[Senate Hearing 108-145]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-145

      MEDICARE REFORM AND COMPETITION SEPARATING FACT FROM FICTION

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                              MAY 6, 2003

                               __________

                            Serial No. 108-9

         Printed for the use of the Special Committee on Aging



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                            WASHINGTON : 2003
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                       SPECIAL COMMITTEE ON AGING

                      LARRY CRAIG, Idaho, Chairman
RICHARD SHELBY, Alabama              JOHN B. BREAUX, Louisiana, Ranking 
SUSAN COLLINS, Maine                     Member
MIKE ENZI, Wyoming                   HARRY REID, Nevada
GORDON SMITH, Oregon                 HERB KOHL, Wisconsin
JAMES M. TALENT, Missouri            JAMES M. JEFFORDS, Vermont
PETER G. FITZGERALD, Illinois        RUSSELL D. FEINGOLD, Wisconsin
ORRIN G. HATCH, Utah                 RON WYDEN, Oregon
ELIZABETH DOLE, North Carolina       BLANCHE L. LINCOLN, Arkansas
TED STEVENS, Alaska                  EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
                                     DEBBIE STABENOW, Michigan
                      Lupe Wissel, Staff Director
             Michelle Easton, Ranking Member Staff Director

                                  (ii)

  
?

                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Larry E. Craig......................     1
Statement of Senator Debbie Stabenow.............................     2

                                Panel I

Abby L. Block, Senior Advisor for Employee and Family Support 
  Policy, Strategic Human Resources Policy Division, U.S. Office 
  of Personnel Management, Washington, DC........................     3
Walton Francis, Federal Employee Health Benefits Program Expert 
  Consultant and Author, Fairfax, VA.............................    11
Robert E. Moffit, Director, Center for Health Policy Studies, The 
  Heritage Foundation, Washington, DC............................    24

                                Panel II

Marilyn Moon, Senior Health Policy Fellow, The Urban Institute, 
  Washington, DC.................................................    47
Joseph R. Antos, Wilson H. Taylor Scholar in Health Care and 
  Retirement Policy, American Enterprise Institute, Washington, 
  DC.............................................................    72
Jeff Lemieux, Senior Economist, Progressive Policy Institute, 
  Washington, DC.................................................    91

                                 (iii)

  

 
     MEDICARE REFORM AND COMPETITION: SEPARATING FACT FROM FICTION

                              ----------                              --



                          TUESDAY, MAY 6, 2003

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room SD-628, Dirksen Senate Office Building, Hon. Larry E. 
Craig (chairman of the committee) presiding.
    Present: Senators Craig, Carper, and Stabenow.

     OPENING STATEMENT OF SENATOR LARRY E. CRAIG, CHAIRMAN

    The Chairman. Good morning, and thank all of you for 
joining us. As Congress' Medicare discussion enters what may be 
its critical final weeks, we are here today to examine one of 
the central issues in that debate, namely proposals to offer 
seniors a new array of competing health plans offering 
prescription drugs and other benefits not currently available 
under Medicare.
    These approaches, variations of which have been advanced by 
President Bush, Majority Leader Frist, and others on both sides 
of the aisle, would offer all of America's seniors the same 
kind of first-class, high-quality health coverage now enjoyed 
by the members of Congress and over 8 million other Federal 
employees.
    Today's hearing assembles several of the nation's foremost 
experts on this issue, including the administrator of the 
Federal Employees Health Benefits Program (FEHB). There has 
been much confusion and indeed disinformation about the 
implications of adding a competitive dimension to Medicare. It 
is time to sit down and hear candidly from both sides, ask some 
hard questions, and get to the bottom of what this approach 
will mean in terms of access, quality, value, cost, and member 
satisfaction.
    The Medicare Program in place today is a creaky, 
inflexible, and increasingly unmanageable system that 
micromanages the tiniest details of medical payment and 
procedure--including the pricing and regulation of more than 
7,000 medical procedures and over 500 hospital procedures.
    Of course, traditional Medicare can and should remain as an 
option for those seniors who want to keep it, but I believe 
that America's retirees also deserve access to the better 
benefits, the greater innovation, and the superior coordination 
of care that a competitive insurance environment offers. 
Members of Congress enjoy all of these advantages. Why not our 
parents? Why not our grandparents? That is our purpose today, 
to examine those issues and build a record for the Finance 
Committee here in the Senate and others directly involved in 
this as we craft this legislation to review.
    Before I do that, let me turn to a member of this 
committee, the Senator from Michigan.
    Senator Stabenow.

            STATEMENT OF SENATOR DEBBIE A. STABENOW

    Senator Stabenow. Thank you, Mr. Chairman.
    I am pleased to be here today. This is an extremely 
important topic, and I appreciate those who are joining us 
today.
    I have a slightly different perspective, but I am very 
interested in listening to what our witnesses have to say 
today. I, at home in Michigan, do not hear people asking for 
more insurance companies to choose from; I hear them asking to 
have Medicare work in terms of prescription drug coverage, to 
be updated, but overwhelmingly, Medicare, which is the only 
part of our health care system that is universal, available to 
everyone at the age of retirement or for the disabled, has been 
a success in providing a guaranteed level of care--defined 
benefit; people know what they are getting; it is stable.
    It is interesting, because as we debate the question of 
choice, we actually set up a number of years ago an option on 
choice--private sector HMOs through Medicare+Choice. I believe 
that those under Medicare have predominantly chosen to stay in 
traditional Medicare overwhelmingly.
    Interestingly, my mother chose Medicare+Choice and went 
into a private sector HMO and had a very good experience except 
that the HMO, the insurance company, dropped Medicare. They 
dropped Medicare because of funding issues. So that choice was 
then no longer available to her.
    So when I look at the issues of Medicare as we go along in 
this extremely important debate, I intend to raise another set 
of questions, and that is whether we think health care is 
important enough to really fund Medicare and to provide 
resources for our hospitals and doctors and home health care 
agencies and so on, and private choices--if people want to go 
into Medicare+Choice, fine. But what I see in Michigan is that 
overwhelmingly, people are saying we want traditional Medicare, 
and we just want it to be updated to cover prescription drugs, 
and we want it to work. I am all for doing away with some of 
that bureaucracy and paperwork so it is more efficient and less 
onerous in terms of the paperwork, but I come from a 
perspective of saying that Medicare has been a great American 
success story and has saved a lot of lives, and I am hopeful 
that we can continue to strengthen it in a way that will 
continue to do that.
    Thank you.
    The Chairman. Senator, thank you.
    We certainly agree that probably one of the most important 
issues that we will tackle this session of Congress is this 
issue, not only for the current recipients but for the long-
term effect it will have on our society in quality health care 
coverage--both that which is realistic in the modern-day health 
care system and affordable in relation to the overall costs.
    So that is what we are about today, and now let me 
introduce our first panel.
    The Chairman. Our first panel this morning will focus 
specifically on the Federal Employees Health Benefits Program 
and how it compares to Medicare. Starting us off this morning 
will be the person most directly responsible for direction of 
the Federal employees program, Abby Block, Senior Advisor for 
Employee and Family Support Policy at the Office of Personnel 
Management.
    Also testifying--if he arrives--will be Walton Francis, 
expert consultant and author of ``Checkbook's Guide to Health 
Insurance for Federal Employees.''
    Finally, we are joined--and he has arrived--on our first 
panel by Bob Moffit, Director of the Center for Health Policy 
Studies at The Heritage Foundation. Bob and his staff have 
studied and written extensively on the Federal employees' 
health program as a possible model for Medicare reform.
    We look forward to your testimony, and Ms. Block, if you 
would start, please, we would appreciate it.

  STATEMENT OF ABBY L. BLOCK, SENIOR ADVISOR FOR EMPLOYEE AND 
    FAMILY SUPPORT POLICY, STRATEGIC HUMAN RESOURCES POLICY 
 DIVISION, U.S. OFFICE OF PERSONNEL MANAGEMENT, WASHINGTON, DC

    Ms. Block. Thank you, Mr. Chairman.
    May I request that I be allowed to submit my entire 
statement for the record, and I will make an abbreviated 
statement now?
    The Chairman. Thank you very much. All of your testimonies 
will be made a part of our record.
    Thank you.
    Ms. Block. I am pleased to be here today to discuss the 
Federal Employees Health Benefits Program. Our Health Benefits 
Program has been in operation for more than 40 years. It is an 
employer-based program and forms an important part of the 
compensation package offered by the Federal Government.
    The Office of Personnel Management has developed widely 
recognized expertise in the complexities of arranging health 
care coverage for more than 100 private sector health plans 
with a covered population of about 8.5 million people. In 2002, 
the program accounted for $24 billion in annual premium 
revenue.
    The program relies heavily on market competition and 
consumer choice to provide our members with comprehensive, 
affordable health care. In 2003, 188 discrete options are being 
offered by 133 different health plans.
    An important and distinctive feature is nationwide 
availability. About 3 million enrollees are in fee-for-service/
PPO-type plans, and one million in HMOs. There is an 
opportunity to enroll in the program, change health plans, or 
change enrollment status at least once a year during the 4-week 
annual open season that begins in November.
    All of the FEHBP national plans except for the Blue Cross 
and Blue Shield Basic Option offer their members access to all 
of the covered providers in their community. But for those 
providers that have not agreed to participate in a preferred 
provider network, the member does not get the advantage of 
reduced out-of-pocket costs. It is clear in our informational 
materials that the preferred provider benefit is an enhancement 
over the standard non-network benefit. In a typical network 
arrangement, the provider agrees to accept a rate of payment 
lower than billed charges in exchange for advantages such as 
more potential patients, expedited reimbursements, and other 
services provided by the plan.
    Often, plans monitor the services provide in network to 
ensure that their providers are well-informed about current 
practice patterns and new developments in health care delivery. 
The plan in turn can pass on the benefits it derives from 
provider participation in the network to members in the form of 
lower out-of-pocket costs when they use a preferred provider. 
Those lower costs are offered as an incentive to members to 
choose in-network services when they are available.
    However, since the Blue Cross/Blue Shield Basic Option 
provides no coverage for out-of-network services, we negotiated 
special provisions for that option to ensure that coverage 
would be available everywhere in the country.
    While all participating plans offer a core set of benefits 
broadly outlined in statute, benefits vary among plans because 
there is no standard benefits package. Even where coverage is 
nearly identical, cost-sharing provisions may differ 
significantly among plans.
    Benefits and rates are negotiated annually, but OPM does 
not issue a request for bids. Instead, we issue a call letter 
to participating carriers in the spring that provides them 
guidance for the upcoming negotiations. Plans remain in the 
program from year to year unless they choose to terminate their 
contracts, typically for business reasons.
    Under current law, the window for new plans to enter the 
program is essentially limited to HMOs. Unlike the 1980's, when 
we were flooded with HMO applications, in the current market, 
we average about six new plans a year.
    Rates are negotiated with the national plans primarily on 
their claims experience. About 93 percent of premium, or 93 
cents out of every dollar, reflects benefit costs. The 
remaining 7 percent covers the plans' administrative costs.
    For community-rated plans, rate negotiations are based on 
per-member, per-month community rate, and adjustments can be 
made to that rate based on demographic factors or utilization 
factors of our particular group.
    Our oversight focuses on key areas of plan performance, 
including attention to quality, customer services, and 
financial accountability. All of our contracts include 
mechanisms through which premiums can be adjusted based on 
performance. In addition, all carriers are subject to audit by 
the independent OPM inspector general. As a result of our 
collaboration with the IG, the program recovers on average more 
than $100 million a year.
    While the program has a statutory and regulatory framework, 
key aspects of plan design such as coverage or exclusion of 
certain services and benefit levels are in neither law nor 
regulation. Within broad parameters set by OPM, plans have the 
flexibility to determine both their benefits package and their 
delivery system.
    Because policy guidance is developed by OPM and provided to 
the plans annually, prior to the start of negotiations, policy 
changes can be made quickly in response to market factors. For 
example, this past year, we accepted a proposal from one of our 
plans for a consumer-driven option that reflects the 
development of new products in a fluid market.
    The FEHB Program uses a hybrid approach that shares 
practices with both public sector and private employer health 
insurance programs. While we believe the program has been very 
successful over its long history, we are always looking for 
ways to ensure that it continues to reflect the current health 
care environment, meet the needs of its members, and service 
the government in its recruitment and retention efforts.
    Our survey results are good. About 80 percent of those 
enrolled in our national plans are satisfied. Our work with the 
participating plans, however, on quality improvement is 
ongoing. We think that the FEHB Program is an excellent example 
of effective public-private partnership.
    Thank you for inviting me to be here today. I am pleased to 
answer your questions.
    The Chairman. Ms. Block, thank you very much.
    [The prepared statement of Ms. Block follows:]

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    The Chairman. Mr. Francis, we are pleased to see that you 
have arrived, frustrated, I trust, by the traffic of 
Washington. Let me again reintroduce you to the committee.
    Walton Francis is an expert consultant and author of 
``Checkbook's Guide to Health Insurance for Federal 
Employees.'' I think I have seen your work on an annual basis.
    Please proceed.

 STATEMENT OF WALTON FRANCIS, FEDERAL EMPLOYEE HEALTH BENEFITS 
       PROGRAM EXPERT CONSULTANT AND AUTHOR, FAIRFAX, VA

    Mr. Francis. I hope so, Senator. Thank you very much.
    I want to report to all concerned that there is a disaster 
in the North Capitol Street tunnel. It is blocked and not 
moving and backed up for miles in every direction. So I 
apologize for my late arrival.
    The Chairman. I am glad you finally found a way to avoid it 
or get around it.
    Mr. Francis. I would like with your permission to 
abbreviate my written testimony.
    The Chairman. Yes. All of your written testimonies are part 
of the record.
    Thank you.
    Mr. Francis. Thank you.
    I decided not to talk about the FEHBP as such, but to talk 
about how it compares to Medicare from the point of view of 
both the enrollee and the sponsor, if you will, the U.S. 
Government in both cases. Although the programs are very 
different in some respects the FEHBP as a fringe benefit of 
employment, and Medicare as a guarantee to older Americans that 
they will not be impoverished by their health care costs--the 
programs nonetheless are the two largest Federal Government 
insurance programs in terms of lives covered and are very 
instructive in the lessons they teach.
    It is also the case that there seems to be an increasing 
set of criticisms of the FEHBP, mostly dead wrong, some 
uninformed, some just using phony statistics or whatever, and I 
thought I would lay some of those to rest.
    Let me just review very briefly the key point of my 
testimony. Retirement health care benefits are better in the 
FEHBP than in Medicare, substantially better. This is obvious 
to everybody who has looked at both programs, but it always 
warrants saying. I estimated for this hearing what Medicare 
would provide if it were a plan offered under the FEHBP as an 
option for retirees and how that would compare to what retirees 
actually get, and not surprisingly, I found that the out-of-
pocket costs under Medicare are roughly twice as high on 
average as those under the FEHBP for that elderly population.
    The components of this better coverage are obvious and 
well-known--catastrophic coverage, prescription drug coverage, 
and a minor benefit to which I will return, coverage when 
traveling abroad or living abroad, for that matter.
    On access, 99 percent of physicians accept fee-for-service 
and PPO patients. That means that 99 percent of physicians 
accept FEHBP enrollees. Only 96 percent of doctors accept 
Medicare patients. So access is better--sure, 99 versus 96 is 
not a huge difference, but it suggests that in rural areas and 
other places where physician availability is quite constrained, 
FEHBP is superior.
    Furthermore, FEHBP is everywhere. In every county in 
America, there are no fewer than 12 plans available to Federal 
retirees and employees. In most of the places where Federal 
employees reside in large numbers--not just Washington, DC, 
although that is obvious, but most of the larger cities around 
the country--there are from 15 to 20 plans available.
    Over time, in sharp contrast to Medicare, the FEHBP 
painlessly adapts to changes in the health care marketplace. 
Both of these programs, by the way, started vintage 1960. It is 
not just that FEHBP has painlessly adopted prescription drug 
benefits--in fact, they were in the program from the get-go 
because nobody would voluntarily enroll in a program that did 
not have prescription drug benefits even back in 1960--but that 
those benefits and many others have adapted over time to 
reflect the realities of the health care market place. For 
example, 10 or 15 years ago, most of the fee-for-service plans 
paid roughly 75 percent of your prescription drug costs, 
whatever they were; that was the model. The model today is 
typically a six-tier system in which there are three price 
levels for mail-order drugs and three price levels for local 
pharmacy drugs, with generics being the cheapest, approved or 
formulary name brand drugs the medium-priced spread in terms of 
copayments, and you pay most of all if you take a non-formulary 
name brand drug.
    The point of this is that had such a benefit been enacted 
in Medicare 15 years ago, it would have been that 25 percent 
option because that is what was common on those days. It would 
never have gotten changed. I estimate that the six-tier drug 
benefit system used in most of the plans in this program saves 
the program roughly $500 million a year. That is a very 
significant savings, based on academic research out there that 
demonstrates that those kinds of benefit structures save a lot 
of money by inducing frugal choices.
    Enrollee satisfaction in this program is very high. There 
is no direct comparison with Medicare possible, but OPM, to its 
credit, was a pioneer in developing surveys of enrollee 
satisfaction to assist enrollees with information on how to 
better choose plans. They find that in these fee-for-service 
plans, 79 percent of participants rate the plans 8, 9, or 10 on 
a scale of 1 to 10.
    On guaranteed benefits, this program is often criticized 
because the benefits are not written into law--my gosh, you 
cannot be sure you are going to get them or something. Well, 
that is absurd. They are guaranteed. They are guaranteed 
indirectly, and they are guaranteed in a way that gets the 
government out of micromanaging benefit-by-benefit details.
    Let me stop there and conclude. This is a very successful 
program. It contains many lessons for Medicare reform, and I 
hope those can be incorporated as you deliberate this year.
    Thank you.
    The Chairman. Mr. Francis, thank you very much.
    [The prepared statement of Mr. Francis follows:]

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    The Chairman. Now let us turn to Bob Moffit, Director of 
the Center for Health Policy Studies at The Heritage 
Foundation.
    Bob, welcome to the committee.

  STATEMENT OF ROBERT E. MOFFIT, DIRECTOR, CENTER FOR HEALTH 
    POLICY STUDIES, THE HERITAGE FOUNDATION, WASHINGTON, DC

    Mr. Moffit. Thank you very much, Mr. Chairman and Senator 
Stabenow.
    I am the Director of the Health Policy Studies Center at 
The Heritage Foundation, but the testimony I give today is my 
own and does not represent the views of The Heritage Foundation 
or its officers or its trustees.
    First of all, I want to say how deeply appreciative I am 
for the opportunity to appear before this committee and talk 
about this issue. Let me also say that for me, this is not 
merely an academic exercise. I was a Federal employee. I was 
involved in the Federal employee system. I was a deputy 
assistant secretary at the Department of Health and Human 
Services during the Reagan Administration, and I also served as 
an assistant director at the Office of Personnel Management, 
the agency that Abby Block represents today. I am very familiar 
with that agency and worked there for several years.
    But it was not until 1992 that my colleagues at The 
Heritage Foundation persuaded me--``persuaded'' is the 
appropriate word, I suppose--to write about the Federal 
Employees Health Benefits Program and its potential for policy 
guidance for broader health care reform, including reform of 
the Medicare Program.
    The central policy question facing the Congress and the 
Nation is whether the Medicare Program as it is today can 
absorb the demographic shock of the baby boom generation and 
continue to deliver high-quality medical care in an 
economically efficient fashion. That is the real nature of this 
debate. I do not think that it can.
    Having said that, that does not mean--I repeat, it does not 
mean--that we should rely on a private sector model of health 
care delivery, nor does it mean that we should rely upon the 
Medicare Choice experience for delivery of medical services.
    The best serviceable model is in fact a public-private 
partnership, and that means both elements, both the public 
sector and the private sector working together. As Abby Block 
has said to the committee, the best serviceable model we have 
of this kind of public-private partnership is the Federal 
Employees Health Benefits Program. It is a program with which 
we have 43 years of experience. It is characterized by choice, 
patient choice, market competition, and very solid consumer 
information and satisfaction.
    As Mr. Francis has pointed out, every Federal employee, 
whether they are retirees or active employees, whether they 
live in urban areas or rural areas, has a choice of at least 12 
plans nationally. Most of these plans are fee-for-service plans 
and PPO plans. They are not HMOs. You can enroll in an HMO; if 
you want to enroll in an HMO, that is your choice. Thirty 
percent of all enrollees do so.
    There is no reason why Congress could not establish a 
similar structure of national plan choice for future Medicare 
enrollees. I would suggest two things in transition to a new 
Medicare Program, two areas where Congress could actually 
improve on the program more effectively.
    First, it could integrate private retiree health insurance 
into the new system, creating a seamless continuity of coverage 
and care. If individuals have had a good experience all of 
their working lives with a private plan, and they want to carry 
that private plan into retirement with them as their primary 
coverage and keep the doctors and specialists they already 
have, they should be able to do so and get a government 
contribution to offset the cost of that plan.
    Another recommendation I would make is that Congress could 
also make sure that new consumer-driven options similar to what 
Abby Block has mentioned in the FEHBP are also easily 
accessible to retirees who want them, including medical savings 
accounts, health reimbursement accounts, or other forms of 
health accounts. Right now, Mr. Chairman, there are 1.5 million 
Americans with such options, and there are prospects for 
significant growth in that market, and people should be able to 
take advantage of that in their retirement.
    As Mr. Francis has pointed out, the FEHB provides a 
benefits package which is clearly superior to Medicare in every 
conceivable way. It has a reasonable record of administrative 
cost--one percent for OPM in administrative costs and roughly 7 
percent for the carriers. It allows and encourages innovation 
in health care delivery. It provides a regulatory system that 
focuses primarily on consumer protection rather than provider 
regulation. Under its statutory authority, OPM is to contract 
with health plans that are licensed in the States, that 
guarantee basic benefits, that charge rates that are reasonably 
and equitably reflecting the costs and the benefits.
    The FEHB model provides for a regulatory environment that 
is light and flexible and does not demoralize doctors or other 
medical professionals.
    Under Section 8902 of Title V of the U.S. Code, OPM is 
authorized to prescribe ``reasonable minimum standards'' for 
health care benefits for plans and carriers. The FEHB 
regulatory system provides a level playing field for competing 
health care plans. The FEHB model also gives enrollees the 
ability to act on solid information in selecting plans as well 
as doctors, hospitals, and medical treatments.
    I think that for the baby boomer generation in particular, 
this is critically important. In the 21st century, information 
technology will accelerate and become an instrument for 
increasingly sophisticated personal decisionmaking. Right now, 
about 70 percent of all Americans in the work force during 
their prime years from their twenties to their fifties use 
computers and have access to the internet. According to the 
Department of Commerce, Americans who use computers and the 
internet when they are younger are likely to continue to do so 
as they age.
    There is no reason why 21st century retirees, particularly 
the baby boom generation, should not be able to take advantage 
of rapidly advancing information technology for periodic health 
care comparisons and even more detailed comparative information 
on quality, on service, on outcomes, on the availability of 
evidence-based medicine among providers.
    Mr. Chairman, the other important point here is that the 
FEHB model provides for a financially stable program. The FEHB 
trust fund is unified. Its administration is comparatively 
simple. The premium income and disbursements in the trust fund 
are easily tracked; the fund's income is routinely subjected to 
congressional action and oversight. If for any reason there is 
a need for a supplemental appropriation for the FEHB trust 
fund, Congress can and does provide it. In this respect, the 
FEHB trust fund model is superior as a mechanism for monitoring 
the solvency and ensuring the financial stability of a 
modernized Medicare system.
    Mr. Chairman, that concludes my remark. My only point is 
that we have 43 years of experience with this program--43 years 
of experience. We know its strengths, we know its weaknesses, 
we know where it can be improved, and we know how to make it 
better. The important point is that with this record of 
success, we have a tremendous opportunity to build a superior 
health care system for the retirees now and in the future, 
particularly the baby boom generation that is going to retire 
in just 8 years.
    Thank you.
    [The prepared statement of Mr. Moffit follows:]

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    The Chairman. Bob, thank you very much for that testimony.
    Now let us turn to some questions, and we will do 5-minute 
rounds. As I ask a question of one of you, if any of the others 
of you wish to join in and make comment to that question, 
please do so.
    Ms. Block, let me first start with you. If Tom Scully were 
to walk into your office today and offer the current Medicare 
fee-for-service program for inclusion in FEHB, would it 
qualify?
    Ms. Block. I do not think it would for several reasons. For 
one thing, as I have pointed out and as the other members of 
the panel have pointed out, we have moved away from fee-for-
service per se to a PPO type of arrangement, which is very 
different from traditional Medicare. With that arrangement, we 
are certainly able to offer a broader benefit package, 
obviously, including a prescription drug benefit, in all of our 
plans. So there would be a huge difference in terms of our 
floor benefit levels and what traditional Medicare offers.
    There would be such differences as well in the way the plan 
is administered. We of course have nothing resembling the kind 
of administration that Medicare undergoes. It would not be a 
good fit, as far as I can see.
    The Chairman. Largely because of the standard benefit 
features required?
    Ms. Block. Well, the benefit features are clearly a major 
difference between our program and Medicare, as has been 
pointed out, and it extends beyond just the prescription drug 
benefit, although that clearly is a key feature of all the FEHB 
plans that is missing from traditional Medicare. But the 
delivery system is also an issue. We are basically at this 
point in time PPO-based, we are network-based, and that makes a 
huge difference.
    The networks when they started out in the early 1980's were 
primarily discount arrangements with providers. They have 
become so much more than that now, and we work very closely 
with the plans to ensure that they are more than just discount 
docs. There is a level of plan oversight; there is a level of 
provider education; there is a level of looking at and making 
sure that the providers in the network are current on medical 
practices, that they are using the best practices, that our 
customers are getting the right care at the right time. So 
there is a great deal more involved in running PPO networks 
today than just getting discounts from providers, and 
traditional Medicare just does not do that.
    The Chairman. Mr. Francis, you are nodding your head.
    Mr. Francis. Yes, Senator, I agree 100 percent with what 
Abby said. If we could somehow wave a magic wand and make 
Medicare participate in the FEHB plan--and OPM would not 
approve it if they had a choice, because it would not meet 
their standards in many respects--and it were offered to 
Federal retirees as an option--you know, you can join Blue 
Cross Standard or you can join Medicare; pick one or the 
other--forget for the moment that the programs have some 
coordination, treating them as separate plans--no one would 
join it. It would rank last in our ratings of health plans for 
retirees.
    The Chairman. So it would make the bottom of the list in 
your book.
    Mr. Francis. It would make the bottom of the list.
    The Chairman. Mr. Moffit, any comment?
    Mr. Moffit. Well, I think that on the basis of the facts, 
there is no debate. The FEHB system provides a superior quality 
of health care and delivery for retirees, and that is true. I 
do not think there is any question about it--including retirees 
who are no longer covered by Medicare. You have access to 
prescription drug coverage, you have access to coordinated 
care, you have access to catastrophic coverage. You do not have 
this kind of bizarre incentive system where you have very, very 
high deductibles to get into the hospital, but you have very, 
very low deductibles in Medicare Part B, which drive up health 
care costs. You do not have a situation where people have to go 
out and buy two sets of plans in order to make sure they cover 
gaps in coverage and pay two premiums. And you do not incur all 
the excessive administrative costs in that, and you do not have 
a situation where every, single major decision about the 
benefit, the treatment, or the procedure that you will get is 
subjected to a detailed regulatory intervention by the CMS. You 
do not have anything quite like that.
    The Chairman. Then, maybe you have answered my follow-up 
question to you. OPM employs about 160 employees to manage the 
FEHB, compared to about 4,500 at CMS to regulate Medicare. 
Then, to what exactly do you attribute this very huge 
difference in employment?
    Mr. Moffit. First of all, it is not just Medicare. CMS has 
awesome managerial responsibilities beyond Medicare.
    The Chairman. Oh, yes.
    Mr. Moffit. It has the Medicaid responsibility, it has the 
State Children's Health Insurance responsibility, it just has 
more than Medicare. But in fact my argument is that actually, 
CMS is in a managerial crisis largely because Congress has done 
two things. One, it has given CMS much too much to do, and 
second, Congress micromanages the Medicare Program in 
particular. The most recent reports that have been documented 
by the General Accounting Office and by independent analysts, 
both conservatives and liberals, indicate that the Medicare 
Program, no matter how you feel about it, is extremely 
micromanaged. This, however, imposes enormous costs on the 
health care system.
    It is true that the administrative costs of the Medicare 
Program are between one and two percent, formally, but none of 
those administrative costs count the costs of doctors, 
hospitals, clinics, and home health care agencies complying 
with at least tens of thousands of pages of rules, regulations, 
guidelines, and regulatory paperwork. They have to do it.
    Now, Senator Stabenow said she does not want to have all 
this bureaucracy. Senator, I agree with you--but if you are 
going to have a system where every benefit is carefully defined 
by the Congress and is going to be priced by the Congress, you 
are going to have to regulate that system. You are going to 
have to make sure that those prices are correct and that there 
is going to be monitoring of those prices to make sure that the 
doctors, all 800,000 of them, in the country are agreeing to 
charge those prices and are keeping within the regulatory 
guidelines.
    It seems to me, with the kind of structure you have in 
Medicare, you cannot avoid a massive expansion of bureaucracy 
and red tape. But that expansion is costing the health care 
system. My point, Mr. Chairman, is that every dollar that goes 
into the compliance with this regulatory system on the part of 
doctors and hospitals and health clinics is a dollar that is 
lost to patient care in the system. We have to start to count 
that as well in terms of when we start talking about the 
additional costs of Medicare.
    The Chairman. Thank you.
    Let me turn to Senator Stabenow. Senator?
    Senator Stabenow. Thank you, Mr. Chairman.
    I would go back and again say that I believe there is much 
we can do in terms of the bureaucracy. There is much more 
micromanaging that happened even after 1997, with the changes 
that were made at that time, that I believe were very much 
micromanaging.
    This has been very informative, and I appreciate the 
information that all of you have provided. When I look first at 
comparing Medicare and FEHBP, in the Federal system, the 
prescription drug benefit is available in every option; isn't 
that correct?
    Ms. Block. Yes.
    Mr. Francis. Yes.
    Senator Stabenow. What has been at least put forward to 
date--and we have not yet put our mark on it in the Senate at 
this point--but what has been proposed by the administration is 
not that. They have said that if you stay in traditional 
Medicare, you would get a discount card, possibly some 
catastrophic help, but you would only get full comprehensive 
prescription drug benefit if you went into a private plan. So 
it is different than what you are suggesting, and I would 
certainly support more of a model of what you are saying, that 
regardless of the plan you pick, you receive comprehensive 
prescription drug coverage.
    This goes back, though, to the experience that my mother 
had with Medicare+Choice that was not funded appropriately, and 
the private sector dropped Medicare. This goes back to what I 
believe is the larger question of are we trying to upgrade 
Medicare in quality because we want better health care, and we 
want prescription drug coverage, and we want it to be, as you 
all talked about, the best quality we can have, or are we 
trying to save dollars--because those are not necessarily the 
same thing.
    Today in The New York Times in fact, there is a major 
article that talks about this very question and comparing 
private plans, the rates that are paid to doctors and hospitals 
and home health providers and so on to what is paid under 
Medicare, because we have taken the approach under Medicare of 
saving costs by just reducing provider reimbursements.
    I would welcome anyone's information regarding cost, 
because I think this is important. We have been given at this 
point--I want to read you just a little bit from the article. 
There has been $400 billion set aside in the budget resolution 
for some proposal which in my mind does not begin, from the 
numbers that we are seeing, to do what you are talking about if 
you are really going to provide the same kind of care 
regardless of plan. But in The New York Times today, just to 
quote a paragraph, ``The Medicare Payment Advisory Commission, 
a nonpartisan Federal advisory panel, recently had a study done 
comparing fees paid by Medicare and private health plans. 
Zachary Deichman, the economist who did the study, collected 
data from 33 health plans of 31 million people. In an interview 
today, Mr. Deichman said he had found that private health plan 
fees are about 15 percent higher than Medicare fees''--and then 
they go on to show various categories. It is 26 percent higher 
for surgery fees in the private plans such as we have; 
radiology is 19 percent higher; other diagnostic services are 
23 percent higher.
    So as we look at these two issues--on the one hand, those 
saying that reform is about saving dollars versus reform is 
about improving quality and choice--how do you reconcile that?
    Mr. Francis. If I may comment, Senator Stabenow, that is a 
great question, and there was one point in my testimony that I 
forgot to cover that is very important. I updated a study for 
you, for this committee,that I had done a few years back 
comparing change in cost over time of the Medicare and FEHBP 
programs. It turns out that if you go back almost 30 years, the 
two programs have tied in cost containment. That is, the annual 
rate of growth measured in the way I detail in my testimony has 
been identical over time in the two programs. Yet on the one 
hand, we have a Medicare Program that pays providers less, that 
is micromanaged, that ceaselessly seeks--the Congress every 
year is forced to go through legislative contortions to come up 
with some dollar savings.
    Your best efforts have barely tied the efforts of Abby 
Block and the system over which she presides, which painlessly 
obtains identical cost containment over time.
    I will go beyond that. We have already talked about the 
benefits are better in FEHBP. They have improved over time. 
Medicare's have not.
    So we have a program that has contained costs while 
improving benefits to a level that is far superior to Medicare.
    Point No. 3--and this again picks up on something that Abby 
said--the managed care features in the plans in this program 
save lives. They are not just there to hold patients' hands. 
There are reasons why networks are set up, why certain kinds of 
reviews are undertaken.
    For example, here is a benefit in this program that does 
not exist in Medicare--large-scale case management. If you have 
a serious problem that requires, either going into a nursing 
home or staying at home while you recover from open heart 
surgery--or go back into the hospital--and it is going to cost 
the plan tens of thousands of dollars, they can give you a 
benefit that is not even in their legal contract--for example, 
a home health care benefit to keep you out of the hospital--
saving them money and saving you the trauma of that 
hospitalization.
    The point is that Medicare could never pass the quality 
standards that the FEHBP plans pass, and OPM is working hard on 
improving those systems, working with the private accreditation 
bodies. I could go on and on, but let me just stop there--it 
controls costs better, provides better care, and provides 
better benefits.
    Senator Stabenow. Just as a quick follow-up, are you 
suggesting, then, that it would cost no additional dollars in 
Medicare to have an average 15 percent increase in fees for 
providers and increase--that it would not cost additional 
dollars under Medicare to get to this system?
    Mr. Francis. I cannot give you a guarantee. I would answer 
you in a slightly different way. The FEHBP uses a dynamic, 
competitive, market-driven, consumer-driven system over time, 
where consumers are always making choices--in open season, you 
face a choice of benefits, premium costs, out-of-pocket costs, 
quality of the network, is your physician in it, for example, 
and so on--and consumers make those choices. Only 5 or 10 
percent switch every year. But that keeps the plans honest, if 
you will. It keeps immense pressure on the plans to keep costs 
down and quality up. And over time, there is no reason to think 
that that system could not outperform Medicare in cost 
containment.
    Senator Stabenow. I would be happy, Mr. Chairman, to follow 
up further, but I would love to see some studies that compare 
people of all ages in all health conditions in one system right 
now that has better payouts in all areas to a system that is 
covering older people in the country and the disabled and 
compare both of those right now and say that somehow, for the 
current dollars going into Medicare and the current very low 
reimbursements to our providers, we could switch to that and it 
would not cost any more dollars. You are hired if we can do 
that.
    The Chairman. Thank you.
    Let me ask a couple more questions before we turn to our 
next panel.
    I think that both you, Senator, and Mr. Francis, Mr. Moffit 
and Ms. Block--we have all touched on the same things in part 
here. While there is a cost component to this that we will 
debate, I do not want my seniors denied service, and yet they 
are being denied service by primary care providers today 
because they will not take them because they can no longer 
afford to take Medicare. In part, that is our fault; it is part 
of that micromanagement that we do around here. I cannot even 
believe that we sit here in Congress and debate the tiniest 
specifics of Medicare benefits, and services, but we do, and we 
have for 30 years. We add a few every year or we take away a 
few, and then we crunch down the costs by allocating a certain 
fixed amount of resources and expect all those services to 
comply into it.
    What is unique--I think you have just said it, Mr. 
Francis--is that in this dynamic, the private sector has 
arrived at the same cost containment success that we have in 
Medicare, with its huge bureaucracy and a phenomenal layout of 
resource and less service as it relates to the total care 
package offered--and no options.
    In designing flexibility and adding the component that I 
think both the Senator and I want, and that is prescription 
drugs, the question is how do you allow the market forces to 
deal with cost as it relates to innovation or additional 
services?
    I am increasingly getting--as I suspect your office is--a 
bit of a panicked phone call on occasion from a senior who has 
just been told that his or her primary care physician is 
retiring, and now they are out shopping for one and cannot find 
one who will take new Medicare patients. We are getting that 
limiting factor, so I guess my question is as it relates to 
access through the private system versus access through 
Medicare and the denial of service. Is there a growing 
disparity there, or are we simply getting physicians who will 
transfer costs over, if you will, to those who can afford to 
pay in relation to the less than comparable system that 
Medicare serves?
    Can you react to that, any of you?
    Mr. Francis. One quick comment, and Abby might want to say 
more--I do not want to put her on the spot. I think that 
central to the FEHBP as it has evolved--this was not true 15 
years ago, but it is true today--the fee-for-service plans 
basically have two sets of benefits--one for going to any 
doctor in the country--that is the traditional fee-for-service 
component--and one if you use preferred providers. You get a 
much better deal if you use preferred providers, and preferred 
provider panels are huge. We are not talking about little, 
teeny-weeny HMO groups; we are talking about 50 to 60 percent 
of physicians typically in these plans. But that is not 100 
percent.
    The difference is that if you go out of plan, out of the 
preferred panel, you will have to pay more. Your reimbursement 
share will be higher, and the physician may charge you a little 
more than he would have charged if you were preferred, although 
you do not see that on the preferred side.
    So I do not want to claim that it is perfect for 
everybody--there is no guaranteed satisfaction of all problems 
in the world in any program. But because you have this double 
tier of benefits, for in and out of network, the plans are much 
more flexible and the choices that consumers face are much 
wider.
    Mr. Chairman, and in that, you are arguing or at least 
believe that over time--we will go back to the New York Times 
article that I found fascinating this morning also--and it is a 
debate that we will get into; some will argue that we are going 
to get great cost savings benefits, that over time, it is a 
factor of competition that creates innovation within the system 
and has the potential for some cost containment--or, more than 
potential--it has proven to contain costs.
    I think you mentioned the premium increase in the last year 
or two--and this program has been very high--you cannot look at 
one or two years. You have to look over long periods of time. 
My comparisons are sort of 10-year rolling averages, because 
the FEHBP had some very good years in the early nineties when 
Medicare was struggling with some very bad years. So if you 
were clever and you picked the right base year in a short 
period, you could prove almost anything. But if you are honest 
about it, over time, on average, this program saves money as 
well if not better than Medicare.
    Senator Stabenow. Mr. Chairman, if I might.
    The Chairman. Yes, Senator.
    Senator Stabenow. Thank you.
    First, let me go back and say that we do agree that these 
are different systems in the sense of one covering people of 
all ages, healthy people, sick people, and so on, and that with 
Medicare, it is older individuals by definition who are going 
to need more health care on average, have more health concerns, 
and the disabled. So they are different systems, and as we 
analyze this, we need to look at who the pool is that is being 
covered.
    But I guess I would go back again and say that while I 
think private-public sector partnerships work, and I am very 
intrigued about doing this, the idea that somehow we could do 
this and bring everyone up to where government employees are 
without additional dollars I think is a rather naive or foolish 
kind of thought.
    In the beginning--and I am not criticizing a panel member; 
I am saying as colleagues, as all of us--at this point, this 
has been argued as a way to save dollars, yet I would argue 
that if we increased the fees at least in Michigan by 15 
percent for every health care provider, we would have no 
problem with access, whether it is up in the Upper Peninsula or 
in lower Michigan, if we increase fees--if we just went to the 
fees that are paid by Blue Cross, we would not have a problem 
right now.
    So the problem has been that we have been cutting service, 
we have been cutting fees, and I am very much willing to look 
at different ways to gain cost savings and competition and the 
kinds of things--as long as we understand that in the end, this 
is a system that every plan has prescription drug coverage, it 
is a system that pays out more than so far we have been willing 
to do as a Congress.
    The first step is to stop cutting if we want to stop losing 
access to care. That is the first step. Do not institute the 
next round of 15 percent cuts to home health; do not institute 
the next 5 percent cut to physicians; do not institute the next 
round for hospitals while we are figuring this out, if we care 
in fact about not losing access to care, which I know we all 
do.
    So I would like, Mr. Chairman, to see us really analyze 
what we are talking about in terms of the dollars that are put 
aside versus what we are talking about here in the budget, and 
I feel very strongly that we have not decided that health care 
is important enough right now to really make sure that this 
works when we put a plan in place. I go back to 
Medicare+Choice, where there was an option put out there, not 
adequately funded, and it failed.
    So we can put forward a structure, and if we are not 
willing to fund it, it does not matter what the structure is--
it will fail. I hope that part of this is going to be a debate 
about how much we are willing to invest in health care for 
older Americans.
    The Chairman. I thank you very much.
    Yes, Ms. Block?
    Ms. Block. I would like to talk a little bit about the 
kinds of things that we can do very easily in the FEHB program 
that the Medicare Program as currently structured cannot do.
    In the past several years, we have become very aware of 
programs that fall under the umbrella of what we call ``care 
management''--and Walt mentioned earlier case management, which 
is one piece of care management; another important piece is 
disease management programs--because we started to believe that 
they had an enormous potential, first of all in keeping people 
with chronic illnesses healthy longer and also being able to 
avoid unnecessary costs that come about because people were not 
getting the right care for chronic diseases and so ended up 
with very costly hospitalizations, in the case of diabetics, 
amputations, blindness--consequences that can be avoided if 
people get the right care and get it early enough and with 
enough continuity to ensure that they are under treatment and 
under appropriate treatment all the time.
    We have worked very closely with our health plans. Blue 
Cross and Blue Shield and the Mail Handlers Plan which is 
underwritten by First Health have developed and are in the 
process of implementing and evaluating excellent care 
management programs that we think will have the dual benefit of 
keeping people healthier longer and also saving money, and that 
is one of the fiscal offsets that we can arrange by working in 
collaboration with our private health plans for the benefit of 
all.
    So we do that very easily because we are so non-
hierarchical. Our director, Kay James, has been extremely 
supportive of care management programs. We have talked about it 
in our call letter for the last couple of years. We just do 
that very easily. We look at it, we say this looks like a good 
idea, let us move in this direction, let us work with the 
plans, and let us see what we can implement. That is the kind 
of flexibility we have, and I think it is both beneficial to 
people, and there are also financial benefits.
    The Chairman. Thank you.
    Mr. Francis. Just an amusing comment if I may, Mr. 
Chairman. When I was at HHS, one of my main functions was as 
regulatory review czar, and I did a study once that showed that 
it took what was HCFA, now CMS, on average 4 years to issue a 
regulation from the day that the idea was thought of until the 
final rules were set in place.
    What Abby is talking about is night and day faster and more 
responsive and more workable than doing this kind of thing by 
regulation and trying to nail down every dot and cross every 
``t,'' and you get it wrong--end of speech.
    The Chairman. We will let you have the last word on the 
panel, Mr. Moffit, and then we will move to our second panel. 
Go ahead.
    Mr. Moffit. All right. I just want to say one thing. Our 
debate has been constantly in terms of the current demographic 
framework. The problem is not now. The problem is the future. 
The problem is 8 years from now. The important thing to 
understand is that 8 years from now, we are going to have an 
unprecedented demand for medical services unlike anything in 
human history or anything we have ever seen before.
    The point here is--and that is why the structural issue is 
important--the only way that you can control cost in the 
current structure of Medicare is ultimately to reduce 
reimbursement--but reducing reimbursement ultimately means you 
are going to control costs by reducing the supply of services, 
the quality and the quantity of services. That is not an 
unintended consequence of price controls. That is an intended 
consequence of price controls--to make sure that we spend less 
in that sector of the economy. That has got to be understood.
    The most important thing, and one argument that I hope 
myself and my colleagues here have made, is that within a 
structure that relies on a market, you can have fairly ruthless 
control of cost on the basis of an interaction of supply and 
demand, but in a system that is governed by price controls and 
central planning in effect, the only way you are ultimately 
going to control cost is to reduce the supply of services--and 
that is the problem.
    Thank you.
    The Chairman. That is a very important point in the whole 
issue of this debate, and we thank you very much for being with 
us this morning.
    Now let us turn to our second panel, and if our colleague 
Senator Carper would wish to join us, we are pleased to have 
you with us. He is a back-bencher this morning--but rarely 
that.
    The Chairman. Our second panel this morning will discuss a 
somewhat broader set of issues involving comparisons between 
Medicare and private insurance generally, looking at questions 
of comparative cost, the very issues that Senator Stabenow 
brought up a few minutes ago, quality, and value.
    Marilyn Moon is a Senior Health Policy Fellow at The Urban 
Institute and a distinguished expert on Medicare and health 
care policy.
    Joe Antos is currently a Scholar at the American Enterprise 
Institute but has had a long career in government work 
involving both CBO and the old HCFA.
    Jeff Lemieux is a Senior Economist at The Progressive 
Policy Institute and was previously a senior staff member in 
the 1999 Presidential Medicare Commission and a CBO economist.
    We look forward to your testimony, and I think your 
testimony follows well with the discussion just had with the 
last panel as it relates to costs and benefits as we deal with 
this important policy issue and debate.
    So, Ms. Moon, if you would start, please proceed.

  STATEMENT OF MARILYN MOON, SENIOR HEALTH POLICY FELLOW, THE 
                URBAN INSTITUTE, WASHINGTON, DC

    Ms. Moon. Thank you, Mr. Chairman.
    It is my pleasure to be here today, and I appreciate the 
invitation.
    I am going to be the skeptic on the panel today and argue 
essentially that private plans are not a magic bullet for 
Medicare, and that there are a lot of pros and cons that need 
to be assessed in analyzing whether or not we should rely on 
private plans and to what extent.
    I do not think anyone any longer is saying there should be 
no participation of private plans, nor is anyone saying there 
should be no traditional Medicare--or at least I hope that is 
not the case. I think it is better to think about this issue in 
terms of the right balance between public and private shares.
    But it is important to ask whether the benefits from 
greater participation of private plans be worth the additional 
problems and costs that could arise in some cases.
    There are likely to be big negative impacts from a plan 
that relies extensively on private plans, particularly if it 
does damage to the traditional Medicare Program, in return for 
little positive reward. First of all, it is important, as 
Senator Stabenow did, to separate out the issue of the 
structure of the program from the benefits covered by the 
program. No one is going to argue that Medicare has a wonderful 
benefit package and therefore that we should stick with 
traditional Medicare because of its stunning benefit package. 
But adding additional benefits is not necessarily inherently 
something that can only be done in a private plan structure. In 
fact, people have estimated that it would cost in the range of 
$850 to $900 billion to add prescription drugs of the type that 
are available to Federal employees in a Medicare Program, and I 
believe that would be true whether we were talking about 
private plans or basic Medicare plans.
    The simple fact of the matter is that drugs are expensive, 
seniors and persons with disabilities use extensive numbers of 
drugs, and if we make them more available to them, we will see 
costs go up over time.
    I also argue in my testimony that Medicare rates of growth 
on a per capita basis are less than the private sector, and 
that claim has gotten me into some hot water. We agree that the 
data we use are not very good and we would like to have better 
data, but it simply does not exist. The additional dimensions 
that I have seen people add to tweak our study, are 
unconvincing. I still believe that our work indicates that 
Medicare does a little better than the private insurance sector 
over a long period of time. Over 30 years, on a cumulative 
basis, the difference amounts to about 19 percent.
    Actually, looking at Mr. Francis' testimony, I think that 
he and I are actually pretty much on the same page. He argues 
that there is a 1-percentage point difference in Medicare over 
a long period of time, on an annual basis. That actually 
translates close to the 19 percent, because the 1 percentage 
point is on a basis of 5 percent versus 6 percent. That is a 
big difference over a very long period of time. I would like to 
have that compounding difference in the Medicare Program, for 
example, that you would get.
    I think our study is consistent with the information today 
in The New York Times.
    The other question I think is a relevant one to ask, and 
that is whether competition adds to this in terms of private 
plans competing, and that is an important issue and question. I 
will let others talk about the many advantages to competition, 
and I will mention just a couple of potential problems.
    First is the issue of risk selection. This is a serious 
issue that needs to be taken into account. It cannot be simply 
said that there will be risk adjustments. Let us assume there 
will be a risk adjuster. Over 20 years of study and effort have 
gone into this, and we have not come very far as yet. Risk 
selection is going to be an issue, particularly to the extent 
to which benefits vary substantially. Younger, healthier folks 
will quite naturally be attracted to plans that have benefits 
that they like and not home health coverage, for example, which 
will appeal to a sicker population.
    I do not see, again, very much advantage here from that 
perspective. In addition, the complexity that arises from 
competition is something that should not be understated. I 
would be happy to compare my experiences with choice and a PPO 
that pays essentially half of what Medicare pays my physician 
when I go to her. I will be better off when I go on to 
traditional Medicare from the PPO that I am in, Care First, and 
I would also be happy to discuss some of the other complexities 
and problems with that plan.
    What we need to keep in place in Medicare is the 
universality and redistribution that occurs in the program that 
is an essential part of social insurance. The pooling of risks, 
also needs to be maintained or a way found to adjust for the 
loss of risk pooling when relying on private plans. Finally, an 
important role for government in protecting the program over 
time also needs to be retained.
    I would like to make two final comments. One is that the 
administrative costs of Medicare are often misunderstood and 
misinterpreted, because remember--Medicare is running an 
insurance program. If anything, it needs more dollars to run it 
well. Adding another layer of private plans will add to 
administrative costs.
    I am all in favor of many changes in the traditional 
program, not the least of which would be coordination of care. 
But I see very little innovation in a lot of the private plans 
out there today to suggest they are already better than 
traditional Medicare.
    The Chairman. Ms. Moon, thank you very much.
    [The prepared statement of Ms. Moon follows:]

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    The Chairman. Now let us turn to Joe Antos, who is 
currently a scholar at the American Enterprise Institute.
    Thank you, Joe.

  STATEMENT  OF JOSEPH R. ANTOS, WILSON H. TAYLOR SCHOLAR IN 
    HEALTH CARE AND RETIREMENT POLICY, AMERICAN ENTERPRISE 
                   INSTITUTE, WASHINGTON, DC

    Mr. Antos. Thank you, Mr. Chairman and members of the 
committee.
    As I think the first panel pointed out quite well, the 
Medicare Program faces unprecedented challenges, challenges 
that simply cannot be avoided, and I think the first panel was 
correct in observing that the Federal Employees Health Benefits 
Program is a very, very capable program that is an excellent 
model for the Medicare Program.
    However, as we know, people have raised concerns about 
whether competitive market reform would actually work in 
Medicare, and I want to address four of those concerns.
    First, on the assertion that Medicare controls costs better 
than the private sector, it is true--I looked at Marilyn Moon's 
paper, and I am one of the people she was referring to, no 
doubt--it is true that, measured the way Marilyn measures it, 
Medicare's costs did grow somewhat less rapidly than private 
insurance.
    However, let us keep in mind that over the last three 
decades, the nature of private coverage has changed 
dramatically. Private insurance has grown and now covers 
substantially more of the cost of services than it did in 1970. 
I am not talking now about adding benefits. I am talking about 
how much of your cost for a given service is covered by 
insurance.
    So we need to be careful when we do our comparison 
shopping. Private insurance has become a bigger benefit in that 
sense, in that fair sense, and Medicare has not. It is not 
surprising that the larger product is more expensive. The big 
box of Rice Krispies in the supermarket costs you $3.69--I 
imagine; I have not been to the supermarket lately--while the 
regular-size box costs $2.99. The big box costs more, but the 
cost per ounce of cereal is lower if you buy the big box. For a 
fixed level of financial protection, private insurance costs 
may have grown less rapidly than Medicare.
    You can look at other programs. You can look at the Federal 
Employees Health Benefits Program. You can look at the 
California Public Employees' Retirement System. The Medicare 
Payment Advisory Commission looked at those two programs, and 
what did they find? They found, according to their numbers, 
that FEHBP's costs grew slightly faster than Medicare's over 
the past 10 years; CalPERS' growth was somewhat lower than 
Medicare--again, no clear win for Medicare.
    It is unreasonable to think that Medicare's administrative 
pricing could ultimately control spending better than a 
competitive market situation. Price controls have typically 
caused providers to find ways to deliver more services. We can 
talk about that more later. Tighter controls that also restrict 
the use of services could prevent that, but such restrictions 
would have adverse consequences for the health of 
beneficiaries, consequences that I do not think anybody would 
countenance.
    The second criticism--Medicare beneficiaries would be 
forced to change doctors. It is not true under an FEHB-style 
reform, anyway. Beneficiaries in fee-for-service Medicare can 
select almost any provider in the country. They could have that 
same ability to choose providers under an FEHB-style reform 
through preferred provider organizations, for example, 
organizations that allow beneficiaries to go outside the panel 
of providers.
    Of course, the Federal Employees Health Benefits Program 
offers a wide range of choices. You would expect the Medicare 
Program to do the same thing, including, I think, HMOs and the 
traditional fee-for-service plan for those who want to make 
those choices.
    I think the argument is about giving people the option--not 
forcing them to do something that they do not want to do.
    Now, it is true, as Marilyn says, that PPOs charge more if 
the beneficiary goes to an out-of-network provider. I am in 
Blue Cross Standard Option FEHB--I am still in the program--and 
that requires that I pay $15 for a standard office visit if I 
stay in network or 25 percent of the charge if I go out. That 
can add up to a lot of money if I got all of my health care out 
of network.
    What should a Medicare beneficiary do about this situation? 
Well, that beneficiary would do what millions of Federal 
employees do every year--look in the book, look for the plans 
that include your doctors in the network.
    Let us not forget that the flexibility that Medicare brings 
comes at a considerable cost. There are gaps in coverage, 
complicated and inequitable cost-sharing structures, and an 
exposure of beneficiaries to potentially unlimited financial 
risk. Nearly everyone wants different benefits than the 
traditional program offers. Nearly everyone buys some kind of 
supplemental coverage, and many pay a high price to do so. In 
the year 2000, for example, about 10 million people bought 
Medigap policies with a premium averaging $1,700.
    My third point is Marilyn's point as well about risk 
selection. The concern is that private plans might not accept 
sicker beneficiaries. I think that is a concern. When we 
implement a choice-based system, we absolutely must be vigilant 
on this point. I share her concern.
    It is comforting that the FEHB Program does not appear to 
have any significant risk selection problem. It is related to 
the design of that program; we could learn some lessons there.
    The fourth criticism--competition cannot work in Medicare. 
As we all know, the experience with Medicare+Choice has been 
very sobering. Over the past 5 years, nearly 200 plans have 
dropped out of the program. Is that proof that competition 
cannot work? Well, it is proof that the plans cannot operate 
under Medicare+Choice, as Senator Stabenow pointed out. Plans 
will not be able to compete in Medicare unless we change the 
government's approach to managing the program.
    Medicare+Choice did not break away from Medicare's history 
of top-down price-setting and complex regulations. The program 
is administratively inflexible; the payments were 
unrealistically low and did not reflect conditions in the local 
markets that you know about very well. It is not surprising 
that plans dropped out.
    Let me conclude. Congress has an opportunity to help 
Medicare fulfill its promise to millions of seniors and people 
with disabilities. We can build on Medicare's successes, but we 
need not repeat its mistakes. The program must expand to cover 
prescription drugs, preventive benefits, and protection against 
uncapped medical costs. The program must be made financially 
sustainable if the taxpayers of today are to receive their 
Medicare benefits tomorrow.
    I think the Federal Employees Health Benefits Program is a 
great place to start, but we cannot just stop there. We need to 
tailor it to the needs of the Medicare Program. I believe that 
all Medicare beneficiaries should be given solid drug benefits, 
but we should not make it a one-size-fits-all benefit. I 
believe that Medicare beneficiaries should have the choice to 
stay with the traditional program if they choose to do so.
    There are certainly risks in attempting to reform a program 
as important as Medicare. But there are risks from failing to 
take the prudent actions necessary to make Medicare a better 
and more sustainable program. I think that effective 
competition can make a lasting and meaningful improvement in 
this essential public program.
    Thank you.
    The Chairman. Joe, thank you.
    [The prepared statement of Mr. Antos follows:]

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    The Chairman. Our final panelist is Jeff Lemieux, a Senior 
Economist at Progressive Policy Institute and previously senior 
staff with the 1999 Presidential Medicare Commission and a CBO 
economist.
    Jeff, welcome to the committee.

STATEMENT OF JEFF LEMIEUX, SENIOR ECONOMIST, PROGRESSIVE POLICY 
                   INSTITUTE, WASHINGTON, DC

    Mr. Lemieux. Thank you, Mr. Chairman.
    Mr. Chairman, your staff asked me to comment very 
specifically on the cost studies that Dr. Antos and Dr. Moon 
have done recently.
    The Chairman. We know that that is an important part of 
this debate, and as Senator Stabenow point out, it is current 
within the discussion this morning with the New York Times 
article, so it is front and center to all considerations, I 
suspect.
    Mr. Lemieux. Let me get right to that, but first let me 
make just three quick assertions in response to the discussion 
that we have heard in both panels.
    I think that there are three conditions that are necessary 
to make an FEHB-style system workable in Medicare. First, the 
government-run plan needs added flexibility to shape its 
benefits and payment systems more along the lines that Abby 
Block told us are possible in FEHB.
    Second, the private health plans in Medicare clearly need a 
stable, predictable, and fair platform from which to make 
business decisions, and that also is lacking.
    The third thing that I think is lacking that we need to 
work on is that both Congress and the public will need a very 
thorough understanding of how a competitive choice system in 
Medicare would work. We need to create a win-win situation here 
for beneficiaries and taxpayers, and we need to know how an 
FEHB system would play out over time before policy decisions 
can be made, and we have not made that analytic effort yet in 
Congress.
    To these comparisons, in my opinion, Dr. Moon and Dr. Antos 
essentially say the same thing. They say that if you look at 
Medicare and private insurance spending trends over 30 years, 
it looks like Medicare's are slightly better. I believe Dr. 
Antos is also correct when he says that when you fold in 
benefit generosity, the cost-benefit comparison, it looks like 
private plans are a little better.
    So my analogy to this--and I am not trying to be funny, but 
I think this is appropriate--is that Dr. Moon is arguing that 
McDonald's is better than Burger King because its burger prices 
have increased by a few pennies less over 30 years, and that 
Dr. Antos is saying no, Burger King is actually a better value 
than McDonald's because Burger King's food is improving at a 
faster rate.
    This is the sort of data that policy wonks on both sides of 
the political aisle are going to use for ideological 
ammunition. Backers of the government-run fee-for-service 
program will argue that McDonald's is better than Burger King, 
and backers of private plan options in Medicare will say that 
Burger King is better than McDonald's. But the larger point is 
that policymakers should not have to choose Burger King or 
McDonald's. Beneficiaries should be able to choose from Burger 
King, McDonald's, Popeye's, the gourmet shop--you name it--and 
that our esteemed foundations and policy think tanks could do 
the most accurate and subtle computations possible, and we 
would never be able to determine a correct answer on something 
that is really a point of preference.
    So in my opinion, comparisons of long-term spending cannot 
really possibly settle a debate over which sector is a better 
value because Medicare and private health insurance spending 
are interrelated. When Medicare finds ways to save money, 
private insurers face pressure, mostly from employers, to mimic 
those savings or to come up with alternative savings.
    Likewise, when private health insurers find a way to save 
money or add value and benefits to their packages, then 
Congress faces pressure to improve Medicare, to find similar 
savings or similar benefit enhancements. The spending trends on 
both sides reflect these pressures, they tell us nothing 
intrinsic to government-run programs or private health 
insurance.
    The first major move toward cost containment in the entire 
United States health sector was in the early 1980's when 
Medicare took the lead on cost containment and implemented a 
prospective payment system for inpatient hospital care. This 
was a payment control method that worked. Hospitals changed 
their behavior, and Medicare's costs slowed down from the 
double-digit rates to single digits, which was unheard of at 
the time.
    That is why Medicare's cost performance moved better than 
private insurance for several years. After about 1993, private 
health insurance and Medicare have gone back to increasing at 
about the same rates. What happened was that private insurers 
became aware that Medicare was paying less for hospitalization, 
so they had to do something about it. Employers put pressure on 
them. Of course, they could not implement a massive payment 
control system of their own; they could not collude to gain 
market power to do that, and the market would not allow them to 
just impose payment restraints. But by the early 1990's, they 
found a solution. That solution was managed care. By targeting 
their enrollees to specific hospitals and doctors, they could 
gain leverage to get better deals with health care providers.
    That sudden cost saving success in managed care then led to 
political actions that turned around and helped to reduce 
Medicare spending again, first in 1996 with the anti-fraud 
provisions, in 1997 with payment cuts. Also, it sparked a 
political debate on Medicare's benefits. If these private plans 
through managed care were able to save money and offer better 
benefits, that really pointed out how Medicare benefits had 
fallen behind.
    Of course, some of those early managed care savings have 
proved fleeting, but there has been one durable item of cost 
saving that many people on this panel and the previous panel 
have mentioned, and that is care management--the ability to 
take care of people with one or more chronic diseases in a much 
better way. I think this is the new potential win-win in 
Medicare. PPI's health plan is focused on care management and 
healthy aging, and it goes through several different ways to do 
it--a way to do a drug benefit that would improve that sort of 
thing and would also help improve risk adjustment; an 
accountability system so the fee-for-service plan can keep up 
with these sorts of innovations; and the new sorts of choices 
that we have talked about on the panel.
    With that, I mention in my written statement a fair bit 
more about the PPI health plan, and I encourage you to take a 
look at it if you have a chance. Thank you very much.
    [The prepared statement of Mr. Lemieux follows:]

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    The Chairman. Thank you all very much for your testimony 
this morning.
    Let me ask questions that all three of you may respond to 
if you wish. The first one, I would suggest, is taking 
everything into consideration--cost growth, benefit packages, 
and flexibility--who is getting greater value for each dollar 
spent on his or her health care at this time--a Medicare 
beneficiary or a person covered under a typical private 
insurance plan, and why is this the case?
    Ms. Moon. I will go first and say I think it would be 
Medicare, because Medicare has remained truer to a benefit 
package with access to providers of services over time. It is 
much easier to stay with the same physician.
    Joe Antos tells us, for example, that you can change 
doctors in a PPO. But to see the doctor that I have seen for 10 
years under my PPO, I pay a 65 percent copay, not because of 
the stated copayment but because of what the PPO determines is 
usual, customary and reasonable. You cannot find out this 
amount before the fact. I know; as a good consumer, I have 
tried--from Care First, because that is proprietary.
    That is one of the reasons. I also believe that over time, 
there are probably a lot of counterbalancing influences. The 
managed care reaction and then reaction against in terms of 
many people rejecting the very tight controls that some managed 
care plans put on individuals, often in arbitrary fashion, 
meant that there was a deterioration in some of the benefits 
that people received.
    The reason that I undertook the study to show that there is 
not a lot to assume that the private insurance market will just 
instantly solve Medicare's financing problems. This was to 
counter the argument that some people have made that you can 
just put Medicare beneficiaries into private plans, and poof--
everything will be wonderful. I think both sides have a 
struggle to hold down costs, as Jeff Lemieux said.
    The Chairman. Joe.
    Mr. Antos. Mr. Chairman, believe it or not, I agree with 
Marilyn but not for the reasons she gives. Marilyn is actually, 
I think, probably typical of most people in private employer-
sponsored plans today. They do not have any choices. That is 
not the kind of reform----
    Ms. Moon. Actually, I have a choice of 14 plans; all of 
them are crappy. [Laughter.]
    Mr. Antos. OK.
    The Chairman. You are not in that high rate of general 
approval.
    Ms. Moon. Satisfaction--no, I am not.
    The Chairman. All right.
    Mr. Antos. You have a choice of 14 plans, and you do not 
like any of them. There is a considerably wide range of choice 
in the Federal Employees Health Benefits Program, and as Walt 
Francis said, ``The level of satisfaction is very high.''
    But my point is let us not talk about ourselves--let us 
talk about the average American worker. The average American 
worker does not have a choice of plans. The average American 
worker has the plan that is settled upon by the employer. 
Typically, if there appears to be a choice, it is three flavors 
of the same kind of plan. That is not a good situation. 
Medicare beneficiaries would do better under a Federal 
Employees Health Benefits type of system where there is a much 
wider range of choices and where there is, frankly, the kind of 
Federal oversight that is going to be necessary for this 
population. Many of these people are frail and have 
difficulties generally with their health and may need some 
greater protection. That is why we have the Medicare Program in 
the first place. That is how it could work under a FEHB style 
of reform.
    On balance, however, people walk with their feet, and they 
talk with their money. Over 90 percent of Medicare 
beneficiaries get some kind of supplemental coverage. More than 
25 percent of them have to buy some form of coverage, and 10 
million of them spend an average of $1,700 a year to make up 
for the inadequacies as they see it in the Medicare Program.
    The Chairman. Jeff.
    Mr. Lemieux. Well, Mr. Chairman, I think Marilyn is going 
to say that Medicare is a better value, and Joe is going to say 
that choices are good and that private options are a better 
value, and I am going to say that there is no way that any 
committee of Congress could determine which sector has the 
better benefits and values intrinsically and that therefore, 
choice is probably the best approach; allow people to choose.
    What we need to do in Congress is set up the oversight 
structures, set up the consumer information to make sure that 
the consumer protections are there so that whatever choices 
people make will be decent ones, sort of like what Federal 
employees make.
    The Chairman. In other words, you are suggesting that all 
will be served better in the health care environment if there 
is a clear competitive market between Burger King and 
McDonald's?
    Mr. Lemieux. In general, yes, that sort of competition and 
choice tends to lead to innovation and progress that is 
probably a less error-prone and awkward way of making progress 
than we have made it in Medicare over the last years with 
responses to private innovations and back and forth in a 
political way.
    The Chairman. Thank you.
    Senator Carper.
    Senator Carper. Thanks, Mr. Chairman. I enjoyed being a 
back-bencher earlier for a brief while.
    The Chairman. Well, we appreciate you attending this 
morning.
    Senator Carper. My pleasure. Thanks for holding the 
hearing. By the way, was a very good panel. I missed most of 
the first panel, but I know some of these people pretty well 
and am very grateful to you and our staff for bringing them all 
together. They have given us a nice menu of ideas.
    I am going to start with Jeff Lemieux and ask him if he 
will to just talk a little bit about what the Progressive 
Policy Institute believes we should do with respect to Medicare 
reform.
    Mr. Lemieux. We have a three-point plan, perhaps not too 
cleverly labeled the ``ABC Plan.'' The ``A'' part of the plan 
is an attempt to create in the fee-for-service program the sort 
of accountability--``A'' stands for accountability--system that 
would allow the fee-for-service plan to modify its benefits and 
its payment systems in a way so that it could compete and 
evolve and innovate within the fee-for-service plan.
    Senator Carper. If you could hold for just a second, for 
our other witnesses, Dr. Moon and Dr. Antos, I am going to ask 
you to critique this for us, so if you do not mind, I just want 
to give you a heads-up.
    Thanks. Go ahead, Jeff.
    Mr. Lemieux. So point No. 1, accountability, is making 
within the fee-for-service program and within Medicare as a 
whole a way to allow the Medicare administrators to evolve more 
quickly without congressional directive and to improve things.
    ``B'' is a benefit package. We are advocating that the most 
practical form of a Medicare prescription drug benefit would be 
a zero premium catastrophic benefit available to all Medicare 
beneficiaries under Part B, that this would be universal--
everyone would get some sort of Medicare catastrophic benefit 
card, either through a supplemental insurer or as a discount 
card--and there would also be an extra program for low-income 
beneficiaries who have incomes too high to qualify them for 
Medicaid but too low to really benefit much from a catastrophic 
benefit.
    The third element is choices. We think that the sorts of 
choices that have been put forward in terms of additional PPO 
options and expanding that demonstration nationwide and to fix 
up the HMO program so that Senator Stabenow's mother has a 
choice back there in Michigan or wherever she lives, that these 
are good things and that they should ultimately lead in the 
direction of an FEHB-style competitive system over time.
    So it is accountability, benefits, and choices.
    Senator Carper. Thanks.
    Mr. Antos.
    Mr. Antos. I think those are great principles. The details 
matter. The details matter a great deal. I have got to say that 
I am not as familiar with the ABC Plan as Jeff is, so correct 
me, Jeff, if I get something wrong here. But I guess the thing 
that I would focus on, the thing that I at least know a little 
bit about, is the idea of having a universal zero premium drug 
benefit type of plan. I think there are some aspects of that 
that are very good, but ultimately, there are concerns that I 
would have especially about the way that that might run.
    As I say, this is my interpretation, and I am not sure I am 
getting it right, but the concern that I would have is that, as 
I understand the proposal, there would be the appearance of 
competition. I think this has been characterized as that 
virtually any kind of organization could offer this drug 
benefit to Medicare beneficiaries, including current Medicare 
carriers, Medicare HMOs in the M Plus C program, or employer 
groups, or you name it--presumably association health plans, 
something like that.
    That sounds good, but this is a program, as I understand 
it, where the government would take all of the financial risk, 
and I think that ultimately, this is of great concern. One of 
the principles of market competition is that the plans have to 
have skin in the game; otherwise, they cannot get very 
interested about trying to control costs if all of their costs 
are covered ultimately by the Federal Government, by whom I 
mean the taxpayer.
    There is a great risk if we have a drug benefit program 
where 100 percent of the risk is borne by the taxpayer. There 
is a great risk that Congress in its due diligence to assure 
that the taxpayer is not paying too much decides that we have 
to have some kind of a national drug pricing scheme to make 
sure that everything is fair and to make sure that all 
beneficiaries are treated fairly and they reach their 
catastrophic cap, the uniform national cap, at the same time as 
anybody else.
    It sounds like equity, but it has the seeds, I think, of 
potential disaster. I think this is part of the plan that I 
would hope that Jeff and others would work on much more 
carefully to try to preserve the kinds of market incentives 
that now exist, especially in the drug benefits business, to 
encourage drug benefit organizations to aggressively manage the 
benefits, aggressively seek out discounts and rebates from 
pharmaceutical manufacturers and to tailor their benefit to 
best meet the needs of the beneficiaries.
    Senator Carper. Thank you, Dr. Antos.
    Mr. Lemieux, would you like to respond to any of the 
comments that Dr. Antos has made?
    Mr. Lemieux. Yes. I believe that his concerns are greatly 
overwrought. Some of them are valid, but they are generally 
greatly overwrought.
    Senator Carper. Dr. Antos, have you ever had that 
accusation leveled at you before?
    Mr. Antos. No. I am considered a very calm guy.
    Mr. Lemieux. I do not know, Senator, if you want us to 
debate each point by point, but I think that in general----
    Senator Carper. As a matter of fact, I would, but we do not 
have time for that--just a couple of points, if you would.
    Mr. Lemieux. I think in general that beneficiaries would 
still be responsible for copayment even after they have hit the 
catastrophic cap, so that should help restrain costs. All such 
plans would have to be approved by CMS to make sure that they 
are doing a fair job, a good job, by getting discounts for 
their beneficiaries and therefore also for the taxpayer. 
Employers certainly would not be anxious to suddenly go lax 
when their retirees suddenly got to a point where the 
government was reimbursing. We also favor risk corridors, other 
sorts of performance based approaches with the government, to 
make sure that all these plans would have a good incentive to 
save money.
    On the equity issue, I really think that that is a very, 
very small issue and that any sort of pluralistic health care 
program run by government is going to have some people having 
slightly better benefits than others in certain different ways, 
but I think that that sort of diversity and plurality is 
generally a good thing that will not cause mischief.
    Senator Carper. Thank you.
    Dr. Moon, your reaction to what Mr. Lemieux has just laid 
out, please.
    Ms. Moon. I would say first of all that a number of the 
principles that he is talking about are desirable ones. But I 
am not sure that I would go the direction that he would in all 
cases.
    Medicare does need considerably more flexibility in terms 
of running and managing the basic program, the traditional part 
of the program, but I would be very cautious about----
    Senator Carper. Does that mean you endorse the ``A'' in 
ABC?
    Ms. Moon. Well, I would be very cautious, though, about 
doing it differentially at the local level. We have a lot of 
concerns around the country already about differential 
treatment of Medicare beneficiaries, and that is something that 
needs to be looked at very closely. But I do think that finding 
ways to be more flexible and to have less micromanagement is 
definitely a good idea.
    On the benefits side, certainly my preference would be a 
well-run drug benefit program that is an integral part of the 
rest of the benefits. I think it is a mistake to try to pull it 
out. That is true for whether the drug benefit is in a private 
plan or in the traditional Medicare Program.
    For one thing, the risks that occur in terms of the costs 
of insurance are much better blended together, because high 
users of drugs are not necessarily high users of the rest of 
health care, and you can pool the risks better that way.
    You would also have to be very careful to have better 
protections for those with low incomes than it is my 
understanding that his plan has. You need to recognize that if 
you go as far up the income scale in order to cover people in 
need, you are going to be talking about perhaps half of the 
population being covered. It may be difficult to be that 
generous.
    Finally, in terms of the choice issue, I think that he is 
on the right track. We should encourage more private 
participation, but focus it in areas where there is supposed to 
be innovation, and that is in disease management and 
coordination of care. We have seen too little of such 
innovation in Medicare+Choice and in many of the commercial 
HMOs and PPOs. That is where I think you would need to 
challenge them to do more.
    Senator Carper. My time has expired; otherwise, I would ask 
Mr. Lemieux to respond if he wanted to.
    The Chairman. Please go ahead.
    Senator Carper. Do you have any response to what Dr. Moon 
has said?
    Mr. Lemieux. I am pleased that that sounded like a partial 
bit of endorsement that I appreciate a great deal. I think I 
agree greatly that benefits to the extent possible should be 
linked and coordinated if possible under one plan, and if not 
possible, they should be linked with information systems that 
allow people running these sorts of benefit programs to 
evaluate tradeoffs. If I have a little bit better drug benefit 
over here, will I save money in hospitalization over here?
    The only other point I wanted to mention--we have spoken a 
lot about the New York Times article this morning and how it 
says that private fees are higher--I think there more to it 
than just fees, and that is a trap we fall into when we are 
congressional estimators and policy wonks around town, that 
there is price and then there is quantity, and then there is 
quality, and these things all go together to form how much we 
actually spend on something, and just because a fee is higher 
or lower may not be indicative of the whole mix of spending 
that goes on behind that. I just wanted to point that out.
    Senator Carper. Thank you.
    Mr. Chairman, I will finish up where I started off. This is 
a good panel, and I do not think it would be possible to get 
the three of them to agree on what we ought to do, but if we 
could, I would endorse it.
    Thanks very much, and my thanks to all of you.
    The Chairman. Tom, thank you.
    I have a couple more questions of you, and all three can 
respond. Critics of any form of competitive model seem to worry 
that health plans will pick and choose the healthiest patients.
    We have also heard FEHB say this does not really happen, or 
it happens very little. What do you think of this adverse 
selection problem, and can you address it?
    Is this a red herring in the arguments, or is that a 
legitimate concern, the issue of adverse selection?
    Ms. Moon. I think you raise a very good point. I would say 
that one of the things that makes FEHBP work relatively well is 
that a large number of individuals are willing to shift plans. 
But studies of seniors have shown they are much less willing to 
do so. In fact, in the FEHBP a few years ago, when there was a 
high-option Blue Cross/Blue Shield, plan people stayed in those 
plans even though when Medicare was primary they did, they got 
not one penny more in benefits by paying the substantial 
additional premiums. People did not want to shift because they 
were comfortable, as you said, with what they have. Since 
choice to make bad decision is also a function of the market; 
then you let people be in those situations.
    Similarly, if there is risk selection, it means that the 
people who are reluctant to leave are going to stay in the 
plans that get to be higher and higher cost over time, which is 
exactly what happened. So there has been some risk selection in 
FEHBP.
    It is also the case that FEHBP has less risk selection, 
because over time, the plans tend to eliminate things that 
attract high risks. We have seen that in terms of some of the 
mental health benefits, for example, in the past. In 1990, for 
example, OPM told everyone they had to have drug benefits.
    So it is not as if not intervention is needed. I agree with 
Joe that there are some things that you can do. But one of the 
problems with competition is how much control you want to place 
on it. In a purely competitive market where you are going to 
get the best price competition, you do not want much variation 
in benefits, because you want people to choose only on the 
basis of price. If you are going to allow them to choose on the 
basis of benefits, you are going to have a lot more variation 
and a lot less lower potential for savings.
    So there are a lot of decisions that need to be made, in 
terms of thinking about this.
    The Chairman. Mr. Antos.
    Mr. Antos. This is a very complicated issue. Your point is 
absolutely correct that we have to distinguish between the 
normal functioning of people making choices, just as they do 
when they go to the supermarket or when they buy automobiles, 
from the adverse consequences of a poorly designed health 
program. We ought to keep those distinctions very separate and 
very clear.
    What we do want to do is prevent a system from causing big 
problems for our seniors, but we also do not want to prevent 
our seniors from exercising their judgment about how they want 
to handle their health care.
    The FEHB story is a complicated story, but I think there 
are several clear bottom lines to it. One is that it is a 
government program; Medicare will always be a government 
program; government oversight is very important.
    Second, FEHB provides a very generous premium subsidy just 
like Medicare.
    Third, FEHB exercises considerable oversight over the 
program, as Marilyn pointed out, but they do it at considerably 
less administrative cost than Medicare does.
    Fourth--and this is the question that you were alluding to 
about if people do not move and how does this work out--FEHB 
actually takes advantage of the competitive market incentives 
that are in place for that program that are fundamentally not 
in place in Medicare. An operating competitive market does not 
require masses of people to bolt from their health plans every 
year. In fact, that would be disruptive. If that happened, that 
would not be a well-functioning competitive market.
    In other markets, there is plenty of brand loyalty. I have 
my favorite brand of cereal--I guess it is Rice Krispies. I buy 
that every time. I am very loyal to Rice Krispies, but that 
does not mean there are not 20 other varieties of cereal out 
there.
    Why are there other varieties of cereal? Because there are 
people who are closer to the edge on how they feel about Rice 
Krispies, and maybe they want sugar in their cereal without 
having to add a spoonful.
    The Chairman. It is the noise.
    Mr. Antos. Yes, exactly right.
    That is the point. Of course, we can stay with government 
controls. We have done that for 30 some-odd years now. The 
question is does that mean that Medicare beneficiaries will 
really be able to make their preferences known in an effective 
way. I think the prescription drug debate demonstrates that 
that is not the case, and it cannot be the case.
    The Chairman. Jeff.
    Mr. Lemieux. To your point on adverse selection, I do think 
it is a serious issue. I think it goes both ways. In the past, 
we always used to say that private health plans were always 
going to seek out the cheaper people, and I think that as the 
Medicare HMO experiment has played out, they have ended up with 
some very, very sick people from low-income neighborhoods 
especially in the Medicare HMO program.
    So I think that adverse selection problems go both ways. It 
is a way to protect the fee-for-service plan from getting too 
many sick beneficiaries. It is also a way to protect private 
plans from getting too many sick beneficiaries without due 
compensation.
    I do believe that the sorts of risk adjusters that have 
been worked on for the last 20 years are gradually getting 
better, and I also believe that if we had a universal 
catastrophic drug benefit so that the risk adjusters would know 
which sorts of medications patients are on--anonymously, of 
course--but for the purposes of risk adjustment, that would be 
a very powerful, instantaneous sort of real-time tool for 
adjusting payments to health plans based on the diagnoses and 
illnesses of the beneficiaries they serve.
    The Chairman. Time is going to demand that this be my last 
question, but let me ask this of all of you.
    Assuming for a moment that Congress does decide to 
incorporate a competitive component in the Medicare reform 
legislation, are there particular features that you think we 
should include to maximize effective cost restraints while 
still fostering quality and full access?
    Ms. Moon. First of all, I believe you have to have a good 
basic benefit package that every plan must adhere to, including 
traditional Medicare. Prescription drugs' absence is one of the 
things that really caused problems to Medicare+Choice plans. 
They were being paid enough to provide Medicare-services, but 
they were not being paid enough to provide a good benefit 
package. So that is an essential piece, and it could even be a 
first piece before you move to expand private plans.
    I think there will need to be a considerable amount of 
accountability, and I think people who think that you can 
operate with the 140 people that OPM does are fooling 
themselves, because for one thing, these choices are going to 
be individually offered to people all over the country without 
the mechanism that the Federal employees now have to work with 
their own benefits offices to sort through their choices. So 
there will need to be a lot more oversight and considerably 
more effort and information efforts to help people make wise 
choices.
    Finally, I think there needs to be a lot better appeals 
process and information for people than we have under the 
current M Plus C program. For example, today a problem can be 
resolved for a beneficiary who is being denied care 
inappropriately by an M Plus C plan, but there is no follow-up 
to make sure that every other beneficiary gets that same 
treatment by the same managed care plan. People who do this 
kind of counseling will tell you that they will get the same 
problem from the same HMO at the same location six and seven 
and ten times and not get it resolved except on a patient-by-
patient basis.
    There are a number of things that ought to be put in place 
that will not get government out of the business, and in fact 
those in Congress who think that folks will stop beating down 
your door if you turn Medicare over to the private sector would 
have a rude awakening in the not-too-distant future.
    The Chairman. Thank you.
    Joe.
    Mr. Antos. I think the issue is not just cost, but also one 
of value, and I do not think we want to lose that important 
theme. So that, yes, it is important to include many of the 
features that I think Marilyn is talking about--to try to 
maximize the ability of the entire system to slow down the 
growth in cost; however, that is where the private competitive 
market really comes into play.
    I think the real emphasis that I would place is to look 
carefully at what needs to be done to have prudent and 
appropriate competition. That does not mean that the government 
can let its guard down. After all, the health market is far 
from a purely competitive market, so there are some real issues 
there related, for example, to antitrust. There are all sorts 
of very complicated policies that are probably not normally 
considered when people think about Medicare reform that have to 
be dealt with.
    Nonetheless there are some important things. I think the 
most important thing is to assure that beyond those basic 
safeguard, we modernize the program. Medicare beneficiaries in 
the fee-for-service program should be exposed to reasonable 
incentives even in their program to use services wisely. That 
does not mean an $840 first day payment for a hospital visit. 
People do not go to the hospital because it is a voluntary act. 
It probably does mean a larger combined deductible, larger than 
the $100 Part deductible. It almost certainly means more 
reasonable cost-sharing arrangements across all of the 
services.
    Those sorts of things can enlist the individual beneficiary 
in both seeking better care for themselves and being on the 
side of the taxpayers--they are taxpayers, too--being on the 
side of the taxpayers to use those resources prudently.
    The Chairman. Joe, thank you very much.
    Jeff.
    Mr. Lemieux. Mr. Chairman, I think if you do decide to go 
with stepping stones toward an FEHB system in a Medicare reform 
package this year, you will have to do some communication with 
people, because the way the current baselines are set up by the 
Congressional Budget Office and the Joint Committee on Taxation 
is that we fundamentally understate the amount of spending that 
we are likely to do in our current baseline, including on 
Medicare, because we presume that rules that require us to cut 
physician payments for years on end and so on actually go into 
place.
    Then, we overstate the revenue we are likely to receive 
because we assume that various sunset provisions actually 
occur, when we all know that drafters of tax law do not intend 
for sunset provisions to occur.
    So from a baseline perspective, it looks like anything you 
do to fix Medicare is going to cost a lot of money; the 
baseline is already too low. However, we will have to explain 
to people that we are going to spend some money according to 
these budget accounts in the short run in an attempt to create 
a situation that, 10 or 20 years down the road, will give us a 
slightly lower rate of growth to the program and help provide 
better value.
    So I think that when you come back with cost estimates 
saying that we are improving our private plan options in 
Medicare, and it is costing us a fair amount of money in the 
short run, that that has to be balanced with a 10- or 20-year 
analysis of how that could gradually save money in the longer 
period.
    That is my only comment about putting an FEHB plan in this 
year and what it might mean.
    The Chairman. To all three of you, thank you very much for 
your time this morning, your testimony, your commitment to the 
issue, and serving as a resource for this committee and for 
Congress as we work our way through this issue.
    Thank you very much, and the committee will stand 
adjourned.
    [Whereupon, at 11:56 a.m., the committee was adjourned.]

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