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



 
                   MEDICARE COST-SHARING AND MEDIGAP

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 1, 2003

                               __________

                            Serial No. 108-8

                               __________

         Printed for the use of the Committee on Ways and Means


















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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

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

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                NANCY L. JOHNSON, Connecticut, Chairman

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

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






















                            C O N T E N T S

                               __________

                                                                   Page

Advisory of April 24, 2003, announcing the hearing...............     2

                               WITNESSES

Medicare Payment Advisory Commission, Glenn M. Hackbarth, 
  Chairman.......................................................     8

                                 ______

Blue Cross and Blue Shield Association, and Anthem Blue Cross and 
  Blue Shield, Richard White.....................................    18
Rice, Thomas, UCLA School of Public Health and, Neuman, Patricia, 
  Henry J. Kaiser Family Foundation..............................    26
United American Insurance Company, Torchmark Corporation, and 
  Maynard, Cooper & Gale, P.C., Stephen W. Still.................    22

                       SUBMISSIONS FOR THE RECORD

American Association for Homecare, statement.....................    49
American Medical Association, statement..........................    50
Coalition to Promote Choice for Seniors, statement...............    51
Health Insurance Association of America, statement and 
  attachments....................................................    51
National Association of Health Underwriters, statement and 
  attachment.....................................................    61




















                   MEDICARE COST-SHARING AND MEDIGAP

                              ----------                              


                         THURSDAY, MAY 1, 2003

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 12:12 p.m., in 
room 1100 Longworth House Office Building, Hon. Nancy L. 
Johnson (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
April 24, 2003
No. HL-4

                      Johnson Announces Hearing on

                   Medicare Cost-Sharing and Medigap

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on rationalizing Medicare cost-sharing 
and supplemental insurance policies. The hearing will take place on 
Thursday, May 1, 2003, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 12:00 noon.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include program experts on beneficiary cost-sharing 
under the Medicare and Medigap supplementary insurance coverage. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The structure of Medicare beneficiary cost-sharing in the 
traditional fee-for-service program reflects the insurance practices 
prevalent when Medicare began in 1965. Today, Medicare's beneficiaries 
are confronted with irrational and confusing cost-sharing which does 
not reflect the current delivery of health care.
      
    In 1965, employer-sponsored group plans had two sets of benefits--
one for inpatient hospitalizations and the other for physician 
services. Employer plans long ago shed this distinction, and created a 
combined plan with a combined deductible. Medicare, in contrast, still 
has two different deductibles--an $840 deductible for Part A and a $100 
deductible for Part B. This means that when a beneficiary is 
hospitalized for an inpatient procedure, and less likely to be 
sensitive to pricing issues, the beneficiary is faced with a 
significant deductible. In addition, after a beneficiary has been 
hospitalized for 60 days, the beneficiary must then pay $210 
coinsurance per day for days 61 through 90, and even more when the 
hospital stay extends beyond 90 days. Moreover, Medicare pays nothing 
if a beneficiary is hospitalized more than 150 days.
      
    In contrast, when a beneficiary receives outpatient care, and is 
arguably more sensitive to costs, the beneficiary must pay the separate 
$100 Part B deductible, which has not increased since 1991, while 
health costs have doubled. Part B has different coinsurance depending 
on the service--none for home health or lab tests, 20 percent for 
physician services and supplies, and close to 50 percent for hospital 
outpatient services.
      
    Unlike 97 percent of private health policies, the Medicare fee-for-
service program still lacks catastrophic insurance protection for those 
with serious health conditions. The other glaring omission is a lack of 
an outpatient prescription drug benefit.
      
    In total, due to cost-sharing obligations and Medicare's limited 
benefit package, more than 40 percent of seniors' health care costs are 
not covered by Medicare. As a result, 9 out of 10 beneficiaries have 
some type of supplemental coverage. Those with retiree coverage from 
their former employers generally receive generous benefits, including 
catastrophic protection and good prescription drug coverage. The 
poorest beneficiaries receive wrap-around coverage through Medicaid.
      
    Medicare's confusing and irrational cost-sharing has led more than 
one-quarter of beneficiaries to purchase Medigap insurance in the 
individual, private insurance market. In 1990, Congress created 10 
standardized Medigap policies. Nine out of 10 of those policies, which 
comprise more than 90 percent of the Medigap market, must cover the 
Part A deductible, and the most popular Medigap policy covers both 
deductibles. Numerous studies have demonstrated that covering the 
deductibles has led to markedly higher Medicare spending because 
beneficiaries become insensitive to costs. In addition, only the three 
most expensive Medigap plans cover prescription drugs, and that 
coverage is limited. Yet, 8 of the 10 plans are required to cover 
foreign travel insurance, while most beneficiaries never leave the 
country. Medicare coverage has changed since 1990, but Medigap plans 
have been frozen in time. Researchers have shown that Medigap 
policyholders sometimes pay more than $100 in premium to cover the Part 
B $100 deductible, illustrating the poor value of some Medigap plans.
      
    In announcing the hearing, Chairman Johnson stated, ``Seniors face 
a confusing hodge-podge of copayments and deductibles in Medicare. The 
system is irrational and difficult to navigate. Simplifying and 
modernizing cost-sharing will make coverage easier to understand and 
will strengthen the Medicare program over the long term. I believe we 
can better design both Medicare and Medigap so that seniors and people 
with disabilities get the most for the health care dollars they 
spend.''
      

FOCUS OF THE HEARING:

      
    Thursday's hearing will focus on improving Medicare's cost-sharing 
structure and reforming Medigap coverage.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, by the close of business, Thursday, May 15, 2003. Those 
filing written statements that wish to have their statements 
distributed to the press and interested public at the hearing should 
deliver their 200 copies to the Subcommittee on Health in room 1136 
Longworth House Office Building, in an open and searchable package 48 
hours before the hearing. The U.S. Capitol Police will refuse sealed-
packaged deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman JOHNSON. Good midday to you.
    Today we continue our examination of the Medicare program 
and how we can strengthen and improve Medicare for seniors and 
the taxpayers financing the program.
    Medicare's current beneficiary cost-sharing was enacted 
nearly 4 decades ago and has separate deductibles and cost-
sharing rules for Medicare Part A and Part B. When Medicare was 
enacted, the Part B outpatient deductible accounted for about 
45 percent of beneficiary expenditures. Today, because it has 
not been indexed, it accounts for less than 3 percent. In 
Medicare, we charge seniors two different deductibles, and make 
the deductible for inpatient hospitalization eight times higher 
than the outpatient deductible.
    Why should the deductible be eight times higher for a 
health service that a patient desperately needs and can't 
avoid? Why would we impose new cost-sharing on a patient who 
has been lying on her back in a hospital bed for 2 months? 
While most private health plans provide catastrophic protection 
for their enrollees, why does Medicare expose the sickest 
patients to unlimited cost-sharing?
    Medicare currently covers slightly more than half of all 
health-care services seniors consume when you include 
prescription drugs and long-term care. As a result, 90 percent, 
9 out of 10 beneficiaries, feel compelled to carry supplemental 
insurance to fill in the holes that Medicare does not cover. 
Many receive retiree coverage through their former employer. 
The poor receive assistance through Medicaid. More than one-
quarter of beneficiaries purchase Medigap insurance themselves.
    In 1990, Congress created 10 standardized Medigap policies 
to assist beneficiaries in choosing plans. After 12 years, it's 
time to revisit the adequacy and structure of these plans. All 
10 Medigap plans are required to cover the coinsurance that 
beneficiaries must pay under Medicare--for example, the 20 
percent of the cost of a physician's visit. Nine out of 10 of 
these plans are required to cover the Part A inpatient hospital 
deductible, which is currently $840.
    The most popular Medicare policy covers both the Part A 
hospital deductible and the $100 Part B deductible for 
physicians' services, and 8 of 10 policies are required to 
cover foreign travel insurance, just in case beneficiaries 
travel to France, though many never leave their home State.
    At the same time, only the three most expensive Medigap 
policies cover prescription drugs, though prescription drugs 
are seniors' most pressing need. Numerous studies have 
demonstrated that Medigap's first dollar coverage of medical 
services has resulted in excessive Medicare spending because 
items and services appear to be free. Beneficiaries with 
Medigap consume $1,400 more in Medicare services than 
beneficiaries without supplemental coverage, and $500 more than 
beneficiaries with employer-sponsored insurance. This higher 
utilization drives up costs for everyone, premiums for Medicare 
beneficiaries without Medigap coverage, and cost to taxpayers.
    In addition, the prescription drug coverage mandated in 
Medigap is wholly inadequate. Yet, Medigap premiums continue to 
rise. From 1998 to 2000, average premiums rose 16 percent for 
plans without drug coverage, and more than twice as fast, 37 
percent, for plans with drug coverage. In addition, premiums 
vary dramatically for identical plans in the same location.
    Weis Ratings, Inc. analyzed Medigap premiums in 2001. A 65-
year-old man living in Fort Myers, Florida would pay about 
$3,600 for Plan J from Physicians Mutual Insurance Company, but 
only $2,700 with United Health Insurance Company through 
American Association of Retired Persons (AARP). That's nearly a 
thousand dollars less for the same policy in the same location.
    The same gentleman living in Las Vegas would spend about 
$1,500 for Plan C with United American Insurance Company, and 
about half that amount, $778, with the USAA Life Insurance 
Company for the same policy.
    Much has changed in health care and health insurance over 
the past 12 years, but Medigap policies have remained the same. 
Medigap insurers have been unable to modify their offerings in 
response to market changes because the 10 standard Medigap 
policies are set in the statute.
    I believe we can do better. We can do better for Medicare 
fee-for-service benefits and Medigap policies, so that seniors 
and people with disabilities can get the best health care and 
the most health care for the dollar they spend.
    Mr. Stark.
    [The opening statement of Chairman Johnson follows:]
 Opening Statement of the Honorable Nancy L. Johnson, Chairman, and a 
        Representative in Congress from the State of Connecticut
    Today we continue our examination of the Medicare program and how 
we can strengthen and improve Medicare for seniors and the taxpayers 
financing the program.
    Medicare's current beneficiary cost-sharing is a relic of the 
program that was enacted nearly four decades ago with separate 
deductibles and cost-sharing rules for Medicare Part A and Medicare 
Part B. After examining the Medicare's complex and irrational cost-
sharing structure, I conclude that a fundamental restructuring is 
needed.
    Why would we charge seniors two different deductibles, and make the 
deductible for inpatient hospitalization--when a patient is least price 
sensitive--eight times higher than the outpatient deductible, when 
health care is arguably more discretionary? And why would we impose new 
cost-sharing on a patient who has been lying on her back in a hospital 
bed for two months? While most private health plans provide 
catastrophic protection for their enrollees, why does Medicare expose 
the sickest patients to unlimited cost-sharing?
    The answer, of course, is that Congress has not changed the law to 
modernize the Medicare program. Consider that when Medicare was enacted 
the Part B outpatient deductible accounted for about 45% of beneficiary 
expenditures. Today, because it has not been indexed it accounts for 
less than three percent.
    Notwithstanding, Medicare currently covers slightly more than half 
of all health care services seniors consume, when including 
prescription drugs and long-term care. As a result, 90 percent--that's 
right 9 out of 10 beneficiaries--feel compelled to carry supplemental 
insurance to fill in the holes that Medicare does not cover. Many 
receive retiree coverage through their former employer. The poor 
receive assistance through Medicaid. But more than one-quarter of 
beneficiaries purchase Medigap insurance themselves.
    In 1990, Congress created 10 standardized Medigap policies to 
assist beneficiaries in choosing plans. After 12 years, it's time to 
re-visit the adequacy and structure of these plans. All 10 Medigap 
plans are required to cover the coinsurance that beneficiaries must pay 
under Medicare, for example, the 20 percent of the costs of a physician 
visit. Nine out of 10 of these plans are required to cover the Part A 
inpatient hospital deductible, which is currently $840. The most 
popular Medigap policy covers both the Part A hospital deductible and 
the $100 Part B deductible for physician services. And 8 of the 10 
policies are required to cover foreign travel insurance, just in case 
these beneficiaries travel to France, though many never leave their 
home State! At the same time, only the three most expensive Medigap 
policies cover prescription drugs, though prescription drugs are 
seniors' most pressing need.
    Numerous studies have demonstrated that Medigap's first dollar 
coverage of medical services has resulted in excessive Medicare 
spending because items and services appear free to beneficiaries. 
Beneficiaries with Medigap consume $1,400 more in Medicare services 
than beneficiaries without supplemental coverage, and $500 more than 
beneficiaries with employer-sponsored insurance. This higher 
utilization drives up costs for everyone--premiums of Medicare 
beneficiaries without Medigap coverage and costs to taxpayers. In 
addition, the prescription drug coverage mandated in Medigap is wholly 
inadequate.
    Yet Medigap premiums continue to rise. From 1998 to 2000, average 
premiums rose 16 percent for plans without drug coverage, and more than 
twice as fast, 37 percent, for plans with drug coverage. In addition, 
premiums vary dramatically for identical plans in the same location. 
Weiss Ratings, Inc. analyzed Medigap premiums in 2001. A 65-year-old 
man living in Ft. Myers, Florida would pay about $3,600 for Plan J from 
Physicians Mutual Insurance Company, but only $2,700 with United 
Healthcare Insurance Company through AARP. That's nearly $1,000 less 
for the same policy in the same location! The same gentleman living in 
Las Vegas would spend about $1,500 for Plan C with United American 
Insurance Company, but about half that amount--$778--with the USAA Life 
Insurance Company for the same policy.
    Much has changed in health care and health insurance over the past 
12 years. But Medigap insurers have been unable to modify their 
offerings in response to these market changes because the 10 standard 
Medigap policies are set by statute. I believe that we can better 
design both Medicare fee-for-service benefits and Medigap policies so 
that seniors and persons with disabilities get the most for the health 
care dollars they spend.

                                 

    Mr. STARK. Well, thank you, Madam Chair.
    This is the third year in a row that we have had this same 
hearing, and maybe at some point somebody will introduce some 
legislation and we can make the changes. If there's anything 
wrong, we only have ourselves to blame. Nobody else is doing 
this. So, our inaction is the root cause of any problems that 
do exist.
    I hope that we can at least have one hearing on the 
forthcoming Chairman's mark to reform Medicare before that 
legislation. It's my understanding that we're going to be 
marking that up and finishing it by Memorial Day, and it would 
certainly be of much more benefit to have a hearing on those 
issues so that we can understand what will happen to Medicare 
in general.
    Cost-sharing for Medicare could benefit from a fresh look 
and some adjustment. I think there's no question about that. We 
have made precious little change to Medicare in the last 9 
years, and unlike the insurance companies who will testify 
today, they don't just set one policy and then never change 
their corporate policies over 10 years or they generally cease 
to exist. So, we might take a page from free enterprise and be 
a little bit more active in improving Medicare from day to day 
as we go along. There is also, of course, a gap due to the lack 
of coverage under prescription drugs and other important 
issues.
    I would like to make sure that we don't blame--when you 
talked at length in your opening statement about the first 
dollar coverage driving up utilization, I would like to point 
out that the beneficiaries have nothing to do with this. The 
only choice that a beneficiary in Medicare has is basically 
whether or not to go to a primary care physician. They cannot, 
for the most part, go to a surgeon directly, because they have 
to have a referral. People don't go to take a test just for the 
hell of it. If I told you you could go down and have a pap 
smear at George Washington this afternoon, would you go down 
and have one? I wouldn't go have a colonoscopy just because it 
was cheap.
    Chairman JOHNSON. Under Medicare, though, I would certainly 
have the right to.
    Mr. STARK. People don't do that, and most specialists won't 
even give you the test unless you're referred. So, what I'm 
suggesting is that it is those benefits to which we are 
referred by our primary care physician, and we don't make those 
decisions as patients. We do what our primary care docs tell 
us, and as you're well aware, Medicare doesn't cover much 
primary care or preventative care. It only covers procedures to 
which we have been referred. So if, in fact, there is a lot of 
extra utilization, it is the physicians and/or other providers 
who cause this and not our beneficiaries. I hope we can keep 
that in mind.
    I would like to note that I intend to introduce a 
catastrophic bill once again that would, in effect, put a limit 
on cost-sharing for the current Medicare beneficiaries. I hope 
the Chair would look forward to cosponsoring that with me, 
because if we intend to do it, we can improve Medicare. That 
would be, of course, for the beneficiaries, a great 
improvement, and we would then bring it up to what most 
policies that we enjoy as Members of Congress and provide that 
same protection for our senior citizens. I know the Chair would 
like to join with me in doing that, and I hope to have that in 
the hopper soon.
    So, with that, I look forward to hearing the suggestions of 
our witnesses about how we might adjust the current Medigap 
coverage to be of more benefit to the beneficiaries. Thank you 
again for holding this hearing, and I hope we can make the 
changes before we have the fifth hearing.
    [The opening statements of Mr. Stark and Mr. Ramstad 
follow:]
       Opening Statement of the Honorable Fortney Pete Stark,* a 
        Representative in Congress from the State of California
* As part of my opening remarks, I would like to submit the following 
statement on behalf of our Ways and Means colleague, Congresswoman 
Stephanie Tubbs Jones:

    Thank you for hosting this very important hearing, and thank you 
for welcoming me to participate. I appreciate this opportunity to hear 
from our invited guest concerning the irrational and complex issues 
surrounding rationalizing Medicare cost-sharing and supplemental 
insurance policies.
    As all of you are aware, Medicare plays a vital role in the lives 
of our Nation's seniors. However, while the program remains popular 
among seniors, it has several major limitations such as the lack of 
prescription drug coverage, and the lack of catastrophic insurance 
protection.
    Most individuals cope with these problems by navigating a complex 
array of supplemental coverage programs, such as: employer coverage, 
Medigap programs and Medicaid. Currently, employer-based programs and 
State Medicaid spending are declining rapidly. Moreover, the cost of 
cost-sharing payments or of supplemental coverage premiums can be 
overwhelming for elderly individuals living on fixed incomes. For 
example, according to the Kaiser Family Foundation, an elderly woman 
with the median income level of $1,400 per month would spend half of 
her monthly income on the Part A deductible alone. It is time for 
Medicare to eliminate disparities in supplemental coverage and provide 
health care services Americans can understand and depend on.
    And, finally, many of my colleagues today have called for higher 
deductibles for outpatient expenses, since individuals are more likely 
to utilize fewer so-called discretionary services if they bear a higher 
percentage of the cost. Yet, as you will hear in testimony today, this 
change would raise the cost of preventative and diagnostic services, 
making such services prohibitively expensive for low-income 
populations, especially those who lack adequate supplemental coverage. 
By discouraging utilization of outpatient coverage, higher cost-sharing 
on outpatient care will force the most vulnerable Americans to wait 
until their health deteriorates further before seeking medical 
assistance. Seniors in my district cannot wait that long. Madam 
Chairwoman and Members of the Subcommittee, I look forward to working 
with all of you to iron out the irrational and complex issues that 
leave many seniors and disabled citizens at a disservice.

                                 
  Opening Statement of the Honorable Jim Ramstad, a Representative in 
                  Congress from the State of Minnesota
    Madame Chair, thank you for holding this important hearing today.
    Medicare's confusing and counterintuitive cost-sharing system and 
the lack of a basic prescription drug benefit are unacceptable and must 
be changed. The status quo does not meet the needs of our seniors or 
reflect the realities of today's health care delivery.
    The Medicare system is difficult to navigate and unfair to Medicare 
seniors. There is a high deductible for hospital services that are 
usually beyond the patient's control and a relatively low deductible 
for services that are more controllable. Many preventive services are 
difficult to obtain. Seniors face long delays before getting access to 
medical technology that could save or improve their lives. There is no 
catastrophic protection for high out-of-pocket costs, nor is there a 
basic prescription drug benefit in the traditional program. Employer-
sponsored supplemental insurance is diminishing, States are cutting 
Medicaid funding, and Medigap policies are costly and incomplete.
    Without a doubt, Medicare faces major challenges. But one thing is 
clear--we must keep our promise to our Nation's seniors to improve 
Medicare and preserve it for current and future beneficiaries.
    Thank you, Madame Chair, for your leadership in examining these 
difficult issues and leading the charge on Medicare reform.

                                 

    Chairman JOHNSON. Thank you, Mr. Stark. As we start this 
hearing, I do want to remind Members that David Walker, in his 
testimony before the full Committee on April 9th, did remind us 
that in just 10 years we will have to find new revenues to 
cover the outlays that we will be obliged to make just in the 
hospital trust fund. So, we will have to find those revenues 
from cutting other programs or increasing taxes. Ten years is 
not a long time away. So, we do have to be very conscious in 
the legislation we're going to write this year in how we make 
Medicare stronger, more financially secure, and of better 
service to our seniors.
    Mr. Hackbarth, welcome.

   STATEMENT OF GLENN M. HACKBARTH, J.D., CHAIRMAN, MEDICARE 
                  PAYMENT ADVISORY COMMISSION

    Mr. HACKBARTH. Thank you, Chairman Johnson, other Members 
of the Committee. I appreciate the opportunity. I know time is 
short, so I will just make a few brief points.
    One, of course, the Medicare program has played a vital 
role in providing financial protection and access to care for 
millions of Americans. Having said that, if we were to start 
over today with a clean piece of paper, the benefit package 
that currently exists is probably not the one we would design. 
The package does not cover some important services like 
prescription drugs. Other services are covered inadequately--
for example, hospital outpatient care--and there is no limit on 
cost-sharing, no catastrophic coverage.
    We have depended on supplementation of various sorts to fix 
these problems, but depending on supplementation is, itself, 
problematic. About 10 percent of Medicare beneficiaries have no 
supplemental coverage; they're not eligible for Medicaid and 
they don't have employer-sponsored retiree coverage. They don't 
have Medigap coverage. These beneficiaries tend to be lower 
income beneficiaries, beneficiaries eligible by virtue of 
disability, rural beneficiaries, and they have somewhat more 
health problems than average.
    In addition to that, employer-based coverage and coverage 
through the Medicare+Choice (M+C) program, and even Medicaid, 
are under pressure. Employers, as you well know, are 
increasingly stepping back from offering retiree coverage. The 
net effect of these developments is that, over time, we will 
become increasingly dependent on Medigap coverage as our 
primary source, our major source of supplementation.
    Medigap coverage, of course, plays a vital role, and it's 
critical for many Medicare beneficiaries, but it's not without 
its problems. It is often inadequate, particularly in the area 
of prescription drug coverage. It can be expensive, in part 
because of the high cost associated with individual coverage, 
but also in part probably because of the design of the 
coverage. It is sold through individual markets primarily, 
insurers feel compelled to use underwriting and rating policies 
that tend to increase cost and reduce availability for 
beneficiaries with health problems. Finally, it can be very 
confusing for Medicare beneficiaries.
    In our June 2002 report, Medicare Payment Advisory 
Commission (MedPAC) analyzed the Medicare benefit package and 
some possible improvements. I want to emphasize that in this 
instance we did not make any specific recommendations. Our 
purpose here was more analytic and educational. There were, 
however, some important themes on which there was a consensus 
among the Commissioners.
    First of all, Medicare needs a better back-end coverage, if 
you will; that is, coverage for beneficiaries using the most 
services--for example, catastrophic coverage or better coverage 
for extended hospital and skilled nursing stays.
    Reduced coinsurance for some services is important. As you 
know, the coinsurance is quite high currently for hospital 
outpatient and mental health services.
    Third, it seemed to us that moving away from the separate 
Part A and Part B deductibles which, of course, are an artifact 
of the history of the program, toward a single combined 
deductible would make sense.
    Finally, it seemed to us that if, in fact, we have 
constrained resources as, of course, we do, that having at 
least some cost-sharing on all services might be a reasonable 
thing to require.
    So, those are my initial comments. I welcome the chance to 
discuss them.
    [The prepared statement of Mr. Hackbarth follows:]
 Statement of Glenn M. Hackbarth, Chairman, Medicare Payment Advisory 
                               Commission
    Chairman Johnson, Congressman Stark, distinguished Subcommittee 
Members. I am Glenn Hackbarth, Chairman of the Medicare Payment 
Advisory Commission (MedPAC). I am pleased to be here this morning to 
discuss cost-sharing in the Medicare program and supplemental 
insurance.
    Thank you for the opportunity to participate in this important 
discussion. MedPAC has considered the design of Medicare's benefit 
package and beneficiary cost-sharing over the past several years. We 
also have examined the different ways that beneficiaries supplement 
Medicare benefits, including Medigap; how various forms of 
supplementation affect access to care; and the costs of the health care 
services beneficiaries use. In my remarks today, I would like to draw 
on that work, and highlight several key points:

      The limitations of the Medicare benefit package and the 
characteristics of its cost-sharing cause beneficiaries to enroll in a 
variety of supplemental insurance programs. These include employer-
sponsored retiree insurance, Medigap, and Medicaid.
      Beneficiaries' access to different forms of supplemental 
coverage vary by their characteristics (such as where they worked, 
their financial resources, and their health care preferences) and where 
they live.
      Supplemental coverage improves beneficiaries' access to 
care, their use of necessary services and reduces their cost-sharing on 
covered services. It also increases Medicare spending and total 
administrative costs.
      Medigap in particular may still leave beneficiaries with 
a significant degree of liability and its premium represents a major 
proportion of beneficiary out-of-pocket expense.
Limitations of the benefit package
    As we discussed in our June 2002 Report to the Congress: Assessing 
Medicare Benefits, Medicare has provided tens of millions of older and 
disabled Americans with access to acute medical care--extending lives, 
improving health and functional status, and protecting families from 
impoverishment (MedPAC 2002). Changes in medical technology, as well as 
demographic changes, however, have drawn attention to the limitations 
of the basic Medicare benefit package.
    By law, the Medicare benefit package is generally limited to acute 
care services needed for the diagnosis or treatment of illness or 
injury.\1\ Medicare's covered services have been revised over its 
lifetime. These revisions have substantially expanded coverage, adding 
new technologies and procedures, more post-acute care, and other 
benefits such as selected preventive services and hospice care for 
those at the end of life. However, the basic structure of the benefit 
design has remained essentially unchanged since Medicare's inception.
---------------------------------------------------------------------------
    \1\ Section 1862(a)(1)(A) of the Social Security Act prohibits 
Medicare payment for items or services that are ``. . . not reasonable 
and necessary for the diagnosis or treatment of illness or injury or to 
improve the functioning of a malformed body member.''
---------------------------------------------------------------------------
    Medicare beneficiaries may receive covered services in the 
traditional program or they may enroll in a private health insurance 
plan under the Medicare+Choice (M+C) program. Traditional Medicare 
covers health care services--furnished on a fee-for-service basis--
through its two parts, the Hospital Insurance and Supplementary Medical 
Insurance programs, known as Parts A and B, respectively. My discussion 
today will focus on the benefit design and cost-sharing structure of 
the traditional program.
    There are three serious limitations of the Medicare benefit 
package:

      It does not cover some important health care products and 
services. For example, the program does not cover outpatient 
prescription drugs (with limited exceptions), many preventive services 
(such as annual physical exams), and routine eye and dental care.
      It has high cost-sharing on some covered services such as 
outpatient care and none on others.
      It has no limit on total cost-sharing (catastrophic cap).

    Cost-sharing structure. Medicare's cost-sharing structure has 
several weaknesses (see Table 1). Insurance theory suggests that 
random, non-discretionary events should be covered more fully than 
events that are within the insured person's discretion. In Medicare, 
however, the Part A hospital inpatient deductible is large ($840 in 
2003), while that for physician services or other ambulatory care under 
Part B is small ($100) even though inpatient care is generally believed 
to be less discretionary and more difficult to predict than ambulatory 
care. Further, the low Part B deductible provides little incentive to 
use covered services judiciously, while the high hospital inpatient 
deductible may contribute to beneficiaries' perceived need for 
supplemental insurance.\2\
---------------------------------------------------------------------------
    \2\ At $100, the Part B deductible is unchanged since it was raised 
in 1991 and only about one-half as high as ambulatory care deductibles 
commonly required by PPOs for services furnished by favored (in-
network) providers (Gold 2002).
---------------------------------------------------------------------------
    Medicare's cost-sharing provisions vary considerably among covered 
services and these variations may lead to inefficient choices by 
beneficiaries and providers. For instance, the coinsurance liability 
for hospital outpatient services (20-55 percent) is often substantially 
higher than the coinsurance that applies for ambulatory surgery centers 
or physicians' offices (20 percent). These discrepancies could 
inappropriately affect patients' or providers' decisions about the 
setting for care. The high (50 percent) copayment for outpatient mental 
health services and high coinsurance for many outpatient hospital 
services may create barriers to the use of these services. On the other 
hand, no cost-sharing on home health and lab services may increase use 
of those services, either because beneficiaries are more likely to 
demand them or providers are more likely to order them.

    Limited financial protection. Medicare's benefit design and cost-
sharing structure taken together determine how well beneficiaries are 
protected from the cost of acute illness. Medicare seeks to ensure 
access to clinically appropriate care and to insulate beneficiaries and 
their families from the risk of impoverishment associated with serious 
illness.
    Medicare provides considerable financial protection to its 
enrollees; most would be much worse off without its benefits. On 
average, beneficiaries consumed $7,500 in health care services in 1999, 
of which Medicare covered 58 percent (Table 2). Moreover, Medicare 
covered a substantially larger share of the total for beneficiaries 
with the highest spending (Figure 1). For instance, on average, 
Medicare covered about 73 percent of the total for the 10 percent of 
beneficiaries with the highest total spending.
    Nevertheless, Medicare's benefit design--with substantial cost-
sharing for many covered services, no catastrophic cap, and no coverage 
for some important health care products and services--leaves 
beneficiaries at risk for large out-of-pocket expenses. For example, 
the 27 percent of total spending that Medicare did not cover for 
beneficiaries with the highest total spending in 1999 averaged $11,000 
per person. The potential for high out-of-pocket spending is a serious 
problem if it reduces beneficiaries' abilities to seek needed care or 
comply with care recommendations. It is equally serious if the burden 
of out-of-pocket spending forces beneficiaries to forego or cut back on 
other necessities.
Supplemental coverage options
    About 90 percent of Medicare beneficiaries obtain some type of 
additional coverage. Supplements have been available from Medicare's 
beginning in 1966, when it looked quite similar to the private sector 
insurance packages offered to the general population. Beneficiaries may 
obtain supplemental coverage for a variety of reasons. Many--
particularly those with relatively low incomes--may prefer the known 
cost of a premium to the unknown costs that may be associated with an 
unexpected illness, and even to the predictable costs of routine 
medical services. Also, large employers in certain industries 
historically have provided retiree coverage that provides supplemental 
insurance at low cost to some beneficiaries. Moreover, as noncovered 
services, such as prescription drugs, have accounted for a growing 
share of beneficiaries' health care, obtaining additional coverage has 
become more important as one means of limiting financial risk.
    Sources of additional coverage include supplements sponsored by 
former or current employers, individually purchased Medigap plans, and 
Medicaid coverage provided for low-income individuals. Also, for 
purposes of this discussion, additional benefits offered by some M+C or 
other Medicare managed care plans are also considered.
    About one-third of all Medicare beneficiaries have employer-
sponsored supplemental insurance (Figure 2).\3\ Currently, benefits 
provided by employer-sponsored plans tend to be comprehensive. For 
example, almost all retiree plans provide some coverage of prescription 
drugs, and the average retiree has an out-of-pocket cap of $1,500 per 
year for all covered services.
---------------------------------------------------------------------------
    \3\ The distributional numbers presented here come from MedPAC 
analyses of the 2000 Medicare Current Beneficiary Survey (MCBS) Cost 
and Use file and include only community-dwelling individuals.
---------------------------------------------------------------------------
    Medigap--private health insurance specifically designed to wrap 
around Medicare's benefit design--is the second most common form of 
additional coverage. Twenty-seven percent of beneficiaries held Medigap 
policies in 2000. All policies issued since 1992, except those sold in 
three waiver States, have been limited to 10 standard benefit packages. 
The plans beneficiaries most commonly choose cover Medicare deductibles 
and coinsurance, but not prescription drugs.
    State Medicaid programs provide additional coverage for certain 
low-income, sick, and disabled Medicare beneficiaries--about 12 percent 
of community-dwelling beneficiaries in 2000. People with full dual 
eligibility receive Medicare benefits, coverage of Medicare cost-
sharing, and full Medicaid benefits, including some health care 
products and services--notably prescription drugs and long-term care--
not covered by Medicare. Other Medicaid programs pay for Medicare 
premiums and/or cost-sharing, but not for Medicare's noncovered 
benefits.

    Medicare managed care plans may offer reduced cost-sharing 
requirements or other benefits beyond those covered in the traditional 
program, such as some coverage for outpatient prescription drugs. 
Medicare's managed care options consist primarily of private managed 
care plans that participate in the M+C program, but also include plans 
paid on a cost basis, and those participating in various demonstration 
projects. About 18 percent of Medicare beneficiaries were enrolled in 
some form of Medicare managed care in 2000--although this share has 
declined to about 15 percent in 2002. Using enrollment data from M+C 
managed care plans as a proportion of all beneficiaries (not just 
community-dwelling as in Figure 2) enrollment peaked in 2000 at 15.8 
percent.
    Other sources of additional coverage, held by about 2 percent of 
beneficiaries, include benefits obtained through the Department of 
Veterans Affairs (VA) or the TRICARE program for military retirees.
Availability of options vary
    The options for supplementing Medicare actually available to 
beneficiaries vary considerably because of significant differences in 
local market circumstances, as well as differences in beneficiaries' 
resources and preferences. MedPAC has investigated the factors 
accounting for relatively low rates of supplementation in some States. 
We find some States have about twice the national average of Medicare 
beneficiaries who lack any supplemental coverage, and this was 
generally true in both urban and rural areas in the State. 
Beneficiaries living in rural areas are more likely to be in the 
traditional Medicare FFS program without any supplemental coverage or 
to be enrolled in Medigap than those in urban areas.
    We also find, however, that coverage patterns can vary among 
metropolitan areas--even in the same State. Tampa and Miami, for 
example, look very different in regard to each type of coverage. An 
explanation for some of the difference lies in the respective 
proportion of people on Medicaid, the availability of Medicare managed 
care, and the employment structure. Because 21 percent of Miami's 
senior population is living under the poverty level and Tampa's rate is 
11 percent, more people in Miami may have supplementation through 
Medicaid.
    In summary, we find that Federal and State oversight of Medicare 
products influence the availability and design of Medigap, employer-
sponsored, and M+C options (as well as supplementation available 
through Medicaid). For example, some of the variation among States in 
Medigap enrollment may be a result of differing State regulation of 
those products. Nonetheless, even though State characteristics have an 
important influence over health insurance markets, local factors such 
as income and employment history are also important. All of these 
factors will need to be considered in the design of reforms.
    Recent trends suggest that the availability of these sources of 
additional coverage may be declining, leaving more people with only the 
basic Medicare benefit package:

      the number of beneficiaries enrolled in Medicare managed 
care has fallen, as have the number of plans participating and, in many 
areas, the value of the benefits offered;
      employers have scaled back on coverage for future 
retirees and increased premium contributions and cost-sharing for 
current retirees, and state that they will continue to do so in the 
future;
      Medigap premiums have continued to increase, raising 
questions about the affordability of this form of supplemental 
coverage; and
      fiscal pressures at the State level may cause reductions 
in Medicaid coverage.

    Increasing numbers of beneficiaries could face greater financial 
risks and may experience access problems if the current sources of 
additional coverage are diminished and not replaced.
Effects of supplemental coverage
    Access and use. Beneficiaries with additional coverage have 
consistently reported better access to health care than those without 
(MedPAC 2000). In 2000, beneficiaries with only fee-for-service 
Medicare compared to those with employer-sponsored or Medigap insurance 
were more than four times as likely to report trouble getting care; 
nearly five times as likely to have delayed care due to cost; and about 
three times as likely to lack a usual source of care. The type of 
additional coverage also leads to differences in access; those with 
coverage from public programs (Medicaid, DOD, and the VA) are less 
likely to report access problems than those without any supplemental 
coverage, but more likely to report problems than those with private 
supplemental coverage (MedPAC 2002).
    Other research has shown that people with supplemental drug 
coverage also have higher use of medically appropriate therapies for 
conditions such as hypertension and coronary heart disease. These 
studies have focused particularly on use of prescription drugs 
(Blustein 2000, Federman 2001, Seddon 2001, Adams 2001). Our research 
has shown that beneficiaries without a supplemental source of coverage 
use fewer services deemed clinically necessary than those with a 
supplement (MedPAC 2002). On the other hand, some increased use may not 
be appropriate, as is discussed in a later section.

    Out-of-pocket costs. Although the vast majority of beneficiaries 
obtain some type of additional insurance, they still face potentially 
large out-of-pocket spending (Figure 3). Beneficiaries' out-of-pocket 
spending includes their direct spending on services--or the associated 
cost-sharing--and their payments for insurance premiums, including 
those for Medicare Part B and any amounts for additional insurance.
    Per capita out-of-pocket spending varies widely among groups with 
different types of supplemental coverage (Figure 4). These spending 
differences primarily reflect differences in premium payments for 
supplemental coverage and direct payments for noncovered services as 
opposed to cost-sharing for covered services. As might be expected, the 
roughly 4 million people who qualify for Medicaid benefits have 
relatively low out-of-pocket spending and most of what they spend goes 
toward services not covered by Medicare or Medicaid. About 10 million 
people buy Medigap policies. On average, these beneficiaries annually 
spend about $1,400 for noncovered services and cost-sharing, and about 
$1,700 for Medigap premiums. Even those who have employer-sponsored 
supplemental insurance, which usually provides generous benefits, still 
have relatively high spending for noncovered services. Beneficiaries 
who report being in fair or poor health spend more out-of-pocket for 
health coverage and for health services than those reporting good, very 
good, or excellent health, regardless of the type of coverage they have 
to supplement Medicare. These findings suggest that supplemental 
coverage does not fully address the limitations of Medicare's benefits.
    High out-of-pocket spending may push some Medicare beneficiaries 
into poverty. Our analysis shows that about 11 percent with total 
incomes above poverty have out-of-pocket spending large enough to push 
them into poverty. Those with incomes just above the poverty line (100 
to 110 percent) clearly have a much greater likelihood of falling into 
poverty than those with higher incomes.

    Implications of first-dollar coverage. All of the Medigap plans, 
Medicaid, and some employer-sponsored plans provide generous coverage 
of Medicare's cost-sharing requirements. This so-called first-dollar 
coverage often protects beneficiaries from financial liability from the 
first dollar of expenditure beyond their premium.
    First-dollar coverage may respond to beneficiaries' desire for 
convenience and to limit financial risk to the maximum extent possible, 
but it may not be the most efficient policy. For the Medicare program, 
extensive coverage of deductibles and coinsurance diminishes many of 
the incentives embedded in the cost-sharing structures that are meant 
to encourage people to be judicious in their use of services. 
Therefore, coinsurance or deductibles may not affect use as expected or 
desired. First-dollar coverage also raises the premiums for 
supplemental coverage. In addition, the costs of predictable 
expenditures, such as the Part B deductible, are automatically included 
in the premium, along with insurers' administrative markup.
    Medicare beneficiaries with supplemental insurance use more 
services and thus generate higher program expenditures than those 
without such coverage. This in turn increases beneficiaries' Part B 
premiums and the burden on tax payers. A MedPAC analysis of the 1998 
MCBS found that Medicaid dual-eligible beneficiaries have the highest 
Medicare program expenditures, followed by beneficiaries with Medigap 
coverage, and then by those with employer-sponsored coverage. Medicare 
beneficiaries without any supplemental coverage have the lowest 
Medicare program expenditures. Researchers have not successfully 
isolated the extent to which the differences in use of care reflect 
people with supplemental coverage getting unnecessary care or those 
without supplemental coverage going without needed care (Atherly 2001).

    Increased administrative costs. Multiple sources of coverage also 
increase administrative costs for providers and insurers. 
Administrative costs for insurers may include marketing, claims 
processing, reserves, and profit. Administrative costs for Medigap 
plans average about 20 percent; in comparison, administrative costs are 
about 11 percent for M+C plans and about 2 percent for program 
management of traditional Medicare--although the administrative costs 
for the Medicare program are thought to be both understated and 
insufficient. For example, the administrative budget for CMS does not 
include the costs of collecting payroll taxes for the Part A trust fund 
or of withholding Part B premiums from Social Security checks. The 
National Academy of Social Insurance recommended more resources for CMS 
to better manage the program (King 2002).

    Confusion among beneficiaries. The multiple sources of supplemental 
coverage create a maze of options for beneficiaries. Beneficiaries have 
a difficult time navigating the choices, in part because they lack a 
basic understanding of the Medicare program (of course, understanding 
of the health care system by the general population is also limited). 
For example, only about half knew that they have health plan choices 
available (Stevens 2000). Beneficiaries are frequently unclear about 
the differences between traditional Medicare and Medicare managed care, 
often not knowing whether they are enrolled in a health maintenance 
organization or in traditional Medicare.
    Beneficiaries also have difficulty understanding their Medigap 
insurance options, not knowing, for example, that if they drop a 
Medigap policy they may only be able to purchase another one under 
certain conditions. Confusion about Medigap was one of the reasons for 
the standardization of Medigap policies. Before standardization, some 
beneficiaries bought multiple policies, not understanding that the 
coverage was duplicative.
    Some research suggests that many Medicare beneficiaries are not 
highly motivated to make choices about their insurance coverage. A 
recent survey found that most beneficiaries (in both FFS and M+C plans) 
did not give serious thought to options for insurance coverage. Only 14 
percent thought seriously about options or actually changed plans, and, 
of those, more than one-third were either new beneficiaries (who had to 
make a choice) or beneficiaries who switched from one M+C plan to 
another (Gold 2001).
Conclusion
    Uneven cost-sharing, lack of a catastrophic cap, and omission of 
certain services--most notably prescription drugs--have called into 
question the health security promised by the Medicare program. To fill 
the gaps in the benefit package, most beneficiaries obtain supplemental 
coverage, but this coverage is often costly and, for Medigap in 
particular, only partly effective in addressing the limitation of the 
Medicare benefits package. It also may contribute to inefficiency in 
providing health care for Medicare beneficiaries because of first-
dollar coverage. The availability and affordability of supplemental 
coverage is, moreover, uneven across different markets, and 
increasingly unstable.
    Although beneficiaries value their Medicare and supplemental 
coverage, the problems with the current Medicare benefit package and 
the resultant supplemental coverage system leave policymakers with 
difficult choices. It might be possible to improve beneficiary 
financial protection through adjustments to the supplemental market, 
however, it would be more fruitful to first directly address the 
limitations in the Medicare benefit package and its cost-sharing 
provisions.
    1. Section 1862(a)(1)(A) of the Social Security Act prohibits 
Medicare payment for items or services that are ``. . . not reasonable 
and necessary for the diagnosis or treatment of illness or injury or to 
improve the functioning of a malformed body member.''
    2. At $100, the Part B deductible is unchanged since it was raised 
in 1991 and only about one-half as high as ambulatory care deductibles 
commonly required by PPOs for services furnished by favored (in-
network) providers (Gold 2002).
    3. The distributional numbers presented here come from MedPAC 
analyses of the 2000 Medicare Current Beneficiary Survey (MCBS) Cost 
and Use file and include only community-dwelling individuals.
References
Medicare Payment Advisory Commission. Report to the Congress: assessing 
    Medicare benefits. Washington (DC), MedPAC. June 2002.
Gold M. Trends in medical coverage that active employers receive from 
    employers: implications for reforming the Medicare benefit package. 
    Washington (DC), Mathematica Policy Research, Inc. April 2002.
Medicare Payment Advisory Commission. Report to the Congress: Medicare 
    payment policy. Washington (DC). March 2000.
Blustein J. Drug coverage and drug purchases by Medicare beneficiaries 
    with hypertension, Health Affairs. March/April 2000, Vol. 9, p. 
    219-30.
Federman AD, Adams AS, Ross-Degnan D, Soumerai SB, Ayananian JZ. 
    Supplemental insurance and the use of effective cardiovascular 
    drugs among elderly medicare beneficiaries with coronary heart 
    disease, Journal of the American Medical Association, October 10, 
    2001, Vol. 286, No. 14, p. 1762-1763.
Seddon M, Ayanian JZ, Landrum MB, et al. Quality of ambulatory care 
    after myocardial infarction among Medicare patients by type of 
    insurance and region, American Journal of Medicine, 2001. Vol. 111, 
    p. 24-32.
Adams, AS, Soumerai, SB, Ross-Degnan D. Use of antihypertensive drugs 
    by Medicare enrollees: does type of drug coverage matter? Health 
    Affairs. 2001, Vol. 20, No. 1, p. 276-286.
Atherly A. Supplemental insurance: Medicare's accidental stepchild, 
    Medical Care Research and Review. June 2001, Vol. 58, No. 2, p. 
    131-161.
King, K, Burke, S and Docteur, E., eds., Final report of the study 
    panel on Medicare's governance and management--matching problems 
    with solutions. Washington (DC) National Academy of Social 
    Insurance, July 2002.
Stevens B, Mittler J. Making Medicare+Choice real: Understanding and 
    meeting the information needs of beneficiaries at the local level. 
    Princeton (NJ), Mathematica Policy Research, Inc. November 2000.
Gold M, Justh N. How salient is choice to Medicare beneficiaries? 
    Monitoring Medicare+Choice: Fast Facts. Washington (DC), 
    Mathematica Policy Research, Inc. January 2001, No. 5.

                        Table 1. Medicare benefits and cost-sharing requirements, 2003 *
----------------------------------------------------------------------------------------------------------------
                             Services                                         Beneficiary cost-sharing
----------------------------------------------------------------------------------------------------------------
Part A
Inpatient hospital (up to 90 days per benefit                       $840 for the first stay in a benefit period
  period plus 60 lifetime reserve days) **                                             Days 1-60; fully covered
                                                                           Days 61-90; $210 per day coinsurance
                                                                         60 lifetime reserve days: $420 per day
Skilled nursing facility (up to 100 days per                                          Days 1-20; no coinsurance
  benefit period)                                                                     Days 21-100: $105 per day
Hospice care: for terminally ill beneficiaries                        Nominal coinsurance for drugs and respite
                                                                                                           care
----------------------------------------------------------------------------------------------------------------
Part B
Premium                                                                                        $58.70 per month
Deductible                                                                                        $100 annually
Physician and other medical amount services                                     20 percent of Medicare-approved
  (including supplies, durable medical equip-
  ment, and physical and speech therapy)
Outpatient hospital care                                              20 percent of 1996 national median charge
                                                                                                updated to 2000
Ambulatory surgical services                                             20 percent of Medicare-approved amount
Laboratory services                                                                                        None
Outpatient mental health services                                        50 percent of Medicare-approved amount
Preventive services                                                 20 percent of approved amount (none for Pap
                                                                         smear, pneumococcal vaccine, flu shot,
                                                                          prostate specific antigen (PSA) test)
----------------------------------------------------------------------------------------------------------------
Both Part A and Part B
Home health care for homebound                                                                             None
  beneficiaries needing skilled care
----------------------------------------------------------------------------------------------------------------
* These benefits and cost-sharing requirements apply to traditional Medicare. Medicare+Choice plans can deviate
  from these requirements, but they must cover the same services, cost-sharing cannot be higher on average, and
  CMS must approve each plan's cost-sharing and benefit package.
** A benefit period begins when a patient is admitted to the hospital for inpatient care and ends when the
  beneficiary has been out of the hospital or skilled nursing facility for 60 consecutive days.
Source: Centers for Medicare & Medicaid Services.


        Table 2. Total spending on health services for Medicare beneficiaries, by source of payment, 1999
----------------------------------------------------------------------------------------------------------------
                           Source                                 Amount per capita         Percent of total
----------------------------------------------------------------------------------------------------------------
Medicare                                                                       $4,370                       58%
Supplemental payers                                                             1,984                       26
Beneficiaries' direct spending                                                  1,158                       15
    Total                                                                       7,512                      100
----------------------------------------------------------------------------------------------------------------
Note: Sample of 9,647 includes community-dwelling beneficiaries who participated in traditional Medicare in
  1999. Supplemental payers include all public-sector and private-sector supplemental coverage. Beneficiaries'
  direct spending includes their out-of-pocket spending on covered and non-covered acute care services. It
  excludes premiums and long-term care services. Percentage do not sum to 100 because of rounding.
Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 1999.


Figure 1. Per capita spending on health services, by source of payment, 
                                  2000


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


 Figure 2. Sources of supplemental coverage among beneficiaries living 
                         in the community, 2000




[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


   Figure 3. Composition of out-of-pocket spending, by out-of-pocket 
                          spending level, 2000



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


Figure 4. Variation and composition of out-of-pocket spending, by type 
                    of supplemental insurance, 2000




[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


                                 

    Chairman JOHNSON. Thank you very much.
    Mr. White.

STATEMENT OF RICHARD WHITE, VICE PRESIDENT, INDIVIDUAL PRODUCT 
MANAGEMENT, ANTHEM BLUE CROSS AND BLUE SHIELD, ON BEHALF OF THE 
             BLUE CROSS AND BLUE SHIELD ASSOCIATION

    Mr. WHITE. Madam Chairman and Members of the Subcommittee, 
I am Richard White, Vice President of Individual Product 
Management for the Southeast Region of Anthem Blue Cross and 
Blue Shield. Thank you for the opportunity to testify today on 
behalf of the Blue Cross and Blue Shield Association.
    All Blue Cross and Blue Shield plans offer Medigap 
insurance, and collectively, we are the largest Medigap issuer 
in the Nation. Blue Cross and Blue Shield plans support 
comprehensive Medicare reform and believe that, with an 
increasing reliance on private competitive markets, Medicare 
can achieve the value, choice, and innovation that has been 
realized in the private sector.
    Medicare's deductibles and cost-sharing requirements leave 
significant gaps that expose beneficiaries to sizeable 
financial risk. These cost-sharing requirements are much higher 
than those in most employer-sponsored plans today, and do not 
protect beneficiaries from the open-ended financial burdens of 
catastrophic illness.
    To protect themselves against high, out-of-pocket costs and 
fill Medicare's coverage gaps, U.S. General Accounting Office 
has estimated that more than one-fourth of Medicare 
beneficiaries rely on Medigap; that is, private, individually 
purchased supplemental insurance. Blue Cross and Blue Shield 
plans believe that the Medigap market is working well. An 
overwhelming majority of Medicare beneficiaries express 
satisfaction with their Medigap coverage and consider their 
policies a good or excellent value. Beneficiaries particularly 
value the peace of mind of predictable monthly expenses and 
knowing that they do not have to hassle with the medical bills 
from their providers.
    Plans are widely available and there are many insurers to 
choose from.
    Finally, Medigap policies are required to meet stringent 
consumer protection rules that were put in place as a result of 
legislation passed by Congress.
    I would like to make three points regarding potential 
changes to Medigap. First, we applaud the Administration's 
recent effort to encourage States to take advantage of a 
provision in existing law that allows for approval of 
innovative benefits in addition to the standardized benefits of 
Medigap.
    Standardization of Medigap policies, in effect since 1992, 
has simplified the purchasing decision for beneficiaries and 
made it easier for beneficiaries to compare benefits and 
premiums. At the same time, standardization means that benefit 
packages have been frozen in time and do not reflect many of 
the design features typical in today's private market. This has 
significantly limited plans' ability to innovate to keep 
Medigap premiums affordable.
    For example, Medigap carriers offering prescription drug 
coverage have not been able to introduce formularies or tiered 
copayments, create incentives for use of generic drugs, or use 
other incentives and methods that we typically apply in the 
private market. Similarly, we cannot provide disease management 
programs with our Medicare supplement products.
    Until recently, many States have been reluctant to approve 
innovative benefits. Examples of innovative benefits proposed 
in previous years, but not approved, include generic 
prescription drug benefits, vision care benefits, and cost-
sharing changes such as a $5 copayment for physicians' 
services. The Administration's initiative is a very promising 
development and we believe it will help assure that Medigap 
continues to provide valuable benefits to Medicare 
beneficiaries.
    Second, we believe the legislative changes to Medigap 
should be made in the context of comprehensive Medicare reform. 
Medigap policies will need to be revised in order to be 
consistent with a restructured Medicare program. Multiple 
rounds of Medigap redesign would increase costs for insurers 
that ultimately are borne by the consumer, and would increase 
the potential for confusion among seniors. This could result in 
three or four different types of Medigap programs out there.
    Third, we believe that beneficiaries should continue to 
have the option to purchase varying degrees of financial 
protection, including ``first dollar'' coverage, that covers 
all of the required Medicare deductibles and cost-sharing. It 
is critical to remember that beneficiaries want ``first 
dollar'' coverage. Many older Americans live on fixed incomes 
and fear that unpredictable medical bills would make it 
difficult to meet their monthly expenses. Medigap law already 
requires all insurers to offer Plan A, which does not cover the 
Part A and B deductibles, in addition to the other policies 
they may choose to carry. Yet, it represents only 3 to 4 
percent of the plans sold. So, consumers aren't picking that 
option.
    It would also be inappropriate to eliminate ``first 
dollar'' coverage solely for people who choose to purchase 
Medigap coverage while others continue to have this option 
through their employer-based coverage, including the Federal 
Government and military retirees through the new TRICARE For 
Life program.
    Finally, ``first dollar'' coverage helps assure that 
beneficiaries get the medical services they need.
    Thank you for the opportunity to submit this testimony on 
behalf of the Blue Cross and Blue Shield Association.
    [The prepared statement of Mr. White follows:]
    Statement of Richard White, Vice President, Individual Project 
 Management, Anthem Blue Cross and Blue Shield, on behalf of the Blue 
                   Cross and Blue Shield Association
    Good afternoon, Madame Chairwoman and Members of the House Ways and 
Means Health Subcommittee. I am Richard White, Vice President of 
Individual Product Management for the Southeast Region of Anthem Blue 
Cross and Blue Shield. I am here today representing the Blue Cross and 
Blue Shield Association (BCBSA). BCBSA represents 42 independent Blue 
Cross and Blue Shield Plans throughout the nation that together provide 
health coverage to 84.9 million--nearly thirty percent--of all 
Americans. We appreciate the opportunity to testify before you today on 
Medicare cost-sharing and Medigap.
    All Blue Cross and Blue Shield (BCBS) Plans offer Medigap 
insurance, and collectively we are the largest Medigap issuer in the 
nation. BCBS Plans have a unique point of view because we are a major 
presence in all aspects of the Medicare program. BCBS Plans process 90 
percent of all Medicare Part A claims and about 67 percent of all Part 
B claims. Collectively, BCBS Plans are also the largest Medicare+Choice 
(M+C) provider in the country, providing comprehensive coverage to 
close to 1 million beneficiaries.
    We are pleased that the Committee is examining ways to modernize 
Medicare and bring Medicare beneficiaries the types of choices and 
innovations that working Americans now enjoy. BCBSA supports 
comprehensive Medicare reform that will assure that the program remains 
financially stable and secure so that it can successfully serve both 
current and future beneficiaries. We believe that with an increasing 
reliance on private competitive markets, Medicare can achieve the 
value, choice and innovation that have been realized in the private 
sector.
    My testimony focuses on two areas:

    I. An overview of today's Medigap marketplace; and
    II. BCBSA's Comments Regarding Potential Changes to Medigap
I. Overview
    While Medicare provides valuable coverage for the health care needs 
of over 40 million elderly and disabled beneficiaries, its deductibles 
and cost-sharing requirements leave significant gaps that may expose 
beneficiaries to sizeable financial risk. For example, according to 
MedPAC, in 1999 Medicare beneficiaries consumed on average $7,500 in 
health care services--of which Medicare covered only 58 percent.
    Traditional Medicare's cost-sharing requirements are much higher 
than those in most employer-sponsored plans today, and do not protect 
beneficiaries from the open-ended financial burdens of catastrophic 
illness. Features of Medicare cost-sharing include:

      Two separate deductibles: a high deductible for Part A 
($840 in 2003) for a hospital admission, which can be charged more than 
once a year and a separate $100 deductible for Part B;
      No cap on beneficiary out-of-pocket spending; and
      Little financial protection against the cost of very long 
hospital stays (e.g., no coverage after 150 days).

    In addition, Medicare does not provide coverage for many services 
such as prescription drugs, dental care, vision care, and hearing aids.
    To protect themselves against high out-of-pocket costs and fill 
Medicare's coverage gaps, roughly 90 percent of Medicare beneficiaries 
acquire some form of supplemental coverage, either through employer-
sponsored plans, Medicaid, a Medicare+Choice plan, or Medigap--
individually purchased private policies.
    According to the General Accounting Office (GAO), more than one-
fourth of Medicare beneficiaries relied on private Medigap policies in 
1999 for supplemental insurance.
The Medigap Market Provides Valuable Benefits
    The Medigap market is working well:

      Beneficiaries are extremely satisfied: Medicare 
beneficiaries express overwhelming satisfaction with their Medigap 
coverage. A 2000 survey conducted by American Viewpoint, an opinion 
research firm, found that 89 percent of Medigap policy holders are 
satisfied with their coverage. A strong majority--76 percent--also said 
that, considering the premiums they pay, their policies were a good or 
excellent value. American Viewpoint found beneficiaries particularly 
value the peace of mind of knowing that they can afford their medical 
bills and do not have to hassle with medical bills.
      Wide availability of plans: In 2001, GAO found that 
Medigap plans are widely available, and beneficiaries have many 
insurers to choose from. In fact, on average, 28 insurers in each State 
offered Plan F, the most popular Medigap plan.
      All seniors are guaranteed the opportunity to choose any 
plan, regardless of their health conditions. Current law requires that 
seniors are given a 6-month open enrollment period to purchase any 
Medigap policy they choose when they first enroll in Medicare Part B. 
During this period, Medigap insurers may not deny coverage to 
applicants or adjust premiums based on health status. There are also 
other open enrollment opportunities for beneficiaries under certain 
circumstances (e.g., those who lose employer-sponsored coverage, or 
Medicare+Choice).
Medigap Policies Are Required to Meet Stringent Consumer Protection 
        Rules Today
    Medigap policies are required to meet stringent Federal and State 
consumer protection requirements. States are responsible for assuring 
that Medigap policies comply with these rules. The Department of Health 
and Human Services (HHS) has the authority to review State enforcement 
policies. Federal and State Medigap laws apply only to individually 
sold Medigap policies; employer-sponsored policies are not subject to 
these rules.
    The major Federal rules that all Medigap policies must meet 
include:

      Standard Packages: Since 1992, Medigap policies have been 
required to conform to 10 standardized sets of benefits, referred to as 
A to J. Medigap insurers can offer some or all of these benefit 
packages, but are not allowed to vary the benefit configurations 
(except in 3 waiver States: Massachusetts, Minnesota, and Wisconsin).
      Initial Open Enrollment: As mentioned above, insurers are 
required to accept all seniors--regardless of their health status--
during a 6-month open enrollment period when they first enroll in 
Medicare Part B. Open enrollment is also available under certain 
circumstances to beneficiaries whose plans have left the 
Medicare+Choice program or to those who lose employer-based coverage.
      Prohibition on Duplication of Coverage: Insurers cannot 
sell a Medigap policy to someone who already owns one.
      Guaranteed Renewal: Beneficiaries are guaranteed the 
right to renew their current policy at their option. If a beneficiary 
moves to another State, he or she simply takes the coverage with them--
the policy is totally portable.
      Limits on Preexisting Conditions: Waiting periods are 
limited to 6 months; however, if a continuously insured Medigap 
subscriber switches policies, new preexisting periods may not be 
imposed.
II. BCBSA Comments on Potential Changes to Medigap
    I would like to make three points regarding potential changes to 
Medigap:
1. Medigap Policies Can Provide Even More Valuable Benefits
    Standardization of Medigap policies--in effect since 1992--has 
simplified the purchasing decision for beneficiaries and made it easier 
for beneficiaries to compare benefits and premiums. At the same time, 
standardization means that benefit packages have been frozen, and do 
not reflect many of the design features typical in today's private 
market. This has significantly limited plans' ability to innovate to 
keep beneficiary premiums affordable.
    For example, Medigap carriers offering prescription drug coverage 
have not been able to introduce formularies or tiered co-payments, 
create incentives for use of generic drugs, require additional cost-
sharing, or use other management techniques typically applied to drug 
coverage for those under 65. Similarly, insurers are not able to 
provide disease management programs.
    BCBSA applauds the Administration's recent efforts to address this 
problem by encouraging State Insurance Commissioners to take advantage 
of a provision in existing law that allows for approval of ``innovative 
benefits.''
    Current law gives States the authority to approve ``new or 
innovative benefits'' in addition to the standard Medigap benefits 
(Section 1882 (p)(4)(B)). However, until recently, many States have 
been reluctant to use this authority because of concern that it would 
undermine Federal intent to standardize products. Examples of 
innovative benefits proposed, but not approved, in previous years 
include:

      Generic prescription drug benefit (with pharmacy network)
      Vision care benefits
      Cost-sharing changes, e.g., a $5 copayment for physician 
services

    BCBSA believes the Administration's initiative is a very promising 
development; while it is too soon to evaluate results, we believe it 
will help assure that Medigap provides valuable benefits to Medicare 
beneficiaries.
2. Legislative Changes to Medigap Should Be in the Context of 
        Comprehensive Reform
    BCBSA believes that any legislative changes to Medigap should be 
made in the context of overall Medicare reform. Medigap policies will 
need to be revised in order to be consistent with a restructured 
Medicare program. We believe multiple rounds of Medigap redesign would 
increase costs and confusion for beneficiaries.
3. Continue to Allow First-Dollar Coverage
    BCBSA believes that beneficiaries should continue to have the 
option to purchase varying degrees of financial protection, including 
policies that cover all of Medicare's required deductibles and cost-
sharing, because:

      Beneficiaries want first-dollar coverage. Older 
Americans, many of whom live on fixed incomes, are particularly risk 
averse. One reason many purchase Medigap coverage is that they want 
predictable monthly expenses. Medigap law already requires all insurers 
to offer Plan A--which does not cover the Part A and Part B 
deductibles--in addition to any other policy they offer. Less than 3 
percent of beneficiaries choose to purchase Plan A, according to the 
GAO.
      It would be inappropriate to eliminate first-dollar 
coverage solely for people who choose to purchase Medigap coverage 
while others continue to have this option through their employers, 
including the Federal Government.
      ``First-dollar'' coverage helps assure beneficiaries get 
needed services.

    The available literature is unambiguously clear that beneficiaries 
with supplemental coverage report better access to health care 
services. For example, in its report in June 2002, MedPAC noted that: 
``Beneficiaries without supplemental coverage were nearly six times as 
likely to have delayed care due to cost and about four times as likely 
to lack a usual source of care, compared to those with employer-
sponsored or Medigap insurance.''
    Thank you for the opportunity to submit this testimony on behalf of 
the Blue Cross and Blue Shield Association.

                                 

    Chairman JOHNSON. Thank you very much, Mr. White.
    Mr. Still.

 STATEMENT OF STEPHEN W. STILL, ESQ., MAYNARD, COOPER & GALE, 
P.C., BIRMINGHAM, ALABAMA, ON BEHALF OF TORCHMARK CORPORATION, 
  BIRMINGHAM, ALABAMA AND UNITED AMERICAN INSURANCE COMPANY, 
                        McKINNEY, TEXAS

    Mr. STILL. Madam Chairman and Mr. Stark, Members of the 
Committee, thank you for having me here today. I am 
representing Torchmark and its subsidiary, United American 
Insurance Company.
    In your opening remarks you said you believe we could do 
better, and we agree with you on that. We hope to have a 
suggestion for you to improve that.
    We believe that the Medicare program should remain viable 
and solvent in order to continue to provide meaningful health 
insurance coverage for senior Americans. We have supported 
efforts in the past to reform the Medicare program in order to 
meet this goal, and we continue to support such efforts.
    We have worked with Members of this Committee and other 
Members of Congress to help you achieve the outpatient co-
insurance reductions that you have seen in the 1999 and 2000 
bills, and we applaud you for your efforts on that. It's been 
very meaningful for beneficiaries.
    Medicare supplement insurance is specifically designed to 
cover the gaps in coverage that the Medicare program does not 
cover. For that reason, Medigap is extremely important to the 
beneficiaries. Medigap is probably the most regulated 
commercial insurance product that I'm aware of. I'm not aware 
of any product that is more regulated than this product.
    One of the criticisms of Medigap is that the products do 
reimburse policyholders for ``first dollar'' health care 
expenses that they incur, and that they cause over-utilization. 
Under current law, Medigap insurers have absolutely no freedom 
to offer products beyond what has been spelled out in Federal 
law. So, if there's a problem with overutilization, then the 
root of the problem lies with the underlying law itself, and we 
believe the law should be changed.
    We would support an amendment to the law that would 
incorporate reasonable notions of cost-sharing in the Medigap 
law. We believe that this can be done in such a way to benefit 
the Medicare beneficiaries as well as the Medicare program. 
Unlike Rich, we believe it should be done immediately within 
the context of Medicare reform or outside of the context of 
that Medicare reform.
    Our legislative proposal would be as follows--and this can 
be done in different ways. There are different ways to address 
cost-sharing, and we realize that. We would suggest that the 
Medicare law be amended to create a new, optional Medigap plan, 
so it would be a new stand-alone plan in addition to the 10 
existing plans. You could include the core benefits that are 
found in Plan F, and under this plan, a beneficiary would share 
50 percent or one-half of the incurred ``first dollar'' Part B 
expenses up to a preselected cap. The cap would be selected by 
the beneficiary. The caps could be established at a minimum of 
$1,000 and then going up to $3,000. They could be in increments 
of $250. Again, the beneficiary could select their own cap.
    The premium would be set accordingly--using actuarial 
principles, the premiums would be set accordingly, and if Rich 
selected a cap of $3,000, he would obviously pay a lower 
premium than I would pay if I selected a $1,000 cap.
    We believe that such a change in the law would be a good 
thing for beneficiaries and for the program. We believe that 
this would help bring the premiums down for this new product, 
and it would be available and affordable for Medicare 
beneficiaries. We are very concerned about the affordability of 
these products and we think this would help make these 
affordable. Similarly, we believe it would be good for the 
program because we think it does address the utilization issue, 
and it helps to address that issue and control costs for the 
Medicare program.
    As I said, we think these changes should be made 
immediately. We don't think this is radical, invasive surgery. 
We think it is simply fine-tuning and a good improvement to the 
plans that you described as having been adopted 13 years ago. 
We think it offers consumer choice, much like a homeowners or 
automobile policy would offer on such cost-sharing.
    Thank you very much for your consideration.
    [The prepared statement of Mr. Still follows:]
  Statement of Stephen W. Still, Esq., Maynard, Cooper & Gale, P.C., 
 Birmingham, Alabama, on behalf of Torchmark Corporation, Birmingham, 
    Alabama, and United American Insurance Company, McKinney, Texas
    I am Stephen Still, an attorney with the law firm of Maynard, 
Cooper & Gale, P.C. in Birmingham, Alabama. I represent Torchmark Corp. 
and its subsidiary, United American Insurance Company. Torchmark is a 
publicly held company; it is traded on the New York Stock Exchange, and 
headquartered in Birmingham, Alabama. United American, based in 
McKinney, Texas, is one of the oldest suppliers of Medigap insurance. 
United American started selling Medicare supplement insurance shortly 
after the Medicare program was created in 1966. By 1981, the company 
was nationally recognized as a preeminent writer of individually sold 
Medigap insurance. Today, United American is known to be one of the 
most cost-efficient Medicare supplement insurers. Annually, it 
processes over 9 million claim transactions that result in over 3 
million claim checks being issued to policyholders. United American 
does not sell any products such as Medicare+Choice. Furthermore, the 
company does not act as a Medicare intermediary as some other 
competitors in the industry do. It is strictly a Medicare supplement 
insurer.
    United American strongly believes that the Medicare program should 
remain viable and solvent in order to continue to provide meaningful 
health insurance coverage for senior Americans. We have supported 
efforts in the past to reform the Medicare program in order to meet 
this goal, and we continue to support such efforts. In fact, we have 
worked closely with members of this Committee and other Members of 
Congress to amend the Medicare law to achieve reductions in the 
outpatient coinsurance amounts that beneficiaries are charged under 
Part B. We applaud you for the reductions you have achieved thus far. 
As you know, beneficiaries continue to be overcharged for these 
amounts, and we continue to seek legislative changes to correct this 
problem.
    Under the current Medicare program, approximately 85% of 
beneficiaries receive their health care service through the traditional 
fee-for-service Medicare delivery system. With that in mind, we are 
especially aware of the fact that the supplemental products that we 
offer are invaluable to Medicare beneficiaries. Why? Because the 
Medicare program, as valuable and important as it is to seniors, does 
not cover 100% of the health care costs that are incurred by 
policyholders. As you know, the Medicare program is designed in such a 
way that it does not cover items such as the deductibles under Part A 
and B, co-payment amounts under Part B, and, importantly, Medicare 
coverage is not unlimited. It is subject to specific limited amounts. I 
might add that the Part B coinsurance amounts and the Medicare caps on 
hospital reimbursement can expose beneficiaries to significant medical 
expenditures.
    Medicare supplement insurance is specifically designed to cover 
these gaps in coverage that the Medicare program does not cover. I 
don't need to remind you that most seniors are very risk averse. 
Whether dealing with medical expenses or any other financial risks, 
most seniors abhor the idea of unknown and unlimited financial 
exposure. For this reason, Medicare supplement insurance is extremely 
important to Medicare beneficiaries. The primary benefit of Medicare 
supplement insurance is that it does provide protection against 
unlimited financial exposure. Thus, United American is proud of this 
service that it offers and the supplemental products that provides. 
Does that mean that everything about the system is perfect? No. As we 
all know, as important as these programs are to senior citizens, 
neither the Medicare program nor the Medigap products are perfect. In 
fact, United American believes that improvements need to be made to the 
standardized Medigap plans.
    To put my remarks in perspective, please keep in mind that Medicare 
supplement is the most regulated commercial insurance product that I am 
aware of. It is regulated by Federal and State laws. These laws dictate 
specifically what products can be sold, the loss ratio that must be 
achieved and the amount of profit that can be earned. It mandates that 
these insurance products must be offered without underwriting for 
coverage, and insurers must guarantee renewal of coverage to 
policyholders. Although most successful Medigap insurers have learned 
to operate subject to these restrictions, keep in mind that constraints 
such as these are foreign to other commercial insurance products. I am 
not aware of any other commercial insurance product that is subject to 
legal requirements remotely similar to these.
    One of the criticisms of Medicare supplement insurance is that the 
products reimburse policyholders for ``first dollar'' health care 
expenses that they incur. These would include expenses such as 
deductibles and copays. The argument is made that this practice leads 
to ``over utilization'' of health care services by beneficiaries, 
because there is no disincentive to use these services. I am not the 
appropriate party to address the validity of that argument; however, I 
can provide the following observation. Medicare supplement insurers 
only offer the Medigap products that Federal law requires them to 
offer. Under current law, Medigap insurers have absolutely no freedom 
to offer anything beyond what you, in Congress, have told them to sell. 
If, in fact, there is a problem with ``over utilization'' and ``first 
dollar coverage,'' then the root of the problem lies with the 
underlying law itself. Does the underlying law need to be changed? Yes. 
United American believes that it should be changed.
    United American began selling the standardized plans in 1992 
pursuant to the Omnibus Budget Reconciliation Act of 1990. The design 
of these plans may have made sense a decade ago, but health insurance 
and health care delivery have changed dramatically over the past 
decade. The standardized Medigap plans offered today are distant 
ancestors to other commercial health insurance plans offered today to 
the under 65 market. One of the principal differences is that other 
commercial health insurance products contain more up-to-date elements 
of ``cost-sharing'' by policyholders. Since Medicare supplement 
products are required by law to cover deductibles and co-payment 
amounts, they avoid cost-sharing and, as previously pointed out, may 
contribute to over utilization of services. Accordingly, United 
American believes that the Federal law should be changed to incorporate 
reasonable notions of cost-sharing. We believe that this can be done in 
such a way as to benefit Medicare beneficiaries as well as the Medicare 
program. How would this work?
    There may actually be more than one way to accomplish this, but 
United American would offer the following legislative proposal. United 
American would propose amending the Medicare law to create a new 
optional Medigap plan. Under this plan, a beneficiary would share one 
half of the incurred, first dollar expenses up to a preselected, 
optional cap. These caps could be established at $1,000, $1,250, and so 
on, in increments of $250, up to a maximum cap of $3,000. This approach 
would operate like a homeowner's policy or personal automobile policy 
in that the policyholder could select the out-of-pocket amount that he 
or she is comfortable with, and the premium for that policy would be 
set accordingly. Thus, a policyholder with a $3,000 cap would pay a 
lower premium than a policyholder who selects a $1,500 cap. The 
Medicare supplement insurers would price their products accordingly 
using actuarial principles in order to reflect these cost-sharing 
amounts and other risks normally associated with such coverage. As with 
other commercial insurance products, different Medigap insurers would 
price these products differently. Likewise, beneficiaries could select 
premium amounts that they were comfortable with. How would such a 
change affect the Medicare program and Medicare beneficiaries?
    United American believes that a change in the law along these lines 
would be a good thing for beneficiaries and for the Medicare program. 
One of the biggest concerns that United American has had in recent 
years is the premium rate increases that it and other Medigap insurers 
have experienced. These increases are the result of increases in health 
care costs, and they are also the result of the regulatory constraints 
of the current law. Medigap insurers do not like premium rate 
increases. Over time, such increases will cause these valuable 
supplemental products to become unaffordable for the very senior 
citizens who demand these products. I can assure you that United 
American would much rather sell more policies at lower premiums, than 
lose policyholders because its products are unaffordable. United 
American believes that changing the law along the lines that I have 
outlined would cause premiums for such modified Medicare supplement 
products to be reduced and, over time, remain more stable.
    Similarly, we believe that this change would be good for the 
Medicare program. If reasonable cost-sharing concepts, such as those 
that I have mentioned, were incorporated into the law, then we believe 
that utilization could be decreased and there could be substantial 
savings to the Medicare program. Such savings could be used by the 
Medicare program to reduce expenses, or even partially provide for a 
prescription drug benefit for seniors. Would a change such as this 
solve all of the problems for the Medicare program, or could it 
completely offset a drug benefit? No. However, I would suggest that 
this is a step in the right direction, and it may provide one piece of 
the puzzle that you, as policy makers need to have in order to best 
serve the Medicare program and beneficiaries.

                                 

    Chairman JOHNSON. Thank you, Mr. Still.
    Dr. Neuman.

    STATEMENT OF PATRICIA NEUMAN, SC.D., VICE PRESIDENT AND 
 DIRECTOR, MEDICARE POLICY PROJECT, THE HENRY J. KAISER FAMILY 
FOUNDATION, ON BEHALF OF THOMAS RICE, PH.D., PROFESSOR AND VICE 
  CHAIR, DEPARTMENT OF HEALTH SERVICES, UCLA SCHOOL OF PUBLIC 
                             HEALTH

    Dr. NEUMAN. Thank you, Mrs. Johnson, and Mr. Stark and 
Members of the Subcommittee. I am going to summarize my written 
remarks, with your permission.
    Medicare offers 41 million elderly and disabled Americans 
reliable health insurance at a time in their lives when they 
are most likely to need medical care. Medicare helps pay for 
basic services, but has high cost-sharing requirements and a 
limit on catastrophic expenses, and no outpatient drug 
coverage. As a result, it is substantially less generous today 
than typical employer plans.
    Gaps in the benefit package are problematic for many, 
particularly those who lack supplemental coverage or who have 
modest incomes. Four in 10 people on Medicare today live on 
incomes below twice the poverty level, or less than $18,000 for 
an individual. The same share has less than $12,000 in 
countable assets. Thus, the risk of incurring unaffordable 
medical expenses is very real. For an older woman with a median 
monthly income of $1,400, the Part A deductible alone would 
consume more than half of her monthly income.
    To help fill Medicare's gaps, nearly 9 in 10 beneficiaries 
have some form of supplemental insurance, but access to 
supplemental coverage is on the decline. Our own surveys find 
that fewer employers are offering retiree health benefits, and 
many are considering eliminating these benefits in the future. 
In addition, the number of people with Medigap policies has 
declined by one-and-a-half million in the late nineties, and 
the number covered by M+C plans has dropped by about the same 
amount. Given State budget problems, Medicaid coverage may also 
be in jeopardy as a supplement to Medicare.
    Modifying Medicare's cost-sharing could be one approach to 
reduce the growth in Medicare spending while addressing 
concerns related to supplemental insurance. Some have suggested 
the beneficiaries should bear more of their health care costs 
to deter use of services that are not really needed. The RAND 
Health Insurance Experiment, which is the largest and most 
prominent study to date on cost-sharing, offers some important 
insights on this issue.
    It found that, as cost-sharing increases, utilization 
decreases, along with total spending. It also found that cost-
sharing lowers the use of both medically necessary services as 
well as less essential care. Subsequent studies of people 65 
and older indicate that cost-sharing, or the lack of 
supplemental coverage, deters people from seeking diagnostic 
and preventive care, such as mammograms, as well as routine 
care for chronic illnesses.
    Lack of supplemental coverage also affects utilization of 
treatments that are not covered by Medicare, particularly 
prescription drugs. A recent study found that seniors with 
conditions such as congestive heart failure and diabetes but no 
drug coverage were far more likely than those with drug 
coverage to forego their prescriptions or to skip doses to make 
their medicines last longer.
    Cost-sharing makes consumers more price-sensitive, but 
there's a limit to how much influence patients have on the care 
they get when they're sick. Cost-sharing tends to affect 
whether people decide to seek care in the first place, but has 
far less influence on the number and types of medical services 
they receive after they initiate care. This is because 
physicians generally guide these decisions about follow-up 
treatment and care.
    In summary, bringing Medicare coverage more into line with 
benefits typically offered by large employers would help 
achieve multiple goals. It would lower seniors' out-of-pocket 
costs, remove financial barriers to care, reduce the need for 
supplemental insurance and, in so doing, would produce some 
administrative savings. Clearly, these enhancements would come 
at a cost and, thus, would compete with other national spending 
priorities.
    The evidence shows that cost-sharing lowers utilization of 
both necessary and potentially nonessential care. Lower 
utilization may reduce spending in the short term, but could 
ultimately result in poorer health outcomes, hitting those with 
limited incomes the hardest, including older women, the oldest 
old, racial and ethnic minority beneficiaries, and the under 65 
disabled.
    If, for example, restructuring results in a lower 
deductible for people using hospital services, but is a 
significantly higher deductible for those using only physician 
care, then beneficiaries with modest incomes could face a 
difficult choice: they could pay more out of pocket to get 
physician care if they have a health concern, or risk going 
without it to save money. If they end up in the ER as a result 
of going without needed care, Medicare spending could actually 
rise.
    Over the course of its nearly 40-year history, Medicare has 
done much to improve the lives of people it serves. Despite its 
limited benefit package, the program continues to enjoy broad 
public support. Efforts to modify cost-sharing should address 
the need to contain program spending without creating new 
financial barriers to care. Adding drug coverage and limiting 
catastrophic expenses are a top priority for seniors. In the 
absence of such changes, people on Medicare will continue to 
seek supplemental insurance, such as Medigap, and shoulder 
these costs themselves.
    Thank you, Mrs. Chairman.
    [The prepared statement of Dr. Neuman follows:]
   Statement of Patricia Neuman, Sc.D., Vice President and Director, 
   Medicare Policy Project, Kaiser Medicare Policy Project, Henry J. 
 Kaiser Family Foundation, on behalf of Thomas Rice, Ph.D., Professor 
 and Vice Chair, Department of Health Services, UCLA School of Public 
                                 Health
    Thank you, Madam Chairman and Members of the Committee, for the 
opportunity to testify on the issue of Medicare's cost-sharing 
structure and Medigap supplemental coverage. I am Patricia Neuman, a 
Vice President of the Kaiser Family Foundation and Director of the 
Foundation's Medicare Policy Project. I am testifying today on behalf 
of myself and Thomas Rice, Ph.D., Professor and Vice Chair of the 
Department of Health Services at the UCLA School of Public Health. This 
testimony reviews the evidence on the effects of cost-sharing on health 
care utilization, and the implications for proposals that would modify 
Medicare's cost-sharing structure.
Medicare Today
    Medicare plays a critical role in the lives of 41 million elderly 
and disabled Americans, offering a reliable source of health insurance 
at a time in their lives when they are most likely to need medical 
care. Medicare pays for much-needed basic medical services, such as 
physician and hospital care. However, with high cost-sharing 
requirements and no outpatient prescription drug coverage, Medicare is 
substantially less generous than plans typically offered by large 
employers (Figure 1).





[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Medicare's Part A deductible, for example, now $840 per benefit 
period, is more than three times as high as the deductible typically 
imposed by large employer plans. It is also considerably higher than 
the FEHBP Blue Cross/Blue Shield Standard Plan, which has a $250 
deductible and a $100 inpatient admission fee. Medicare has no limit on 
beneficiaries' out-of-pocket expenses, while the typical large employer 
plan has a $1,500 limit and the FEHBP Blue Cross/Blue Shield Standard 
Plan has a $4,000 limit on out-of-pocket spending.[1] And, 
virtually all large employer plans, including FEHBP plans, cover 
prescription drugs--typically without a separate drug deductible or cap 
on covered drug benefits.
    Gaps in Medicare's benefit package are increasingly problematic for 
beneficiaries given that many have relatively modest incomes and 
limited assets, and face declining access to affordable supplemental 
coverage. Four in ten Medicare beneficiaries live on incomes below 
twice the Federal poverty level--about $18,000 per person and $24,000 
per couple in 2003 (Figure 2), and the same number have less than 
$12,000 in countable assets, leaving them with little capacity to pay 
for unexpected medical expenses (Figure 3).[2] On average, 
Medicare beneficiaries spend more than a fifth of their income on 
health expenses, including Part B premiums; Medicare cost-sharing; non-
covered services, such as prescription drugs; and premiums for 
supplemental insurance.[3]



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    With many living on fixed incomes, the risk of incurring 
unaffordable medical expenses is very real. For an elderly woman at the 
median income level of $1,400 per month, the Part A deductible alone 
would consume more than half of her monthly income. Those with serious 
health problems are particularly at risk. A recent study of out-of-
pocket spending among beneficiaries with various medical problems found 
that a chronically ill, frail 80-year-old woman could pay more than 
$10,000 within a year for her health care, supplies, and prescriptions, 
if she had no supplemental insurance.[4]
Gaps in Medicare and Supplemental Coverage
    The majority of beneficiaries--9 in 10--rely on supplemental 
insurance to help fill the gaps in Medicare's benefit package and to 
protect themselves from large, unanticipated health care expenses 
(Figure 4). Employer-sponsored retiree coverage is the primary source 
of supplemental insurance, assisting one-third of all beneficiaries. 
Seniors with health benefits from a former employer typically have 
relatively generous benefits, and tend to have higher incomes and more 
years of education than do other beneficiaries.[5]


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Medigap is the second leading source of supplemental coverage, 
providing coverage to a quarter of all beneficiaries. Beneficiaries who 
elect to stay in traditional Medicare have a choice of purchasing one 
of ten standard Medigap benefit packages (Figure 5). Those who buy 
Medigap policies are typically female, white, older, and more educated. 
They also tend to have higher-than-average incomes, although more often 
lower incomes than retirees with employer-sponsored coverage. They are 
also more likely to live in rural areas, where they are less apt to be 
offered retiree coverage from a former employer or a Medicare+Choice 
plan that offers supplemental benefits.


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Finally, Medicaid is a critical source of supplemental coverage for 
low-income Medicare beneficiaries. Medicaid helps relieve the financial 
burdens facing low-income Medicare beneficiaries in several ways. 
First, it pays their monthly Medicare Part B premium, which now amounts 
to over $700 per year. Second, Medicaid pays the cost-sharing charged 
for many Medicare-covered services. Finally, Medicaid covers a range of 
important benefits excluded from Medicare, such as prescription drugs.
    Together, these various supplemental insurance options have helped 
to shield seniors from the full effects of Medicare's high cost-sharing 
requirements and limited benefit package. The evidence now suggests 
that access to supplemental coverage is on the decline, however. 
Between 1996 and 1999, while the share of beneficiaries with 
supplemental coverage remained stable due to the increase in 
Medicare+Choice enrollment, the number of beneficiaries with Medigap 
policies declined by 1.5 million, bringing the share of all Medicare 
beneficiaries with Medigap coverage from 29% to 24% (Figure 
6).[6] Since then, enrollment in Medicare+Choice plans has 
also dropped by roughly the same number.


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    In addition, results from several surveys point to an erosion of 
employer-sponsored retiree health benefits. Between 1988 and 2002, the 
share of large employers offering retiree health benefits dropped from 
66 percent to 34 percent.[7] And, according to the recent 
Kaiser/Hewitt survey, 22% of large employers say they are likely to 
terminate health benefits for future retirees in the next few 
years.[8] Finally, the adequacy of Medicaid benefits is 
likely to be jeopardized by acute budgetary problems at the State 
level.
    The erosion of supplemental coverage raises questions about how 
best to protect beneficiaries from high out-of-pocket costs in the 
future, from improving Medicare's benefit package to changing cost-
sharing structures under Medicare and supplemental sources.
COST-SHARING: IMPLICATIONS FOR BENEFICIARIES
    One key consideration in redesigning Medicare's benefit package is 
an understanding of the effects of cost-sharing on beneficiaries' 
access to care. Some have suggested, for example, that beneficiaries 
should bear a greater share of their health care costs to deter use of 
non-essential services. A review of the literature, however, identifies 
several concerns associated with proposals that would raise cost-
sharing under Medicare: (1) higher cost-sharing requirements are likely 
to lower use of medically necessary services and may have a negative 
impact on beneficiaries' health status; (2) higher cost-sharing is 
inequitable, hitting the most financially vulnerable beneficiaries the 
hardest; and (3) many if not most seniors do not appear to have 
sufficient information and knowledge to navigate the health care system 
and assess their options when faced with high cost-sharing 
requirements.
Impact of Cost-Sharing on Use of Services
    It is clear that increased cost-sharing reduces service utilization 
and total spending. The most notable study on the topic was the RAND 
Health Insurance Experiment. Conducted in the 1970s and early 1980s, 
the study remains the only large-scale, randomized controlled trial to 
compare use of services and total spending across different cost-
sharing arrangements. The study examined the effects of four 
coinsurance groups: 0% (free care), 25%, 50%, and 95%. All participants 
were protected by an annual limit on out-of-pocket costs. The study 
demonstrated that coinsurance had a considerable impact on both use and 
spending, finding that people in the highest cost-sharing group, who 
had to pay 95% of charges, had total annual expenditures that were 31% 
lower than those of the no-coinsurance group. From a policy standpoint, 
perhaps more relevant is the finding that those facing a 25% 
coinsurance rate had expenditures that were 19% lower than those of the 
participants in the free-care group.[9]
    One would hope that, as people cut back on utilization as their 
cost-sharing increases, they would be selective in doing so--forgoing 
services of little value, while continuing to receive the most useful 
services. However, the RAND study found that cost-sharing is as likely 
to lower use of services judged by medical experts to be medically 
effective as it is to lower use of those deemed less effective or 
ineffective.[10] The authors of this evaluation concluded 
that, ``[C]ost-sharing did not lead to rates of care seeking that were 
more `appropriate' from a clinical perspective.'' That is, cost-sharing 
did not seem to have a selective effect in prompting people to forgo 
only care that would likely be of little or no value.[11]
    Although the RAND experiment did not include seniors, subsequent 
studies that have show similar results. A recent review of studies that 
included people ages 65 and older confirmed these results, with nearly 
all studies showing that higher patient cost-sharing resulted in use of 
fewer services.[12] Rice and Matsuoka examined 18 studies 
that measured the impact of cost-sharing or the possession of 
supplemental insurance on clinically appropriate 
utilization.[13] Of the 18 studies, 14 found that higher 
cost-sharing or lack of supplemental coverage had a negative effect on 
appropriate utilization of health services, whereas just 4 found that 
it had no effect or a positive effect. For example, one of the studies 
found that women on Medicare without supplemental coverage were far 
less likely than those with some form of coverage to have a 
mammogram.[14] Together, these findings strongly suggest 
that those having to pay Medicare's cost-sharing requirements out of 
their own resources (i.e., without supplementation) use far fewer 
preventive and medically necessary services than recommended.
    Surveys of beneficiaries themselves confirm these results. 
Beneficiaries who are exposed to Medicare's cost-sharing requirements 
because they lack supplemental coverage report greater access problems 
than do those with supplemental coverage. Data from the Medicare 
Current Beneficiary Survey show that while 21% of those with only 
traditional Medicare reported having delayed care due to cost, just 11% 
of those with Medicaid and 5% of those with private supplemental 
coverage had done so in 1999. In addition, while 14% of those without 
supplemental coverage had no usual source of care in 1999, this was the 
case for only 6% of those with Medicaid and 4% of those with private 
coverage to fill in Medicare's gaps (Figure 7).



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Beneficiaries without supplemental coverage--including those with 
serious health concerns--are also less likely to receive treatments not 
covered by Medicare, particularly where prescription drugs are 
concerned. A 2002 study by Safran and others found, for example, that 
seniors with chronic conditions, such as congestive heart failure, 
diabetes, and hypertension, but no drug coverage, were far likelier 
than those with drug coverage to forgo filling their prescriptions due 
to costs, or to skip doses to make their medicines last longer. Among 
seniors with diabetes, for example, nearly a third of those without 
drug coverage skipped doses (30%) or didn't fill a prescription (31%); 
among diabetics with drug coverage, the comparable figures were 17% and 
14%, respectively (Figure 8).[15]


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Along with potential implications for beneficiaries' health, lower 
use of prescription drugs stemming from lack of coverage may raise 
overall spending due to increased demand for other services, such as 
inpatient hospital care (Lichtenberg, 2001).[16]
Impact on Equity
    By its nature, increased patient cost-sharing hurts the financially 
vulnerable the most. This is because of three interrelated issues: 
cost-sharing accounts for a greater proportion of their incomes; those 
with lower incomes tend to be sicker; and, because they are sicker, 
they generally require more services.
    Families with lower incomes who seek medical care will likely spend 
a greater proportion of their income on cost-sharing requirements than 
will wealthier families, unless they have relatively comprehensive 
private supplemental insurance or Medicaid. Higher cost-sharing 
requirements disproportionately affect Medicare beneficiaries with 
incomes below twice the poverty level (about $18,000 for an 
individual), including: women (44%), seniors ages 85 and over (52%), 
African American (60%) and Hispanic (59%) beneficiaries, and under-65 
beneficiaries with permanent disabilities (59%) (Figure 
9).[17] Adding to the obvious challenge of living on modest 
incomes, low-income beneficiaries are less likely than those with 
higher incomes to have any form of supplemental coverage (Figure 10). 
They are also more likely to be in fair or poor health and therefore 
have a greater need for medical services.

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Increased cost-sharing can therefore be viewed, colloquially 
speaking, as a ``triple jeopardy'' for elderly and disabled 
beneficiaries with modest incomes:

      Those with low incomes are more likely to be without any 
form of supplemental insurance that covers Medicare's cost-sharing 
requirements;[18]
      Since those with low incomes also tend to be in poorer 
health and need more medical services, Medicare's cost-sharing 
requirements will account for a greater portion of their limited 
incomes if they use the necessary additional services; and
      If they do not use the additional services they need, 
their health is likely to suffer as a result.
Seniors and Health Care Decisions
    One of the arguments for maintaining cost-sharing under Medicare is 
that it gives consumers an incentive to ``think twice'' before using 
services. The idea is that, if beneficiaries are made more price-
sensitive, they will forgo potentially unnecessary services, which in 
turn, will help contain health care spending. There are other factors 
that drive treatment decisions for patients, including whether they 
have control over the medical services they get, and sufficient 
information to make such decisions for themselves.
    There is a limit to how much decision-making power is vested, or 
even should be vested in beneficiaries when it comes to health care 
utilization. The RAND experiment suggested that patient cost-sharing 
has a considerable impact on whether or not beneficiaries seek care 
when they are sick, but far less influence on the intensity of service 
use after they initiate care.[19] This is likely because 
physicians, not patients, generally guide decisions about follow-up 
care and testing.
    Even when patients are more actively involved in decisions about 
their own care, they need to be able to review information from a 
variety of sources to determine whether medical treatment is not only 
affordable, but also whether it is clinically necessary. This is 
challenging as it requires: (a) knowing what the out-of-pocket costs of 
a service will be, and (b) understanding both the health implications 
of obtaining the service and the medical (and financial) consequences 
of not obtaining the service. This would likely be extremely difficult 
for people of all ages.
Summary and Policy Considerations
    In summary, there is substantial evidence showing that cost-sharing 
leads to lower utilization of health care services--both necessary and 
potentially non-essential services. A number of studies show that cost-
sharing (or lack of supplemental coverage) deters people from seeking 
diagnostic and preventive services, as well as services that are often 
used to treat chronic illness. Lower utilization may reduce health care 
spending in the short term, but could ultimately result in poorer 
health outcomes for seniors and younger beneficiaries with 
disabilities.
    This body of evidence has direct bearing on efforts to modify 
Medicare's current cost-sharing structure, and has implications for 
low-income and otherwise vulnerable beneficiaries. If, for example, 
restructuring results in a lower deductible for people using hospital 
services, but a higher deductible for those who use only physician 
care, then beneficiaries with modest incomes would face a difficult 
choice. They could decide to pay the higher deductible out of their 
limited incomes to get physician care or they could decide to take a 
risk and go without care in order to save money, which could 
potentially increase Medicare spending if they end up in the hospital.
    As noted earlier, Medicare is substantially less generous than 
typical large employer plans. Bringing Medicare coverage more in line 
with typical employer benefits would go a long way toward removing 
financial barriers to care. Benefit improvements could also reduce the 
need for supplemental insurance, and produce some administrative 
savings as well. At the same time, these changes would increase 
Medicare spending, by shifting costs now incurred by beneficiaries onto 
the program.
    It is important to note that changes in Medicare's cost-sharing 
requirements and benefit package would also impact State budgets, in 
that Medicaid fills in Medicare's gaps for low-income beneficiaries 
also covered by Medicaid. This can play both ways for States. Benefit 
improvements such as a prescription drug benefit or stop-loss 
protection could significantly reduce Medicaid spending, while passing 
increases in Medicare premiums and deductibles on to Medicaid could 
have the opposite effect.
    Over the course of its nearly 40-year history, Medicare has done 
much to improve the lives of its beneficiaries. Despite a limited 
benefit package, Medicare remains a popular program and enjoys broad 
public support. Efforts to modify cost-sharing should balance the need 
to reduce program spending without creating new and unintended 
financial barriers to care. From the perspective of people served by 
the program, adding a prescription drug benefit and limiting 
catastrophic expenses are especially important. These benefit 
enhancements would come at a cost, and compete with other national 
spending priorities. In the absence of such changes, beneficiaries will 
continue to shoulder these costs.
                               REFERENCES
     [1]  Blue Cross Blue Shield Federal Employee Program. Accessed on 
April 28, 2003. http://www.fepblue.org/benefits/benefits03/
soaag03.html.
     [2]  Moon, M., R. Friedland, and L. Shirey. Medicare Beneficiaries 
and Their Assets: Implications for Low-Income Programs. Prepared for 
The Kaiser Family Foundation, June 2002.
     [3]  Maxwell, S., M. Moon, and M. Storeygard. Reforming Medicare's 
Benefit Package: Impact on Beneficiary Expenditures. Prepared for The 
Commonwealth Fund, May 2001.
     [4]  Snyder, R., T. Rice, and M. Kitchman. Paying for Choice: The 
Cost Implications of Health Plan Options for People on Medicare, 
January 2003.
     [5]  Pourat, N., et al. ``Socioeconomic Differences in Medicare 
Supplemental Coverage,'' Health Affairs 19(5), September/October 2000: 
186-196.
     [6]  Laschober, M.A., M. Kitchman, P. Neuman, and A.A. Strabic. 
``Trends in Medicare Supplemental Insurance and Prescription Drug 
Coverage, 1996-1999.'' Health Affairs Web Exclusive, 27 February 2002.
     [7]  Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 
2002; KPMG Survey of Employer-Sponsored Health Benefits: 1988.
     [8]  Kaiser/Hewitt 2002 Survey on Retiree Health Benefits, 
December 2002.
     [9]  Newhouse, J.P., et al. Free for All? Lessons from the RAND 
Health Insurance Experiment. Cambridge, MA: Harvard University Press, 
1993.
    [10]  Lohr, K.N., et al. 1986. ``Effect of Cost-Sharing on Use of 
Medically Effective and Less Effective Care.'' Medical Care 24 
(Supplement): S31-S38.
    [11]  Lohr, K.N., et al. 1986. ``Effect of Cost Sharing on Use of 
Medically Effective and Less Effective Care.'' Medical Care 24 
(Supplement): S31-S38.
    [12]  Rice, T., and K.Y. Matsuoka. ``The Impact of Cost-Sharing on 
Utilization and Health Status: A Review of the Literature on Seniors,'' 
Submitted for publication. Available as working paper from the 
Department of Health Services, UCLA School of Public Health, 2003.
    [13]  Ibid.
    [14]  Blustein, J. 1995. Medicare Coverage, Supplemental Insurance, 
and the Use of Mammography by Older Women. New England Journal of 
Medicine 332(17): 1138-1143.
    [15]  Safran, D.G., et al. ``Prescription Drug Coverage and 
Seniors: How Well Are States Closing the Gap? Findings from a 2001 
Survey of Seniors in Eight States,'' Health Affairs Web Exclusive, July 
31, 2002.
    [16]  Lichtenberg, F. ``Are the Benefits of Newer Drugs Worth Their 
Cost? Evidence from the 1996 MEPS.'' Health Affairs 20(5), September/
October 2001: 241-251.
    [17]  The Urban Institute analysis of 2000 Current Population 
Survey prepared for The Kaiser Family Foundation.
    [18]  Pourat, N., et al. ``Socioeconomic Differences in Medicare 
Supplemental Coverage,'' Health Affairs 19(5), September/October 2000: 
186-196.
    [19]  Newhouse, J.P., et al. Free for All? Lessons from the RAND 
Health Insurance Experiment. Cambridge, MA: Harvard University Press, 
1993.

                                 

    Chairman JOHNSON. I thank the panel for their comments. Mr. 
Still, that's an interesting option that you proposed. Have you 
done any runs to see what the premiums would be for various 
deductibles? I assume that once you reach the deductible, that 
you would have catastrophic coverage then?
    Mr. STILL. What kind of coverage?
    Chairman JOHNSON. Once you met the cap you were describing, 
50 percent of the cost up to a cap----
    Mr. STILL. Yes.
    Chairman JOHNSON. --after the cap, the policy would provide 
complete coverage?
    Mr. STILL. Yes, that's correct.
    Chairman JOHNSON. Do you have any idea what the premium 
would be?
    Mr. STILL. We've done some rough estimates on that. Of 
course, this would have to be priced once the product was 
offered and you knew how many policyholders you had, and every 
company would have to price it accordingly. We're estimating, 
if you assume that Plan F currently costs $2,300 a year--and 
that's on the high side----
    Chairman JOHNSON. The cap would be?
    Mr. STILL. With a $1,000 cap, we think the annual savings 
would be $480. That's an estimate. We think there would be a 
$480 savings on Plan F, with a $1,000 cap.
    Chairman JOHNSON. So, for a $1,000 cap, the premiums would 
amount to about $520 a year?
    Mr. STILL. No, $1,820 a year. We believe--The other thing 
is we believe it would help keep the increases in check in the 
future, which is also important. The initial----
    Chairman JOHNSON. For a $1,000 cap, the premium would be 
$850 a year?
    Mr. STILL. It would be $1,820 a year. You have the same 
coverage as in Plan F. You would have all the benefits under 
Plan F, the core benefits of Plan F, but what you would be 
doing is you would have an annual savings of $480.
    I just did an example. If you had a $2,000 Part B 
expenditure, the policyholder would incur a $100 Part B 
deductible, and then 20 percent of that $2,000 is $400, for a 
total incurred amount of $500. If the beneficiary pays 50 
percent of that, then the beneficiary would pay $250 out of 
pocket and would still have saved $230. It still has all the 
other coverage that they have under Plan F.
    Chairman JOHNSON. That's interesting. All right.
    The issue of ``first dollar'' coverage is, of course, a 
very important issue. I would like each of you to enlarge on 
that a little bit more. It is certainly true that it 
discourages buying, buying both needed services and unneeded 
services.
    Are there structures in the real world that allow a 
differentiation between those things, at least at the 
preventive level? Are there other comments that you might have 
on how to structure a ``first dollar'' responsibility, or do 
you think having a ``first dollar'' responsibility is just 
something we shouldn't do?
    Mr. Hackbarth.
    Mr. HACKBARTH. A couple of quick reactions.
    One, there is two different sets of reasons for having some 
front-end cost-sharing. One is to try to effect the utilization 
pattern. The other is just as a matter of allocating resources.
    I mentioned in my comments that in our thinking about the 
issue there did seem to be a consensus among Commissioners that 
we ought to have better coverage at the back end for the 
patients using the most services, and in exchange for that, 
have some front-end cost-sharing for all services. So, that's a 
decision based primarily on how we make the best use of limited 
resources. That's a good, general trade consistent with 
insurance principles from our perspective.
    In terms of the effect of cost-sharing on use of services, 
I basically agree with Tricia's summary of the available 
evidence, with a couple of additional points. One, with regard 
to the RAND Health Insurance Experiment, which, by the way, did 
not include seniors--the oldest people included were 62, as I 
recall--there was a decline in utilization. As Tricia said, it 
was a mixture of both effective and ineffective services that 
were foregone as a result of cost-sharing.
    The RAND experiment found no effect on the general 
population of foregoing the services, no effect on their health 
status, with the important exception of some health effects for 
low-income people and people with some particular conditions. 
So, in general, there was no negative health status effect. It 
did only apply to a non-Medicare population.
    Whether we could extrapolate that finding to Medicare is 
very much in doubt. It's a question because of the differences 
in the populations.
    With regard to other research that's been done, there have 
been a fair number of studies specifically directed at cost-
sharing and its effect on seniors, but none of them have been 
experimental like the RAND Health Insurance Experiment. So, 
even though they're done by very capable researchers, they are 
always plagued by not having an experimental design and there 
are questions about whether you're appropriately controlling 
for all of the variables, what's the cause, what's the effect 
and all that.
    In most of them, the vast majority of them focus on 
prescription drug cost-sharing as opposed to cost-sharing for 
other services.
    The last point, as Tricia said, cost-sharing does tend to 
work on the decision to enter the system, and it would effect 
most powerfully the initial decision to seek services, as 
opposed to the services delivered to a patient once they are in 
the system. So, it would have the greatest effect on ambulatory 
services. This is one reason why many people recommend that 
there be reduced or no cost-sharing for preventive services, 
for services that you really want to encourage.
    Chairman JOHNSON. Thank you. Would anyone else care to 
comment?
    Mr. White.
    Mr. WHITE. Yes. We believe that consumers should have the 
ability to choose what they want, and right now it appears that 
the consumers are choosing in the Medicare supplement market 
``first dollar'' coverage. Sixty-seven percent of the policies 
being sold are plans that offer coverage for the Part A and B 
deductibles.
    Persons that are purchasing Medicare supplements should 
also have the same options that are available to other people. 
The Federal employees program, if you choose the Blue Cross 
option, it covers everything with a complete wrap-around. The 
TRICARE For Life was recently introduced. It's a complete wrap-
around. A lot of employer-based plans are complete wrap-
arounds, along with Medicaid, which the reason there is 
obvious.
    If you look at how much impact does Medicare supplement 
``first dollar'' coverage have, it's really only going to be--
If it's 67 percent of the people purchasing those plans, and 
then only 25 percent of the people buy Medicare supplements, 
we're only talking about a small fraction of Medicare 
beneficiaries.
    Why do people choose these plans? One, it's financial. It 
makes it predictable. The second is the billing. Personally, 
I'm dealing with my mother, who recently passed away, and it 
makes it much simpler to know that if she is balanced billed, I 
don't need to worry. I don't need to talk to Medicare and talk 
to the insurance company. I can stay out of it. I'm fortunate 
because I know the system. It makes it much simpler for 
consumers.
    On the effect of cost-sharing, I tend to agree with what 
Tricia is saying. I do not see, in the data I look at, that the 
cost-sharing would have that much benefit. I offer certain 
plans and I compare the cost between plans. I do look for anti-
selection--drug plans have higher medical costs, versus the 
non-drug plans. When you look at the plans that have the Part B 
deductible and those that don't, there is not a radical 
difference in the claims cost once you adjust for the benefits. 
So, I'm not saying that utilization is----
    Chairman JOHNSON. However, the choices under Medigap really 
don't give you any information on that point, because if you 
look at the benefits offered by the plans, in addition to 
copayments for A and B, foreign travel--How big an issue is 
this? Under coinsurance, most people don't realize how exposed 
they are, and that's not a big item. In other words, we don't 
have any experience in offering a supplemental that has 
variable copayments and offers variable opportunities to 
participate. So, seniors can't see what the impact would be for 
them on their premiums.
    We do have seniors paying extraordinary premiums under 
Medigap now. That really concerns me, because I sit with 
seniors who are very upset about the premium cost and, 
honestly, they're never going to use their premium. So, I am 
concerned that there's a very narrow range of choice for 
seniors.
    There are two series of questions the Subcommittee will 
have to look at. One is, do we simply outright require 
everybody to carry some ``first dollar'' responsibility for the 
Medicare program, certainly exempting preventive care services? 
Do we make some similar exception for chronic care patients, so 
that, in a sense, everybody knows that they are part of the 
action?
    Then the other issue is, how much can you vary those so 
that you can vary premiums? Then, if they want almost 100 
percent coverage, they pay a higher premium. If they're willing 
to pay 50 percent of their copayments or 100 percent of their 
copayments, they pay a lower premium. So, we need for seniors 
to have choices that will--We need them to have a choice of 
benefits that will more deeply affect the premium. Foreign 
travel is not going to affect the premium much, truthfully, and 
even at-home recovery is not going to affect the premium much.
    I hear what you're saying about the disadvantages of 
requiring that everyone carry some ``first dollar'' coverage, 
although my jury is still out on whether that isn't good public 
policy. I don't think you can make the case that our current 
structure of Medigap benefits demonstrates to us that seniors 
want to have 100 percent coverage. Yes, they like the 
predictability; yes, they like the simplicity. They don't like 
the premiums and they have no way of seeing that, if they take 
some responsibility, then their premiums might be radically 
lower.
    Mr. WHITE. I would agree. In fact, the important point is 
choice. We don't want this choice to be taken away. The 
Torchmark proposal, our only concern would be about timing and 
is there a better approach perhaps--could we modify the high 
deductible plans F and J, offer different options, just so we 
keep the market simple. We would be interested in working with 
you on that, if you all decided to----
    Chairman JOHNSON. I think we have to be rather more 
creative than perhaps your testimony indicated.
    I'm not going to allow the other panelists to comment 
because this issue will come up, I'm sure, over and over again. 
I think I will let Mr. Stark have his chance and other people a 
chance to comment before they have to leave.
    Mr. STARK. Let me just see if I can review how we got where 
we are.
    First of all--and I would direct this to Mr. Still and Mr. 
White--the insurance industry, in the best tradition of free 
enterprise and free markets, basically wrote the various 
Medigap plans, did they not? The designed them. When the bill 
came into effect, they met with the Secretary of U.S. 
Department of Health and Human Services (HHS) and came up, as 
an industry, with the various plans, A through J or whatever 
they are.
    Mr. WHITE. Actually, I believe that was deferred to the 
National Association of Insurance Commissioners.
    Mr. STARK. Well, in conjunction with these various State 
insurance commissioners, yeah. In other words, the industry and 
the industry State regulators agreed, maybe compromised, for a 
set of benefits.
    Mr. WHITE. Consumer representatives, also.
    Mr. STARK. We basically had nothing to do with it. Yeah, 
that's right, and the consumers protecting them overly 
aggressive insurance companies, which is what actually 
triggered the legislation in the first place. There was 
confusion among the seniors, who were unable really to discern 
what very aggressive salespeople might tell them were the 
benefits, and there was no way to really compare prices when 
you had a variety of benefits, as the Chairman has suggested, 
what is the value of a foreign travel benefit, and I suspect 
you could oversell that.
    To change Medigap offerings today would be done by the same 
procedures, as I read the law--I happened to write it, so I 
think I recall this--and you would once again meet with the 
insurance commissioners and the Secretary of HHS and redesign 
the benefits. I'm sure the Chair would join with me in 
encouraging you to do that.
    I think both of your testimonies have indicated that you 
would just as soon wait until Medicare is reformed or not 
reformed, as we may decide, so that you don't have to do it a 
couple of times, that once there is a new Medicare, or if there 
is a new Medicare design, that it might be time then for the 
industry, who doesn't have to offer this policy--we're not 
directing you to; it's a private, free enterprise issue--would 
get together. Is that not correct, Mr. Still, and meet once 
again and negotiate with the insurance commissioners in denying 
new benefits?
    Mr. STILL. That's not our proposal. Our proposal is to----
    Mr. STARK. I know that's not your proposal, but that's what 
the law is.
    Mr. STILL. We would propose for Congress to actually write 
the bill.
    Mr. STARK. I would suggest to you that that's a formula for 
disaster. You all did a pretty good job when you did it early 
on. Now times have changed. There wasn't as much demand for 
drug benefits when this bill was first written. That has 
changed.
    I'm perfectly willing--and we did decide and that's why the 
insurance industry cooperated with us in the bill in the first 
place, to say, look, this is your business, you decide what--
you know the market. Mr. White is an expert in that, in 
marketing to seniors, is that not correct? I think you 
mentioned that what seniors like most is the predictable 
premium. They don't want to worry about whether they're going 
to pay 50 percent of this and how much of that because most 
live on very fixed incomes, and to know that this set monthly 
premium takes care of their problems as they see it, is what 
makes them decide. Was that a fair assessment, Mr. White, of 
what your research finds?
    Mr. WHITE. Yes. Well, for 67 percent of the people perhaps. 
Yes, they do--and this is consistent with when we did research 
back before standardization when we started offering the 
standardized plans and asked them, what were they interested 
in.
    Mr. STARK. You wanted to sell them a plan.
    So, what I'm suggesting is that I think we have a lot of 
faith in the free enterprise system here, and I think we would 
encourage you to go back with the insurance commissioners, who 
do regulate you, and all we look for was a standardized set, 
whether it was 10 or 12 or 20, was pretty much up to you, even 
leaving some creative loophole in there that said, if a State 
found a special policy, if you needed it for ice fishermen who 
had hyperthermia a lot, like in Wisconsin, where if they fall 
through the ice they could have a special benefit----
    Mr. KLECZKA. Or sunstroke like California.
    Mr. STARK. Or sunstroke like in California, all right. I 
think that this has worked well. I think it served the public. 
They've been able to identify the various costs. It may not 
today, particularly in the pharmaceutical benefits, have all of 
the desired features the public would like, but that's up to 
you guys to decide. I have a great deal of faith in your doing 
that.
    If I could, Madam Chair, for an additional second, just on 
another issue. I gather that you, Mr. Still and Mr. White, 
would agree with that. That's what the law would call for as 
it's currently written.
    Mr. STILL. What we would propose under the McCarren-
Ferguson Act, of course, if Congress speaks, then it preempts 
the State law. So, there is a way that Congress can define the 
plan----
    Mr. STARK. We spoke.
    Mr. STILL. If Congress were to define a new plan----
    Mr. STARK. We speak again? The plan is yours. You guys have 
to decide. We can't tell a private industry what they have to 
sell or not sell. You guys could back out. I could say to 
Torchmark, you've got to offer a policy like this, and you 
would say huh-uh, I ain't going to do that. There's nothing we 
could do to force you. So, for us to have coverage available to 
beneficiaries, you guys have to come up with something that 
arguably you can sell and make a profit, and that the seniors 
want.
    I just want to hear from Mr. Hackbarth and Dr. Neuman. My 
sense is that the research, such as it is, would indicate that 
there are not great savings available to any insurance system 
by increasing a huge copay. As I recall, Kaiser Permanente, not 
the Kaiser Foundation, found that after a certain level of 
copay--$5 or $10--you didn't get much change in behavior, or 
when you dropped it a certain level. In other words, for $5, 
you got as much people withholding as you did if you went to 
15, and if you got too high, people didn't come at all. If 
we're looking for cost savings, I guess my question to Dr. 
Neuman and Mr. Hackbarth is, looking at limiting ``first 
dollar'' coverage would probably do more harm than it would be 
worth for the same savings we would get. Is that a fair 
assessment of what the research tells us so far?
    Mr. HACKBARTH. On the first piece, on how large is the 
effect, again we're handicapped because we don't have Medicare-
specific research. In the case of the RAND Health Insurance 
Experiment, for the plan that had 25 percent coinsurance 
basically across the board, the effect was large. It was like a 
20-percent reduction in utilization of services. So, the effect 
can be substantial. That's fairly significant cost-sharing, of 
course, but the effect can be substantial.
    The real issue is around again, what is the impact on 
necessary care and ultimately on health status. Cost-sharing 
can make a difference in utilization.
    Mr. STARK. Trish?
    Dr. NEUMAN. I would agree with that. I think the real 
issue, though, is setting the right amount, what level should 
the deductible be, what level should the cost-sharing be, if 
there's going to be cost-sharing under Medicare or under any of 
these policies.
    Actually, employer plans, while they're really generous in 
wrapping around Medicare, many of them do maintain some 
smaller, a $200 deductible, so they don't fully shield seniors 
from the $840 deductible, but they partially do. So, I think I 
would agree completely with Glenn on his comments about this 
level of savings, because they are real, but the concern is 
savings at what cost. So, you might want to give greater 
thought to how high the cost-sharing responsibility should be, 
so that you don't really penalize people with modest incomes 
who can't really deal with the calculus of making a decision of 
when they're avoiding care that's less essential, versus care 
that might be necessary. There's lots of evidence to show that 
they do both.
    Mr. STARK. Thank you, Madam Chair.
    Chairman JOHNSON. Mr. McCrery.
    Mr. McCRERY. I'll just address this to anyone on the panel 
who can answer it. If we were to decide that we wanted to allow 
Medigap plans more flexibility, in terms of their design, would 
that have to be done by legislation, or could it be done by 
referral to the same group that Mr. Stark referred to?
    Mr. STILL. I believe it would have to be done by 
legislation. What I proposed to Mr. Stark, would be to have a 
new plan and just create that legislatively. That would be the 
most efficient and cleanest way to do it, and Congress has the 
authority to do that.
    Mr. McCRERY. Thank you. Madam Chair, I have no further 
questions.
    Chairman JOHNSON. Mr. Kleczka.
    Mr. KLECZKA. Thank you, Madam Chair. Dr. Neuman, it's good 
seeing you again. In your testimony, I thought you indicated--
and correct me if I'm wrong--that currently in the Medicare 
program there is some high cost-sharing; however, you went on 
to say that we could probably look at cost-sharing for what you 
term ``nonessential care.''
    Could you give me a feel for what we're talking about when 
you talk about ``nonessential care''? What type of procedures 
are----
    Dr. NEUMAN. Well, first I would like to say that this would 
not be my view of what nonessential care is. The RAND Health 
Insurance Experiment had a group of clinical advisers that 
looked at people with different conditions. They made 
determinations of what would be clinically indicated and what 
might not be clinically indicated for a person with a specific 
health problem under certain circumstances.
    Mr. KLECZKA. So, you're not willing to give me a specific 
procedure that that bad study called ``nonessential care''?
    Dr. NEUMAN. Well----
    Mr. KLECZKA. If it's nonessential care, it's probably not 
covered by Medicare, or I hope it's not.
    Dr. NEUMAN. Glenn, perhaps your work at MedPAC speaks to 
this question.
    Chairman JOHNSON. Medicare covers you whenever you go to 
the doctor, whether you needed to or not.
    Mr. KLECZKA. I can give you some examples.
    Dr. NEUMAN. The point is, if you have a health problem, if 
you don't have symptoms related to a condition like diabetes, 
you may not need to have tests that diagnose diabetes. There 
are some things that are appropriate and some things that are 
not appropriate for people, given their conditions.
    Mr. KLECZKA. Bad example. I don't buy that one.
    Dr. NEUMAN. Glenn.
    Mr. HACKBARTH. I can't speak specifically to what the RAND 
Health Insurance Experiment considered unnecessary care, but an 
example of where front-end cost-sharing might have a 
significant effect is in terms of ambulatory visits to a 
physician. Again, there will be arguments about whether this is 
a loss or not in terms of beneficiary welfare, but that's an 
area where you would probably expect to see a decline in 
utilization.
    In my experience in talking to physicians, they will talk 
about beneficiaries who are non-Medicare patients who require 
extra visits, often for reassurance. Sometimes physicians talk 
about the ``worried well.'' That's a type of visit that might 
decline in the face of cost-sharing.
    Again, whether we want that to happen or not is another 
question. It's effect on health status of the beneficiary may 
be minimal of losing that sort of visit.
    Mr. KLECZKA. Is the Medicare program rampant with these 
types of office visits you just cited?
    Mr. HACKBARTH. I can't answer that. I don't know the answer 
to that. I don't know how frequent they are.
    Now, by definition, we would be talking about patients that 
have some medical problem, because Medicare doesn't cover----
    Mr. KLECZKA. Trish, do you have any----
    Dr. NEUMAN. I don't think there's any evidence that the 
program is rampant with people using services willy nilly that 
they don't need.
    Mr. KLECZKA. Well, my two colleagues on the right here 
indicated that yeah, it does happen in Medicare. From the 
discussion here, it's not a real big abusive problem that I'm 
aware of. I stay away from the doctor----
    Chairman JOHNSON. Would the gentleman yield?
    Mr. KLECZKA. Sure.
    Chairman JOHNSON. Frankly, we don't know the dimensions of 
the problem, nor is anyone suggesting we try to find out. I 
don't think the Medicare program is structured, nor do we want 
the Federal Government trying to evaluate whether any 
particular item of care was necessary or not necessary. I think 
the statistics that I gave in my opening comments do give us 
some reason to believe that there is overuse. Beneficiaries 
with Medigap insurance policies consume $1,400 more in Medicare 
services than beneficiaries without supplemental coverage. So, 
that's----
    Mr. KLECZKA. Maybe those buying supplemental coverage are 
sicker. If I'm a healthy senior, I'm not going to buy a 
supplemental because I have the basic plan and I'll go bare, 
and once I turn 73 and start creaking around----
    Chairman JOHNSON. Mr. Kleczka, can I just finish my 
sentence?
    Mr. KLECZKA. Sure. --and I start creaking around, then I'm 
going to start looking for a Medigap policy. That's wise 
consumerism.
    Chairman JOHNSON. Miss Tubbs Jones.
    Ms. TUBBS JONES. Thank you, Madam Chairman, for the 
opportunity----
    Mr. KLECZKA. I wasn't done yet, but go ahead.
    Chairman JOHNSON. Ms. Tubbs Jones.
    Ms. TUBBS JONES. Thank you, Madam Chairman, for the 
opportunity to inquire. Dr. Neuman, I'm interested, because a 
significant number of my constituents are low-income persons, 
about, from your perspective, what basic provisions Medicare 
covers and what are they missing out of without the ability to 
purchase a Medigap policy?
    Dr. NEUMAN. Well, Medicare does provide a pretty good range 
of basic services. The big gap in Medicare from the perspective 
of seniors is prescription drugs. That's the real issue. Some, 
but not all, are able to get prescription drugs through other 
sources, like the M+C plans, depending on where they live, or 
Medigap, if they're able to find a policy and don't have health 
problems that would exclude them, or from Medicaid if they're 
very low income. That's really the number one concern.
    Ms. TUBBS JONES. Now, if they're very low income and they 
can get--Let me ask another question.
    The way the Federal Government figures out how you are able 
to access assistance, there is probably a group of folks--and 
I'm not speculating; I'm asking this question of you--that fall 
above what Medicaid covers and below what these supplemental 
programs, if I were able to afford one, would cover.
    Dr. NEUMAN. You're absolutely right. Medicaid does not 
cover everybody up to the poverty level, so if you think of 
poverty being around $9,000 for a single person, and if you 
think you're low income if you're maybe earning less, or have 
an income of less than $20,000, you probably have more than a 
third of all people on Medicare in that group right there who 
would be low income but wouldn't qualify for Medicaid.
    Ms. TUBBS JONES. I find this very interesting because 
earlier today I was participating in a Subcommittee on Social 
Security hearing, where we were talking about the government 
pension offset and a husband and a wife both having 
participated in Social Security, and when one spouse dies the 
other one doesn't get the full income but gets a portion of it, 
we were looking at the--The person who testified said to me 
that, in order for me to get $1,000 a month income, I would 
have had to have made $36,000 annually in order to get $1,000 a 
month in Social Security.
    When you contemplate that this group we're talking about 
probably made no where near $36,000, we have a significant 
number of folk out there who are not receiving Medicaid and 
can't afford Medigap.
    I'm going to ask Mr. White this question as well. We are 
paying for these people at some point, at some time, either in 
more serious, acute care down the line, or in chronic illnesses 
that they have, even without this type of coverage. What would 
you suggest as a policy person, each of you, what do we do to 
cover that group that can't afford Medigap and make too much 
money to be in Medicaid? That's our dilemma, at least from my 
perspective.
    Dr. NEUMAN. Well, I'll get it started, and I'm sure the 
other panelists will have some comments.
    Today, Medicaid helps some people, and there is some 
discussion about--there had been discussions before the current 
fiscal crisis facing States, of either federalizing some of the 
benefits that are available to low-income people through 
Medicaid, or expanding the role of Medicaid. I think Medicaid 
expansions appear a more difficult proposal now, with States 
facing large deficits. So, then the real issues involve 
expanding Medicare directly, to provide the benefits directly, 
or provide more affordable coverage in the supplemental market. 
Supplemental coverage is available, but for many people it's 
quite expensive.
    Maybe the others would have some comments about how to make 
it more affordable.
    Ms. TUBBS JONES. I'm sorry. I didn't mean to leave you, Mr. 
Still. My father is a graduate of Parker High School, 
Birmingham, Alabama, or Mr. Hackbarth. Please join in.
    Mr. STILL. Trish has some connections to Birmingham, too. 
She had grandparents there.
    Ms. TUBBS JONES. Okay. Good.
    Chairman JOHNSON. We're going to have a vote, so let's 
focus on your comments.
    Mr. STILL. We are trying to make the products more 
affordable. We are trying to do that. Our suggestion would be 
to try to make these more affordable. I'm not sure we could 
take care of everyone who falls between Medicaid eligible and 
someone who can afford a Medicare supplement. We're trying to 
reduce the prices of these products to make them more 
affordable.
    Ms. TUBBS JONES. Mr. White, I apologize. We're about to 
have a vote, so I'm going to terminate my questioning--only to 
say this. Clearly, if we didn't have the tax cut that's being 
proposed, we might be able to pay for some of the health care 
benefits that many of the people that are left out of this 
process can afford.
    Thank you, Madam Chairman, for the opportunity to be heard.
    Chairman JOHNSON. I thank my colleague. I think if you 
attended the full Committee hearing, you would have heard from 
all of the experts, that there is no way, even with the tax 
cut, under any other circumstances, that we're going to buy 
ourselves out of this problem. We've got a big problem looming, 
and the tax cut, eliminating the tax cut, does not solve the 
problem. So----
    Ms. TUBBS JONES. Madam Chairman, I'm thankful that you 
brought out to the attention of the world that I wasn't at the 
whole hearing, but there are other issues going on that I'm 
required to pay attention to.
    Chairman JOHNSON. Thank you. I do want to return to the 
issue of overuse, and if Mr. Kleczka would like to comment, he 
is welcome to do so.
    I think it is significant, or at least I would like to 
better understand, why people with Medigap insurance do consume 
$1,400 more on average for Medicare patient, when employer-
covered people only consume about $900 more. So, there is a 
difference between the structure of the employer plans. 
Generally, they have more copayments and ``first dollar'' 
responsibilities, and people get better coverage with Medicare 
and the employer, and yet they're only consuming, on average, 
$500 more per patient. So, you would assume that they're not 
able to have health care that they need, as Mr. Kleczka clearly 
pointed out some people without Medigap, and Ms. Tubbs Jones 
clearly was concerned about--and that's a group we've been 
concerned about--don't have the resources to get into the 
system. Nonetheless, that difference between $1,400 and $500 is 
significant and does suggest, in my mind, overuse. Is that a 
conclusion that is illogical?
    Mr. HACKBARTH. Cost-sharing clearly matters. It affects 
utilization of services. I think that's pretty much beyond 
dispute, and it may help explain the numbers that you're 
talking about.
    The issues tend to be about whether the reduced utilization 
has an adverse effect on health or not, and there the questions 
are more complicated.
    Chairman JOHNSON. It's likely, with the employer provided 
plans, that it doesn't deny access that is needed. It suggests 
to me that the difference between the $500--so you have a 
difference between the $1,400 level of usage and the $500 below 
that, so one could suggest that you may have about a $500 on 
average overuse.
    Mr. HACKBARTH. I'm not familiar with all the details of the 
studies you're citing, but as I understand what's happening 
with employer-provided retiree coverage, there is now a 
tendency to move toward means of coordinating the benefits, the 
result in people continuing to face some front-end cost-
sharing, as opposed to the employer picking up all of the 
Medicare cost-sharing. To the extent that they are facing some 
cost-sharing as opposed to Medigap beneficiaries, who have 
basically ``first dollar'' coverage, that might help explain 
the utilization difference.
    Chairman JOHNSON. Dr. Neuman, would you care to comment?
    Dr. NEUMAN. I would just concur with that. Our work with 
Hewitt Associates has found that employers are maintaining some 
level of cost-sharing through deductibles, so many people with 
employer coverage don't have ``first dollar'' coverage.
    Chairman JOHNSON. Thank you.
    Dr. NEUMAN. However, let me just add that they are not 
required to pay the full Part A deductible. The amount that's 
required is generally in the $200-$300 range.
    Chairman JOHNSON. We are looking into that, what exactly is 
the general shape of the employer provided coverage.
    The gentleman from California, would you care to----
    Mr. STARK. Thank you.
    I was just going to ask Mr. White and Mr. Still if they 
were familiar with the previous Medicare plan that the majority 
introduced that had a $250 deducible and a 20 percent cost-
sharing for the next $750, and then a 50-percent cost-sharing 
for the next $1,000, and then 100 percent cost-sharing for the 
next $2,800 and so forth.
    Have you ever come across a similarly structured drug 
benefit in your experience in the medical insurance world that 
has the ``donut hole,'' as it was called, and is that something 
that is used in any other insurance program that you know of?
    Mr. WHITE. I think I've heard of one or two very limited 
uses of that. It's called a ``corridor'' deductible, which is 
the technical term for it.
    Mr. STARK. A which?
    Mr. WHITE. Corridor deductible is the standard term.
    Mr. STARK. Mr. Still.
    Mr. STILL. I'm not the best witness on this point.
    Mr. STARK. Thank you, Madam Chair.
    Chairman JOHNSON. I thank the panel, and appreciate your--
--
    Ms. TUBBS JONES. Madam Chairman, just briefly, could I have 
unanimous consent to submit an opening statement for the record 
on this issue?
    Chairman JOHNSON. I would prefer not to set that precedent, 
just because you're not a Member of the Subcommittee.
    Ms. TUBBS JONES. I'm a Member of the full Committee, ma'am.
    Chairman JOHNSON. I appreciate that.
    Mr. STARK. Madam Chair, I----
    Chairman JOHNSON. There is a Subcommittee structure that I 
think is responsible--I have tried to be welcoming and 
respectful to----
    Mr. STARK. Madam Chair, could I ask permission to submit an 
extended opening statement?
    Chairman JOHNSON. You certainly may.
    Mr. STARK. Thank you.
    Chairman JOHNSON. The meeting is adjourned.
    [Whereupon, at 1:23 p.m., the hearing adjourned.]
    [Submissions for the Record follow:]
           Statement of the American Association for Homecare
    The American Association for Homecare (AAHomecare) would like to 
thank Chairwoman Johnson, Ranking Member Stark and the Ways and Means 
Health Subcommittee, for the opportunity to provide testimony on 
rationalizing Medicare cost-sharing. We appreciate the Subcommittees 
work to strengthen and preserve Medicare and look forward to continuing 
to work with the Subcommittee.
    AAHomecare is a national association representing a continuum of 
home health care including home health agencies, suppliers of durable 
medical equipment (DME), orthotics and prosthetics, and suppliers of 
re/hab and assistive technology. As a representative of home health 
agencies, our members are very concerned about proposals to add a 
copayment to the Medicare home health benefit.
BACKGROUND
    The typical Medicare home health patient is female, older, poorer, 
more likely to live alone, and more likely to have three or more 
impairments in activities of daily living (ADLs) than the average 
Medicare beneficiary.
    As you know, last year the House of Representatives rejected the 
inclusion of a home health copayment in the Medicare Modernization and 
Prescription Drug Act of 2002 (H.R. 4954). This legislation also 
included an elimination of the 15% cut and an extension of the 10% 
rural add on for home health services provided to beneficiaries living 
in rural areas. Unfortunately, since the bill was not approved by the 
Senate, the 15% cut went into effect on October 1, 2002 and the rural 
add on expired on April 1 of this year. While the true impact of these 
recent reimbursement cuts has yet to be determined, home health 
agencies have closed since the enactment of the 15% cut and many of the 
remaining providers are finding it extremely difficult to continue 
providing medically necessary health care services to beneficiaries in 
the home. The home health industry desperately needs a period of 
stability to enable providers of home health services to continue to 
provide services to the most vulnerable medically complex patients.
CONGRESS SHOULD NOT ENACT COPAYMENTS FOR HOME HEALTH
Copayments Would Have Disproportionate Impact on Frail Elderly
    AAHomecare strongly opposes adding a copayment to the home health 
benefit for many reasons outlined throughout the testimony. A copayment 
would fall heaviest on the sickest Medicare home health patients, those 
having multiple episodes of care. Home health patients are typically 
older, sicker, poorer, and are the least likely to have disposable 
incomes. 70 percent of beneficiaries are over age 75, and 25 percent 
are over 85. Most have incomes of less than $15,000 per year, while 43 
percent have less than $10,000 per year. They are confined to home, 
unlikely to ever return to work, and unable to earn money to offset the 
cost of an additional copayment.
    Home health beneficiaries are already subject to copayments and 
assume responsibility for many of their health care costs, including 
the 20% copayment for physicians' services which is an essential part 
of covered home health services. In addition, home health beneficiaries 
pay for more of their health care costs than beneficiaries in other 
treatment settings, as well as their food, shelter, and other costs 
necessary to remain at home. Copayments would increase beneficiaries' 
costs without improving the Medicare home health benefit.
Copayments Will Undermine The Patient Caregiver Relationship and 
        Increase Administrative Burdens on Home Health Agencies
    AAHomecare also has concerns regarding the change in the 
relationship between the beneficiary and the caregiver implementation 
of a copay would bring. If home health agencies are required to collect 
a copayment the beneficiaries in many cases will refuse care. In 
addition, implementing a copayment would add new administrative burdens 
to home health agencies when they can least afford it. Agencies would 
be forced to set up new billing and collection systems at the very time 
they are still trying to master the intricacies of the new prospective 
payment system and OASIS, as well as preparing for implementation of 
the Outcome Based Quality Improvement system and HIPAA privacy and 
transaction standards. These new administrative costs are being imposed 
upon home health providers in the wake of reimbursement reductions of 
over 50% stemming from the Balanced Budget Act of 1997.
Copayments Not Needed To Reduce Home Health Rate of Growth
    One argument in favor of copayments is that they would help contain 
the rate of growth in the industry. AAHomecare does not believe that 
copayments are necessary in order to control the rate of growth in home 
health. Since 1997, approximately 1.2 million Medicare beneficiaries 
have been lost from the home health benefit, payments have been cut by 
more than 50%, and the number of home health providers has been cut by 
36%. MedPAC concluded in its March 2003 report that following the 
implementation of home health PPS, there continues to be a decline in 
the number of beneficiaries receiving home health services. Simply 
stated, there is no reliable evidence to show that the home health 
benefit is growing at an inappropriate rate.
    One other misunderstanding is that home health is the only benefit 
under Medicare that does not currently have a copayment. This is not 
true. The Medicare program does not impose a copayment on the first 60 
days of inpatient hospital services or on outpatient clinical 
laboratory services.
    In 1997, when Congress created the prospective payment system for 
home health it was done in part as an alternative to copayments. At the 
time, Congress supported PPS over copayments because PPS promotes 
efficiency and appropriate care, while copayments restrict utilization 
by penalizing the sick. If given time to stabilize, the PPS system 
currently in place can be refined to address issues with the Medicare 
home health benefit.
CONCLUSION
    In closing AAHomecare would like to reiterate its recommendation 
that the Subcommittee reject the idea of adding a copayment to the home 
health benefit. Congress should follow the recommendations of the 
Polisher Research Institute by giving the home health benefit a chance 
to stabilize.

                                 
             Statement of the American Medical Association
    The American Medical Association (AMA) appreciates the opportunity 
to present to the Ways and Means Subcommittee on Health our views on 
Medicare cost-sharing and Medigap, and we applaud the efforts of the 
Chairman and Members of the Subcommittee for focusing on this important 
issue.
    For years the AMA has been a strong advocate of basic, essential 
reforms of Medigap and the cost-sharing aspects of the Medicare 
program, and AMA policy supports the following modifications in this 
regard.

                   Medicare Beneficiary Cost-Sharing

    The AMA recommends that the Medicare fee-for-service program 
implement a single combined deductible for beneficiaries, instead of 
the existing, separate Part A and B deductibles, and, in addition, we 
recommend a cap on beneficiaries' total out-of-pocket spending.
    Beneficiary cost-sharing in the traditional Medicare fee-for-
service program is a key contributor to the bleak outlook for the 
Medicare program's long-term finances. Because patient copayments are 
not capped and hospital benefits diminish and eventually expire if 
patients have to stay in the hospital for a lengthy period, 
beneficiaries annually face potential out-of-pocket costs for covered 
Medicare services of as much as $34,000. Beneficiaries also face 
additional and exorbitant out-of-pocket costs for non-covered medical 
services. These enormous potential costs generate a huge demand for 
supplemental insurance, or medigap, policies. Far from being a 
solution, however, medigap is part of the problem.

                          The Medigap Problem

    As the General Accounting Office (GAO) recently testified, Medigap 
coverage is expensive and its costs are increasing rapidly. Fewer 
employers now offer retiree health benefits (34% in 2001, down from 66% 
in 1988) and even fewer offer supplemental coverage to their Medicare-
age retirees (23% of firms in 2001, down 10% since 1999). More 
beneficiaries must, therefore, buy medigap policies themselves, and 
annual premiums averaged $1,300 (but the range could exceed $5,500) in 
1999 and rose by up to 34% in 2000.
    Medigap policies also encourage inappropriate utilization of 
services since they offer first-dollar coverage that completely 
insulates patients from the costs of covered services. The current 
system is designed so that the beneficiary's rational response is to 
obtain supplemental coverage, which the majority of beneficiaries do as 
a hedge against economic catastrophe. The risk of paying tens of 
thousands of dollars out-of-pocket is not one that most beneficiaries 
want to take.
    Further, government studies have shown that beneficiaries with 
Medigap utilize 28% more medical services than they would otherwise. 
While Medigap plans cover about 20% of the cost of this increased 
utilization, the Medicare program pays 80%. Besides adding to the 
strain on Federal resources, the 80% that Medicare pays increases 
Medicare premiums for all beneficiaries, whether or not they have 
Medigap.
    The AMA would like to work with Congress and the Administration to 
design enhancements for both traditional Medicare and new private plan 
options, including restructuring Medicare's cost-sharing policies, as 
discussed above, to reduce potential beneficiary liability in a manner 
that eliminates the need for private Medigap insurance.
    As an example of the benefits of a more sensible cost-sharing 
structure, PriceWaterhouseCoopers has estimated that a system with a 
combined refundable deductible of $500 and no additional cost-sharing 
would reduce Medicare spending by about 4.0% for each enrollee who 
selected this type of plan.
    The Baby Boomers will begin aging into Medicare in just a few 
years, and it is imperative that we take steps now to improve and 
secure the program for this generation of older and disabled Americans 
and the generations to come.
    We again thank the Subcommittee for your leadership on these 
important matters and for the opportunity to provide our views.

                                 
        Statement of the Coalition to Promote Choice for Seniors
    The Coalition to Promote Choice for Seniors represents the vast 
majority of companies who provide supplemental Medicare coverage to 
over 10 million Medicare beneficiaries. Numerous public and private 
sector studies have demonstrated that Medicare beneficiaries express 
overwhelming satisfaction with Medicare supplemental insurance, 
including Medigap plans.
    When considering issues related to Medicare cost-sharing and 
Medigap, we would recommend that the Committee consider the following 
principles:

      The overwhelming majority of senior Medicare 
beneficiaries currently elect to obtain their Medicare health care 
services through the traditional fee-for-service delivery system. 
Policymakers should take no action that endangers the delivery of 
health care service to senior Medicare beneficiaries.
      Private, voluntary Medigap coverage can continue to 
provide older Americans with a valuable Medicare drug benefit that 
might not otherwise be available to them.
      To help keep Medigap coverage affordable for older 
Americans who choose to purchase private insurance, a one-time open 
enrollment option should be retained to avoid adverse selection and 
higher costs.
      Seniors should continue to have access to existing 
Medigap products. Further, insurers should have the flexibility to 
continue offering existing products, but must be able to discontinue 
failed products if necessary.
      In order to provide the most appropriate level of 
benefits to seniors, insurers should have the ability to employ tools 
used in the commercial market to manage the benefits.
      Seniors should be afforded the option of first dollar 
insurance coverage that is consistent with many employer-provided 
retiree offerings.

    The Coalition to Promote Choice for Seniors consists of the 
following companies and associations: Blue Cross Blue Shield 
Association; Health Insurance Association of America; Highmark Blue 
Cross Blue Shield; Monumental Life Insurance Company; Mutual of Omaha; 
National Association of Health Underwriters; Torchmark Corp.; 
WellPoint.

                                 
        Statement of the Health Insurance Association of America
                              Introduction
    The Health Insurance Association of America (HIAA) greatly 
appreciates the opportunity to submit written testimony for your May 1, 
2003 hearing from the standpoint of our member companies (Medigap 
policy issuers) and their customers (Medicare beneficiaries). HIAA is 
the nation's most prominent trade association representing the private 
health care system. Its nearly 300 members provide health, long-term 
care, dental, disability, and supplemental coverage to more than 100 
million Americans. Many of HIAA's members provide Medicare supplemental 
insurance products, including individual Medigap policies.
                Need for Medicare Supplemental Benefits
    Medicare beneficiaries are at risk of incurring major out-of-pocket 
costs for medical care. The Medicare Part A deductible for each episode 
of inpatient hospitalization in a year is $840 in 2003. There is a $100 
annual deductible for physician and other outpatient benefits covered 
by Part B. In addition, once the deductibles have been met, 
beneficiaries may incur substantial cost-sharing obligations for 
covered services. Medicare places no limit on out-of-pocket 
expenditures for these payments. In addition, Medicare beneficiaries 
are fully at risk for benefits that Medicare does not cover at all, 
such as most outpatient prescription drugs. Attachment A lists the 
major health care expenses not covered by Medicare. The Secretary of 
the U.S. Department of Health and Human Services, in April 2002 
testimony to the House Ways and Means Committee, noted: ``Because of 
the major gaps in the benefit package in the fee-for-service [Medicare] 
program, supplemental coverage--often called Medigap--is an essential 
part of Medicare coverage for millions of our nation's elderly and 
disabled.'' \1\
---------------------------------------------------------------------------
    \1\ Testimony of Tommy G. Thompson, Secretary, U.S. Department of 
Health and Human Services, before the House Committee on Ways and 
Means, April 17, 2002.
---------------------------------------------------------------------------
               Beneficiaries Value Supplemental Coverage
    Because of the cost-sharing requirements on covered services, and 
limits on what services are covered, as noted above, Medicare is 
estimated to cover only about half of the health care costs incurred by 
seniors and other beneficiaries. It is little surprise then that nine 
out of ten Medicare beneficiaries obtain additional coverage to 
supplement their Medicare benefits and protect themselves from these 
substantial costs. In 2000, the major sources of coverage supplementing 
Medicare were employer-sponsored coverage (32 percent of beneficiaries) 
and individually purchased insurance policies, i.e., Medigap plans (27 
percent of beneficiaries). This 27 percent translates to over 10 
million Medicare beneficiaries enrolled in a Medigap plan in 2000.\2\ 
Estimates of the number of Medigap enrollees for a sampling of States 
in 2001 include: California, 584,000 Medigap enrollees; Connecticut, 
138,000; Florida, 663,000; New York, 382,000; Pennsylvania, 664,000; 
and Texas, 500,000.\3\ Attachment C shows Medigap enrollment in 2001 
for each State.
---------------------------------------------------------------------------
    \2\ Medicare Payment Advisory Commission, Report to the Congress: 
Medicare Payment Policy, March 2003, p. 206.
    \3\ U.S. Census Bureau, Analysis of 2001 coverage data from the 
March 2002 Current Population Survey. Posted at http://
ferret.bls.census.gov/macro/032002/health/h05_000.htm.
---------------------------------------------------------------------------
    Medicare beneficiaries overwhelmingly value and express 
satisfaction with Medicare supplemental insurance, including Medigap 
plans. Annual surveys of Medicare supplemental insurance policyholders 
conducted by the U.S. Department of Health and Human Services 
consistently show a high level of satisfaction with supplemental 
coverage. In a 2001 survey conducted by American Viewpoint, 89 percent 
of beneficiaries were satisfied or very satisfied with their Medigap 
coverage, while 76 percent said that, considering the premiums they 
pay, the policies are a good or excellent value. What they value most 
is peace of mind from knowing what their medical costs will be and the 
lack of paperwork--they don't have to hassle with medical bills. The 
vast majority (81 percent) would recommend Medigap coverage to a friend 
or relative when they become Medicare eligible.
    Another indication of the value beneficiaries ascribe to their 
Medigap coverage is policy renewal and retention rates. While 
standardized Medigap plans have been available since 1992, the Medicare 
Payment Advisory Commission (MedPAC) recently pointed out that 
``[a]bout 25 percent of Medigap enrollees have stayed in their 
prestandardized plans that have been closed to new enrollment since 
1992.'' \4\ In other words, many Medicare beneficiaries retain Medigap 
policies they originally purchased more than 10 years ago. MedPAC went 
on to observe that the ``benefits in nonstandardized plans tend to be 
similar to those found in the standardized plans.'' MedPAC also noted 
recently that there are a large number of beneficiaries in standardized 
Medigap plans that have been closed to new members for at least three 
years.\5\ Clearly these beneficiaries value their current coverage.
---------------------------------------------------------------------------
    \4\ Medicare Payment Advisory Commission, Report to the Congress: 
Medicare Payment Policy, March 2003, p. 199.
    \5\ Transcript of MedPAC March 20, 2003 meeting on health insurance 
markets for Medicare beneficiaries.
---------------------------------------------------------------------------
    We would argue that yet another indication of value is the fact 
that a number of associations serving senior citizens have chosen to 
offer Medigap coverage as a benefit of membership. This includes AARP. 
Cheryl Matheis, AARP Director of State Affairs, said the following in 
December 3, 2002 testimony to the NAIC Medicare Supplement Working 
Group:

         ``Because Medicare benefits cover only a portion of a typical 
Medicare beneficiary's spending on health care, supplemental coverage 
can provide financial protection against out-of-pocket costs for many 
of the beneficiaries who are enrolled in original fee-for-service 
Medicare. Therefore, the availability of adequate, affordable insurance 
coverage to help supplement Medicare remains vitally important. To help 
make financial protection available to our members, AARP contracts with 
United HealthCare to offer Medicare Supplement policies to our 
members.''

    At the outset, then, we should all be mindful of the fact that 
seniors satisfied with their current health care coverage would likely 
oppose major changes to a product that already works well for them. We 
say this as a representative of dozens of companies whose customers 
include millions of Medicare beneficiaries.
    In the remainder of this testimony, we will briefly describe 
current Medigap coverage options, review several burning Medigap 
issues, and provide a few recommendations for your consideration.
                         Medigap Benefit Design
    The Omnibus Budget Reconciliation Act of 1990 (OBRA 90) limits 
Medigap policies to ten standard plans labeled A through J. In 1997 
Congress added a high-deductible version of plans F and J.\6\ Each 
standard plan contains a core benefit package. Plan A consists of the 
core benefits alone; Plans B-J contain additional benefits such as 
coverage of copayments for care in a skilled nursing facility, benefits 
for at-home help, coverage of physician charges in excess of Medicare's 
approved amount, and limited coverage for prescription drugs. 
Attachment B shows the core benefit package and the additional benefits 
covered by each standard plan. All Medigap policies currently issued 
must conform to one of the ten standard plans, although beneficiaries 
may renew non-standard plans issued before July 1992.\7\
---------------------------------------------------------------------------
    \6\ The high deductible plans were added under P.L. 105-033, the 
Balanced Budget Act of 1997. For 2003, the high deductible amount is 
$1,650.
    \7\ Three states (Massachusetts, Minnesota, and Wisconsin) kept the 
system of standard plans they developed prior to OBRA 90.
---------------------------------------------------------------------------
    Some standard plans are considerably more popular than others. 
Figure 1 shows the percentage of Medigap policyholders enrolled in each 
standard plan. As explained below, plans H, I, and J, which provide 
some coverage for outpatient prescription drugs, have seen low 
enrollment because of the effects of adverse selection.

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Medicare Payment Advisory Commission, ``Report to Congress: 
Assessing Medicare Benefits.'' (June 2002).
                       Prescription Drug Coverage
    Three of the standard Medigap plans (plans H, I, and J) provide 
limited coverage for outpatient prescription drugs. Plans H and I 
contain a $250 deductible for drug benefits and pay 50 percent of drug 
costs up to a maximum payment of $1,250 in a year. Plan J has the same 
deductible but pays 50 percent of drug costs up to a maximum annual 
payment of $3,000. None of these plans, nor any other standard Medigap 
plan, provides catastrophic coverage for prescription drug costs.
    Offering affordable Medigap coverage that covers prescription drugs 
has proven extremely difficult, especially as drug utilization and 
spending have increased at a rapid pace over the last decade. The 2002 
average annual expenditure for prescription drugs by a Medicare 
beneficiary was estimated to be $1,912.\8\ And during the last decade 
prescription drug spending has outpaced increases in other health 
expenditures by a wide margin, so that prescription drugs have come to 
account for a larger and larger portion of total health care 
expenditures.
---------------------------------------------------------------------------
    \8\ Marilyn Moon and Matthew Storeygard, ``Stretching Federal 
Dollars: Policy Trade-offs in Designing a Medicare Drug Benefit with 
Limited Resources,'' The Commonwealth Fund Policy Brief. (August 2002).
---------------------------------------------------------------------------
    In addition to the rising cost of prescription drugs, adverse 
selection against plans H, I, and J has driven premiums for these plans 
to a level where they are a reasonable purchase only for persons who 
have extremely high annual drug expenses. The term ``adverse 
selection'' refers to the tendency of individuals to purchase health 
benefits only when they expect to need them. Prescription drug benefits 
are particularly susceptible to adverse selection in the senior market 
because drug expenditures for seniors tend to be more predictable (for 
example, because of high utilization of maintenance drugs) and are much 
higher than they are for younger individuals.
    Over time, adverse selection has caused premiums for the Medigap 
plans with drug coverage to spiral upwards as the pool of persons with 
these plans has come to include, to a greater and greater extent, just 
those who have a substantial and ongoing need for prescription drug 
benefits. Because of this problem, many insurers no longer offer these 
plans.
                     Non-Standard Medigap Coverage
    While a great deal of attention is paid to standardized Medigap 
policies, it needs to be remembered that a large number of Medigap 
policyholders actually have nonstandardized policies. In its June 2002 
report to the Congress, MedPAC noted that in 2000, about 400,000 
Medicare beneficiaries with private Medicare Supplement insurance lived 
in the three States not subject to the national Medigap benefit 
standards (Massachusetts, Minnesota, and Wisconsin). And, more 
importantly, another 3.1 million beneficiaries were still enrolled in 
pre-standardized plans.\9\ Many of these non-standard Medigap plans 
offer some coverage for outpatient prescription drugs.
---------------------------------------------------------------------------
    \9\ Medicare Payment Advisory Commission, Report to the Congress: 
Assessing Medicare Benefits, June 2002, pp. 76-77.
---------------------------------------------------------------------------
   Federal Requirements Relating to Open Enrollment and Premium Rates
    In addition to standardizing Medigap policies, OBRA 90 established 
a six-month open enrollment period for Medigap coverage beginning when 
a beneficiary is age 65 or older and enrolls in Part B. A beneficiary 
applying for a Medigap plan during this period may not be denied 
coverage and cannot be charged a higher premium because of poor health. 
OBRA 90 also requires that all Medigap policies be guaranteed renewable 
regardless of when the policy is issued and increased other regulatory 
standards.\10\
---------------------------------------------------------------------------
    \10\ A guaranteed renewable policy may not be cancelled or have its 
benefits changed, although the premium may increase, subject to State 
limitations. Other requirements on Medigap plans established by OBRA 90 
include requiring State approval of premium rates and reporting of the 
proportion of premiums paid as benefits.
---------------------------------------------------------------------------
    Recent Federal laws have expanded open enrollment for Medigap plans 
to include certain additional circumstances--for example, certain cases 
where a beneficiary terminates or loses coverage in a Medicare+Choice 
plan or loses coverage under an employer-sponsored plan.\11\ Additional 
proposals to expand open enrollment are presented in nearly every 
Congressional session. It is important for Congress to evaluate these 
proposals carefully. Additional open enrollment opportunities may 
prompt Medicare beneficiaries to delay purchasing Medigap coverage or 
even game the system. This can disadvantage the majority of Medicare 
beneficiaries who obtained supplemental coverage at the first 
opportunity, by driving up the costs of coverage.
---------------------------------------------------------------------------
    \11\ The Balanced Budget Act of 1997 (BBA), the Medicare, Medicaid 
and SCHIP Balanced Budget Refinement Act of 1999 (BBRA), and the 
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 
2000 (BIPA) each expanded Medigap open enrollment opportunities.
---------------------------------------------------------------------------
                            State Regulation
    Although Federal law establishes a wide range of requirements for 
Medigap coverage, the States have primary enforcement jurisdiction over 
Medigap insurers and policies. State regulatory authority includes 
review and approval of premium rates, regulation of rating practices 
and rules of enrollment, review and approval of policy forms, and all 
other aspects of insurance regulation. States may expand open 
enrollment and other guaranteed rights to Medigap coverage beyond the 
requirements established by Federal law, and, in fact, many have done 
so.
                   The Issue of First-Dollar Coverage
    It is clear from Figure 1 above that the most popular standardized 
Medigap plans are Plans C and F--the only two non-drug plans that cover 
both Medicare Part A and Part B deductibles as well as Part A copayment 
and Part B coinsurance amounts. This benefit design is typically 
referred to as first-dollar coverage. Some policymakers have expressed 
concern that first-dollar coverage, by lessening beneficiary price 
sensitivity, may increase Medicare spending, perhaps inappropriately.
    This is not a new issue, and things are not as simple as they might 
first appear. To begin with, Medigap plans that do not provide full 
first-dollar coverage are available to beneficiaries. However, the 
plans that do are far and away the most popular plans among the 
nation's seniors. Despite the fact that less expensive plans are 
available, over half of Medigap purchasers select plans C or F. This 
popularity is likely due to the fact that Medicare beneficiaries are 
risk averse and derive a great deal of financial and personal security 
from their supplemental insurance policies.
    Moreover, as mentioned above, under the Balanced Budget Act of 
1997, Congress provided for two new high-deductible Medigap products. 
However, few such plans have actually been sold, and there are reports 
that the biggest hurdle to the sale of these products is overcoming 
beneficiary expectations that a Medigap plan will provide first-dollar 
coverage.
    Second, if Medicare spending is higher for beneficiaries who 
purchase a Medigap plan with first-dollar coverage, it cannot 
automatically be assumed that such spending is for medically 
inappropriate or unnecessary services. Medicare's existing coverage and 
utilization review mechanisms are specifically designed to assure that 
Medicare pays only for items and services that are reasonable and 
necessary. Medicare supplemental insurers do not make independent 
coverage decisions. Thus, attempts to move away from first-dollar 
coverage might in fact impose barriers to the receipt of necessary 
care. A special study performed a few years ago for HIAA by Gerard 
Anderson and his colleagues at Johns Hopkins noted that the burden of 
Medicare cost-sharing is distributed unequally across beneficiaries, 
increasing as they become older, develop chronic illnesses, or have 
catastrophic illnesses.\12\ Supplemental insurance spreads this risk, 
thereby reducing the financial burden on older beneficiaries and those 
with chronic or catastrophic illnesses.
---------------------------------------------------------------------------
    \12\ Anderson, GF; Wiest, A; Shaffer, T; Hussey, P; and Bilenker, 
J. Concerns About the Theory of Increased Cost-Sharing for Medicare 
Beneficiaries and Its Policy Implications for the Medicare Program. 
Washington, DC: Health Insurance Association of America, 1999.
---------------------------------------------------------------------------
    Dr. Anderson's study also noted that the available literature 
suggested that Medicare beneficiaries' price sensitivity is greatest 
for preventive and physician services. According to Dr. Anderson's 
study, Medicare beneficiaries without supplemental insurance were much 
less likely to have flu shots, mammograms, and pap smears. For this and 
other reasons, Dr. Anderson cautioned that comparisons of the Medicare 
expenditures incurred by beneficiaries with supplemental coverage and 
those who do not overestimate the effect of supplemental insurance on 
Medicare spending.
    Even the celebrated RAND Health Insurance Experiment, which 
investigated the impact of cost-sharing on health care utilization by a 
non-elderly population, found that when faced with cost-sharing, 
individuals were just as likely to limit the use of ``highly 
effective'' care as ``less effective'' care. Thus, as far as we can 
determine, the Medicare savings predicted from restrictions on first-
dollar coverage of Medicare deductible and coinsurance amounts would, 
at least to some extent, be due to the fact that beneficiaries would be 
discouraged from seeking medically appropriate care. In a report last 
year, the Congressional Budget Office acknowledged that ``the decrease 
in use of services by Medigap policyholders'' produced by restrictions 
on first-dollar coverage ``might not be limited to unnecessary care, so 
the health of some policyholders might be adversely affected.'' \13\
---------------------------------------------------------------------------
    \13\ Congressional Budget Office, Budget Options, February 2001.
---------------------------------------------------------------------------
    A more recent study provides actual evidence of continuing 
underutilization by Medicare beneficiaries. In a paper published in the 
Journal of the American Medical Association early this year, Federal 
officials noted that a large number of Medicare beneficiaries enrolled 
in Medicare's fee-for-service program failed to receive the amount of 
recommended care.\14\ For example, during 2000-2001, 29 percent of 
Medicare beneficiaries failed to obtain a yearly flu shot, and 36 
percent had never received the recommended pneumococcal vaccine. 
Similarly, 23 percent of female Medicare beneficiaries aged 52 to 69 
failed to receive recommended mammographic screening. And, in the case 
of Medicare beneficiaries with diabetes, large numbers failed to 
receive recommended eye exams and lab tests.
---------------------------------------------------------------------------
    \14\ S.F. Jencks, E.D. Huff and T. Cuerdon, ``Change in the Quality 
of Care Delivered to Medicare Beneficiaries, 1998-1999 and 2000-2001,'' 
JAMA, January 15, 2003, 289(3): 305-312.
---------------------------------------------------------------------------
    The level of underutilization documented by this report was even 
more profound in some States. For example, 48 percent of female 
Medicare beneficiaries in the District of Columbia, 44 percent of those 
in California, and 42 percent of those living in New York did not 
receive the recommended level of mammographic screening in 2000-2001. 
In the case of annual flu shots, more than a third of the Medicare 
beneficiaries in Alabama, Florida, Kentucky, Louisiana, Nevada and the 
District of Columbia did not get them. And, during this same period, 35 
percent or more of the Medicare beneficiaries with diabetes living in 
14 States (Alabama, Alaska, Arizona, Georgia, Indiana, Kentucky, 
Louisiana, Missouri, Nevada, New Mexico, Oklahoma, Tennessee, Texas, 
and West Virginia) did not get the recommended eye exams. In short, 
while some see the higher health care utilization rates of Medicare 
beneficiaries with supplemental coverage as a problem, the real problem 
may be that many beneficiaries are not getting the care they need. That 
may well explain why Medicare expenditures vary for beneficiaries with 
and without supplemental coverage.
    With respect to first-dollar coverage, we would make only one 
additional point. The HIAA member companies that sell Medigap insurance 
have made it clear to me that Medicare beneficiaries--their customers--
greatly prefer Medigap plans that provide full protection against 
Medicare deductibles and other cost-sharing amounts. They predict that 
any Congressional plan to restrict Medigap first-dollar coverage of 
such deductibles and cost-sharing obligations will, at best, be 
difficult for Medicare beneficiaries to understand, and could even risk 
producing a great deal of anger and hostility. HIAA's member companies 
vividly recall beneficiary reactions to the Medicare catastrophic 
protections passed by Congress in 1988 and repealed soon after. They 
wish to avoid a repeat of this kind of public relations disaster.
                       The Foreign Travel Benefit
    Some policymakers have questioned the value of one of the 
prescribed benefits for most Medigap policies, foreign travel 
insurance, asserting that most beneficiaries never leave their home 
country. This benefit covers 80 percent of the medically necessary 
emergency care received in a foreign country, after a $250 deductible, 
up to a lifetime maximum of $50,000. Based on conversations with our 
member companies, we can make several interesting observations about 
this benefit.
    The first thing to recognize is that consumer groups had an active 
role in deciding what benefits would be included in the standardized 
plans. During the 2000 National Association of Insurance Commissioners 
(NAIC) winter meetings, consumer representative Bonnie Burns spoke 
about the foreign travel benefit at a public hearing on Medigap reform. 
Ms. Burns said:

         ``The benefit for foreign travel is often criticized for being 
included in most of the packages. Let me explain the genesis of this 
benefit. Before OBRA 90, the Blues and AARP, representing over half the 
Medigap market, routinely covered foreign travel but few beneficiaries 
knew that they had that benefit. When people traveled out of the U.S. 
they bought travel policies to cover their medical expenses. Those 
policies then as now seldom covered medical care in the way seniors 
expected. In fact, they were much more like accidental injury, death or 
dismemberment policies.
         ``During the formation of these standardized packages it 
became apparent that the major insurers automatically provided this 
benefit and that the cost of doing so was extremely low, and the 
benefit was included in most of the packages. Since 1992 this benefit 
has been so obviously covered by a Medigap policy there has been no 
need for seniors to buy a separate, but woefully insufficient travel 
policy when they travel outside the country. And, it isn't just the 
wealthy who travel and can potentially take advantage of this benefit, 
but many people of modest means who now take cruises or travel to 
Mexico or Canada. If the medical benefits in travel policies were 
reformed there might be much less need for this benefit in a Medigap 
policy. But over the years powerful interests have beaten back efforts 
to reform various types of low value policies and that shows no sign of 
changing.'' \15\
---------------------------------------------------------------------------
    \15\ 2000 Proceedings of the NAIC, 4th Quarter.

    One of our member companies sells Medigap policies to seniors in 
---------------------------------------------------------------------------
the Southwestern States. They make the following observations:

         ``Many of our members tell us that the foreign travel benefit 
is perceived as a valuable benefit to them and those who have had to 
use the benefit have communicated to us how grateful they were that the 
benefit existed.
         ``The number of foreign travel claims paid is small in 
relation to other Medigap benefits paid. In 2002, we paid 162 foreign 
travel claims on over 72,000 Medicare Supplement policies in force. 
However, those 162 policyholders are all glad that this benefit was 
part of their Medicare supplement from our company--it paid off when 
they found themselves in the position to need it. One of our claims, 
that ran up to the lifetime $50,000 maximum, was for an insured who was 
in an extreme life-threatening situation.''

    While the foreign travel benefit may be used fairly infrequently, 
it adds no more than a few dollars per year to the premium. Given that 
Medicare covers nothing when seniors travel abroad, the foreign travel 
benefit provides considerable peace of mind to seniors who do travel.
    We should also keep in mind that, for purposes of this benefit, 
``emergency care'' means ``care needed immediately because of an injury 
or illness of sudden and unexpected onset.'' \16\ So coverage is not 
limited to life-threatening conditions, and immediate treatment abroad 
may well provide savings to Medicare if, without it, individuals might 
have required treatment for complications or more severe problems when 
they returned to the States.
---------------------------------------------------------------------------
    \16\ See NAIC Medicare Supplement Model Regulation section 8(c)(8).
---------------------------------------------------------------------------
    Ideally, any redesign of Medigap benefits in the context of 
Medicare reform would take account of the needs and preferences of 
today's seniors. In this regard, it also needs to be remembered that 
current law requires that Medigap products be guaranteed renewable. 
This means that a Medigap policy may not be cancelled or have its 
benefits changed. Thus, any revisions to current Medigap benefits would 
raise very important transition issues, which are likely to be complex 
and difficult to resolve.
                 HIAA's Recommendations to the Congress
    What we have tried to do in this statement is to provide a context 
for the understandable desire to reform not only the basic Medicare 
program, but Medigap coverage options as well. We hope it is apparent 
that even the most tempting Medigap reforms would need to navigate some 
difficult ground. The design of any new or revised Medigap plans would, 
of course, be heavily dependent upon the features of a modernized 
Medicare program. Thus, it seems to us that the Congress should first 
make decisions about the Medicare program itself, and then proceed to 
address corresponding Medigap issues.
    HIAA also believes that changes to Medigap policies should be done 
in conjunction with comprehensive changes in Medicare benefits, and not 
before that time. Further, changes affecting Medigap should be made at 
one time and not in an incremental or piecemeal fashion. Making Medigap 
changes in two or more ``rounds of reform'' would add significantly 
more administrative costs to the system than making such changes at one 
time, and would likely increase beneficiary confusion.
    We would also suggest that Congress provide as much flexibility as 
possible for any mandated redesign of Medigap benefits. As you know, 
under the Omnibus Budget Reconciliation Act of 1990, the Congress did 
not specify the contents of the 10 standardized Medigap plans we have 
today, but instead allowed for a process where consumer 
representatives, State regulators, and insurers worked together to 
design Medigap benefit options. Similarly, we believe that it would be 
extremely risky for Congress to mandate by statute the contents of 
insurance products intended for voluntary sale and purchase in the 
private marketplace.
    In the case of the elderly, many of whom suffer from chronic 
illnesses, treatment costs for such things as prescription drugs and 
regular physician office visits can be more or less predictable. This 
relative predictability certainly permits each beneficiary to make a 
reasoned economic judgment about the expected near-term value of an 
insurance product. In other words, beneficiaries can be expected to do 
the math, comparing anticipated benefits with known premium costs. This 
raises the potential that healthier Medicare beneficiaries will seek 
out lower cost Medigap products or even decide to self-insure, thereby 
further driving up the average costs of coverage for those remaining 
behind. As insurers know only too well, benefit redesign, if not very 
carefully done, can lead to adverse selection and ultimately make the 
re-designed insurance product simply unaffordable for the average 
citizen.
    Finally, to state the obvious, when it comes to Medigap, Medicare 
beneficiaries are the customers, and they are free to buy--or not buy--
available products. In the end, whatever we do must be viewed as 
beneficial, not harmful, to the interests of the typical Medicare 
beneficiary, and result in Medigap products that are affordable.
                               Conclusion
    Given budgetary realities, it seems almost certain that even a 
modernized Medicare will leave substantial out-of-pocket expenses for 
many Medicare beneficiaries, who will continue to want and need 
Medicare supplemental insurance. Thus, any Medicare modernization plan 
will need to provide a reasonable roadmap for transitioning from 
``old'' to ``new'' Medicare, and from current Medigap and other 
supplemental coverage to any new Medicare supplemental insurance 
options.
    In considering such a transition, it is extremely important to 
understand that the States, not the Federal Government, have primary 
enforcement jurisdiction over Medigap insurers and policies. As a 
result, any Federal legislation affecting Medigap insurance products 
will need to be mindful of the interplay between Federal and State 
requirements.
    We hope that this testimony helps elucidate the many issues that 
arise in any consideration of changes to Medigap. HIAA is open to 
considering Medigap reforms in the context of broader reform of 
Medicare covered benefits. However, without knowing how the core 
Medicare benefit package is structured, it is difficult, if not 
impossible to properly evaluate the merit of individual Medigap reform 
suggestions. In addition, some suggestions may not be well received by 
Medicare beneficiaries, could risk subjecting Medigap plans to adverse 
selection, or might otherwise endanger the important goal of 
maintaining affordable Medigap products. In any case, HIAA and its 
member companies look forward to working with this Committee to craft 
feasible Medicare and Medigap policies that will meet the needs and 
expectations of Medicare beneficiaries.

                               __________

                                                       Attachment A

    Costs Not Covered By Medicare Traditional Fee-For-Service Program
------------------------------------------------------------------------
               Part A                       2003 Beneficiary Costs
------------------------------------------------------------------------
Inpatient
------------------------------------------------------------------------
  Deductible for each hospital stay                                $840
 of 1-60 days
------------------------------------------------------------------------
  Copayments for days 61-90                                $210 per day
------------------------------------------------------------------------
  Copayments for lifetime reserve                          $420 per day
 days 91-150
------------------------------------------------------------------------
  Beyond 90 days after exhausting                             All costs
 lifetime reserve days
------------------------------------------------------------------------
Skilled Nursing Facility Care
------------------------------------------------------------------------
  Days 21-100                                        Up to $105 per day
------------------------------------------------------------------------
  Beyond 100 days                                             All costs
------------------------------------------------------------------------
Home Health Care
------------------------------------------------------------------------
  Durable Medical Equipment                      20% of approved amount
------------------------------------------------------------------------
Hospice Care
------------------------------------------------------------------------
  Outpatient drugs and inpatient                                       Limited costs
 respite care
------------------------------------------------------------------------
Blood
------------------------------------------------------------------------
  First three pints                                           All costs
------------------------------------------------------------------------
Part B
------------------------------------------------------------------------
  Medical expenses                               $100 annual deductible
------------------------------------------------------------------------
  Physician costs                              20% of allowable charges
------------------------------------------------------------------------
  Physician not accepting                 20% of allowable charges plus
 assignment
                                         100% of the difference between
                                               allowable charges and an
                                               additional capped amount
------------------------------------------------------------------------
  Outpatient hospital services                   Variable copay amounts
                                                 determined by formula*
------------------------------------------------------------------------
  Outpatient mental health services             50% of approved charges
------------------------------------------------------------------------
  Monthly premium                                                $58.70
------------------------------------------------------------------------
Other Costs Not Covered By Medicare
------------------------------------------------------------------------
  Routine exams and podiatric care                            All costs
------------------------------------------------------------------------
  Long-term care                                              All costs
------------------------------------------------------------------------
  Care outside United States                                  All costs
------------------------------------------------------------------------
  All costs that are not medically                            All costs
 necessary
------------------------------------------------------------------------
  Dental, hearing, and vision care                            All costs
------------------------------------------------------------------------
  Outpatient prescription drugs                             All costs**
------------------------------------------------------------------------
* Under current law, copayments exceeding 20% are being phased down
  gradually to 20%.
** Medicare covers a limited number of drugs and antigens that cannot be
  self-administered.


                                                       Attachment B

                                   Benefits Covered By Standard Medigap Plans
----------------------------------------------------------------------------------------------------------------
                                                                   Standard Medigap Plans
             Covered Benefits              ---------------------------------------------------------------------
                                              A      B      C      D      E     F**     G      H      I     J**
----------------------------------------------------------------------------------------------------------------
Core Benefits*                                 3      3      3      3      3      3      3      3      3      3
----------------------------------------------------------------------------------------------------------------
Part A Deductible                                     3      3      3      3      3      3      3      3      3
----------------------------------------------------------------------------------------------------------------
SNF Coinsurance                                              3      3      3      3      3      3      3      3
----------------------------------------------------------------------------------------------------------------
Foreign Travel Emergency                                     3      3      3      3      3      3      3      3
----------------------------------------------------------------------------------------------------------------
At-Home Recovery                                                    3                    3                    3
----------------------------------------------------------------------------------------------------------------
Part B Deductible                                            3                    3                           3
----------------------------------------------------------------------------------------------------------------
Part B Excess Charges                                                             3      a             3      3
----------------------------------------------------------------------------------------------------------------
Prescription Drugs                                                                              b      b      c
----------------------------------------------------------------------------------------------------------------
Preventive Medical Care                                                    3                                  3
----------------------------------------------------------------------------------------------------------------
* Core benefits include Part A copayment for days 61-90 in the hospital, Part A copayment for each lifetime
  reserve day in the hospital, up to 365 additional days of hospital coverage after Medicare coverage is
  depleted, the first three pints of blood used under Part A or Part B, and the 20-percent coinsurance for Part
  B services after the Part B deductible has been met.
** Plans F and J also have a high deductible option. The high deductible, which is adjusted for inflation, is
  $1,620 in 2002.
a. Medigap policy pays 80 percent of balance billing charges.
b. After $250 deductible, policy covers 50 percent of prescription drug costs to a maximum of $1,250.
c. After $250 deductible, policy covers 50 percent of prescription drug costs to a maximum of $3,000.


                                                       Attachment C

                                                Number of Beneficiaries in Medigap Plans by State, 2001 *
                                                                         (000's)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    Percent                  Percent of
                                                               Total     Covered by               Individually    covered by      Percent   individually
                                                          population     private     Employment    purchased       private         of        purchased
                                                            65 and        health      based--65      health         health     employment      health
                                                             over     insurance--65   and over   insurance--65  insurance--65   based--65  insurance--65
                                                                         and over                   and over       and over     and over      and over
--------------------------------------------------------------------------------------------------------------------------------------------------------
United States                                                33,769        20,751       11,645         9,106            62%          35%           27%
Alabama                                                         552           332          194           138            60%          35%           25%
Alaska                                                           37            19           14             5            50%          39%           14%
Arizona                                                         607           336          188           148            55%          31%           24%
Arkansas                                                        394           202           90           112            51%          23%           28%
California                                                    3,243         1,658        1,074           584            51%          33%           18%
Colorado                                                        413           249          120           129            60%          29%           31%
Connecticut                                                     481           326          188           138            68%          39%           29%
Delaware                                                        100            73           51            22            73%          51%           22%
District of                                                      64            35           28             7            55%          44%           11%
  Columbia
Florida                                                       2,660         1,447          784           663            54%          30%           25%
Georgia                                                         724           333          211           122            46%          29%           17%
Hawaii                                                          158            99           74            25            63%          47%           16%
Idaho                                                           149           108           55            53            72%          37%           36%
Illinois                                                      1,428           905          453           452            63%          32%           32%
Indiana                                                         831           555          273           282            67%          33%           34%
Iowa                                                            382           313           92           221            82%          24%           58%
Kansas                                                          413           289          119           170            70%          29%           41%
Kentucky                                                        507           339          200           139            67%          40%           27%
Louisiana                                                       522           283          164           119            54%          31%           23%
Maine                                                           211           126           61            65            60%          29%           31%
Maryland                                                        616           387          247           140            63%          40%           23%
Massachusetts                                                   807           455          253           202            56%          31%           25%
Michigan                                                      1,184           852          586           266            72%          50%           22%
Minnesota                                                       460           338          150           188            74%          33%           41%
Mississippi                                                     306           147           75            72            48%          25%           24%
Missouri                                                        664           461          201           260            69%          30%           39%
Montana                                                         132            96           35            61            72%          27%           46%
Nebraska                                                        202           159           46           113            79%          23%           56%
Nevada                                                          230           121           80            41            53%          35%           18%
New Hampshire                                                   179           125           64            61            69%          36%           34%
New Jersey                                                    1,204           780          453           327            65%          38%           27%
New Mexico                                                      246           134           90            44            55%          37%           18%
New York                                                      2,414         1,397        1,015           382            58%          42%           16%
North Carolina                                                  969           567          299           268            59%          31%           28%
North Dakota                                                     84            61           15            46            73%          18%           55%
Ohio                                                          1,465         1,043          724           319            71%          49%           22%
Oklahoma                                                        423           284          151           133            67%          36%           31%
Oregon                                                          359           221           85           136            62%          24%           38%
Pennsylvania                                                  1,639         1,198         1534           664            73%          33%           41%
Rhode Island                                                    163            92           40            52            56%          25%           32%
South Carolina                                                  528           344          188           156            65%          36%           30%
South Dakota                                                    106            75           17            58            71%          16%           55%
Tennessee                                                       610           348          209           139            57%          34%           23%
Texas                                                         2,082         1,163          663           500            56%          32%           24%
Utah                                                            168           108           57            51            65%          34%           30%
Vermont                                                          69            33           22            11            48%          32%           16%
Virginia                                                        834           543          297           246            65%          36%           29%
Washington                                                      701           492          239           253            70%          34%           36%
West Virginia                                                   299           178          117            61            60%          39%           20%
Wisconsin                                                       692           487          246           241            70%          36%           35%
Wyoming                                                          60            37           13            24            61%          22%           40%
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Source: U.S. Census Bureau, Current Population Survey, March 2002, posted at http://ferret.bls.gov/macro/032002/health/h05_000.htm.


                                 
      Statement of the National Association of Health Underwriters
    The National Association of Health Underwriters (NAHU) is an 
organization of over 17,000 insurance professionals specializing in the 
sale and service of health insurance and related products. Many of our 
members who specialize in the senior market regularly counsel and work 
with Medicare beneficiaries on Medicare, Medigap, and Medicare+Choice 
options as well as other types of products. We are pleased to offer 
comments and suggestions regarding the current options and enrollment 
procedures for supplemental health insurance coverage for Medicare 
beneficiaries.
    NAHU believes that there are a number of inherent problems within 
the Medicare program that can only be addressed through comprehensive 
Medicare reform. The current Medicare programs A and B present an 
antiquated approach to the financing of health care reminiscent of 
1960, when the greatest fear for most seniors was an extended hospital 
stay. Now, with many services provided on an outpatient basis and the 
availability of stronger and more effective prescription drugs, many 
beneficiaries are able to avoid hospitalization. In addition, Medicare 
hasn't kept up with advances in technology and treatments, and the 
level of coverage provided under traditional Medicare alone is 
inadequate protection for most seniors. A number of solutions have been 
offered that would improve the current system, and many proposals 
include new options for Medicare beneficiaries that would provide a 
choice of comprehensive coverage more like that found in the individual 
market. Depending on the ultimate structure of the new comprehensive 
coverage, Medicare supplemental coverage as we know it would need 
substantial changes to conform to the new comprehensive form of 
Medicare.
    Most current proposals for reform retain the option for 
beneficiaries to continue to participate in traditional Medicare. A 
number of improvements could be made to the currently mandated Medicare 
supplemental offerings to ensure that consumers have a variety of 
choices to allow them to select the type of plan most suitable for 
their personal situation. The first step in ensuring these choices will 
be to look at the plans that are already in existence and ascertain 
that Medicare+Choice plans and Medicare supplement providers have 
adequate incentives to participate in health plans for Medicare 
beneficiaries. It is essential that the current regulatory requirements 
for Medicare+Choice plans be eased and that they be compensated fairly. 
The current instability in the Medicare+Choice program obviously has a 
significant impact on increasing demand for Medigap coverage on a 
guaranteed issue basis. This increased demand may significantly alter 
both the availability and the cost of Medigap policies. Action by 
Congress to address this urgent situation will only have a positive 
impact on beneficiaries purchasing Medigap policies.
    Our members report the following regarding market experience and 
beneficiary preferences concerning current Medigap policies:

      The most popular benefit is coverage of the Part A 
deductible. Coverage of the Part B deductible is sometimes purchased, 
but often because some other benefit in the plan is desired.
      The skilled nursing benefit isn't used often, because of 
the difficulty in meeting the requirements for skilled care due to the 
mandatory 3-day hospital requirement, and because most care quickly 
falls into a custodial category not covered by Medicare.
      Coverage of Part B excess charges is becoming more and 
more important, especially in rural areas where physicians may not feel 
compelled to accept Medicare assignment. In the absence of any stop 
loss provision being added to the basic Medicare program, coverage of 
these excess charges should remain available.
      The most popular plans sold by our members are C, F, H, 
and I. Although some employers offer this benefit plan for their 
retirees, very few people want to pay the premium associated with plan 
J.
      The benefits beneficiaries request most often, that are 
not currently covered by Medigap, are for coverage of dental care, 
vision services, hearing aids, and of course, prescription drugs.

                    BENEFICIARY REACTION TO MEDICARE

    Based on what Medicare beneficiaries tell our members, the most 
significant problem facing them today is the cost of health care. Many 
Americans approaching retirement age believe that when they become 
eligible for Medicare, all of their health care needs should and will 
be taken care of. Their first step into the Medicare maze comes when 
they discover that they must purchase Part B to cover outpatient and 
other physician care. Many of these beneficiaries believe that Part B 
is a supplement especially since the Medicare supplements are alpha 
labeled, and they don't understand that they will still have 
significant financial exposure for the cost of their medical care even 
after they purchase Part B. Often beneficiaries first become aware of 
the gaps in coverage after they have passed open enrollment for 
Medigap. Unfortunately, by that time some have developed health 
problems, limiting or eliminating their choices for supplemental 
coverage. Having been participants in low co-pay drug cards as 
employees for many years, they are amazed to find out how much coverage 
for prescription drugs will cost them, if it is available at all, and 
many of them seek supplemental coverage for prescription drugs at this 
time. They are even more amazed to learn the extent of the other 
medical services not covered under the traditional Medicare program. 
Many of these same individuals who may have sought supplemental 
coverage in order to secure insurance for prescription drugs end up 
buying plan C or F (which doesn't cover outpatient prescription drugs) 
primarily to cover hospital and physician charges not covered by the 
Medicare program. Since the benefit under a Medigap policy that 
includes limited coverage for prescription drugs is often equal to or 
less than the extra premium charged, many beneficiaries choose not to 
purchase prescription drug coverage under Medigap. Many of these 
Medicare beneficiaries have low incomes limited to little beyond their 
Social Security benefit, but for a variety of reasons, they may not be 
eligible for Medicaid or other low-income programs. Additionally, the 
Medicare+Choice plans, which they might have been able to afford, may 
no longer be available in their area.

                            RECOMMENDATIONS

    So, how could Medigap be structured to make it more meaningful as 
well as more affordable? Again, in the absence of basic in depth 
changes to the Medicare program, our first recommendation would be that 
no Medigap plan subsidize the Part B deductible. This is not about 
saving $100 a year, but about changing consumer behavior regarding 
consumption of health care. There are numerous statistics that show 
that individuals with Medigap coverage utilize medical services at a 
significantly higher rate than Medicare beneficiaries without 
supplemental coverage. Their utilization rate is also higher than that 
of retirees with supplemental coverage through their former employers. 
We believe the reason for this is that there is typically some cost-
sharing for beneficiaries covered under employer plans, and that plan 
utilization can be safely reduced if there is some financial incentive, 
however small, that causes a person to think before they seek medical 
care for even the most minor illnesses.
    In terms of prescription drug coverage, we are very skeptical of 
any sort of mandate on Medicare supplemental plans to provide drug 
coverage, and we are pleased to see that most proposals have not 
included this requirement. Insurance carriers report that plan 
utilization is significantly higher on Medigap plans H, I, and J, the 
plans that include coverage for prescription drugs, and based on their 
experience, they have consistently maintained that drug only policies 
or mandatory drug coverage on all policies is simply not an insurable 
risk. Although some pharmacy benefit managers have expressed interest 
in being providers in a Medicare prescription drug program, they have 
not indicated a desire to take on all of the risk for the program.
    On a positive note, some insurance carriers as well as some of our 
member agents routinely provide Medicare beneficiaries with a 
prescription drug discount card, often at no cost to the beneficiary. 
Some Blue Cross organizations have begun to extend the discounts they 
have negotiated through the pharmacy benefit managers with whom they 
contract for their under-65 insureds, to their Medicare Supplement 
policyholders. This allows policyholders to purchase their outpatient 
prescription drugs at significantly discounted rates, as much as 15 to 
30%, even though outpatient drugs are not specifically covered by their 
Medigap policy. This provides no risk for the insurance carrier, but is 
an excellent way for beneficiaries to reduce their cost by using their 
numbers to negotiate discounts. For this reason, we're extremely 
pleased with the Administration's proposal for a prescription drug 
discount program for Medicare beneficiaries. We believe the discounts 
that could be provided by these programs will be greater than the 
Administration's estimates, based on the experience of employer plans 
in the under 65 market, and that beneficiaries would greatly value the 
assistance the discounts would provide.
    NAHU additionally recommends that additional study be given to the 
very complicated coordination between COBRA and Medicare, and between 
individual health plans and Medicare. It is very difficult for 
beneficiaries, agents, and employers to navigate through the landmines 
associated with these benefits. Many beneficiaries discover too late 
that they should have made different decisions on applying for Part B 
after they prematurely trigger Medigap open enrollment rights, or when 
they are forced to go without Part B for an extended period of time due 
to late enrollment time penalties. Many others retain individual health 
insurance policies for years because they believe the policy will serve 
as a Medicare supplement only to find that their individual policy will 
actually pay little beyond what Medicare pays due to language on 
guaranteed renewability found in HIPAA. This is not the fault of the 
carriers, agents or employers but rather the complexity of several 
overlapping Federal laws that don't coordinate adequately or provide 
for adequate notice to insureds of their rights and responsibilities.
    Disabled Medicare beneficiaries need better access to Medigap 
coverage. Due to cost considerations, we are not suggesting that 
disabled beneficiaries have the same purchase rights and plans as those 
age 65, since doing so may mean increases to Medicare beneficiaries' 
already escalating Medicare supplement premiums. We do believe that 
creative options should be explored for extending coverage that won't 
increase costs for other beneficiaries, such as offering coverage for 
disabled beneficiaries through State high-risk pools. Currently eight 
States allow disabled beneficiaries to purchase coverage through high-
risk pools. This allows these less healthy individuals to be pooled 
with other individuals in the same category, provides a place to 
purchase supplemental coverage, and keeps the costs down in the regular 
Medigap pool. We've included a chart for Members of the Committee 
illustrating the type of supplemental coverage currently available 
through high-risk pools.
    Medigap policies are highly valued by Medigap beneficiaries and 
provide a great sense of security for millions of Medicare 
beneficiaries. Although changes need to be made to Medigap coverage, it 
may be difficult to implement broad reform without knowledge of the end 
result of reforms in the Medicare program itself, and any changes 
undertaken should be done with careful consideration of any impact they 
may have on current market availability.

                               __________


                                High Risk Pools That Include Medicare Supplements
----------------------------------------------------------------------------------------------------------------
                                    Is Medicare
               State                 Disabled       Standardized    If No Standardized Plans,   Are Prescription
                                     Covered?      Plans Offered?       What Is Offered?         Drugs Covered?
----------------------------------------------------------------------------------------------------------------
Alaska                                      Yes     Plans A & I.                                            Yes
                                                        Medicare
                                                   ``carve-out''
                                                      offered to
                                                  those under age
                                                             65.
----------------------------------------------------------------------------------------------------------------
Minnesota                                   Yes               No   Two plans, Basic Plan and      Yes, but only
                                                                        Extended Basic plan.      from Extended
                                                                                                    Basic plan.
----------------------------------------------------------------------------------------------------------------
Mississippi                                 Yes               No   An individual under age 65  Yes, prescription
                                                                   that becomes eligible for       benefits are
                                                                   Medicare after purchasing   covered under the
                                                                   a high-risk pool plan may    high-risk pool.
                                                                          keep the plan as a
                                                                     Medicare ``carve-out.''
----------------------------------------------------------------------------------------------------------------
Montana                                     Yes               No      Medicare ``carve-out''                Yes
                                                                                    offered.
----------------------------------------------------------------------------------------------------------------
North Dakota                                Yes           Plan F                                             No
----------------------------------------------------------------------------------------------------------------
Washington                                  Yes               No      Medicare ``carve-out''                Yes
                                                                                    offered.
----------------------------------------------------------------------------------------------------------------
Wisconsin                                   Yes               No    Individuals under age 65                Yes
                                                                        are offered Medicare
                                                                            disability plan.
----------------------------------------------------------------------------------------------------------------
Wyoming                                     Yes               No           High-risk pool is                Yes
                                                                      secondary to Medicare.
----------------------------------------------------------------------------------------------------------------


                                  
