, there is a level of quality that can be achieved through 
a market-based incentive that simply does not occur in a price-
controlled, regulated environment.
    Mr. Chairman, there is no question that Medicare 
beneficiaries are missing out on quality health care 
innovations that are being delivered to millions of health care 
consumers throughout the country. Private health plans and 
other providers have created effective care management programs 
that lead to better health outcomes, greater patient 
satisfaction, and cost efficiencies.
    By contrast, Medicare does have an inherent difficulty in 
keeping pace with the changing state of health care. Changing 
the Medicare benefit package requires an act of Congress, and 
the administrative process for determining whether Medicare 
should cover a new treatment or procedure is painfully complex.
    And, consequently, Medicare beneficiaries did not then have 
access to the most effective preventive care available. Within 
the FEHBP program, health plans respond quickly to changing 
beneficiary needs, to new treatments, and to the availability 
of new technologies.
    My second point concerns the undeniable linkage between 
choice and quality. Consumers influence the quality of their 
care by choosing health plans that demonstrate better outcomes. 
Consumers can also influence the value of their care by 
choosing health plans that offer the best product for the 
lowest price.
    Doesn't it stand to reason, then, that Medicare 
beneficiaries, given this power of choice, can be the drivers 
of greater quality and greater value. Some have said that it 
would be a confusing imposition to give seniors these choices. 
We should not sell older Americans short. And with more 
retirees having experienced some form of managed care during 
their working years, modern Medicare beneficiaries will be 
increasingly comfortable with, and accustomed to, selecting and 
joining private health plans.
    Finally, I would like to say a word about the financial 
aspects of Medicare and how best to move the program toward 
sound footing for future generations. Some would argue that the 
right answer for Medicare involves government price controls 
and periodic spending reductions like those that were included 
in the 1997 Balanced Budget Act legislation.
    And, yes, those actions have kept Medicare spending growth 
at a comparatively lower rate. But at what price? Today's 
Medicare program can control spending growth, because it does 
not provide an outpatient prescription drug benefit. And it 
does not always keep up with new health technologies as quickly 
as the private sector does.
    And providers can only continue to meet and treat Medicare 
patients at low reimbursement rates by making up for that 
through some of--or making up for some of their losses through 
other payers. You can find savings through price controls and 
spending cuts, but you pay through an erosion in access and in 
quality.
    It would make far more sense and be better for Medicare 
beneficiaries to use market-based incentives to increase value 
and to use the power of consumer choice to simulate cost 
efficiencies and to use preventive care and health innovations 
to reduce the need for costly acute care and lengthy 
hospitalizations.
    We can have a Medicare program that offers both quality and 
value, and that is geared to meet the needs and challenges of 
this century. We look forward to working with this committee to 
pursue these essential goals.
    Thank you.
    [The prepared statement of Mary R. Grealy follows:]

Prepared Statement of Mary R. Grealy, President, Healthcare Leadership 
                                Council

    Thank you, Chairman Bilirakis, Congressman Brown, members of the 
subcommittee for your invitation to testify today. The Healthcare 
Leadership Council shares your commitment to a strong Medicare program, 
and I look forward to sharing our members' views on how this valuable 
program can be improved.
    The Healthcare Leadership Council (HLC) is made up of chief 
executives of the nation's premier health care companies and 
institutions. Our members are health industry leaders who share a 
vision of a patient-centered health care system characterized by 
innovation, value and constantly-improving quality. The HLC is one of 
the governing members of the Alliance to Improve Medicare--a broad-
based coalition of health, employer and retiree organizations dedicated 
to a stronger Medicare program that embodies the best qualities of 
American health care.
    Clearly, steps must be taken to improve Medicare, in both financial 
and health care quality terms. Today, Medicare spends an average $6,200 
annually for each beneficiary in the fee-for-service program. Ten years 
from now, that cost will increase to about $9,500. That's a 50 percent 
increase in cost to simply maintain the program we have today, with no 
outpatient prescription drug coverage, no significant overall quality 
improvements or added value for beneficiaries.
    I think we can all agree that Medicare should have a prescription 
drug benefit. In fact, the HLC supports President Bush's generous $400 
billion budget request for a prescription drug benefit and the work 
done last year by the Committee. Medicare should also offer a higher 
level of health care quality and innovation, and should offer greater 
value to both beneficiaries and taxpayers.
    We believe these goals can be achieved if Medicare moves toward a 
delivery model that utilizes competition, flexibility and invests 
beneficiaries with the power of consumer choice. This model works well 
today for the tens of millions of Americans who receive their health 
care through large employer-sponsored plans or through the Federal 
Employees Health Benefits Program (FEHBP). People enrolled in these 
programs generally receive better benefits, including prescription 
drugs, lower out-of-pocket costs and the ability to choose a health 
plan best suited for their needs.
    Medicare, as it is structured today, bound by government 
micromanagement, cannot offer these advantages.

            REGULATED QUALITY VERSUS INCENTIVE-BASED QUALITY

    Today's Medicare program has inherent barriers that prevent it from 
offering the same kind of coordinated care, medical innovation and 
continuous quality improvement offered in the private health insurance 
market.
    Medicare's administered pricing system and its complex regulations 
don't provide incentives for quality improvements. Medicare's 
regulations achieve a defined, and often outdated, regulatory 
standard--in essence, a ``ceiling'' of health care quality. This 
regulatory rigidity doesn't recognize that quality improvement is never 
static. It is constantly evolving. Today's best practices, which 
regulations lock into place, could be outdated a few months from now.
    Medicare beneficiaries are missing out on quality achievements 
taking place elsewhere. Private health plans, pharmacy benefit managers 
and other health care providers have created effective care management 
programs that lead to better health outcomes, greater patient 
satisfaction and cost efficiencies. Members of one nationally-known 
health plan can, for example, use the Internet to compare hospital 
quality information for a wide variety of medical conditions and 
surgical procedures, compare prescription drug choices for cost and 
potential side effects and access information on thousands of health 
and medical topics. Additionally, beneficiaries can utilize a 24-hour 
telephone service to get professional case management services for 
serious and complex medical conditions. This is emblematic of the 
efforts and innovations being undertaken by health plans to keep 
Americans healthier. Medicare simply does not have any built-in 
incentives to guide beneficiaries toward the few preventive benefits 
the program covers.
    And private plans, not conventional Medicare, utilize the services 
of pharmacy benefit management companies, which have developed 
impressive programs to improve the quality and safety of pharmaceutical 
regimens while also containing costs.
    Competition, flexibility and consumer choice create these positive 
results. Health plans must pursue and develop constant improvements in 
order to compete for employers shopping for greater quality and value 
in health coverage.
    The Medicare+Choice program, its flawed structure notwithstanding, 
has provided us with valuable information on the steps private health 
plans will take to keep patients well. Ninety-five percent of 
Medicare+Choice plans have diabetes management programs. Three of every 
four have asthma and coronary heart disease management programs. And, 
every single Medicare +Choice plan provides annual physical 
examinations. By contrast, fee-for-service Medicare has just started 
implementing limited disease management demonstrations.
    In a recent paper, Dr. John Wennberg, author of the renowned 
Dartmouth Atlas, discussed the linkage between a health system's 
organizational structure and the usage of effective health care 
practices. For example, the percentage of female Medicare beneficiaries 
who received a mammogram at least once over a two-year period fell 
below the ``best practice'' benchmark in every geographic region of the 
country--ranging from a high of 77 percent to a disturbing low of 21 
percent.
    Why is there such variation in effective care? Dr. Wennberg wrote 
that a critical factor is the lack of infrastructure to ensure 
compliance with well-accepted, evidence-based standards of practice.
    Dr. Wennberg's analysis is extremely important in discussing the 
future of Medicare. We can't automatically improve the quality of care 
for Medicare beneficiaries by adding new benefits, on an ad hoc basis, 
to the existing fee-for-service program. Even the few preventive 
benefits covered by Medicare are used sporadically, according to a 2002 
General Accounting Office report. There are a lack of incentives and 
organizational systems to encourage beneficiaries to take advantage of 
services that can keep them healthier.

                  THE LINK BETWEEN QUALITY AND CHOICE

    Beneficiary choice is a highly effective regulator of quality. 
Consumers influence the quality of their care by choosing health plans 
that demonstrate better outcomes. Consumers influence the value of 
their care by choosing plans that offer the best product for the lowest 
price. It stands to reason that Medicare beneficiaries, given the power 
of consumer choice, will be the drivers of greater quality and value 
within a modernized Medicare program.
    In fact, beneficiaries who are provided user-friendly, customized 
information on health care choices can bring about greater efficiency 
in the overall Medicare program by reducing the need for top-down 
federal micromanagement.
    We object to the contention that Medicare beneficiaries would not 
be up to managing a greater degree of consumer choice. This argument 
sells today's seniors short. With more retirees having experienced some 
form of managed care during their working years, and with fewer 
employers offering retiree health benefits, ``modern'' Medicare 
beneficiaries will be increasingly more willing to join private plans.
    Statistics bear out this trend. In 1992, about 63 percent of the 
under-65 population with health coverage were enrolled in traditional 
fee-for-service health plans, with the remainder enrolled in HMOs, 
preferred provider organizations and point-of-service plans. By 1999, 
fee-for-service enrollment had decreased to only nine percent of the 
under-65 covered population, with the other categories having greatly 
expanded participation. These newer beneficiaries will enter Medicare 
eligibility experienced in choosing health plans based on quality 
measures, tailored benefit packages and cost-sharing advantages.
    Further, moving Medicare toward an FEHBP model would likely open a 
greater variety of plan options, as has happened in the private sector. 
One can assume the emergence of preferred provider organizations and 
private fee-for-service plans, as well as the more organized systems of 
delivery already discussed. In a truly competitive environment, 
beneficiaries will have different plan structures, premium 
differentials and, very importantly, quality comparison information. 
Just as federal employees do today, beneficiaries and their families 
will have the information conveniently at hand to choose a plan and 
benefits that best suit their individual needs.
    Debate over whether a more competitive Medicare model should be 
developed inevitably includes discussions of the Medicare+Choice 
program. We can learn a great deal from the flaws of the 
Medicare+Choice structure, and use that knowledge to shape Medicare 
reform that will attract plan participation in Medicare and make health 
plans attractive to Medicare beneficiaries.

          MEDICARE+CHOICE: LEARNING LESSONS TO AID TRUE REFORM

    Some have made the assertion that a competitive model for Medicare 
cannot work. They use Medicare+Choice as an example. That is a flawed 
argument.
    It is true that Medicare+Choice has not yielded enough 
participating plans to generate meaningful competition. This is largely 
due to the fact that Medicare+Choice plans have not had the opportunity 
to offer a competitive alternative to the Medicare fee-for-service 
program.
    Over the last five years--the time frame during which the 
Medicare+Choice program has phased in--there has been an increasing gap 
between what the traditional fee-for-service Medicare program spends on 
a beneficiary and the amount a Medicare+Choice plan is paid to provide 
care to a Medicare beneficiary in the same geographic area. This 
widening payment differential forced Medicare+Choice plans to reduce 
extra benefits they could use to attract beneficiaries. It has also 
forced increased beneficiary cost-sharing. The concept of fair 
competition was rendered impossible.
    An important lesson learned from Medicare+Choice is that 
competition based on quality and value cannot take place in an 
environment of price controls and inflexibility. It is critical to keep 
this in mind in designing a better Medicare program. Medicare+Choice 
could not achieve its full potential because it ran into the impassable 
barrier of unbalanced competition. Lawmakers will be faced with the 
task of creating a level field of competition while maintaining the 
current fee-for-service program. This will be difficult, both 
politically and technically. It is, however, absolutely essential to 
inject competition into the Medicare program if we are to provide 
current and future beneficiaries with comprehensive, high-quality 
health care.

                       A SUPERIOR MEDICARE MODEL

    Our society has changed tremendously since Medicare was created in 
1965. The Medicare of that time offered seniors what they needed most--
the acute care that so many older Americans required not long after 
they reached retirement age.
    Today, though, our senior population is greatly changed. Thanks to 
modern medicine and greater knowledge about healthy lifestyles, life 
expectancy is much greater than it was in 1965. Now, what seniors need 
most is to better manage, or even prevent, chronic disease. Today's 
Medicare, though, is still offering a 1965 prescription for a 21st 
century diagnosis.
    Creating a competitive FEHBP-style model for Medicare would 
directly address many of the inherent flaws that prevent senior 
citizens from receiving the benefits of health care innovation and 
advancements.
    Today's Medicare program is highly regulatory and inflexible, 
although HHS Secretary Thompson deserves considerable credit for his 
efforts to address this problem. The program is still afflicted with 
over 100,000 pages of regulations, rules, manuals, instructions, 
letters, alerts and notices. The administrative process for determining 
whether new medical treatments or procedures merit coverage under the 
Medicare benefits package is excruciatingly complex. Consequently, 
Medicare is always a few steps behind the current state and quality of 
American health care, and patients pay the price for this lag.
    We have to ask ourselves, should seniors have to wait for an act of 
Congress to modify the Medicare benefit package in order to have access 
to the most effective preventive health services available?
    HLC members believe an FEHBP-style model for Medicare would 
represent the best possible partnership between the public and private 
sectors to provide quality health care to America's seniors. In this 
model, it would be a proper and essential role for government to 
provide oversight of private health insurance programs, as is the case 
with FEHBP.
    We can draw a sharp contrast, though, between the FEHBP model and 
conventional Medicare, in that the former requires a minimal amount of 
regulation. This competitive model would provide better benefits, lower 
out-of-pocket costs and much quicker access to lifesaving and life-
enhancing medical innovations. In the FEHBP model, health plans respond 
swiftly to changing beneficiary needs, to new treatments and to the 
availability of new technologies. Medicare, under this model, could 
better keep pace with advances in health care and, most importantly, 
prevent and manage disease instead of simply responding to individual 
episodes of illness. That is the care today's seniors need.

                               CONCLUSION

    Mr. Chairman, in discussing Medicare reform, there are important 
facts that should come to the forefront of consideration--facts about 
care management programs, about preventive care, about pharmacy benefit 
management programs, about all of the beneficial approaches and 
innovations that private plans are utilizing and Medicare is not. It is 
possible to modernize Medicare to better serve the health needs of 
America's seniors and to do so cost-efficiently.
    As we look at Medicare's financial challenges, some will argue that 
the right answer for Medicare involves government price controls and 
periodic spending reductions such as those legislated in the 1997 
Balanced Budget Act. They will say that these tools have traditionally 
kept Medicare spending growth at a lower rate than private health care 
spending.
    But, looking at the health care economy as a whole, these savings 
are false. In the bifurcated world of Medicare versus private health 
care, payment reductions in Medicare just result in shifts from one 
side of the payment world to the other. Providers are only able to 
continue treating Medicare patients at such low rates because they make 
up for some of these losses through other payers.
    Additionally, Medicare's slower growth is partially due to the fact 
that it does not provide an outpatient prescription drug benefit and it 
does not keep up with new technologies as well as the private health 
care sector does.
    Using draconian payment cuts to control Medicare spending, instead 
of building in incentives to increase the value of care, cheats 
Medicare beneficiaries out of the potential quality innovations being 
achieved by providers and plans competing for millions of federal 
employees and private sector workers. Such cuts ignore also the fact 
that providers deserve and must have adequate payment in order to 
provide high quality health care to Medicare beneficiaries.
    The Healthcare Leadership Council compliments this committee for 
its efforts to look toward a future for Medicare that embraces both 
long-term financial health for the program as well as better health 
care for its beneficiaries. We look forward to working with you to 
achieve these important goals.
    Thank you again for this opportunity to share our views.

    Mr. Bilirakis. Thank you very much, Ms. Grealy.
    Ms. Kennelly.

                STATEMENT OF BARBARA B. KENNELLY

    Ms. Kennelly. Thank you, Chairman Bilirakis and ranking 
member Mr. Brown, and other distinguished members of the 
committee. I am honored to be here to comment, and I thank you 
very much for holding this very important hearing.
    The national committee of which I am president is a 
membership organization. It is a nonprofit, and it is 
bipartisan. And I am here today to tell you a little bit about 
it. We have a lobbying division. We have a grass-roots 
division. But we also have a membership division, which 
receives 600 calls a week. And this is what our members tell us 
consistently.
    Our members want preventive benefits which help keep them 
healthy and out of the hospital. They favor reforms that keep 
Medicare as a program in which everybody contributes, everyone 
gets the same benefits, and those benefits are guaranteed.
    The national committee supports a prescription drug benefit 
that is universal, voluntary, and affordable. It should be 
readily adjusted to account for inflation and offered as a 
standard benefit under Medicare. We support chronic disease 
management and preventive benefits, and, most importantly, we 
are committed to preserving the social insurance nature of 
Medicare.
    We all want meaningful prescription drug coverage, yet it 
seems when I look at what the administration is proposing that 
this would not give seniors the assurances that they need. 
Instead, it uses the promise of prescription drug coverage for 
some to restructure Medicare, and eventually undermine its 
social insurance principle.
    We recognize that the country faces a deficit and fiscal 
constraints. We also recognize the administration's suggestion 
of spending $400 billion--and that is a lot of money--in 10 
years, probably will not do it because we know CBO tells us 
that $1.8 trillion will be spent by seniors on medications. But 
we hope that Medicare is improved in a way that allows us to 
build on this beginning and provide meaningful prescription 
drug coverage to every senior who needs it.
    Can private insurance models provide these seniors the 
affordable, predictable, and reliable health coverage they say 
they need? Let us examine this scenario. Beneficiaries in 
different plans would have different benefits and costs. These 
costs and benefits would have--could dramatically change, as 
they have done in managed care plans in the past.
    Your premiums and costs increase. Poor and sicker 
beneficiaries might not be able to afford the same coverage as 
others. So far evidence does not indicate that private 
insurance can promise seniors that premiums will not fluctuate 
substantially from year to year.
    Our seniors, who like 85 percent of Medicare beneficiaries 
enrolled in traditional fee for service Medicare, tell us how 
much they depend on Medicare and on its quality care. The 
administration's plan creates a new category of private 
Medicare insurance to deliver prescription drug coverage, and 
this could be problematic.
    The shortcomings are well documented. We recently had one 
of our members testify in front of another committee--Lucille 
Bryson. She joined a Medicare+Choice program 5 years ago. 
Paying $19.98 a month, she thought she really had a good deal. 
Over 3 years, her premium increased to $80 a month, and her 
benefits were cut. Mrs. Bryson is not unique.
    I look at the proposals that claim to model the FEHBP plan, 
of which I am a member, as a delivery model, which the 
administration advocates. Also, we don't think that meets the 
test of evidence. Seniors are much older and tend to have a 
higher rate of chronic illness than the FEHBP working 
population.
    The average age of an FEHBP employee is 47, and the average 
annual income is over $54,000. This is hardly comparable to a 
senior over 65 years of age whose annual income is $22,000.
    Chairman Bilirakis, I would also like to associate myself 
with the remarks yesterday of Bruce Vladeck. I know you have 
worked very closely with him on one of the bipartisan 
commissions, and you have disagreed with him. But you also 
understand that he is an expert, as Dr. Moon is an expert.
    And I read his testimony last night, and I really would 
like to associate myself with it, because he spoke eloquently 
about the importance of the universality of Medicare. He also 
said how this has to be a meaningful benefit. One-third of 
those on Medicare have under $500 spent in a year on drugs. Ten 
percent spend over $6,000. So the majority spend $2,500, and 
they are the ones that really need the help.
    We also--I read some interesting things that I hadn't even 
thought of, that we really would find it very difficult to mean 
test Medicare, because we are so unknown exactly what senior 
incomes are, and so many seniors have low income.
    And then, I look to Aetna here, Mother Aetna, who I live 
right down the block from, and they are a wonderful company and 
I want them to succeed. But they don't have a very good record 
with seniors. We know so far they haven't saved any money for 
Medicare. We know they don't work very well in rural areas. And 
we also know that if they don't make a profit, they have to get 
out of the business, because they have shareholders and they 
have to make a profit.
    So I come here this morning not as an expert but as an 
advocate for 1.5 million seniors to say that I really think 
Medicare has worked and will continue to work.
    But, Chairman Bilirakis, what I really want to thank you is 
for all of your hundreds and hundreds of hours of hard work. I 
sit and look at you and think of the time you have spent trying 
to solve this problem, and I say with Bruce Vladeck, as he said 
yesterday, don't think about the ideology, don't think about 
the philosophy or the theories. Take all of your knowledge and 
put it together and fix Medicare with a prescription drug.
    Thank you, Mr. Chairman.
    [The prepared statement of Barbara B. Kennelly follows:]

    Prepared Statement of Barbara B. Kennelly, President and Chief 
 Executive Officer, National Committee to Preserve Social Security and 
                                Medicare

    Good morning, Chairman Bilirakis, Ranking Member Brown and 
distinguished members of the committee. I appreciate the opportunity to 
comment today about proposals to change Medicare and what that means 
for seniors. Thank you for holding this very important hearing.
    The National Committee averages more than 600 calls per week from 
seniors throughout the country. For our seniors, Medicare reform means 
getting a comprehensive drug benefit under traditional Medicare, and--
like most seniors, who are living on fixed incomes--coverage that is 
affordable and does not fluctuate substantially in price. They like 
preventive benefits, which help keep them healthy and out of the 
hospital. They favor reforms that keep Medicare as a program in which 
everyone contributes, everyone gets the same benefits, and those 
benefits are guaranteed.
    The National Committee supports a prescription drug benefit that is 
universal, comprehensive in coverage, affordable, regularly adjusted to 
account for inflation, voluntary, guaranteed to all who want it 
regardless of income or health status, and offered as a standard 
benefit under Medicare. We support chronic disease management and 
preventive benefits and advocate for such improvements. And, most 
importantly, we are committed to preserving the social insurance nature 
of Medicare.
    Seniors are spending an average of $200 a month on prescription 
drugs 1 and they need the assurance of meaningful 
prescription drug coverage. This is something we all recognize and wish 
to do something about. Yet the administration's Medicare proposal, as 
well as other legislative proposals, would not give seniors this 
assurance. Instead, they use the promise of prescription drug coverage 
for some to restructure Medicare and eventually undermine its social 
insurance principle--the same social insurance principle that now 
assures all seniors a defined set of benefits and should guarantee all 
seniors a defined prescription drug benefit.
---------------------------------------------------------------------------
    \1\ ``Medicare and Prescription Drug Fact Sheet,'' Kaiser Family 
Foundation, February 2003.
---------------------------------------------------------------------------
    We recognize that the country faces a deficit and fiscal 
constraints, just as we all recognize that the administration's 
suggestion of spending $400 billion over 10 years for Medicare changes, 
including drug coverage, covers a fraction of the $1.8 trillion seniors 
will be spending on drugs over the next decade.2 But we hope 
that Medicare is improved in a way that allows us to build on this 
beginning and provide meaningful prescription drug coverage to every 
senior who needs it.
---------------------------------------------------------------------------
    \2\ ``Projected spending for prescription drugs by and on behalf of 
Medicare enrollees,'' Congressional Budget Office, February 3, 2003.
---------------------------------------------------------------------------
    Can private insurance models provide these seniors the affordable, 
predictable and reliable health coverage they say they need? Let's 
examine the scenario. Beneficiaries in different plans would have 
different benefits and costs. Those costs and benefits could 
dramatically change every year, as they have done in managed care plans 
in the past five years, and seniors would not be able to plan for their 
healthcare costs. If premiums and costs increased, poorer and sicker 
beneficiaries might not be able to afford the same coverage as others. 
So far, evidence does not indicate that private insurance can promise 
seniors that premiums would not fluctuate substantially from year to 
year.
    Our seniors--who like 85 percent of Medicare beneficiaries who are 
enrolled in traditional fee-for-service Medicare--tell us how much they 
depend on Medicare and on quality care. There is an underlying 
assumption operating in a number of Medicare proposals that private 
plans give better care. Certainly this assumption is present in the 
administration's plan, which creates a new category of private Medicare 
insurance plans and uses private plans to deliver prescription drug 
coverage.
    That private plans give better care is unsupported by historical 
evidence. The shortcomings are well documented, from the earliest 
unsuccessful Medicare-risk HMO demonstration projects to today's 
uncertain Medicare+Choice. Since the enactment of the Balanced Budget 
Act of 1997 that created Medicare+Choice, managed care plans have 
dropped more than 2.4 million seniors,3 many of whom 
enrolled for the drug coverage the plans provided. When plans drop 
seniors, there often is not another Medicare managed care plan in the 
area, especially in a rural setting. Many in this position fall back on 
traditional fee-for-service Medicare because other plans did not work 
out.
---------------------------------------------------------------------------
    \3\ ``Medicare Privatization: Bad for Seniors and People with 
Disabilities,'' Public Citizens, February 2003.
---------------------------------------------------------------------------
    Medicare+Choice premiums have increased dramatically, by 37 
percent,4 compared to an 8 percent increase in Medicare Part 
B premiums. For example, one of our members, Lucille Bryson, joined a 
Medicare+Choice program five years ago, paying $19.98 a month. Over the 
next three years, her premiums increased to $80 a month and she says 
that her benefits are now being cut. Mrs. Bryson is not unique.
---------------------------------------------------------------------------
    \4\ ``Average Out-of-Pocket Health Care Costs for Medicare+Choice 
Enrollees Increase Substantially in 2002,'' Issue Brief, Commonwealth 
Fund, November 2002.
---------------------------------------------------------------------------
    Also, HMOs have spent, on average, between 10 and 15 percent of 
their revenue on administrative costs,5 compared to 
Medicare's 2 percent. The dramatic increase in premiums and sizable 
administrative costs are further evidence that the private sector does 
not have the track record to support the assertion that it can provide 
seniors adequate prescription drug coverage for a reasonable cost.
---------------------------------------------------------------------------
    \5\ ``Medicare Privatization: Bad for Seniors and People with 
Disabilities,'' Public Citizens, February 2003.
---------------------------------------------------------------------------
    Even now, managed care plans continue to ask Congress for more 
money to run the Medicare+Choice programs or they threaten to no longer 
cover seniors. When Congress did increase payments of $1 billion to 
plans in 2000 through the Benefits Improvement and Protection Act, more 
than 544,000 beneficiaries still lost coverage.
    And, according to a recent Urban Institute study by Marilyn Moon, 
private health insurance companies spend more per beneficiary than does 
Medicare.6
---------------------------------------------------------------------------
    \6\ ``Comparing Medicare and Private Insurers: Growth Rates in 
Spending Over Three Decades,'' Health Affairs, March/April 2003.
---------------------------------------------------------------------------
    This information gains significance when considering whether to 
divert prescription drug coverage to the hands of private plans and 
funnel beneficiaries to private Medicare plans. The administration's 
plan could result in seniors who wanted more than just a drug discount 
card leaving traditional fee-for-service and going to a private 
insurance plan. Plans, if modeled after Medicare+Choice, could perform 
in a manner similar to that of managed care: Evidence indicates that 
they would be likely to participate in favorable risk selection by 
offering Medicare beneficiaries low-cost, low-coverage plans that 
attract younger, healthier seniors, leaving the sickest and oldest 
unable to afford the more generous plans.
    Proposals to use the FEHBP program as a delivery model, which the 
administration has advocated, also do not meet the test of evidence. 
Seniors are much older and tend to have a higher rate of chronic 
illnesses than the FEHBP working population. The average age of an 
FEHPB employee is 47 and the average annual income over $54,000. This 
is hardly comparable to a senior over 65 years of age, with an average, 
and usually fixed, annual income of $22,000.7
---------------------------------------------------------------------------
    \7\ Federal Civilian Workforce Statistics: The Fact Book, Office of 
Personnel Management, 2002.
---------------------------------------------------------------------------
    The National Committee supports a prescription drug benefit that is 
universal, comprehensive in coverage, affordable, regularly adjusted to 
account for inflation, voluntary, guaranteed to all who want it 
regardless of income or health status, and offered as a standard 
benefit under Medicare. We also support disease management and 
preventive measures, and we are pleased that Department of Health and 
Human Services Secretary Tommy Thompson recently announced a three-
year, 10-state demonstration proposal for chronic disease management 
for Medicare beneficiaries. According to the Centers for Medicare and 
Medicaid Services, 73 percent of women and 65 percent of men who are 
Medicare beneficiaries have two or more chronic 
conditions,8, and many of them are among the six percent of 
Medicare beneficiaries that account for more that half the program's 
spending.9 Improvements such as care coordination, chronic 
disease management and preventive services not only are very important 
to keeping seniors healthy and out of the hospital, they also have the 
potential to save the program a significant amount of money. These 
improvements can be added to traditional Medicare right now. It's not 
necessary to create private plans to implement them.
---------------------------------------------------------------------------
    \8\ ``Characteristics and Perceptions of the Medicare Population,'' 
Centers for Medicare and Medicaid Services, 1999.
    \9\ Medicare Chart Book, Kaiser Family Foundation, Fall 2001.
---------------------------------------------------------------------------
    As we move forward, let us keep in mind that before Medicare, only 
50 percent of seniors had health insurance. Today, 99 percent of 
seniors are covered. Society has benefited and we are all better off. 
This is what the social insurance principle, on which Medicare is 
based, is all about.
    Ultimately, if we want to improve Medicare, we have no choice but 
to consider it in the context of the health care system of which it is 
a part. That system has 41 million Americans under 65 with no health 
insurance, and they are forcing hospitals to absorb costs and helping 
to drive double-digit health inflation.10 We must look to 
the source of everybody's inflation--the 41 million uninsured, new 
medical testing and devices, and research and development--if we are to 
improve the components of the healthcare system that the inflation 
affects, including Medicare.
---------------------------------------------------------------------------
    \10\ ``The Uninsured and their Access to Healthcare,'' Kaiser 
Family Foundation, January 2003.
---------------------------------------------------------------------------
    In conclusion, I want to thank Chairman Bilirakis, who has tried so 
hard to address seniors' needs and continues to work to address the 
needs of his constituents in Florida. And I want to thank all of the 
members of this body and their staff who are carefully considering how 
the Medicare proposals would impact seniors. I appreciate the 
opportunity to appear before you today and I look forward to any 
questions the distinguished members of this committee may have. Thank 
you for your time.

    Mr. Bilirakis. Thank you for that, Ms. Kennelly. You know, 
this would be a much more interesting hearing I think if we 
just allowed you all to debate to each other.
    I have always wanted to do that, to be perfectly honest 
with you.
    Mr. Buddy, please pull the mike over, sir, and speak into 
it, if you can.

                    STATEMENT OF ROBERT BUDDY

    Mr. Buddy. Good morning, Mr. Chairman and members of the 
committee. My name is Robert Buddy, and I am a highly satisfied 
member of a Medicare+Choice health plan in Houston, Texas.
    Mr. Bilirakis. We can't----
    Mr. Buddy. Can you hear me? Okay. Not too well.
    I would like to take this opportunity to thank the 
committee for inviting me to participate in this hearing on 
behalf of all seniors. It is a privilege and an honor to 
attend, and I sincerely hope that my comments can make a 
constructive contribution to the proceeding.
    I will describe as concisely as possible how my wife and I 
have benefited from the Medicare+Choice program and why I 
believe this important program should be preserved.
    While certain aspects of our experience are unique, the 
important point is that millions of seniors have had similar 
experiences. My objective, then, is to try to put a human face 
on a Medicare program that is working for me and for millions 
of other seniors who have chosen to join a Medicare+Choice 
health plan.
    My wife and I are now both 76 years of age. In 1993, when 
we both turned 65, we became eligible for Medicare, and we were 
relieved and delighted to become eligible for this benefit. We 
purchased a Medicare supplement policy to supplement the 
Medicare benefits at a combined cost of about $4,000 a year.
    A year later we were introduced to the idea of a privatized 
version of Medicare through an HMO. Today this program is known 
as Medicare+Choice, soon possibly to be Medicare Advantage. The 
advantages of this plan were the emphasis on early detection 
and treatment of illness, its promotion of wellness, the 
opportunity it provided us to become active participants in our 
medical care with our primary care provider as a partner.
    Because this approach resulted in a more efficient 
utilization of resources, the plan offered broader benefits, 
including both brand name and generic prescription drug 
coverage at a lower cost--in fact, at no cost at all, in terms 
of premium, that is.
    The emphasis on early detection and treatment had 
particular appeal to me because of what had happened to my 
father. The traditional way of dealing with medical problems 
was to wait until there were symptoms. Unfortunately, by the 
time symptoms appear, it is usually very late and possibly too 
late.
    In my father's case, just when he was at the peak of his 
career, he became severely disabled by an acute case of 
glaucoma at the age of 55. There had been no symptoms 
whatsoever. After a series of unsuccessful operations, he 
became totally blind at the age of 63. He also suffered from 
serious, but undetected and, therefore, untreated, 
hypertension, the silent killer, and died of a massive heart 
attack at age 69.
    Thus, the lack of proper preventative medical care resulted 
in his being blind-sided by a major disabling illness and the 
resulting total destruction of his ability to lead a productive 
life. Since both of these illnesses tend to be hereditary, I 
assumed that I would suffer a similar fate at some time in the 
future.
    Thanks to the significant emphasis on early detection and 
treatment inherent in the Medicare+Choice program, that fate 
did not become a reality. Instead, my primary care physician 
carefully monitored my progress and made periodic referrals to 
appropriate specialists.
    As a result of having the ophthalmologist monitor the 
pressure in my eyes, I was able to get laser surgery in both 
eyes which saved my eyesight. As a result of careful monitoring 
of my blood pressure, my primary care physician has gradually 
phased in three separate medications, and the pressure has 
stabilized at a normal level with good control.
    As a result of detecting an elevated PSA, prostate 
screening, we were able to treat my prostate cancer in a timely 
fashion, and the followup has shown stability of the PSA at a 
very low level. As a result of detecting an abnormal-looking 
lesion on my right leg, a malignant melanoma was detected and 
treated immediately with an incision, and there has been no 
recurrence in 5 years.
    Had I not had the benefit of early detection and treatment, 
I would either be blind or terminally ill, or perhaps both. So 
this experience has, understandably, made a believer out of me.
    However, this is not the only benefit. By using managed 
care, my wife and I have saved an estimated $60,000 over the 
years, taking into consideration the cost of Med sup premiums, 
the cost of drugs, the benefits in the form of eyeglasses and 
drastically reduced dental costs.
    We have used some of these savings to invest in ourselves 
with a wellness program, including a vigorous cardiovascular 
routine and resistance training at the local YMCA, and a heart 
healthy diet long on fresh fruits and vegetables, no fat dairy 
products, with lots of protein and more exotic items like 
veggie burgers and salmon burgers.
    Most important of all, we have benefited from a very high 
quality of medical care from our primary care providers, our 
specialists, and our medical facilities. We believe that we 
have benefited from an approach that emphasizes disease 
management programs and enables patients to play a larger role 
in their own care.
    By making the necessary changes in our lifestyle, we have 
attempted to monitor our progress through fitness through a 
gradual process wherein we are partners with our physician and 
our health, rather than relying on him after symptoms appear or 
expecting a major bullet.
    We are extremely fortunate to be living in a society that 
has made such great strides in medical research, and we are 
very grateful for Medicare. What we need to do now is 
strengthen the Medicare+Choice program so that it continues to 
provide incentives for prevention, so that seniors can hold up 
their share of the bargain by being proactive in wellness and 
early detection and treatment.
    With adequate funding, the Medicare+Choice program offers 
the potential for seniors to remain not only healthy but also 
productive and active contributors to their families, their 
communities, and to society as a whole.
    Thank you for providing me this opportunity to testify.
    [The prepared statement of Robert Buddy follows:]

                   Prepared Statement of Robert Buddy

    Good morning, Mr. Chairman and members of the committee. My name is 
Robert Buddy and I am a highly satisfied member of a Medicare plus 
Choice health plan in Houston, Texas. I would like to take this 
opportunity to thank the committee for inviting me to participate in 
this hearing on behalf of all seniors. It is a privilege and an honor 
to attend, and I sincerely hope that my comments can make a 
constructive contribution to the proceedings.
    I will describe as concisely as possible how my wife and I have 
benefited from the Medicare plus Choice program and why I believe that 
this important program should be preserved.
    While certain aspects of our experience are unique, the important 
point is that millions of seniors have had similar experiences. My 
objective, then, is to try to put a human face on a Medicare program 
that is working for me and millions of other seniors who have chosen to 
join a Medicare plus Choice health plan.
    My wife and I are now both 76 years old. In 1993, when we both 
turned 65, we became eligible for Medicare, and we were relieved and 
delighted to become eligible for this benefit. We purchased a Medicare 
Supplement policy to supplement the Medicare benefits, at a combined 
cost of about $4,000 a year.
    A year later, we were introduced to the idea of a privatized 
version of Medicare through an HMO. Today, this program is known as 
``Medicare plus Choice.'' The advantages of this plan were its emphasis 
on early detection and treatment of illnesses, its promotion of 
wellness, and the opportunity it provided us to become active 
participants in our medical care with our primary care provider as a 
partner. Because this approach resulted in a more efficient utilization 
of resources, the plan offered broader benefits, including both brand 
name and generic prescription drug coverage, at a lower cost--in fact, 
no cost at all.
    The emphasis on early detection and treatment had particular appeal 
to me because of what had happened to my father.
    The traditional way of dealing with medical problems was to wait 
until there were symptoms. Unfortunately, by the time symptoms appear, 
it is usually very late and possibly too late.
    In my father's case, just when he was at the peak of his career, he 
became severely disabled by an acute case of glaucoma at the age of 55. 
There had been no symptoms whatsoever. After a series of unsuccessful 
operations, he became totally blind at age 63.
    He also suffered from serious, but undetected, and therefore 
untreated hypertension--the ``silent killer''--and died of a massive 
heart attack at age 69.
    Thus, the lack of proper preventive medical care resulted in his 
being blindsided by major disabling illness and the resulting total 
destruction of his ability to lead a productive life.
    Since both of these illnesses tend to be hereditary, I assumed that 
I would suffer a similar fate at some time in the future.
    Thanks to the significant emphasis on early detection and treatment 
inherent in the Medicare plus Choice program, that fate did not become 
a reality. Instead, my primary care physician carefully monitored my 
progress and made periodic referrals to appropriate specialists.
    As a result of having the ophthalmologist monitor the pressure in 
my eyes, I was able to get laser surgery in both eyes in time, which 
saved my eyesight.
    As a result of carefully monitoring my blood pressure, my primary 
care physician has gradually phased in three separate medications, and 
the pressure is stabilized at a normal level with good control.
    As a result of detecting an elevated PSA (prostate screening), we 
were able to treat my prostate cancer in a timely fashion and the 
follow up has shown stability of the PSA at a very low level.
    As a result of detecting an abnormal looking lesion on my right 
leg, malignant melanoma was detected and treated immediately with an 
incision, and there has been no recurrence in 5 years.
    Had I not had the benefit of early detection and treatment, I would 
be either blind or terminally ill--or perhaps both--so this experience 
has understandably made a believer out of me.
    However, that is not the only benefit. By using managed care, my 
wife and I have saved an estimated $60,000 over the years, taking into 
consideration the cost of Med-sup premiums, the cost of drugs, the 
benefits in the form of eyeglasses, and drastically reduced dental 
costs.
    We have used some of these savings to invest in ourselves with a 
wellness program, including a vigorous cardiovascular routine and 
resistance training, at the local YMCA and a heart healthy diet long on 
fresh fruits and vegetables, no-fat dairy products with lots of 
protein, and more exotic items like veggie-burgers and salmon burgers.
    Most important of all, we have benefited from a very high quality 
of medical care from our primary care providers, our specialists, and 
our medical facilities.
    We believe that we have benefited from an approach that emphasizes 
disease management programs and enables patients to play a larger role 
in their own care. By making the necessary changes in lifestyle, we 
have attempted to monitor our progress toward fitness through a gradual 
process wherein we are partners with our physician in our health--
rather than relying on him after symptoms appear or expecting a magic 
bullet.
    We are extremely fortunate to be living in a society that has made 
such strides in medical research and we are very grateful for Medicare. 
What we need to do now is strengthen the Medicare plus Choice program 
so it can continue to provide incentives for prevention and so seniors 
can hold up their share of the bargain by being proactive in wellness 
and early detection and treatment.
    With adequate funding, the Medicare plus Choice program offers the 
potential for seniors to remain not only healthy--but also productive 
and active contributors to their families, their communities, and to 
society as a whole.
    Thank you for providing me this opportunity to testify.

    Mr. Bilirakis. Thank you. Thank you, Mr. Buddy.
    Well, I guess I would prefer a nice debate.
    Mr. Buddy, you are, by your own admission, 10 years from 
19--from when you turned 65----
    Mr. Buddy. Yes, sir.
    Mr. Bilirakis. [continuing] you are about mid-70's now.
    Mr. Buddy. 76.
    Mr. Bilirakis. Yes, 76.
    Mr. Buddy. And so is my wife.
    Mr. Bilirakis. You apparently feel that you are able to 
make choice, you are able to study different--a variety of 
plans. Is that what you did, you studied a variety of plans to 
decide what plan would be best for you?
    Mr. Buddy. Yes, I did. I have been in a health insurance 
program for many years, and my wife is, too, and so we had had 
some practical experience in the commercial area.
    Mr. Bilirakis. All right. You had the experience.
    Mr. Buddy. Yes, sir.
    Mr. Bilirakis. Okay. Now, if you had not had that 
experience, or let us say if you were 4 years older--I mean, 
nobody knows when you are going to--what things will be 4 years 
from now, but are you concerned, based on your personal 
experience, not from your personal experience but experience 
maybe with neighbors, with friends, and what not, who might be 
older, who might be--maybe had the same background that you 
have had, maybe the same education, and what not, are you 
conserved that they may not be able to well determine what 
choice they should choose, what plan they should choose, be 
able to study the plans adequately, etcetera, etcetera? Do you 
get my question?
    Mr. Buddy. I do, and it is an excellent one. I think the 
seniors are surprisingly sophisticated as a matter of 
necessity. Health care at this age is such an urgent thing that 
they can't afford to make a mistake, so they scrutinize these 
plans relatively carefully.
    And we have been able to exchange--communicate with perhaps 
several hundred seniors through various programs, senior 
programs. And I find that, generally speaking, they are very 
rational in their choices, and they appreciate the benefits, 
particularly of a Medicare+Choice plan. The one concern that is 
experienced--it seems almost too good to be true. So if 
anything, there is a little bit of credibility gap. But in 
terms of the merits of the relative programs, they are 
sophisticated enough to make rational and prudent decisions.
    Mr. Bilirakis. So you feel that the average senior is 
sophisticated enough and knowledgeable enough and would have 
the wherewithal to be able to make an intelligent decision.
    Mr. Buddy. Very much so. Yes, sir.
    Mr. Bilirakis. Well, you should know, I would think.
    Mr. Foster, do you feel that it is incumbent upon us to 
make sure that Parts A and B remain separate, as Dr. Moon 
indicated?
    Mr. Foster. No, sir, I don't think it is necessary to keep 
them separate. Legislative historians will recognize that the 
two parts of Medicare were actually separate proposals way back 
when, artfully put together by Wilbur Mills to consolidate 
political support. The two parts are very different. There is 
no particular reason they have to be that way. If Congress 
chose to combine them, there is no particular reason not to.
    Mr. Bilirakis. Thank you.
    Coordination of care--certainly, a number of you have 
placed emphasis on that. Certainly, Ms. Rawlings did when she 
discussed her emphasis on wellness, preventative medicine, and 
chronic disease management. Ms. Grealy, of course, referred to 
it. I think it was Dr. Moon who made the comment that--I don't 
know whether you were referring to Aetna or in general--managed 
care plans would not do--or do not do a good job--I think those 
are your exact words--regarding coordination of care.
    So let us have a little bit of a--I don't have much time 
left. But, Ms. Rawlings, respond quickly. I want to hear from 
Ms. Grealy and maybe from Dr. Moon, too, if we have time.
    Ms. Rawlings. I think--in fairness, I think private plans 
historically have made efforts at coordination of care, but I 
think there have been significant improvements over the last 
several years as awareness of aging and awareness of what that 
means to health plans and to beneficiaries as our customers--
what that means and how significant that is. And I know in 
Aetna's case, in particular, we have made significant strides 
in the last 2 years to significantly improve our coordination 
of care efforts to improve the beneficiaries' experience of the 
plan.
    Mr. Bilirakis. And fee for service, there is no emphasis at 
all on that, is that right?
    Ms. Rawlings. Not to my knowledge. I am not exactly sure 
how that would be constructed. There is not an infrastructure 
there. It is more of an insurance--traditional indemnity 
insurance type program.
    Mr. Bilirakis. Ms. Grealy?
    Ms. Moon. I agree that----
    Mr. Bilirakis. All right. Since you have the mike in 
possession----
    Ms. Moon. I am sorry.
    Mr. Bilirakis. Go ahead.
    Ms. Moon. I agree that there are valuable plans that are 
out there that do a good job of coordinating care. But if you 
look at a large number of commercial plans that were put 
together not necessarily to really coordinate care but to get 
discounts from doctors and hospitals and operate in that 
fashion, that has never been a strong suit of theirs, and it 
has been a problem for many beneficiaries that are in those 
plans.
    Mr. Bilirakis. Can a good coordination of care--and this is 
so very important. And believe it or not, that is part of our 
discussions constantly when we talk about reforming Medicare. 
So it isn't always concern about privatizing, etcetera, 
etcetera. It is doing some real good things.
    Can, under fee for service, we do that?
    Ms. Moon. I believe that there are ways in which you can do 
it. It is clearly harder than in a capitated world. There is no 
doubt about it. But I believe that most people have 
demonstrated that they prefer the fee for service world. And 
the lack of ability of a lot of plans to do it that are 
presumably HMOs suggests to me we should give that a try as 
well.
    Mr. Bilirakis. Ms. Grealy, very briefly, please. Thank you.
    Ms. Grealy. Well, I think a critical distinction is we are 
seeing these things in the private sector. And the ability to 
quickly respond to consumer demand, consumer preference, is 
something that we don't have in the existing Medicare program.
    We see the existing Medicare program, I think, playing 
catch up, seeing that disease management programs are 
beneficial, and perhaps we should look at those, do a 
demonstration project. So I think the real value of looking at 
some of these private sector models, again, is how quickly they 
can respond and the flexibility that they have to respond to 
their customers, their beneficiaries.
    Mr. Bilirakis. Thank you very much. Five minutes does go 
awfully quickly.
    Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Buddy, thank you for your comments especially, and I 
hope that we can reform Medicare, that traditional Medicare can 
offer that kind of preventive care and management of care and 
coordination of care. So thank you for that.
    There was an article in The Wall Street Journal about 2 
weeks ago. I want to read one paragraph. ``The Congressional 
Budget Office Chief tells Republican Senators the Medicare 
overhaul plan could add hundreds of billions of dollars in 
costs. Administration cost-saving claims for its plan also are 
belied by early data from a demonstration project. Small 
savings from encouraging seniors to opt for private plans are 
offset by high administrative costs.'' Ms. Moon, the people 
that argue for FEHBP tell us that seniors should have an 
incentive to choose plans with lower premiums. That would save 
the government money. Would restructuring Medicare in an FEHBP-
like program save Medicare from insolvency?
    Ms. Moon. No, I don't believe that it would. I think that 
it is very difficult to imagine that you can double the number 
of people in this program for a product that people value and 
which the costs we assume are going to continue to rise over 
time will come about through any kind of greater efficiency 
alone.
    I also believe that we have to be very careful in making 
the distinction between passing off higher costs on to 
beneficiaries through higher premiums, higher out-of-network 
expenses, and so forth, and referring to that as reform or as 
improving the program necessarily.
    Mr. Brown. So if, in fact, it would save money, you are 
suggesting the cost--it would save the government money 
ultimately, if, in fact, it would, you are suggesting that the 
way that--the only way to really do that is to shift costs more 
onto seniors?
    Ms. Moon. I wouldn't say the only way. I think there are 
modest savings that can be gotten from improving coordination 
of care, and so forth. But that takes a lot of attention and 
time, and the administrative costs are higher. And so to do it 
well, you have to have higher administrative costs, sort of by 
necessity.
    So I have not seen evidence that suggests massive savings 
from that kind of an approach, but, rather, more modest 
savings.
    Mr. Brown. Those who argue for privatization often talk 
about their--I think it is an ideology more than it is a 
practical decision based in--or practical suggestion based, in 
part, on their belief that the private sector, by definition, 
does things more efficiently than the public sector. I think 
Medicare shows that is not really true.
    You authored a paper recently that I would like to insert 
in the record that arrives at a different conclusion. Would you 
share that with us?
    Ms. Moon. We used national health expenditure data over the 
last 30 years, essentially said let us start with everyone at a 
value of 100, private insurers at 100, Medicare is 100, 
recognizing that on a per capita basis Medicare does cost more, 
but really compare the rates of growth over time.
    And the rates of growth on a per capita basis for Medicare 
are better than the per capita rates of the private insurance 
companies. That is even after you control for the differences 
in what is covered, particularly by taking out prescription 
drugs, for example, and on the Medicare side by taking out home 
health and skilled nursing care.
    Mr. Brown. Ms. Grealy, you mentioned Medicare's 
administered pricing system. How does this system differ from 
the way private health insurers pay providers?
    Ms. Grealy. Well, I think this is a nice segue. And when we 
are talking about the relative growth in the Medicare program 
versus the private sector, it is very easy to control growth 
when you can administer prices. I think throughout many of the 
testimony that I read in preparation for the hearing today, we 
see that Medicare is such a large presence. It is the, you 
know, 500-pound gorilla. It establishes a price. Then, everyone 
has to accept that price. There is no negotiation.
    The difference between administered pricing and negotiation 
in the private sector is just that word. There is a negotiation 
that occurs, so that the providers at least have some power in 
the private sector that you just don't find. And that is why we 
are able to control growth in Medicare through things like the 
Balanced Budget Act of 1997, which we are still continuing to 
do givebacks because those cuts were so deep at that time.
    So I would say the big distinction is administered pricing, 
no negotiation on behalf of the providers.
    Mr. Brown. Could we do the same kind of negotiation if 
Medicare would use the 40 million beneficiaries to negotiate 
prescription drug prices for beneficiaries?
    Ms. Grealy. I am not sure that that is a negotiation. That 
is establishing the price. I think it would be great if there 
were some competition in the----
    Mr. Brown. So it is a negotiation if it is private sector, 
but it is price control if it is the public sector?
    Ms. Grealy. Well, if there is true competition, and, yes, 
you do have an ability to negotiate with the government, that 
it is not we are going to establish the price, and you take it 
or leave it. That is the distinction.
    Mr. Brown. Thank you.
    Mr. Bilirakis. Mr. Buyer. Eight minutes, 7 minutes, 7\1/2\ 
minutes.
    Mr. Buyer. Thanks. Seven and a half minutes.
    Mr. Bilirakis. Seven and a half.
    Mr. Buyer. First of all, I would like to thank Mr. Brown 
for placing in the record Figure 1. That helps correct the 
fiction in his earlier statement.
    That is reiterated by testimony presented by Mr. Foster on 
page 3, the second paragraph, which is also very similar to 
testimony provided to the U.S. Senate in year 2001. So I think, 
Mr. Brown, what you have done by inference is compliment the 
Congress in passing the Balanced Budget Act that would have, in 
fact, saved Medicare. So I appreciate that, even though you 
probably voted against it.
    Let me move and ask--I want to exclude Mr. Foster and Mr. 
Buddy. You are out of the political arena, all right? And I am 
going to go down and ask a series of questions, and I don't 
have the time to get into a whole bunch of discussion on them.
    Some things that are in front of us with regard to proposed 
changes come from many different sectors with Medicare, and 
they have been discussed before the bipartisan commission and 
Breaux and Thomas. One would be increasing the program's 
eligibility age. When Social Security did this in 1983, it 
moved it to age 67, it excluded Medicare.
    Let me go right down the line whether or not you would 
increase--support increasing the age to 67, and even if we were 
to do it on a graduated scale. Dr. Berenson, would you----
    Mr. Berenson. I would oppose it. If anything, one of the 
major----
    Mr. Buyer. That is all I need to know.
    Mr. Berenson. Okay.
    Mr. Buyer. Whether you oppose it or support it.
    Ms. Rawlings?
    Ms. Rawlings. Aetna does not have a position either way.
    Ms. Moon. I would oppose it, because it doesn't save much 
money.
    Mr. Buyer. That is all I need to know.
    Ms. Grealy?
    Ms. Grealy. Speaking personally, it may be one of the tools 
we might have to look at, personally.
    Mr. Buyer. Yes. It is on the table.
    Ms. Kennelly. I would oppose it, sir.
    Mr. Buyer. Oppose. All right.
    Next question is with regards to--Ms. Kennelly had brought 
this up earlier about means testing. Someone yesterday used the 
language ``income relation.'' Is this a discussion that we 
should be having? Would you support this concept, for us to 
look at this, into Part B on Medicare?
    Doctor?
    Mr. Berenson. No, I wouldn't.
    Mr. Buyer. Ms. Rawlings?
    Ms. Rawlings. We would be willing to discuss it.
    Mr. Buyer. Dr. Moon?
    Ms. Moon. No.
    Ms. Grealy. Should examine it.
    Ms. Kennelly. Not yet.
    Mr. Buyer. Not yet. All right.
    I understand and respect the universe--making sure that it 
is universal, but obviously we also have to examine that there 
are people who are lower income brackets that have been paying 
into the system for over years and are subsidizing 
millionaires, and we need to really self-examine that.
    The other question I have is the increased beneficiary 
cost-sharing. Part B coinsurance, 20 to 25 percent, and Part B 
deductible, from 100 to make it comparable to private plans. Is 
this something that we should be considering?
    Dr. Berenson? May I have order? I can't hear.
    Mr. Berenson. Yes, I think we should be looking at cost-
sharing.
    Mr. Buyer. Thank you.
    Ms. Rawlings. I think we need to consider it. Absolutely.
    Mr. Buyer. All right. Thank you.
    Ms. Moon. I think particularly the deductible you need to 
look at. The other cost-sharing I believe is high enough.
    Mr. Buyer. All right. Thank you.
    Ms. Grealy. Yes, it should be looked at.
    Mr. Buyer. Thank you.
    Ms. Kennelly?
    Ms. Kennelly. It should be looked at, but it should be 
balanced when you look at the statistics of how many use the 
100 and how many the 840.
    Mr. Buyer. That is fair.
    With regard to introduction of market-based innovations, 
into the current key for service--fee for service program, such 
as case management programs for heart disease, diabetes, 
chronic pain, etcetera, is this an innovation that we should be 
considering into the present model?
    Mr. Berenson. Absolutely.
    Mr. Buyer. Thank you.
    Ms. Rawlings. Absolutely.
    Ms. Moon. Absolutely.
    Mr. Buyer. Thank you.
    Ms. Grealy. Yes.
    Ms. Kennelly. Yes.
    Mr. Buyer. All right. With regard to the issues on major 
structural reforms, Senators Breaux and Thomas had introduced 
to the bipartisan commission the idea of combining Parts A and 
B in the programs into a single $400 deductible. Is this 
something that we should be considering?
    Mr. Berenson. I don't have an opinion.
    Ms. Rawlings. We believe it is worthy of consideration.
    Mr. Buyer. Thank you.
    Ms. Moon. I think it should be looked at as well.
    Mr. Buyer. Thanks.
    Ms. Grealy. I agree.
    Ms. Kennelly. I still believe in trust funds, and I think 
Part A is a trust fund. And if you put it into Part B, you lose 
it.
    Mr. Buyer. Put it in Part B. All right.
    The other comment I have--Ms. Kennelly, you had made a 
comment on the issue on means testing, and you cited the 
difficulty in determining seniors' income was your statement. 
The only currently operational system to identify income is the 
IRS, that I know of.
    The Senate version of the DBA had a proposed means testing 
that went to conference, and it used a parallel system of the 
IRS to be created through CMS to identify levels of income. If 
we end up in that approach, should we turn to the IRS to be the 
operator of that system, or should we create a separate 
parallel system within CMS, or is that too bureaucratic? Your 
opinion.
    Ms. Kennelly. Well, Congressman, having seen the news last 
night at how much we are now collecting through the IRS because 
of, really, the changes that have happened over the last few 
years, I don't want to put any more burden on them. But I am 
afraid if we just rely on the IRS, we won't find out an awful 
lot because so many seniors don't have an income high enough to 
pay taxes. And that is one of the reasons it is so hard to find 
out what the income is.
    So if we ended up in this path, you would advocate not 
having the IRS, but to create a parallel system within CMS that 
turns to the IRS for the shared data, but it really should be 
run through CMS.
    Ms. Kennelly. I think my point was when I saw how Bruce 
Vladeck explained how hard it was to find these income numbers, 
the administration cost could go up because we were looking for 
those numbers.
    Mr. Buyer. Right.
    Ms. Kennelly. And we won't get anything out of it.
    Mr. Buyer. Well, I recognize that as a point. Sometimes I 
have to decipher, is that a point or an argument? And I have--
no, I am just trying to say if we have this in front of us, how 
do we work through it? And that is the point of my question.
    Ms. Kennelly. I think that is my concern about income 
related, because I think it is a slippery slope. You cut it off 
at a certain point, and then later when things aren't good you 
cut it off lower. And where does it start and----
    Mr. Buyer. But when things are great, you increase it even 
higher.
    Ms. Kennelly. Well, you know, it was not that many years 
ago that things were pretty great.
    Mr. Buyer. Well, and that is the challenges that we have in 
Medicaid----
    Ms. Kennelly. Yes. Yes.
    Mr. Buyer. [continuing] for example. States saw this money 
coming and increased the percentage above poverty and 
eligibility, and now they come to us to pay the bill.
    All right. Thank you for your testimony.
    Ms. Kennelly. Thank you, Congressman.
    Mr. Buyer. Appreciate your service here.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Buyer. I yield back.
    Mr. Bilirakis. Let us see, Mr. Pallone.
    Mr. Pallone. Thank you, Mr. Chairman.
    I wanted to talk about the lack of a defined benefit. In 
other words, if you change Medicare into a voucher system, 
which is what I believe that the Republican leadership is 
proposing, it would mean that seniors in different parts of the 
country would pay different premiums and receive different 
benefits.
    For example, under the President's vision for reform, which 
I think, again, is a voucher, Medicare would operate very 
differently than it does today. Each senior would receive a 
contribution from the government that can be used to help pay 
the premium of the plan of their choice. In the Federal 
employees' program, the government's contribution is equal to 
72 percent of the average premium.
    I guess what I am saying is that this geographic variation 
in price could create equity problems if we restructured 
Medicare into a voucher model. And I just wanted--I would ask 
initially Barbara Kennelly, and then Mr. Berenson, what are 
some of the problems that could result from a system where 
seniors in different parts of the country pay different 
premiums and receive different benefits? That is a concern, and 
if you would comment. We will start with Barbara.
    Ms. Kennelly. Well, I think we already know, Congressman, 
that that is exactly what has happened and will continue to 
happen, because of geography, because of all sorts of different 
things. So I think that is one of the reasons that so many 
seniors--you know, I listened to Mr. Buddy talk, and, you know, 
his thing was perfect. It all worked out.
    And, really, you know, many of the people that are in the 
private plans like them. But I still have to come back to the 
question of if it is so good across the--you know, across the 
surface, why are only right now something like 11 or 12 percent 
of the people in these plans? Why do we get these frantic 
calls, people willing to spend out-of-pocket one-third to stay 
in Medicare?
    So I think that not being able--you know, I know that the 
chairman said that, you know, was leading into that seniors can 
make decisions and can understand choice, but what I----
    Mr. Bilirakis. I didn't say that. Mr. Buddy said it.
    Ms. Kennelly. Okay. And let me tell you, he could have sold 
me my policy, just the few minutes we talked this morning. But 
I just think consistency is what seniors are looking for. They 
want to be able to rely on something, and that is why when they 
do the polls that you people mention that they say they are 
satisfied.
    And they are willing to pay more because they want to be 
sure that they have what they want. What they want in choice, 
Congressman, is they want choice of their doctors. And we saw 
that so dramatically when that--two sentences in the State of 
the Union. Just our phones rang off the hook, so we know they 
want choice of doctor. But I am not so sure they are asking for 
choice of plan. I think they like their Medicare.
    Mr. Pallone. Let me ask Mr. Berenson, and then we will go 
back to Mr. Buddy.
    Mr. Berenson. Very briefly, I came to HCFA in April 1998, 
and by June plans started withdrawing from the Medicare+Choice 
program. I didn't attribute that to my coming necessarily.
    But what we faced in Medicare+Choice was dramatic 
geographic variation in how much plans would get because of 
this artifact of paying them based on how much private--I mean, 
how much traditional Medicare was paying on the fee for service 
side. It is still a problem. There are some parts of the 
country where plans can provide very generous benefits and do a 
good job, although the trust fund is losing money, and in other 
places plans can't get in there at all and can't offer 
benefits.
    If you are trying to define a government contribution based 
on these local variations in fee for service spending, you 
would then formalize this kind of geographic inequity, and I 
think you would have increased problems over what you have 
today in trying to justify that kind of horizontal inequity 
across the country.
    Mr. Pallone. I know that Mr. Buddy had his hand up. I just 
wanted to say one thing, though, and I hope nobody takes 
offense at this, but I have to use my free lobster dinner 
analogy.
    When I--because I know Mr. Bilirakis raised the issue 
about, you know, can seniors make choices? I mean, obviously, 
seniors are able to make choices. Nobody suggests that they are 
not. But there is just a lot of misinformation that is out 
there.
    I mean, I have said before the committee before, we had the 
case where, you know, there was an ad in the paper, a free 
lobster dinner if you came down and listened to the HMO. And I 
had all of these seniors going down there and signing up, and 
there is just a lot of misinformation and incentives that are 
used. So even though people are, you know, intelligent, they 
may not get the right information in terms of making those 
choices.
    If you want--you wanted to say something.
    Mr. Buddy. Yes. I don't want to encroach too much on your 
time. No. 1----
    Mr. Pallone. Well, there is almost no time left.
    Mr. Buddy. First of all, lobster dinners can be a lot of 
fun, and I don't know if that alone is going to influence their 
decision. I hope not. If I am right, that won't, but that is 
not necessarily true.
    Second, I would love to have Ms. Kennelly as a client. She 
would make, I am sure, a very good----
    Third, I would like----
    Ms. Kennelly. I have Medicare.
    Mr. Buddy. Okay. We need to talk. At any rate, the second 
thing I would like to say is I perhaps spoke too quickly when I 
responded to the chairman's first request for information as to 
whether seniors are able to make rational decisions. I, too, 
read that editorial since it, by pure coincidence, happened to 
appear in The Houston Chronicle just as I was leaving.
    I did write to the editor. I have never written a letter to 
the editor before and probably never will again, but it was--my 
ran five pages. And my wife says that now probably we will be 
desubscribed from The Houston Chronicle. There were a number of 
misstatements, and I think there have been some misstatements.
    Your point is absolutely correct. Seniors do become 
confused by misstatements, and there were a number of things in 
that editorial--I am not trying to pillory The Houston 
Chronicle, but I think unfortunately created a misperception 
that--there are a number of them. I identified 4 or 5 in my 
rebuttal, and I don't want that necessarily to be entered into 
the minutes of this proceeding.
    But one of the things that I think caused seniors to have 
tremendous inhibitions about the Medicare+Choice program was I 
don't think we can really necessarily fault the Medicare 
carriers that have made a valiant effort on--you are well aware 
of the 2 percent cap and the fact that Medicare expenses are 
going at 10 percent. They have made a valiant effort to stay 
the course and to make--become a viable option.
    Unfortunately, that has proved to be very difficult, and as 
a result there has been a steady deterioration of their 
financial situation to the point where they had to evacuate the 
market. And one of the principal reasons was not competition or 
it wasn't a lot of other things. It was simply the fact that 
the money wasn't there.
    And I think seniors have become very apprehensive. There is 
one HMO carrier that left the market. There are about 20,000 
seniors who were in that program who now aren't, because they 
simply have refused to believe anymore. And I think you are 
probably----
    Mr. Bilirakis. We have all had plans in our districts that 
have----
    Mr. Buddy. The same thing.
    Mr. Bilirakis. [continuing] canceled out.
    Mr. Buddy. And I think really----
    Mr. Bilirakis. No question about that. If we were to do 
anything like that, by gosh, we would have to make sure that 
there are safeguards in some way or other. I will be darned if 
I--that is why we hold those hearings, so we can learn.
    Mr. Buddy. I do have a possible solution on that. Wellness 
is bipartisan----
    Mr. Bilirakis. Well, why don't you write it down for us and 
furnish it, or possibly respond to maybe one of the other 
inquiries.
    Mr. Deal to inquire.
    Mr. Deal. Thank you, Mr. Chairman.
    Dr. Berenson, I would like to follow up on your last 
comments about the disparaging--disparity between regional 
plans that were offered. Would you elaborate on why you think 
that exists, and how does it exist in a competitive 
environment?
    Mr. Berenson. The regional variations in payments to the 
health plans in Medicare?
    Mr. Deal. I was thinking you were talking about the 
availability of services.
    Mr. Berenson. Well, they run together. Basically, ever 
since the TAFRA Act was passed in the early 1980's to set up 
private plans, risk plans in Medicare, the basis for payment to 
them has been based on how much the traditional program pays in 
fee for service at the county level.
    There are huge geographic variations in how much we pay. In 
fact, to me, that is one of the unexamined questions, is how 
the fee for service program can get some control over those 
variations. But basically----
    Mr. Deal. I agree with that, too.
    Mr. Berenson. [continuing] if you are in a part of the 
country where the traditional program has a lot of spending per 
capita, if you are an HMO, you can come into that market, get a 
pretty generous payment, although it is obviously decreasing as 
rates have gone up only at 2 percent, and be able to, one, come 
in and offer a product, and, two, offer pretty good benefits 
such that somebody would leave traditional Medicare. And so 
that is sort of basically a function of those payment levels.
    Mr. Deal. I see. So you are saying that that is 
precipitated by the variability in the fee for service schedule 
by regions as it exists now.
    Mr. Berenson. Yes. And then one of the problems, then, 
for--on the financial side is plans will go into the generous 
payment areas, not go into the other areas, and so, therefore, 
we lose money. We are paying plans more in the one area, and 
without an effective risk adjuster are paying even more, but 
aren't getting the commensurate savings on the other side. So 
the net is that the--we lose money on the Medicare+Choice 
program.
    Mr. Deal. Of course, you could make the same argument in 
the fee for service, that that is the reason some physicians 
are withdrawing from the program is because of those inadequate 
reimbursements as well. So----
    Mr. Berenson. Well, you know, and, in fact, I think it 
has--that has gotten everybody's attention recently, which to 
me is one of the countervailing pressures on administrative 
prices. Medicare has to find the balance between paying prices 
that will get providers to participate and not deny access to 
beneficiaries.
    And so I actually think that there are some protections. 
And to restate what I said earlier, Medicare gets lower rates 
than private payers do for the most part.
    Mr. Deal. Dr. Moon, one of the comments that you made was 
to take issue with the fact that under the alternate plans that 
are available, Medicare+Choice, etcetera, that there were 
variable premiums from plan to plan. And I presume those 
variable premiums are in part based on the options that are 
afforded under those plans.
    Would you agree that that is basically the difference in 
the fees that are charged?
    Ms. Moon. Well, that is right. At the present time, private 
plans can charge additional premiums and offer additional 
benefits. They must, if they are providing just the basic 
Medicare services, live within that rate. But otherwise----
    Mr. Deal. Well, is that bad, that those who wish to pay 
more premiums and get better services shouldn't be allowed to 
do that? Is that your argument?
    Ms. Moon. No.
    Mr. Deal. So you favor that.
    Ms. Moon. In answering the question about the variation or 
the potentially high cost of services, my concern is that that 
will be the mechanism that people use to save dollars for 
Medicare, and that is have the government underfund the program 
and then pass the higher premiums off pretty much universally 
on to beneficiaries.
    Mr. Deal. Well, I think that assumes quite a bit, to assume 
that that would be the case.
    Let me ask you about one comment that you had. It is--you 
were talking about the fact that fee for service doesn't let 
people spend as much time with the patients. And you say one 
simple way to deal with that is to give the beneficiaries a 
certificate that spells out the care consultation benefits. Are 
you talking about just a certificate that will say you can 
spend X amount more minutes or hours with your doctor just to 
talk and feel good about it?
    Ms. Moon. No. I am talking about the issue that people have 
objected to the fact that it is very difficult for physicians 
to spend the time with Medicare patients, because there is a 
bias toward keeping the charges at a relatively low level and 
not essentially allowing the really high levels to be 
reimbursed periodically for beneficiaries.
    I think that an assessment by a physician is a good idea 
periodically. I don't think that you should just do it across 
the board by raising fees to physicians, but, rather, think of 
ways to get beneficiaries themselves to be interested in 
saying, okay, I can go to you and have this expectation. It is 
a contract that the two would have--would engage in.
    Mr. Bilirakis. The gentleman's time has expired.
    Ms. Capps for 8 minutes.
    Ms. Capps. Thank you, Mr. Chairman.
    A quick point to follow up on Mr. Buyer's questions about 
means testing Medicare. Almost half--45 percent of the seniors 
in Indiana, Mr. Buyer, are low income, meaning that they earn 
less than $18,000 a year. It doesn't sound like there is a lot 
of money to be saved in that State for means testing. You would 
have to start charging people more money pretty low on the 
income scale to get much savings.
    A question for you, Dr. Moon. Medicare+Choice plans, in 
much of my district, have cut benefits, raised cost-sharing, 
and, in fact, pulled out entirely. This has happened all over 
rural America. Do you believe that private plans can offer 
current Medicare benefits, plus a prescription drug benefit, 
plus preventive care services, to rural America for less than 
or even the same as traditional Medicare?
    Ms. Moon. No, I----
    Ms. Capps. I know this is a big topic. If you could be 
brief, because I have a couple more questions.
    Ms. Moon. So I should just say no.
    Ms. Capps. You can say no, but----
    Ms. Moon. I believe that private plans can do a very good 
job of trying to be efficient in the right circumstances. But I 
don't think even very good private plans can provide 
prescription drug benefits that now run in the hundreds of 
dollars for the amount that Medicare pays, if they are being 
paid appropriately.
    They were able to do so in the past because the payments 
were actually higher than what those plans needed to provide 
basic Medicare benefits, and they offered extra benefits. So I 
believe that realistically we have to assume that private plans 
or traditional Medicare, if we are going to add prescription 
drug benefits, we have to add dollars.
    Ms. Capps. Thank you.
    And, Dr. Berenson, this is your topic, too. Could you 
address the same point? But also, you know, we are talking 
about Medicare+Choice now not just as an option for 
prescription drug coverage but as a way to try to update and 
modernize a hopeless, outdated Medicare. And I don't agree with 
that, but that seems to be what the administration is doing.
    Would you respond to my rural district, and also talk about 
how--some of the things you weren't able to do in your opening 
statement.
    Mr. Berenson. Yes.
    Ms. Capps. Just also briefly, though, because I have one 
more question.
    Mr. Berenson. Let me just focus on the rural issue. One of 
my jobs in the PPO I worked at was involved with negotiating 
with physicians and hospitals, and we wound up paying lower 
rates to Georgetown and George Washington than the few rural 
hospitals we had, because they were the sole hospital out 
there.
    The only way that a private plan actually goes into rural 
areas now in private fee for service plans is being able to use 
the Medicare fee schedule, because they don't independently 
have any negotiating leverage.
    They don't have an infrastructure to do some of the good 
stuff that managed care actually does, so my sense is that what 
we would be doing is permitting a private plan to put in the 
same rules that traditional Medicare has, but they take their 8 
or 10 percent of administrative costs off the top. I am not 
sure what advantage we have provided to anybody.
    Ms. Capps. And this is rural America. Are there some other 
parts of America that would face the same challenges?
    Mr. Berenson. Well, again, this does go somewhat to the 
issue of the function of a lot of private plans for private 
employers is to negotiate rates. Some private plans only 
survive--I mean, Medicare+Choice plans because for out-of-
network care they are able to use the Medicare fee schedule, 
and on their own wouldn't be able to have any mechanism to not 
be paying charges right now.
    So it just doesn't make sense. There are private plans in 
Medicare+Choice, like group and staff model HMOs, and certain 
kinds of HMOs that truly do provide state-of-the-art disease 
management which we should have in Medicare. We should figure 
out how Medicare+Choice can be redesigned to do that.
    But to bring in this whole variety, array of private plans 
that are sort of there, would be there to figure out how to 
create benefit packages to attract healthy people, serves no 
useful purpose as far as I can tell.
    Ms. Capps. Thank you.
    Finally, Barbara Kennelly, from your days of being our 
colleague here, I remember you speaking often about women 
living longer, earning less, having less retirement security, 
generally also going to the doctor more often. If we make 
changes to Medicare that reduce stability in the program and 
lead to different benefits and cost-sharing in different areas, 
tell me--tell us, now probably not a lot of time remaining--and 
this, again, is a big topic. But this is about women, widows 
and others who----
    Ms. Kennelly. Congresswoman, even though we have made vast 
advances in the----
    Mr. Bilirakis. Your mike, your mike.
    Ms. Kennelly. Congresswoman, though we have made, you know, 
incredible advances in the women--look at the women sitting at 
this table--advances in who is college educated, women's life 
experience has stayed pretty much the same. They still earn 
less than men. They still--you know, they haven't found any way 
for anybody but us to have the children. So we go in and out of 
the workforce.
    And I have got to tell you, Mr. Chairman, we women live 
forever. So it is really important, the universality of the 
Medicare, because you can't live too long for it. It stays 
right with you until the day you die, and that is one of the 
good arguments for staying with the fee for service.
    Often women have much less money. As we know, one out of 
four unmarried women only have Social Security, and they live 
on it, and they have to take care of their health out of it. So 
yes, I do still give those speeches of why it is so important 
to have a universal program for Medicare and Social Security.
    Ms. Capps. Thank you.
    And I still have a little time left. I bet you, Mr. Buddy, 
you would like to make a comment on this as well. And we 
shouldn't be restrictive to women, should we?
    Mr. Buddy. The reason she would make an excellent client is 
that she----
    Ms. Capps. Oh, you are not going to use my time to----
    Mr. Buddy. She made a very interesting comment, and I think 
it is very relevant. She said illness by seniors is a 
bipartisan type of thing. And essentially, whether it is public 
or private, I think it is very important that we stress the 
wellness idea, which is a win-win deal for everyone.
    And one of the things I should mention, the THI, the Total 
Health Initiative sponsored by the YMCA, they have six pilot 
projects that will make it feasible to implement, utilizing 
their facilities and their staff. They would be receptive to a 
joint venture with the government in terms of making it 
feasible to make available to all people, whether private or 
public, the wellness needs analysis and specialized treatment.
    So I think the main thrust should be a bipartisan approach 
to try to deal with things like disease management, which I 
think can be beneficial to all segments of the population.
    Ms. Capps. I know that consumers would wish that we would 
be bipartisan as we respond to the needs to modernize Medicare.
    I just have a few seconds. Ms. Rawlings, can you address 
this issue of your own company's ability to stay in a rural 
area?
    Ms. Rawlings. I am glad you asked me. I think I would agree 
with Dr. Berenson. I think there are challenges in the way we 
contract with physicians and hospitals in those rural areas. It 
is difficult to negotiate, and we do have abilities around 
providing--using the Medicare fee schedule for some cost 
protection.
    I think the more critical issue, though, as you are 
thinking about coordination of care is what is required in that 
is an integrated delivery system. And many times, if your 
enrollment in rural California----
    Ms. Capps. Right.
    Ms. Rawlings. [continuing] you don't have those integrated 
delivery systems available to you. You might have to drive 80 
miles to see a nurse for your, you know, geriatric exam. It 
makes it very difficult to deliver comprehensive, coordinated 
care in those markets. So I think that is a limitation for a 
coordinated care system.
    I think, however, private plans can provide value in 
working with the government and finding ways to enhance the fee 
for service programs in those areas, or maybe looking at hybrid 
products that take the best of both worlds.
    Ms. Capps. Can I get a yes or no from Dr. Berenson? I know 
I am over my time.
    Mr. Bilirakis. The gentlelady's time has expired. But if it 
is important for you to get a yes or no, as long as it is not 
followed by----
    Mr. Berenson. Very briefly, I basically agree. My point is: 
why have 3 or 4 plans trying to work with a physician to 
coordinate care instead of a single plan, traditional Medicare, 
working to do that, perhaps with private sector contracting.
    Mr. Bilirakis. Yes or no.
    Ms. Capps. I got my answer.
    Mr. Bilirakis. All right. I am sure you liked that answer, 
yes.
    Mr. Strickland, 8 minutes.
    Mr. Strickland. Thank you, Mr. Chairman. And I want to 
thank the witnesses.
    I was in the chamber of the House of Representatives when 
the President gave his State of the Union address. And I 
started to applaud--I applauded several times during that 
address, but at one time I started to applaud and then I 
stopped.
    The President said something to the effect that if a senior 
citizen likes traditional Medicare and wants to keep it just 
the way it is, they should be able to do so. And I stopped my 
applause, because I realized that traditional Medicare, just 
the way it is, is without a prescription benefit.
    And then, the President said that the Nation should take 
control of our health care away from the bureaucrats, the trial 
lawyers, and HMOs, and return it to doctors, nurses, and 
patients, and I applauded. And then, the President described 
his plan, and under his plan, as I understand it, if Medicare 
or an older person is going to get comprehensive prescription 
drug coverage, they are going to be forced into basically an 
HMO, because if they stay in traditional Medicare what is 
available to them is going to be terribly limited.
    I think there were contradictions in what the President 
said. I hope they weren't purposeful contradictions, quite 
frankly, because they were basic and fundamental to what we are 
dealing with.
    I have here a publication from the Center on Budget and 
Policy Priorities, and I would like to read this statement. 
``The 75-year cost of the administration's tax cuts is more 
than three times the long-term deficit in Social Security and 
larger than the long-term deficits in Social Security and 
Medicare combined.'' And that leads me to something that I said 
yesterday in a hearing on prescription drug coverage. Our 
problem is a value problem, not a monetary problem, because if 
we truly were determined to make a prescription drug benefit 
that was affordable to all of America's senior citizens, if we 
truly were committed to that, we would do it. And we would be 
cost conscious, certainly, but we wouldn't let the financial 
obligations of doing so keep us from proceeding.
    So I have a question for you, Ms. Kennelly. The President 
argues that we really can't afford Medicare as it is, and 
improve it, and make prescription drug benefit as a part of it, 
and so on. People argue that we can't afford to spend more than 
$400 billion for a prescription drug benefit.
    However, this argument seems a little disingenuous when you 
look at the size of the tax cuts the administration is 
proposing. And as I said, according to the Center on Budget and 
Policy Priorities, it is disturbing information. It seems that 
there are--the people who are saying we can't afford to improve 
and keep traditional Medicare for everyone are the same ones 
who would divert our existing resources to tax cuts. In fact, 
these tax cuts, I think, are going to jeopardize our ability to 
preserve Medicare, let alone improve it.
    If these tax cuts were enacted, we would be running up more 
deficits instead of paying down the national debt. The interest 
on these deficits would eat up precious revenue.
    And my question to you, Ms. Kennelly, is, do you believe 
that the administration's proposed tax cuts could jeopardize 
the future of the Medicare program? And do seniors in your 
organization--do seniors in your organization think that some 
of these tax cuts should be used to add a drug benefit to 
Medicare instead?
    Ms. Kennelly. Well, Congressman, I have been known to use 
that exact quote that you quoted recently, at a large 
convention of elderly services in Chicago last week. What you 
say is the truth. I had hoped we wouldn't get into this 
discussion, because I understand the budget resolution passed 
by the House. It does have a very large tax cut in it.
    I am sure that I would probably--my organization is 
bipartisan, but I am sure I will go back to my roots and say 
yes, I think the tax cut is too large. Yes, I think the 
sustainability of Medicare and Social Security will be 
challenged if that tax cut passes at the height that it is 
right now. There is no doubt about it. You just have so many 
dollars, and right now we are in deficit situation, budget 
deficit situation, and we will increase that deficit, if, in 
fact, those high tax cuts are passed.
    I also want to see a democracy, and I understand that the 
President is the President, and the Republicans have the 
majority in both the House and the Senate. So this is a 
difficult situation.
    And, yes, I can tell you, when you look at senior incomes, 
and when you see that only 19 percent of seniors earn over 
$40,000 or even have over $40,000, they are going to get a very 
small tax cut. Obviously, that is the fact. And so, of course, 
they would much rather have a prescription.
    Mr. Strickland. Thank you.
    I would like, if we could, just to go down the table, 
beginning with Mr. Foster, if you could give me a brief 
response, yes or no, or if you want to make it a little 
longer--the same question.
    Mr. Foster. I would pass on the desirability of the tax 
cuts from offering an opinion either way. I would mention that 
the primary source of revenue for the Hospital Insurance Trust 
Fund is payroll taxes, which would be unaffected. The real 
issue is the general revenue financing for Part B of Medicare. 
The law provides for that revenue. How you get it is the 
challenge, and that would be the real issue.
    Mr. Strickland. But it is true that we have a limited 
amount of resources. And if we chose, we could use some of 
those resources to enrich Medicare beyond even the amount 
available in the trust fund. I recall maybe 3, 4 years ago 
members of both parties were pledging to use at least part of 
the deficit to do that.
    Yes, Dr. Berenson.
    Mr. Berenson. My priority would be on Medicare and Medicaid 
and not--I mean, Medicare, Medicaid, and Social Security, 
rather than the tax cut. But my point would be that I think we 
can find some savings, significant savings, in the traditional 
Medicare program if the program had new authorities to do so. 
And that we don't have to just assume that we have to spend 
what we have to spend. We can add prescription drugs and find 
offsetting--not fully offsetting but some savings.
    Mr. Strickland. Thank you.
    Ms. Rawlings. I would add that Aetna does not actually have 
a position on that specifically, but I would comment on that I 
do believe that whatever program is developed and evolved, we 
believe if we can evolve the program and maintain a competitive 
playing field that we can make it more effective from a cost 
perspective and quality perspective as well.
    Mr. Strickland. Thank you.
    Ms. Moon. I believe that one of the important things to 
think about is that there will be a need for additional 
revenues. And my generation of baby boomers will be the folks 
who are advantaged by the tax cut, and who should be 
contributing to our future in terms of Medicare and Social 
Security.
    Mr. Strickland. My time is up. If just the two of you could 
make a quick----
    Mr. Bilirakis. Very brief, please.
    Ms. Grealy. Well, I agree with Ms. Rawlings. Regardless of 
what happens with the budget resolution, No. 1, there is money 
in there for a prescription drug benefit. But more importantly, 
we need to look at how we are going to sustain this program 
over time. We need to bring competition and more efficiencies 
into it.
    Mr. Strickland. Mr. Buddy?
    Mr. Buddy. I have to agree wholeheartedly. I think there is 
definite room for improvement in the Medicare system, and so I 
am enthusiastically in favor of that. The jury is out on the 
other. I am not sure what we can afford, but I think that we 
can all agree on----
    Mr. Strickland. Thank you.
    And thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Shadegg.
    Mr. Shadegg. Thank you, Mr. Chairman. Thank you for holding 
this important hearing. I apologize I have not been here for 
the entire testimony.
    I want to thank our panelists. I appreciate their 
thoughtful testimony.
    Ms. Rawlings, I want to follow up on the questioning of my 
colleague from Ohio. Have you studied the President's plan, or 
looked at what the President proposed?
    Ms. Rawlings. We have, yes.
    Mr. Shadegg. Does Aetna offer both an HMO product and a PPO 
product?
    Ms. Rawlings. We do under the Medicare+Choice program 
today, yes.
    Mr. Shadegg. And there are substantial differences between 
the HMO product and the PPO product, are there not?
    Ms. Rawlings. Well, there is probably 2 or 3 key 
differences. What we have done is, in our PPO--in the PPO 
demonstration, which was just launched in January, as you know, 
we offered in 21 counties and 3 States enhanced benefits, 
including prescription drugs. We offered no referrals, out-of-
network coverage----
    Mr. Shadegg. I want to stop right there. First of all, no 
referrals means no gatekeeper.
    Ms. Rawlings. That is correct.
    Mr. Shadegg. So when he was talking about the President 
would force you into an HMO product, in point of fact, one of 
the things that makes HMOs very unattractive is you have to go 
through a gatekeeper who decides whether you can go to a second 
doctor. You are saying that in your PPO product you can go 
straight to the doctor of your choice, is that right?
    Ms. Rawlings. That is correct, yes. I would----
    Mr. Shadegg. And then you were about to say the second 
distinguishing feature.
    Ms. Rawlings. Well, the one thing I wanted to add is I 
think as we have heard and talked about today, the element of 
coordination of care is not lost in the PPO. We still do our 
health risk assessments. We have our comprehensive case 
management units that are looking to work with these patients 
in this product as well, so we get the additional benefit of 
that.
    But it is very--it meets the customers' needs, allows them 
to travel, allows them to have direct access. They seem to like 
it.
    Mr. Shadegg. And it also allows them choice of doctors. 
They can pick any doctor----
    Ms. Rawlings. That is correct.
    Mr. Shadegg. [continuing] in the plan, and that is covered. 
And then, if they want to go outside the plan, they can do that 
for a slight additional fee?
    Ms. Rawlings. That is correct. It is a slight difference in 
benefits. That is correct.
    Mr. Shadegg. One of the things that I think is--and I would 
encourage my colleague from Ohio to study the differences 
between HMOs and PPOs. I think one of the things that was 
underappreciate about the President's plan is the fact that 
what he was proposing--enhanced Medicare--was a PPO and not an 
HMO. And I think there is a world of difference.
    Indeed, across America, more Americans are choosing now 
PPOs than HMOs, precisely because of those very important 
distinctions. And so I think that is an important part to 
understand about the President's plan.
    I also would echo what you said, and that is the PPOs that 
I talk to tell me that they can manage care, they can improve 
care and improve quality of care, without, for example, having 
a gatekeeper that denies people care or some bureaucrat back in 
an office that denies them care.
    Ms. Rawlings. I think that is true, but I think the 
critical thing to remember, too, is, you know, we are talking 
about an aged and disabled population. You know, you 
mentioned--Ms. Capps mentioned the women and aging, and, you 
know, there is a significant social change and environmental 
change when people age. You know, spouses of 55 years or so 
die, and one is left alone, children move away, etcetera.
    I think the critical thing to think about is it is 
different when you are 25 and when you are 75. And some people 
say, ``Well, gosh, I don't want to have anybody calling me. I 
don't want any part of that.'' When seniors are sick, they need 
help. They appreciate it. They respect it. And we have found 
that we have--we develop excellent partnerships which really 
improve quality, and we can get that on the PPO.
    Mr. Shadegg. Mr. Berenson, I want to focus on this issue of 
PPO with you. You indicate in your testimony that the PPOs you 
dealt with did not want to work toward quality improvement. 
Were any of those non-risk PPOs, or were they all risk PPOs?
    Mr. Berenson. Well, most PPOs were non-risk PPOs that I 
talked to. I mean, I----
    Mr. Shadegg. They weren't insurance-based PPOs?
    Mr. Berenson. Some were insurance-based and some were 
rental or broker PPOs that did not manage risk. But I think 
there is some history here that is illustrative and that----
    Mr. Shadegg. I appreciate that. I would like to hear the 
history, but I am going to run out of time, and I want to ask 
Mr. Foster a series of questions.
    Mr. Foster, we are being asked, or at least my--one of my 
key goals is to reform Medicare and to make it more efficient. 
One of the things I want to do is I am of the belief that by 
adding prescription drug coverage to the current Medicare 
program, you can, in fact, reduce overall cost by reducing both 
doctor visits and hospitalizations.
    Have you studied that question, or do you know of anyone 
that has studied that question?
    Mr. Foster. Yes, we have. Clearly, with the right 
medications, people can stay out of the hospital in certain 
circumstances or have lower costs than they would otherwise 
have. The question is whether the availability of a Medicare 
prescription drug benefit would generate some partial 
offsetting savings through such actions?
    We have not estimated a significant offsetting amount of 
that type, in part because the great majority of beneficiaries 
already have some level of drug coverage one way or another, 
and in part because in the case of most folks, if you can stay 
out of the hospital by getting a certain drug, you are going to 
try very hard to get that, even if you don't have coverage.
    Mr. Shadegg. Assuming that in fact, though, having--the 
entire Medicare population have access to drugs would bring 
down some costs. That means it would bring it down if it were a 
benefit added both to fee for service and if it were a benefit 
added to other options, for example, a PPO. Would that be 
correct?
    Mr. Berenson. Yes. The impact that you mention would apply 
regardless of the setting.
    Mr. Shadegg. Okay. The second question--and you heard Ms. 
Rawlings refer----
    Mr. Bilirakis. The time has expired.
    Mr. Shadegg. I apologize. Could I ask the one last 
question, then?
    Mr. Bilirakis. Well, ask it, but a very brief answer.
    Mr. Shadegg. Have you also looked at the question of 
whether, because there is some element of managed care in a 
PPO, have you tried to estimate what could be--what savings 
could be achieved if people were encouraged to move from 
traditional fee for service into a PPO-type structure?
    Mr. Foster. Yes, sir. We have estimated both the management 
savings directly and the savings potentially you could get from 
having beneficiaries with a financial incentive to move from a 
more expensive plan to a less expensive plan.
    Mr. Shadegg. I would like to see that information. Thank 
you for your testimony.
    And thank you for your indulgence, Mr. Chairman.
    Mr. Bilirakis. Thank you.
    Mr. Stupak.
    Mr. Stupak. Well, thank you, Mr. Chairman. I am sorry I 
have been popping in and out, but we had a markup down in T&I 
Subcommittee.
    Mr. Bilirakis. Yes, I know we did.
    Mr. Stupak. So I have been in and out, but----
    Mr. Bilirakis. Have you had any votes down there yet? 
Because I am stuck up here.
    Mr. Stupak. No, but we had to do some amendments, so--but 
thank you.
    Dr. Berenson--and I know Mr. Brown put in The Wall Street 
Journal article. I want to ask you just on this one paragraph 
in particular where it says, ``The Congressional Budget Office 
Chief tells Republican Senators the Medicare overall plan could 
add hundreds of billions of dollars in cost. The administration 
cost-saving claims for its plan also are belied by early data 
from a demonstration project. Small savings from encouraging 
seniors to opt for private plans are offset by high 
administrative costs.'' Do you care to comment on that at all?
    Mr. Berenson. Well, we do know that Medicare+Choice plans 
typically have about 8 percent to 10 percent higher 
administrative costs than traditional Medicare does. And there 
is no--the way we would pay plans under the--the way we pay 
plans under Medicare+Choice, again, results in a net loss to 
the government.
    The only way you can restructure this to save money would 
be to fix the government contribution at a relatively low 
level, so that people are paying out of their pocket for the 
various choices. And we haven't seen the details, but there--I 
think most people don't view that there are inherent 
inefficiencies in most private sector alternatives to 
traditional Medicare.
    Mr. Stupak. Well, in these--if you go into a PPO, is that--
you went into a PPO, that is good for a year, right? The 
contract you would enter into if you are a beneficiary, you 
would sign up for the PPO----
    Mr. Berenson. Well, presumably, if there was a 1-year open 
season the way we do now--we currently in Medicare Choice have 
a non-lock-in situation. We presumably have--that is another 
issue that would have to be dealt with is whether we are 
locking people in.
    Mr. Stupak. And the benefits could change yearly, then?
    Mr. Berenson. Presumably, it would be done on an annual 
basis.
    Mr. Stupak. See, the other problem I have with these PPO 
and HMO--and I know Mr. Shadegg dwelled on it, so I want to 
bring this up. The State of Michigan just went--used to be--
have a defined benefit plan for their retirees who are not in 
Medicare. So they went to a PPO. And if your physician is part 
of that PPO, they still pay the 80/20. You pay 20 percent out 
of pocket.
    Well, what happens up in my district, which is real 
northern Michigan, none of the doctors are in the PPO. So if we 
want to get the 80/20, 20 percent payout, we have to drive 
hundreds of miles to find a doctor who is in the PPO. The issue 
is really choice of doctors here. It is not necessarily PPO or 
HMO. You want to stay with your doctor.
    Since we don't have PPO physicians up in my neck of the 
woods, we have got to pay a 50/50. They will pay 50 percent, 
and we pay the other 50 percent. So it costs us more money 
underneath the PPO for the beneficiaries, too.
    Mr. Berenson. And that is one reason why the data from 
recent years suggests that the differential between what 
private plans are paying their network physicians and hospitals 
are going up in relationship to Medicare, because networks are 
simply not adequate, and to have an adequate network you have 
to pay more.
    Very briefly on the history of PPOs, the BBA set up PPOs as 
a coordinated care plan and had to do quality improvement and 
reporting. And the PPO industry said they can't do that, and 
they came to Congress and got relief. So I don't think we have 
a good track record of seeing that PPOs actually would be doing 
the kinds of things we need for Medicare beneficiaries.
    Mr. Stupak. Ms. Grealy, if I can ask you a question. You 
were--Mr. Brown was asking you some questions, and he basically 
said when the government does it, it is called control. When 
private industry does it, it is called negotiations. And your 
answer to Mr. Brown was, well, that is true competition. That 
is really what you are looking for, right, was true 
competition?
    Ms. Grealy. Yes.
    Mr. Stupak. Then, to have true competition, should we not 
take away the antitrust exemption enjoyed by the insurance 
industry? They are not subject to antitrust laws. Therefore, 
you can put your rates anywhere you want.
    Ms. Grealy. Highly regulated by the States, and I think 
that is sort of the safety net.
    Mr. Stupak. Well, you are really not highly regulated by 
States, because you have got 50 different States who have 
insurance commissioners. And if you look at the laws of 
insurance commissioners, some of them are political appointees, 
others are elected, some have strong regulations, some have 
very little, like my State of Michigan. It is like a paper 
tiger.
    So shouldn't we really--if you really want to get true 
competition, shouldn't we really take that exemption away, make 
it nationwide, so the regulations are the same through all 
States, and, therefore, we could really promote some 
competition within the insurance industry?
    Ms. Grealy. I think if you have that balance of Federal and 
State regulation. I mean, what you don't want to do is withdraw 
it in one area and yet leave in place those 50 different 
mechanisms. I know on many issues that we work on we are 
looking for those single Federal standards, whether it be the 
HIPPA privacy regulation or whether it be in health care 
liability reform.
    So often times there is something to be said for having one 
set of rules, so that we all know that we are competing 
effectively and fairly.
    Mr. Stupak. So if we took away that exemption, then it 
would be easier because you would just have one set of rules 
for all States. So you would be supportive of our legislation?
    Ms. Grealy. As I said, if it is balanced with--I am not 
there. It would have to look at what else is done in 
conjunction with that, so I wouldn't be willing to put on the 
record, ``Let us repeal the antitrust exemption'' without some 
of those other qualifiers that I think are critical.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Stupak. Thank you.
    Mr. Bilirakis. Mr. Barton has just joined us.
    Mr. Barton. Thank you, Mr. Chairman. I am not going to ask 
any questions, since it is lunchtime. But I would yield to Mr. 
Buyer.
    Mr. Bilirakis. But it is still lunchtime, and yet you are 
yielding.
    Mr. Barton. This is my lunch.
    But I will be happy to yield to Mr. Buyer.
    Mr. Buyer. Thank you, Mr. Barton.
    In an attempt to keep the record clear, I went back to see 
if I could find the letter in 1995 from the trustees. I was 
unable to. What I did find, and that I am going to ask to be 
placed in the record, is the 1995 Annual Report from the Board 
of Trustees of the Federal Hospital Insurance Trust Fund. The 
communication to Congress was from the Board of Trustees of the 
Federal Hospital Insurance Trust Fund.
    I stand corrected. I used the word ``bankruptcy.'' They did 
not. So I stand corrected. They used the word ``insolvency,'' 
and the threatened impending insolvency of the program, which 
set in course our action that led to the BBA in 1997.
    Referring to the testimony of Mr. Foster, again, on page 3, 
his chart shows in 1995, 1996, and 1997, that expenditures 
exceeded income. So I ask unanimous consent that the summary of 
the Medicare trustees 1995 be placed in the record.
    Mr. Bilirakis. Okay.
    Mr. Barton. I would announce while we have been holding the 
hearing that they are toppling the statues of Saddam Hussein in 
Baghdad. At least the press is reporting that it is a liberated 
city, so it has been a pretty eventful morning.
    And I would yield to the chairman.
    Mr. Bilirakis. Well, I just have--thank you for yielding.
    Mr. Foster, regarding the Part B deductible of $100, that 
hasn't changed in approximately 10 years, approximately, would 
you say?
    Mr. Foster. I believe it was 1991 or 1992. Is that right?
    Mr. Bilirakis. Yes, so approximately 10 years. So would you 
know, what would be the impact on Medicare's finances of simply 
indexing that deduction for inflation?
    Mr. Foster. If you indexed it prospectively, then the 
existing amount, the $100 today, would keep pace, depending on 
your index, either with something like the CPI or the level of 
health care costs and would represent its--it would continue to 
represent its current meaning or level, as opposed to gradually 
being watered down over time, which would happen otherwise and 
which has happened over the last 10 years.
    If you would like we could estimate for you a specific 
proposal, the financial----
    Mr. Bilirakis. I guess if you have--do you have any dollars 
in mind? What would be the impact in terms of additional 
revenue coming into the program?
    Mr. Foster. I can provide that for the record, sir.
    Mr. Bilirakis. Okay. You don't know off the top of your 
head?
    Mr. Foster. Well, it is non-trivial, but it depends a whole 
lot on the specific proposal. If you just index it, you don't 
get a lot of savings because it takes considerable time for the 
amount to vary from what it would have been. If you raise it 
and index it simultaneously, that saves quite a bit more.
    Just for comparison, if you took the original $50 amount 
from way back when, and said what would that amount be today if 
you had indexed it all the way along, if you had used the CPI, 
then the amount is somewhere in the range of $250 to $300 
today. If you had used per beneficiary Part B cost growth, the 
answer is fairly staggering. It would be $1,500 today.
    Mr. Bilirakis. Okay. I am not sure that I wanted to hear 
that answer. Never ask a question you don't want to hear the 
answer to.
    Well, I think that completes our hearing. We will have 
questions in writing to you. We would appreciate a timely 
response to them.
    Dr. Berenson, you talked about--you wanted to get into 
savings that you think can be realized by reforming the 
traditional Medicare fee for service system. You know, any 
ideas like that are only helpful, and I raise that point to all 
of you, any ideas you may have.
    Mr. Buddy was chomping at the bit to go into something, 
too, and, you know, I want you all to feel free to write us as 
soon as you can. Help us out here, because you would be 
surprised. Sometimes some of the information we get can be 
helpful.
    That having been said, thank you so very much. It was a 
good hearing, and you made it so.
    [Whereupon, at 12:10 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

         Prepared Statement of The Alliance to Improve Medicare

    The Alliance to Improve Medicare (AIM) is pleased to submit this 
statement to the hearing record to the Energy & Commerce Health 
Subcommittee. We applaud the Subcommittee and Chairman Bilirakis for 
their continued attention to this issue. AIM has identified six 
principles to guide Medicare modernization efforts and we are pleased 
to share these with the Subcommittee. These principles seek to improve 
both the administration of the Medicare program and the benefits 
provided to program beneficiaries.

           KEY PRINCIPLES TO STRENGTHEN AND IMPROVE MEDICARE

    First, Congress should enact comprehensive, market-based Medicare 
modernization as a mechanism for providing access to prescription drug 
coverage. Prescription drug benefits should be offered to all Medicare 
beneficiaries as an integral part of Medicare health coverage and the 
benefit should be added as part of broader efforts to strengthen and 
improve both the fee-for-service program and Medicare+Choice. Expanding 
Medicare to include prescription drug coverage should be a stepping 
stone toward comprehensive program reform with prescription drug 
coverage as part of an integrated benefit package. Finally, a Medicare 
prescription drug benefit program should ensure that private health 
plans have flexibility in designing prescription drug benefits to 
include proven, private-sector management tools to improve quality of 
care and to better manage costs.
    Second, Congress should ensure the long-term financial integrity 
and solvency of the Medicare program when considering program reforms 
and additional benefits. A stand-alone drug program should not be 
simply layered onto Medicare. The program's financial and structural 
systems must be strengthened to ensure adequate long-term financial 
stability to meet the challenges presented by the retirement of the 
baby boom generation and the projected doubling of the Medicare 
population. Congress should address these problems first, or at least 
concurrent with, adding a prescription drug benefit.
    Third, Congress should address the financial crisis facing health 
plans and providers in order to establish a solid foundation upon which 
to build a better Medicare. Patient care has been adversely affected by 
inadequate reimbursements to health plans, hospitals, doctors and other 
providers. Further, these inadequate provider reimbursement levels have 
directly undermined progress toward a modernized program. Congress 
should ensure appropriate and timely payments for these providers and 
plans to ensure appropriate care. Further, prescription drug benefits 
should be designed with adequate financial support and effective 
management tools to ensure reliable coverage and long-term success.
    Fourth, an improved Medicare program should improve coverage 
options through increased consumer choice and health plan competition. 
Medicare beneficiaries should have the power to choose from a range of 
coverage options similar to those available to Members of Congress, 
federal employees and millions of working Americans under 65 years of 
age. Options can include both fee-for-service Medicare as well as a 
variety of private plans. The Medicare+Choice program seeks to provide 
these types of private coverage options to seniors nationwide. However, 
inadequate payments and excessive regulation of private sector 
providers participating in Medicare+Choice have seriously constrained 
the ability to expand coverage areas. Numerous plans have withdrawn 
from areas where reimbursement was inadequate to cover even the costs 
of basic care.
    Fifth, a modernized Medicare program should improve coverage 
through better coordination of care and the inclusion of health 
promotion and disease prevention efforts. The traditional Medicare 
program has not kept pace with private sector benefits and plans 
offering disease management programs, preventive health care and 
screening measures such as annual physicals, hearing and vision tests, 
and dental care. Medicare beneficiaries, more so than other age 
populations, can benefit from these preventive measures which help 
reduce long-term costs and ensure appropriate, early treatment of 
health problems. Medicare+Choice plans have the flexibility to provide 
these measures as part of basic health care services whereas an act of 
Congress has been required to provide routine screening tests under the 
Medicare fee-for-service program.
    Finally, an improved and strengthened Medicare program would 
replace the current rigid and outdated benefit structure and 
bureaucracy and ensure flexibility to make new health care innovations 
more accessible. An example of efforts to ensure flexibility in the 
program is H.R. 810, the ``Medicare Contracting and Regulatory Reform 
Act,'' recently approved by the full Energy & Commerce Committee. AIM 
members support this effort to create a more collaborative relationship 
between CMS and the providers who serve Medicare beneficiaries, to 
address provider concerns, and to improve beneficiary and provider 
education. Additionally, the HHS Secretary's Advisory Committee on 
Regulatory Reform has issued a final report and recommendations to 
streamline regulatory burdens and improve Medicare and other HHS 
programs. Congress should encourage the HHS Secretary and CMS officials 
to continue to work toward reducing potential obstacles to patient's 
access to care and improve communications with both beneficiaries and 
providers. This effort should also seek to ensure that Medicare has the 
flexibility to make new health care innovations and technologies more 
readily accessible to beneficiaries. Quality health care for Medicare 
beneficiaries requires these new technologies to be available for all 
patients.

                               CONCLUSION

    We appreciate the opportunity to submit this statement and we look 
forward to working with the Subcommittee and other members to ensure 
passage of Medicare prescription drug and reform legislation in the 
108th Congress.

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