[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
               MEDICARE ADVANTAGE AND THE FEDERAL BUDGET 

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, JUNE 28, 2007

                               __________

                           Serial No. 110-14

                               __________

           Printed for the use of the Committee on the Budget


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                        COMMITTEE ON THE BUDGET

             JOHN M. SPRATT, Jr., South Carolina, Chairman
ROSA L. DeLAURO, Connecticut,        PAUL RYAN, Wisconsin,
CHET EDWARDS, Texas                    Ranking Minority Member
JIM COOPER, Tennessee                J. GRESHAM BARRETT, South Carolina
THOMAS H. ALLEN, Maine               JO BONNER, Alabama
ALLYSON Y. SCHWARTZ, Pennsylvania    SCOTT GARRETT, New Jersey
MARCY KAPTUR, Ohio                   MARIO DIAZ-BALART, Florida
XAVIER BECERRA, California           JEB HENSARLING, Texas
LLOYD DOGGETT, Texas                 DANIEL E. LUNGREN, California
EARL BLUMENAUER, Oregon              MICHAEL K. SIMPSON, Idaho
MARION BERRY, Arkansas               PATRICK T. McHENRY, North Carolina
ALLEN BOYD, Florida                  CONNIE MACK, Florida
JAMES P. McGOVERN, Massachusetts     K. MICHAEL CONAWAY, Texas
BETTY SUTTON, Ohio                   JOHN CAMPBELL, California
ROBERT E. ANDREWS, New Jersey        PATRICK J. TIBERI, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia  JON C. PORTER, Nevada
BOB ETHERIDGE, North Carolina        RODNEY ALEXANDER, Louisiana
DARLENE HOOLEY, Oregon               ADRIAN SMITH, Nebraska
BRIAN BAIRD, Washington              [Vacancy]
DENNIS MOORE, Kansas
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin

                           Professional Staff

            Thomas S. Kahn, Staff Director and Chief Counsel
                James T. Bates, Minority Chief of Staff
































                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, June 28, 2007....................     1

Statement of:
    Hon. John M. Spratt, Jr., Chairman, House Committee on the 
      Budget.....................................................     1
    Hon. Paul Ryan, ranking minority member, House Committee on 
      the Budget.................................................     2
    Peter R. Orszag, Director, Congressional Budget Office (CBO).     4
        Prepared statement of....................................     7
    Mark E. Miller, Executive Director, Medicare Payment Advisory 
      Commission.................................................    30
        Prepared statement of....................................    32
    Mark McClellan, M.D., Ph.D., AIE Brookings...................    75
        Prepared statement of....................................    77
    Hon. Barbara B. Kennelly, president and CEO, National 
      Committee to Preserve Social Security and Medicare, former 
      Member of Congress.........................................    84
        Prepared statement of....................................    86
    Patricia Neuman, director of Medicare policy, the Henry J. 
      Kaiser Family Foundation...................................    90
        Prepared statement of....................................    94
    Robert Wah, M.D., American Medical Association...............   100
    Catherine Schmitt, vice president, Federal programs, Blue 
      Cross Blue Shield of Michigan..............................   101
        Prepared statement of....................................   103
    Hon. Robert C. ``Bobby'' Scott, a Representative in Congress 
      from the State of Virginia:
        Prepared statement of the American Federation of State, 
          County and Municipal Employees (AFSCME)................   115
    Ardis D. Hoven, M.D., American Medical Association, prepared 
      statement of...............................................   123
    Hon. James P. McGovern, a Representative in Congress from the 
      State of Massachusetts, prepared statement of..............   127


               MEDICARE ADVANTAGE AND THE FEDERAL BUDGET

                              ----------                              


                        THURSDAY, JUNE 28, 2007

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:10 a.m. in room 
210, Cannon House Office Building, Hon. John Spratt [chairman 
of the committee] presiding.
    Present: Representatives Spratt, DeLauro, Edwards, Cooper, 
Schwartz, Doggett, Blumenauer, Berry, McGovern, Scott, 
Etheridge, Moore of Kansas, Bishop, Moore of Wisconsin, Ryan, 
Bonner, Hensarling, Lungren, Conaway, Tiberi, Porter, 
Alexander, and Smith.
    Chairman Spratt. Good morning, and welcome to the House 
Budget Committee's hearing on Medicare Advantage. We have an 
outstanding lineup of witnesses today. I am pleased that all of 
you could join us, and I appreciate your taking the time to 
testify.
    As the Budget Committee, we have a serious obligation to 
continually review the scarce resources available to the 
Federal Government and how those resources are allocated. We 
are here today to look at one particular program, the Medicare 
Advantage program, partly based upon the recent testimony of 
the Congressional Budget Office estimating that, if these plans 
providing for Medicare services were paid for at rates 
equivalent to fee-for-service Medicare, we could save nearly 
$150 billion over 10 years.
    Now, this is a program within Medicare, which everyone 
tells us faces insolvency sometime in the foreseeable future. 
When we see something that might save as much as $150 billion, 
it is our obligation to take a close and serious look at the 
alternatives. I would emphasize we are not here to demonize 
anybody. We are not here to claim that the insurance companies, 
HMOs, PPOs or whoever participates in these programs is making 
profits that are unconscionable or are not anything other than 
taking advantage of a government program which we put in place. 
We are going back and looking at the terms of that program and 
asking ourselves does it need to be adjusted for a number of 
different reasons, not the least of which is budget resources.
    The current payment structure was put in place in the 2003 
Medicare Modernization Act. Even Tom Scully, who was the former 
administrator of the Center on Medicare and Medicaid Services 
and who played a serious and significant role in the 2003 
legislation, even he now says that there appears to be 
overfunding. In reference to the subsidies that insurance 
companies receive and who participate in Medicare Advantage, 
Tom Scully told the St. Petersburg Times at a recent conference 
that there has been a huge overfunding, and he also said, 
``Some of the excess payments exceed what was intended for 
sure, and I think Congress should take some of it away.'' That 
was Tom Scully speaking.
    Private plans operating within Medicare Advantage are paid, 
on average, 12 percent more than the cost for regular fee-for-
service Medicare. While it is true that some of that payment is 
returned to beneficiaries in the form of additional benefits, 
it is not exactly clear how much is, and there are, in any 
event, some significant additional issues at stake.
    First of all, there is the issue of equity. Should we be 
paying as much as 15-20 percent more for some beneficiaries 
than for other beneficiaries? Is that an equitable 
administration of this program which is supposed to provide, 
basically, equal benefits for every beneficiary?
    Secondly, what are the benefits of the Medicare Advantage 
plan? Are a plan's participants achieving higher and healthier 
outcomes than other participants? We do not really know because 
we do not have the feedback of information that one would want 
in order to make an honest judgment of this system.
    Third, is it time to take a look at something that was put 
in place several years ago on the grounds that it needs 
adjustment at the present time? The whole point of providing 
private plans was that competition for enrollment would lead to 
better services, more choices, lower cost. Paying for these 
plans more than for fee-for-service permanently, forever, seems 
to defy that logic.
    The Medicare Payment Advisory Commission, or MedPAC, has 
argued that beneficiaries should have a choice of a private 
managed plan or a fee-for-service plan but that these plans 
should play on a level playing field in the competition for 
Medicare enrollees.
    We have got a significant number of witnesses today. We are 
going to start with Dr. Peter Orszag, who is the director of 
the Congressional Budget Office, and with Dr. Mark E. Miller, 
who is the executive director of the Medicare Payment Advisory 
Commission.
    I would like to note at this point that your testimony will 
be made part of the record, and you can both summarize it and 
take as much time as you need to explain it. If you wish, we 
have got the facilities here that are available to display any 
slides you have brought with you.
    Before proceeding with your testimony, however, let us hear 
from the Ranking Member, Mr. Ryan.
    Mr. Ryan. Thank you, Mr. Chairman. I want to thank you for 
holding today's hearing.
    Also, I want to welcome our witnesses. And in particular, 
Dr. Orszag, I would like to welcome your two children, Leila 
and Joshua. It is nice to have them here with us today, and I 
hope they get some good coloring done during this hearing. At 
least I can see she is well on her way.
    This is an appropriate hearing. It is a timely hearing, 
too. We need to be discussing our Nation's health care 
entitlements in the Federal budget. In particular, today's 
hearing is appropriate on the Medicare Advantage program.
    Private health plans are not new to the Medicare program. 
They have been available since the early 1970s, and their goal 
then was the same as it is now, to offer beneficiaries choices 
that will improve their health and will reduce their out-of-
pocket costs while saving Medicare money.
    Over the years, we realized that some seniors had more 
choices than others. We understood that rural populations were 
not as well served as urban, and that low-income beneficiaries 
had unique problems in need of specific solutions. So we made 
adjustments. The Balanced Budget Act of 1997 expanded the range 
of private Medicare plans available, and the Medicare 
Modernization Act of 2003 created additional options, further 
strengthening the program.
    Today, 1 in 5 Medicare beneficiaries is enrolled in a 
Medicare Advantage plan, and a vast majority of them are 
receiving coverage, such as dental, vision, caps on out-of-
pocket costs, that they would not have had otherwise. In 
addition, Medicare Advantage is saving beneficiaries and 
taxpayers money. Beneficiaries enrolled in a Medicare Advantage 
plan see an average savings of more than $1,000 a year. These 
plans also return an average of $3 billion annually to the U.S. 
Treasury.
    Now, all of that said, I appreciate any ideas on health 
care entitlement reform that my friends on either side of the 
aisle would bring to the table. We should take a hard look at 
whether all private plans are fulfilling the goals of the 
Medicare Advantage program and whether we can improve some 
areas of the program to save beneficiaries and taxpayers even 
more money.
    The unfunded liability of Medicare is currently standing at 
$32 trillion over the next 75 years. That is the amount by 
which benefits promised by Medicare exceed the projected 
financial resources. This translates to more than $282,000 per 
household, and that figure is growing at an alarming rate. When 
Leila is 10 years old--because I believe--no. She is 7 now, 
right? When she is 12 years old, that figure is going to get us 
to $54 trillion. So, if we do nothing for the next 5 years, the 
unfunded liability of Medicare will go from $32 trillion to $54 
trillion. This is why some of us keep saying that the current 
path of Medicare is unsustainable.
    Yet no one is talking about cutting Medicare Advantage 
payments to make entitlements more sustainable or to reduce the 
deficit. And given that this is the Budget Committee, I think 
we ought to at least entertain the notion that if we are going 
to create savings in some program, we ought to actually save 
the money.
    To the contrary, the majority is talking about reducing 
these payments just to use that money for more entitlement 
spending in another part of the government. No matter where you 
stand on those issues, taking from one entitlement just to 
expand another one will not address any budgetary concerns.
    The recently passed budget, which is the incumbent budget 
resolution we are now operating on, does not offer any 
entitlement reforms, not for health care, not for anything 
else. So, not surprisingly, this subject became the primary 
focus of the committee's Tuesday hearing on the Federal deficit 
and the debt. Once again, we were warned, this time by some of 
our Nation's leading financial experts, that the chief threat 
to our Nation's long-term fiscal and economic health is the 
unsustainable growth of our health care entitlements, with 
Medicare and Medicaid leading the way. In urging Congress to 
act, our witnesses argued that the benefits of doing what was 
needed would far outweigh the perceived short-term gains from 
putting it off, and I agree with that.
    Again, I want to thank the Chairman for calling today's 
hearing. We have excellent witnesses, and I look forward to 
their testimony.
    I yield.
    Chairman Spratt. I thank the gentleman.
    Let me say again that this is about entitlement reform. 
This is about savings which should equal as much as $150 
billion were we to reduce Medicare Advantage payment rates to 
the rates that are paid for traditional fee-for-service 
Medicare, according to CBO. What we do with those funds would 
then be up to Congress' determination. They could be used for 
SCHIP expansion, for example, or they could be applied to the 
reduction of the budget deficit, or both.
    In any event, this is about entitlement reform. It is 
certainly about the entitlement overview of a program that is 
costing a substantial sum of money.

 STATEMENTS OF PETER R. ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET 
   OFFICE; AND MARK E. MILLER, EXECUTIVE DIRECTOR, MEDICARE 
                  PAYMENT ADVISORY COMMISSION

    Chairman Spratt. Dr. Orszag, we are glad to have you. We 
appreciate your testimony. As I said earlier, your full 
statement will be made part of the record, and you are free to 
summarize in any way you see fit. Thank you very much for 
coming.

                  STATEMENT OF PETER R. ORSZAG

    Dr. Orszag. Thank you for having me back this morning.
    As you know, the central long-term fiscal challenge facing 
the Nation involves health care, and the focus of this 
morning's hearing is Medicare Advantage. In addition to my 
written testimony on the topic, CBO is releasing an issue brief 
this morning on Medicare Advantage plans. My testimony makes 
four points.
    First, Medicare Advantage has been growing rapidly. 
Payments to Medicare Advantage plans increased from $36 billion 
in 2004 to an estimated $77 billion this year. Reflecting that 
cost growth, enrollment has been rising rapidly.
    As the first table shows, enrollment growth during 2006 
amounted to almost 1.5 million beneficiaries. In 2007 alone, 
there has also been almost another 1 million beneficiaries 
added. Disproportionately, the growth has been occurring in a 
subcomponent of Medicare Advantage plans called ``private fee-
for-service plans,'' which do not have as much case management 
and utilization management as the other types of Medicare 
Advantage plans--HMOs and PPOs in particular. It is striking 
that enrollment in private fee-for-service plans increased by 
over 700,000 beneficiaries during this year so far alone.
    The next figure shows that CBO projects continued rapid 
growth in Medicare Advantage, mostly due to private fee-for-
service plans. In particular, CBO projects that private fee-
for-service plans will reach 5 million members by 2017. As a 
result of that growth, Medicare Advantage enrollees are 
projected to rise from about 18 percent of all Medicare 
enrollment today to more than a quarter by 2017. The result of 
such continued rapid growth--and I would note that it is 
possible that it will, under current law, be even more rapid 
than we currently project--would likely be a significant change 
in the fundamental nature of the Medicare program.
    The second point of my testimony is that Medicare's 
payments for beneficiaries enrolled in Medicare Advantage plans 
are higher on average than what the program would spend if 
those beneficiaries were in the traditional fee-for-service 
program. In particular, the CBO estimates net payments to plans 
will be approximately 12 percent higher this year than per 
capita fee-for-service costs. The differential is more 
pronounced for private fee-for-service plans. I understand that 
some industry claims have suggested that these figures are 
significantly biased. Such claims are simply inaccurate. As a 
result of this cost differential, shifts in enrollment out of 
the fee-for-service program and into private plans increase net 
Medicare spending. The cost differential raises overall 
Medicare costs and, as a result, slightly increases Part B 
premiums and accelerates the date of exhaustion of the Part A 
trust fund.
    The third point of my testimony is that these additional 
costs to the government for Medicare Advantage plans subsidize 
additional benefits and reduce premiums for the beneficiaries 
who enroll in the Medicare Advantage plans. In particular, the 
payments that plans receive in excess of their bids for 
providing the service are required to be returned to 
beneficiaries as additional benefits or as a rebate of their 
Part B or Part D premiums. Those extra benefits and reduced 
premiums are a significant motivation for enrollees to join the 
plans.
    It is also noteworthy that, at least outside of private 
fee-for-service plans, many Medicare Advantage plans undertake 
various efforts at disease management, care coordination and 
preventative care. Thus, one possible benefit of the Medicare 
Advantage program is the higher quality of care beneficiaries 
may receive through these programs than they would receive in 
the Medicare fee-for-service program. The extent to which such 
services lead to improved health outcomes, however, is 
difficult to assess with the currently available data.
    Policymakers may, therefore, want to explore options for 
the expanded reporting of outcomes and other measures within 
the Medicare Advantage program. In particular, I would note 
private fee-for-service plans are exempt from many of the 
reporting requirements that apply to other types of Medicare 
Advantage plans.
    My final point is that a number of policy options exist 
that would reduce spending on Medicare Advantage. For example, 
one policy would reduce the county level benchmarks under 
Medicare Advantage to the level of local per capita fee-for-
service spending.
    Relative to spending under current law, as the next table 
shows, that policy would reduce spending by $54 billion over 
the next 5 years and $150 billion over the next 10 years. Such 
policy changes would also reduce Part B premiums and improve 
the actuarial soundness of the Part A trust fund.
    Reducing benchmarks, however, would leave less money for 
health plans to offer reduced premiums or supplemental 
benefits. That change, in turn, would make the program less 
attractive to beneficiaries and lead some to return to the 
traditional fee-for-service program.
    Indeed, by CBO's estimates, enacting that policy which I 
just mentioned would reduce enrollment in Medicare Advantage by 
about 6 million beneficiaries in 2012 relative to projected 
levels. That is a decline of about 50 percent, leaving total 
enrollment at a little over 6 million in that year, which is 
roughly 1.7 million enrollees fewer than today.
    Potential policy changes could also be limited to private 
fee-for-service plans. For example, limiting benchmarks to 100 
percent of fee-for-service costs for private fee-for-service 
plans alone and maintaining current law benchmarks for other 
plans would reduce spending by about $14 billion over the next 
5 years. Similarly, requiring private fee-for-service plans to 
negotiate their own terms with participating doctors rather 
than automatically gaining access to Medicare's payment rates 
to doctors would save roughly $13 billion over the next 5 
years.
    Each policy would also have some impact on enrollment, we 
estimate, roughly a reduction of 3 million beneficiaries in 
2012 from either of those private fee-for-service plan options 
which I just mentioned.
    In conclusion, the Medicare Advantage program has been 
growing rapidly and is projected to continue to do so. Such 
growth under current policy increases net costs to Medicare. 
Policymakers evaluating options for reducing payments to 
Medicare Advantage plans need to weigh the cost savings against 
benefits that the plans provide in managing care, the effect on 
overall health care costs and the impact on beneficiaries.
    Finally, regardless of what happens to payments, expanded 
reporting on health outcomes may help policymakers better 
evaluate the overall effects and specific care management 
approaches of Medicare Advantage plans.
    Thank you very much.
    Chairman Spratt. Thank you, Dr. Orszag.
    [The prepared statement of Peter R. Orszag follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman Spratt. Dr. Miller, the executive director of 
MedPAC, thank you for coming. And we would now like to hear 
your testimony. We will make the full statement part of the 
record. You can summarize it as you see fit.

   STATEMENT OF MARK E. MILLER, EXECUTIVE DIRECTOR, MEDICARE 
                  PAYMENT ADVISORY COMMISSION

    Mr. Miller. Chairman Spratt, Ranking Member Ryan and 
distinguished members of the committee, I appreciate your 
asking for MedPAC's views on Medicare's managed care payments. 
MedPAC is an independent congressional support agency created 
by the Congress to provide analysis and recommendations 
regarding Medicare policy. Much of our work focuses on payment 
issues, and I would stress that we make many payment 
recommendations on the fee-for-service side that involve 
reducing payments, much as the recommendations we are going to 
discuss today for managed care.
    In our recommendations, the Commission tries to assure that 
beneficiaries have access to quality care, to assure that tax 
dollars are well spent and to assure that payments to providers 
are fair and adequate. Furthermore, the Commission believes 
that all providers in Medicare, whether fee-for-service or 
managed care, should be under some degree of fiscal pressure, 
to motivate the continuous search for efficiency and quality 
improvement. The Commission is also acutely aware of the long-
run sustainability problems facing Medicare. These problems are 
reviewed in my testimony, and I am sure Peter has gone through 
them with this committee many times.
    The Commission has long supported managed care plans as a 
choice in Medicare. Managed care plans have the potential to be 
efficient, and they have greater flexibility in innovating care 
delivery. Indeed, the original concept of the managed care 
plans was that they would be more efficient than fee-for-
service and, through these efficiencies, offer extra benefits 
such as lower cost sharing, and that in turn would attract 
beneficiaries.
    Regarding payment, for many years the Commission has 
recommended that Medicare payments should be neutral to the 
beneficiary's choice. We should not have payments that favor 
either fee-for-service or managed care plans, and of course, as 
has been mentioned, they should encourage efficiency. The 
current Medicare managed care payment system is flawed. It is 
not neutral, and it does not encourage efficiency. It draws 
beneficiaries to enroll in managed care, and as Peter 
indicated, every beneficiary enrolled is an increased cost to 
the Medicare program. This is largely because the plans bid 
against legislatively set benchmarks that are, on average, 16 
percent above traditional fee-for-service payments. These 
benchmarks vary across the country. They can be as high as 30 
and 40 percent above fee-for-service in the Continental U.S.
    The current bidding system, which I can explain in 
questions, results in payments that, on average, are 12 percent 
above traditional fee-for-service. Plans are required to use 
part of their total payment to give extra benefits to 
beneficiaries. And of course, this is attractive to 
beneficiaries, and there has been a large increase in plan 
offerings and enrollment. There are now an average of 20 plan 
options offered per county, and enrollment is at 18 percent, 
the highest it has ever been in Medicare.
    Note that these extra benefits are paid for by taxpayers 
through the Part A trust fund and general revenues. Further 
note that it increases the Part B premium that is paid by all 
beneficiaries whether they are in managed care plans or not. It 
is also alarming to note that the most rapid growth is in the 
private fee-for-service plans. These plans operate largely like 
traditional fee-for-service. They do not put together networks 
of providers to manage care. They do not negotiate fees. In 
fact, they use the same fees as traditional fee-for-service, 
and they are highly inefficient based on the analysis that we 
have done. On average, Medicare pays them 9 percent more than 
fee-for-service to deliver the traditional fee-for-service 
benefit, and then because of our current payment system, these 
plans, on average, are paid 19 percent more than fee-for-
service after all is said and done.
    Furthermore, these plans have very few requirements. Peter 
referred to the fact that they have very minimal quality data 
reporting requirements, and there is less oversight exercised 
by the agency on these plans. The current Medicare managed care 
payment mechanism sends signals inviting and rewarding 
inefficient plans, and the private fee-for-service plans may be 
the most striking example of what is wrong with the system.
    As you know, the Commission has recommended reducing the 
benchmarks to pay managed care plans to 100 percent of fee-for-
service. We acknowledge and realize that this creates concern 
that in some markets there will be fewer plan offerings and 
benefit packages will be less generous. Our most recent report 
explains some methods of transitioning to these lowered 
benchmarks. And we also note that there are plans that are 
efficient and that can provide additional benefits through 
those efficiencies, but we do recognize that there will be less 
plans and less generous offerings, as Peter indicated.
    In closing, I would make these points. The Commission 
supports the role of managed care plans in Medicare. There is 
evidence that plans, particularly certain types of plans, can 
be efficient, but the current system is costly and rewards 
inefficient plans. Reducing the benchmarks will have the effect 
of focusing our resources on plans that can provide extra 
benefits through savings and return to the original intent of 
the program. There will be resistance from plans enjoying the 
extra payments and from beneficiaries enjoying the extra 
benefits, but the problems will be more costly and more 
difficult to address given the current enrollment trends.
    I look forward to your questions.
    [The prepared statement of Mark E. Miller follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    
    Chairman Spratt. Let us explore for the record, first, 
exactly how the benchmarks are determined and why it is they 
differ from place to place and throughout the country, which is 
a great part of the source of inequity, or unevenness, in the 
payment scheme here.
    Dr. Orszag.
    Dr. Orszag. Sure. The existing benchmarks come from or are 
sort of the legacy of congressional changes that were made at 
various different points in 1997 and in 2000 and as part of the 
Medicare Modernization Act.
    One of the things that happened was that Congress decided 
that there should be floors put in in particular counties, 
particularly and often disproportionately in rural areas, so 
that plans would have more ability to operate in those areas.
    So the result today is that you have the legacy of that 
history embedded in benchmarks which are then updated from year 
to year, basically, by the national average growth rate in 
Medicare costs.
    If Mark wants to add anything----
    Chairman Spratt. Is it correct to say that the benchmarks 
are set above FFS, fee-for-service?
    Dr. Orszag. Yes.
    Chairman Spratt. In all cases?
    Dr. Orszag. Yes.
    Chairman Spratt. So, to the extent that FFS already from 
county to county is uneven, the unevenness is exaggerated by 
adding benchmarks that differ from place to place on top of 
these uneven payments?
    Dr. Orszag. Not quite, because relative to local fee-for-
service costs, the benchmarks tend to be higher in the low fee-
for-service cost areas than in the high fee-for-service cost 
areas.
    Chairman Spratt. Dr. Miller, would you like to comment on 
that?
    Mr. Miller. There is nothing really to add, and this was 
addressed, I think, some by Mr. Ryan's comments.
    I mean, the benchmarks were created because the business 
case for managed care to go to rural areas was difficult to 
make when you have sparse beneficiaries. Your marketing costs 
are higher, and it is harder to create networks. And I think 
the original intent was, ``Well, if we put these higher 
payments in these areas, will we draw plans?'' then you have 
got something of a ripple effect as other areas wanted to get 
the higher benchmarks and try and draw plans to those areas, 
and then you basically would have a legislative history, as 
Peter laid out.
    Chairman Spratt. But the original idea was that more 
competition for enrollment would lead to better services, 
better choices, better outcomes, one would hope, and lower 
costs.
    Mr. Miller. Yes, and I tried to address this a little bit 
in my 5 minutes.
    I think the original intent of the managed care plan--and 
you know, I will actually take this opportunity to make this 
point. We are saying that the benchmarks should be tied to fee-
for-service, and I want to be clear. We do not think that fee-
for-service is a highly effective, well-functioning system. 
Much of the work that we engage in at MedPAC is directed 
towards trying to make that system more efficient and more 
effective.
    Chairman Spratt. And this was one way that we sought to 
make it more efficient and more effective.
    Mr. Miller. Exactly. So I think the original intent of 
managed care was that I could come in as a managed care plan 
and do better than this uncoordinated, duplicative system that 
does not focus on the patient. By managing care, putting 
together a network of providers who are oriented towards 
quality and lower resources, I will produce savings. Those 
savings, in turn, can be used to provide additional benefits. 
That was the original intent.
    Chairman Spratt. To the extent that the objective was to 
produce savings or to create efficiency and lower costs, does 
it make sense to have this incremental payment for the Medicare 
Advantage plans permanently paying more than fee-for-service 
Medicare? If so, does the program, the system, ever realize the 
savings?
    Mr. Miller. There are two comments from me on that.
    The Commission's position is that the benchmarks need to 
come down to fee-for-service, and so our point is, no, they 
should not be above it.
    Secondly, the Commission--and again, I tried to reference 
this--feels that all providers, not just managed care plans but 
that those on the fee-for-service side as well, should be under 
some degree of fiscal pressure so that they are always 
searching for efficiencies, improved quality. To the extent 
that any payment system--fee-for-service or managed care--does 
not put that kind of pressure on a provider, the Commission 
thinks it is not achieving the objectives in Medicare that it 
should be.
    Dr. Orszag. Mr. Spratt, if I could just add: From the 
perspective of the Federal budget, given the current law system 
of financing Medicare Advantage plans and in order for the 
current system to actually save money for Medicare, the 
efficiency improvements that Medicare Advantage plans would 
have to achieve relative to local fee-for-service are so large 
that they are implausible.
    So, in particular, Medicare Advantage plans would have to 
come in with bids that were on the order of magnitude of one 
half of local fee-for-service costs in order for the net costs 
to the Federal Government to be reduced as a result of Medicare 
Advantage plans. There are other dimensions along which you can 
evaluate Medicare Advantage in terms of quality of care, in 
terms of overall efficiency of the health care system, but for 
the Federal budget by itself, the result is that we are 
providing a benefit that raises net costs to a particular set 
of beneficiaries.
    Chairman Spratt. Dr. Miller, let me ask you.
    Both of you mentioned the criticisms of your argument, that 
there is a differential here that is more than what was really 
intended. AHIP and the other insurance companies that are 
providers say that you have overestimated the differences 
between Medicare Advantage payments and fee-for-service 
medicine.
    Would you take those points one by one and defend, both of 
you, the analyses you have made?
    Dr. Orszag. Who would like to go first? All right. I will 
do it briefly. I think for us it is pretty straightforward.
    There are a variety of assertions that are made. You can 
see them there. The first is that the bottom part, actually, 
that Congress raised rural and urban floor rates above fee-for-
service, is what we were just discussing, and it does not 
reflect the accuracy of our analysis. It reflects an underlying 
reality that one of the things going on here is that you had 
various kinds of statutory interventions.
    Chairman Spratt. In other words, it is not, in fact, an 
additional cost, but it was one that was warranted from outside 
the program?
    Dr. Orszag. That does not affect the analytical integrity 
of the comparison that is being made. There are other 
assertions that are made, for example, that CBO's numbers do 
not take into account the changes that were made with regard to 
the risk adjustment system or with regard to the physician 
payment fix.
    With regard to the risk adjustment system, that is not 
correct. CBO's estimates reflect our March 2007 baseline, which 
incorporates the changes from the Deficit Reduction Act and the 
Tax Relief and Health Care Act.
    With regard to the doctors' fix that was enacted, the SGR 
override, that override does not affect our numbers for 2008 
forward, which is again the key thing for determining the 
budget numbers that I gave you.
    So, as we go down the list one by one of the assertions 
that are made, they are either just wrong or disingenuous.
    Chairman Spratt. Dr. Miller.
    Mr. Miller. I agree with that characterization. There are 
just a couple of things that I want to add.
    I mean this was used extensively in hearings and by the 
press to discredit our numbers, and I want to be really clear 
for the record that we stand by our numbers. We believe that 
the ``112 percent'' is correct, and I just want to add a couple 
of things to what Peter said.
    The basic argument on the budget neutrality adjustment, the 
assertion of the industry, is ``do not do anything because, 
over time, my payments will come down.''
    Chairman Spratt. Let me stop you here because this assumes 
a knowledge that a lot of us do not have.
    Mr. Miller. Oh.
    Chairman Spratt. You might start with the Deficit Reduction 
Act, risk adjustment of payments and things of that nature.
    Mr. Miller. I am happy to hit it. I just did not want to 
take up a lot of your time, and I will keep this as brief as I 
can. So where this came from worked like this:
    Whenever you have enrollment in a managed care plan, you 
can get different types of patients or beneficiaries, say a 
very healthy 65-year-old or somebody with multiple conditions 
and complications. And so what the payment system is designed 
to do is to adjust for the relative risk of a patient who gets 
enrolled.
    There was an implementation of a new risk adjustment 
system, and it would have had the effect of lowering overall 
payments for the industry as a whole because, on average, 
enrollment was tilted towards healthier beneficiaries. There 
was a decision made not to allow the payments to come down.
    You know, we analyze things like this, and we went through 
it and said, no, if the risk adjustment says that the 
beneficiaries are less sick or more healthy, the payments 
should come down. We made that recommendation. Congress took it 
up as part of the DRA. So, all things being equal, this might 
lower the payments. So the industry's point is it is going to 
go down, do not take the benchmarks down. But there are also 
trends that are counteracting this.
    Enrollment is moving into high-payment areas, which has the 
effect of increasing payments over time. So our point is that 
this is not necessarily going to play out the way people 
thought it would, and I would offer one piece of evidence. We 
did the analysis on 2006 data, and we got 12 percent above fee-
for-service. The CBO folks did the analysis on 2007 data, so 
you would expect it to come down. It did not come down. They 
also arrived at 12 percent, and I think I am characterizing 
that fairly.
    Dr. Orszag. Yes.
    Mr. Miller. I also want to say--is that what you needed 
before I go on?
    Chairman Spratt. Absolutely. Go ahead.
    Mr. Miller. Okay. All right.
    Chairman Spratt. By ``12 percent,'' we are talking about 12 
percent above fee-for-service?
    Mr. Miller. Above fee-for-service, absolutely, this 1 
percent underestimate from the change in the doc payment, that 
was taken into account in our number.
    I would also point to the floor. He is absolutely correct 
that that is a question: Does Congress want to put those floors 
in place? But we also think that that number on the table is 
wrong, that those floors account for much more of the 
overpayment than is represented on that chart.
    Chairman Spratt. Thank you very much.
    One final question, Dr. Orszag. If we could, put back up in 
closing--not ``closing'' because others have questions, but 
just to wrap up with me--the chart estimating the cost 
differential over a period of 10 years equaling, eventually, 
$149 billion cumulative. Do we have that chart?
    Dr. Orszag. Yes, chart 3. Yes, that one.
    Chairman Spratt. Would you walk us through that again?
    Dr. Orszag. Sure.
    What this shows you is you currently have this wide variety 
of benchmarks relative to fee-for-service costs. If you limited 
the benchmarks to different ratios relative to local fee-for-
service, what would the reduction be compared to current law?
    So, if you said in every area the benchmark is no more than 
100 percent of local fee-for-service, the reduction in the 
budget savings basically over the next 5 years would be $54 
billion, and over the next 10 years it would be $150 billion.
    What is noteworthy about this table is--and it is in 
addition to those sets of numbers--if you look down, other 
highlighted figures show you that even at ratios of 130, 140, 
and 150 percent limits, if you put in a 150 percent limit, you 
are still saving money, which tells you that there are some 
areas of the country in which the benchmarks are more than 50 
percent above local fee-for-service costs, which was the 
purpose of highlighting that bottom row.
    Chairman Spratt. Now, does this assume the expansion of 
enrollment in Medicare Advantage programs that you outlined 
earlier going to 26 percent?
    Dr. Orszag. These figures assume our baseline. And just to 
underscore what Dr. Miller said, one of the reasons that even 
with the phase-out of the ``hold harmless'' provisions on the 
risk adjustment that you still get numbers like this is that 
enrollment is growing very rapidly, and my other chart showed 
you disproportionately in private fee-for-service areas which 
tend to have higher ratios of benchmarks to fee-for-service 
costs than other types of Medicare Advantage plans.
    Chairman Spratt. Okay. Thank you both very much.
    I have one question for the record, Dr. Miller, that the 
Energy and Commerce Committee has asked to submit:
    Has MedPAC looked into the physician access problems in the 
Northwest? If so, have you found that these problems are 
specifically related to Medicare patients or do they impact 
both Medicare and privately insured patients?
    Mr. Miller. MedPAC does a couple of things--and I am going 
to answer your question--but we do an annual survey of 
beneficiary access across the country, and just recently we did 
a survey of physicians to look at access for Medicare 
beneficiaries. And we generally find across the country that 
access has remained stable and comparable to the privately 
insured. And I can go through more details if anyone cares.
    We do not have a strong ability to go in market by market, 
and we know that there are markets where there are concerns 
about access to physicians. However, other analysts--and I have 
in mind right at the moment Health Systems Change, the group 
that is run by Paul Ginsburg--have looked at some of this; and 
some of their conclusions were that markets like the ones you 
are talking about are really the effect of broader demographic 
changes. These markets are often experiencing very rapid 
increases in population. Sometimes it is retirees moving to the 
areas. And so the general access to physicians is compromised, 
not as a specific result of Medicare policy, but I want to 
underscore this is based on analysis that other organizations 
have done. We have not directly looked at that area of the 
country.
    Chairman Spratt. Thank you very much. Others now may have 
questions.
    First, Mr. Ryan.
    Mr. Ryan. Thank you, Chairman.
    I remember this vividly. I serve on Ways and Means as well, 
and we went through all of this, back and forth, as to how to 
make these payments rates. If you remember from, you know, a 
1997 law, we had this Medicare Plus Choice program, and all of 
us probably had a county where plans came in, where people were 
pretty happy, payments changed; you had, you know, one county 
with this number and another county with that number, one State 
with this, one State with that. And then plans left, and our 
constituents were very upset.
    So we had this huge rocky road of private plans coming in 
and out because you had this uncertain payment system. So that 
was then.
    What we have now is--the idea was a more certain payment 
system. Then the rural Members of Congress--and this was a 
bipartisan thing. The Rural Health Care Coalition, I think it 
is called, really wanted to get these plans into the rural 
areas. And because I do not have my glasses, I could not see 
your second to the last chart, and we do not have a hard copy 
of it.
    So, really, Dr. Miller and Peter, because your numbers are 
very similar, I am trying to get a handle on how much of the 12 
percent overpayment, or whatever we want to call this--12 
percent additional--is attributable to the rural enhancements 
that were a conscious decision by Congress to enact.
    Mr. Miller. I am not sure I am able to quantify that on the 
spot for you. I would say that it is a function of a couple of 
things. It is definitely true--and Peter made this point early 
on--that the benchmarks, the floor, are the results of the 
floors, and the floors and the benchmarks tended to be higher 
in rural areas. How much ends up being actually attributed to 
the rural areas is dependent on how much enrollment occurs in 
the rural areas and then how the plans bid relative to those 
benchmarks in rural areas. I cannot toss off a number.
    Mr. Ryan. It would be helpful to get that because that was 
a conscious decision by Congress in 2003, and I would just like 
to know what the price of that policy preference was with 
respect to these overpayments.
    Peter, did you want to add to that?
    Dr. Orszag. I would just add again, if you look at the 
benchmark relative to fee-for-service costs, in high-cost fee-
for-service areas, that difference is about 4 percent. In low-
cost fee-for-service areas, mostly because of the policy 
interventions that Congress adopted, it is 26 percent.
    Mr. Ryan. Oh, really?
    Dr. Orszag. So you can see that there are very significant 
differences in that differential across the country, and the 
low-cost areas have a higher differential, and actually we have 
data on where the low-cost areas are, so you can start to----
    Mr. Ryan. That would be interesting to get a handle on, 
because then we would know what this conscious decision--and I 
think these numbers have exceeded what people expected, to be 
sure, but it would be interesting to know how much is 
attributable--thank you, I finally got a hard copy of this--how 
much would be attributable to that.
    Another question for both of you, but for particularly Dr. 
Miller. CMS has 22,000 employees who run Medicare and Medicaid. 
Last year, we provided CMS with $3.2 billion for their 
administrative costs to run these programs. The Medicare 
Advantage plans do not receive additional subsidies for 
administrative costs, and so they have to embed those 
administrative costs within their plan bids.
    When calculating these payment differentials between 
traditional Medicare and Medicare Advantage, does MedPAC, and 
CBO for that matter, include the CMS costs, administrative 
costs, so we sort of have an apples-to-apples comparison on 
that?
    Mr. Miller. Yes, we do.
    Mr. Ryan. You do.
    You do as well?
    Dr. Orszag. Yes, and I would just note--I mean, to the 
extent that there are administrative cost differentials, that 
does not undermine the fact that these plans cost the 
government more than the traditional fee-for-service program.
    Mr. Ryan. Right. I am just trying to see if we have 
disaggregated these things. So to me that is pretty 
significant.
    What would be the difference between Medicare Advantage and 
fee-for-service if the traditional program--the government 
program--had disease management, coordinated care, mandatory 
quality reporting and improvement, and out-of-pocket caps, as 
are found in many Medicare Advantage plans? That is, how much 
would the difference be reduced if traditional Medicare did all 
of the things that Medicare Advantage does?
    The key thing I am trying to understand here is apples to 
apples. With Medicare Advantage, the beneficiary kind of gets 
it all in one plan, meaning they get their Medigap insurance or 
the equivalent of that. They get their Part D plan in all but 
the fee-for-service ones, and they get a part A and a Part B. 
So that is the one comprehensive plan.
    You know, what would be the cost differential if we assumed 
apples to apples over on the traditional program, including all 
of those other things--the supplementals, the part Ds and the 
As and the Bs?
    Mr. Miller. All right. There are a couple of things that I 
think--and actually, let me be very direct.
    I cannot quantify that, but I think there are some things 
that we should talk out in thinking about that. I mean, first 
of all, some of the argument of managed care plans are that 
they engage in these types of activities, because over the long 
haul, it is supposed to produce savings. So if you manage 
disease and you coordinate care, the whole idea is that, 
actually, costs would be lower over time. That is kind of what 
the business--that is kind of what the business model is about.
    The other thing I would say is that you are saying, at 
least on the quality front, well, what if fee-for-service were 
required to do this? More and more, fee-for-service providers 
are being required in Medicare to do it. For example, in 
hospitals, if they do not report--I cannot remember whether it 
is 22 or 24 health/clinical process measures--their update is 
lowered by a certain percentage. So some of this is going on. 
Incidentally, our work----
    Mr. Ryan. That cost is not being borne in the traditional 
fee-for-service program as we measure it to Medicare Advantage, 
though. I mean the 24 is a cost that is borne by the hospitals.
    Mr. Miller. It is borne by the hospital, right; and just 
like we are saying that the quality metrics that the health 
plans have to provide are borne by the health plan, and that is 
part of their administrative structure.
    I am just trying to say that while it is not a uniform 
requirement in fee-for-service--and on that point, you are 
absolutely right--more and more, there is a push to require 
quality reporting on the fee-for-service side, and as a 
Commission, we have been arguing strenuously that that needs to 
happen, which I know does not give you the quantitative answer 
that you want.
    One other thing I would say is that you are right, that a 
lot of plans have, say, out-of-pocket caps and that type of 
thing, catastrophic caps. But the other thing that is somewhat 
concerning about this is you can find also plans where we are 
paying this additional amount, and the beneficiary ends up, 
depending on their health path, being exposed to higher cost-
sharing than they would actually experience under traditional 
fee-for-service. There is no guarantee that when you walk in 
with these plans, even with the higher payments, that you are, 
you know, protected--I am sorry--from the additional out of 
pocket. I am sorry.
    Dr. Orszag. That is okay. I would just add two things 
quickly.
    One, it is clear that a lot of plans are doing a lot of 
these activities, and effectively we are sort of running a 
public experiment. We are providing them Federal Government 
money, and then the plans are going off and doing things, some 
of which may actually work. But we do not have sufficient 
reporting requirements, given the amount of Federal money that 
is going into these experiments, if you will, to see what works 
and what does not, and it seems like that may be something 
worth exploring.
    The second point I would note is the evidence that we do 
have that some of these programs--for example, the coordinated 
care demonstration project that was conducted under Medicare--
actually reduce costs as opposed to improve quality still 
remains to be seen. The evidence from that demonstration 
project is suggesting that the programs, for example, on 
coordinating care do not, on net, reduce the cost of care 
delivered even when you have a nurse kind of centralizing your 
care and keeping track of things. So I would just sort of be 
waiting for more empirical data, which the plans, if they were 
required to report more, could basically serve as little 
laboratories for it.
    Mr. Ryan. That is kind of where we are with this.
    You know, the idea here is comprehensive care where you 
have your care coordinated within your plan, and you have the 
right kinds of incentives--disease management, you know, 
preventative medicine--and that, over time, this is good for 
the beneficiary and good for the taxpayer. The traditional 
program, you know, is sort of silos. You have got to go out and 
buy your supplemental; then you have to go out and buy your 
Part D; and then you have your Part B premiums and this and 
that. So it seems like we still have not gotten our 
quantitative tools available yet that will really give us a 
good measuring of this.
    One of the reasons I think you were selected to be the 
director of CBO, Peter, is you are an expert on health care, 
and this is an area where I think we all--and we are encouraged 
and are looking forward to the modeling that you are working on 
with respect to health care modeling.
    Give us an idea of where you think you are on better 
quantifying these things like disease management, preventative 
medicine and risk management. Where are we in getting a better 
idea on how to measure these things, which are kind of an 
intangible, but we know intuitively that these things are good 
things? How is it that we can get to the point as policymakers 
where we can make good judgments on good health care policy, 
and we can see the kinds of savings that we think we would get?
    Dr. Orszag. Well, first, let me just say there are many 
mornings when I wake up wondering precisely why I was selected 
to be the CBO director and why I thought that was a wise move. 
But in any case, let me just say that I think that there is 
progress being made, but there is substantially more that could 
be done.
    I think, perhaps, on Tuesday I mentioned vastly expanded 
comparative effectiveness research where you are examining 
outcomes and what works and what does not, provides a 
significant step forward that Congress could be exploring and 
expanding upon.
    With regard to CBO's own internal efforts, we are 
increasingly moving towards becoming the Congressional Health 
Office, as you know----
    Mr. Ryan. Right.
    Dr. Orszag [continuing]. And shifting staff into the area 
and doing more modeling. We are, though, dependent on in many 
cases the outside empirical knowledge, and we have not yet 
moved to a state of the world where there is enough data 
available at a finely disaggregated level to be examining all 
of the questions that need to be examined.
    So there is progress, but we are still pretty far from 
where we should be.
    Mr. Ryan. Dr. Miller.
    Mr. Miller. Yes, if I could just say a couple of other 
things on this front, and I just want to reinforce a couple of 
points that were just made.
    You know, the notion of collecting quality data uniformly 
across plans--which does not happen--and uniformly between fee-
for-service and managed care is part of what needs to happen 
here so that we know, and we have made recommendations along 
those lines.
    Another way to think about it is trying to have the 
payments vary to the plans--and by the way, we have made 
recommendations on the fee-for-service side--but to the plans 
based on their quality outcomes. If you want to pay a plan 
more, how about a plan that produces a higher quality outcome--
and we have made recommendations along those lines--which then 
may also drive some evidence. If you find a plan with higher 
quality metrics and you are paying them more, you can look at 
what they are doing.
    Finally, I just want to also strongly make the point on the 
comparative effectiveness. We just in our recent report have 
made a recommendation to move forward on comparative 
effectiveness. And I just want to be sure that I endorse that, 
because I think that is a direction we need to go.
    Mr. Ryan. Great. Thank you. That is very helpful. Thank you 
very much.
    Chairman Spratt. Mr. Edwards.
    Mr. Edwards. Thank you, Mr. Chairman.
    Mr. Chairman, under the Republican leadership in the House 
for the last 12 years, we have had a number of economic 
theories passed into law, and it is interesting to look at the 
difference between the theory and the reality. One theory was 
that we could pass trillion-dollar tax cuts, fight a war on 
terrorism, and balance the budget. That theory proved to be 
absolutely wrong, and we ended up turning the largest surpluses 
in American history into the largest deficits in American 
history.
    Then in 2003 at 3:00 o'clock in the morning, with 3 hours 
of arm-twisting, after the vote should have ended--arm-twisting 
by Mr. DeLay--we passed into law the largest increase in 
entitlement spending for Medicare in the history of that 
program, based on the theory that tax subsidies for Medicare 
Advantage would somehow save taxpayers money.
    Then, I think, just a few minutes ago, I heard my colleague 
Mr. Ryan refer to Medicare Advantage--and I put this in direct 
quotes--``while saving Medicare money and saving taxpayers' 
money.'' That was the theory in 2003 and apparently the theory 
this morning.
    Dr. Orszag, I want to ask you: On average--not theory, but 
fact. On average, how much extra tax-funded subsidy is there 
per Medicare recipient under Medicare Advantage versus fee-for-
service per person on average?
    Dr. Orszag. Again, roughly, 12 percent.
    Mr. Edwards. How about dollars, actual tax dollars per 
person? An average, ballpark.
    Dr. Orszag. I am told about $1,000.
    Mr. Edwards. So $1,000 more cost per taxpayer in America 
today for every person who--under this theoretical program that 
was going to save taxpayers money, it is $1,000 per Medicare 
recipient as an extra cost to the taxpayer.
    How much is the total cost to taxpayers for the Medicare 
Advantage program as compared to the fee-for-service are we 
talking about in fiscal year 2007?
    Dr. Orszag. This year--I will give you the calendar year 
number. We can get the fiscal year number. The total payments 
are about $75 billion. I think I said $77 billion.
    Mr. Edwards. But the extra cost compared to if we had 
everyone under fee-for-service. What is the extra cost this 
year in fiscal year 2007?
    Dr. Orszag. Something like $10 billion.
    Mr. Edwards. Somewhere around $10 billion.
    Am I correct that you both testified that over 5 years, 
Medicare Advantage is an additional $54 billion cost to 
taxpayers--is that correct--compared to fee-for-service?
    Dr. Orszag. That is correct.
    Mr. Edwards. Am I correct that the number--let me just get 
the facts on the table here.
    Are we correct that your testimony today says that, over 10 
years, Medicare Advantage will cost $149 billion more relative 
to if we had a fee-for-service for all Medicare recipients? Is 
that correct?
    Dr. Orszag. That is correct.
    Mr. Edwards. One hundred forty-nine billion dollars.
    So, rather than the theory of saving taxpayers money and, 
quote, ``saving Medicare money,'' the data prove that it is 
actually costing more than $10 billion more to taxpayers this 
year, $149 billion over the next 10 years.
    Mr. Ryan. Would the gentleman yield for a friendly 
clarification?
    Mr. Edwards. In just a moment. If I can just finish. The 
gentleman has had two opportunities----
    Mr. Ryan. Well, you invoked my speech.
    Mr. Edwards. All right. I would be glad to give you 30 
seconds, and then I am going to continue. Yes.
    Mr. Ryan. What I was talking about in the $3 billion 
savings number is the bid system where 75 percent of the 
savings goes to the beneficiary, that was about $1,000 in 
benefit and premium reductions, and 25 percent goes to the 
taxpayer. That is the $3 billion figure I am saying. I am not 
suggesting that, net, the program is $3 billion lower. I am 
saying that the system----
    Mr. Edwards. Okay. So, when you said ``saving taxpayers 
money'' in your testimony and ``saving Medicare money,'' you 
were talking about savings within one part of the program.
    Mr. Ryan. That is right. That is what I was talking about. 
When you are under the benchmark, the 25 percent goes to the 
taxpayer, and the 75 percent goes to the beneficiary. It is 
that part of----
    Mr. Edwards. I understand that. So then you would agree 
with the data that has been presented here today that, overall, 
the plan that was passed in 2003--largely on a partisan basis--
is costing taxpayers $1,000 per Medicare beneficiary more per 
person.
    Could I ask one other question? I do not know how you 
define it--``administrative costs''--and compare that in 
profits within the public versus private sector.
    Is there some kind of comparison--we are all together, on a 
bipartisan basis, looking for efficiencies. Can you tell me 
what the administrative costs are for the Medicare program fee-
for-service versus the administrative costs for the Medicare 
Advantage program? Is it more efficient? Do we have lower 
administrative costs, including profits, under the private part 
of the system compared to the publicly managed part of the 
system?
    Mr. Miller. I think--and I do not have a lot of precision 
on what the profit margins--in fact, I do not have any 
precision on the profit margins on the private side, but it is 
generally understood that the administrative costs--you know, 
overhead, marketing and profits in the managed care plans--are 
higher than the costs of administering the Medicare program.
    Mr. Edwards. Do you know how much higher? A ballpark, 
either in percentages or numbers?
    Mr. Miller. I really do not. The plans submit bids, and I 
believe that there is data that it has on medical cost ratios 
that--or medical loss ratios that are submitted as part of the 
bid that CMS reviews, but that information is not publicly 
available.
    Mr. Edwards. Okay. I thank you.
    Chairman Spratt. Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    One, let me sincerely thank you for holding this hearing. 
As I see Dr. Orszag's child over there, she looks roughly to be 
the age of my own daughter. And I have been very, very 
concerned about the impact that runaway entitlement spending is 
going to have on future generations, and I know we all care 
deeply about our children and our grandchildren. We just 
perceive their interests, obviously, in varied ways.
    So, since the budget that was passed out of this committee 
was stone-cold silent on the subject of doing anything to 
reform entitlement spending, I welcome this hearing, and I 
welcome the opportunity to learn more about the subject matter 
at hand.
    I must admit, in listening to my good friend from Texas 
here and his statement, I was interested to hear about the 
sensitivity on the vote for the prescription drug benefit in 
2003, since yesterday we had a vote left open on the Udall 
amendment in order to persuade people to change their opinions. 
So I am glad to see that that continues.
    Ms. DeLauro. Five minutes versus 3 hours.
    Mr. Hensarling. I am sorry. I thought the time was mine, 
Mr. Chairman.
    The purpose was the same. So, if there is a difference in 
the time, I am just appreciative of the sensitivity of my 
friends on the other side of the aisle. And although certainly 
this prescription drug benefit program is of massive cost for 
those who criticize it, I at least remember looking at the CBO 
scores at the time of the Democrat alternative, and was 
interested to discover that it cost even more. So I would 
invite my friend from Texas and other friends on the other side 
of the aisle to look into that.
    Dr. Orszag, the question that I have here for you--I 
understand there is insufficient data as of today, and I 
certainly am interested in receiving more information from you 
and Dr. Miller on perhaps legislative incentives to ensure that 
we have, I believe, uniformity and quality of data in order to 
judge some of these policy options, but at least in the time 
that I have been a Member of the House of Representatives, 
every medical professional with whom I speak all believe that 
the long-term solution to the health care crisis is to be found 
somewhere in preventative care and incentives for wellness, 
which, according to your testimony, is what we see in a number 
of the Medicare Advantage plans--disease management, care 
coordination and preventative care programs. At least to those 
who know more about the subject than I do, they claim that is 
the long-term solution.
    So, number one, is it a possibility that the program is 
working and we just do not understand it is working because we 
have insufficient data? I guess the other part of the question 
is: Could it be that we have a very good model, and we have 
just overpaid for the model?
    Dr. Orszag.
    Dr. Orszag. I am not going to comment on the structure. 
That is obviously up to you. Again, my job is just to tell you 
what the budgetary implications and other implications are 
without the normative term of ``good'' or ``bad.''
    With regard to preventative medicine, I would say a couple 
of things. One is--and we could provide more information to you 
on this topic. I hold out a lot of hope for prevention and 
healthy living to ultimately improve health. The impact on 
health care costs, at least to date from existing programs, is 
much more ambiguous than we would like. In part, the reason is 
that you first need to have an intervention actually work for a 
particular subset of the population. Often when you are doing 
preventative medicine steps, you are finding things that 
require additional health care costs because you screen people 
for something and then realize they actually require something 
more, and that can offset it. Then you are often applying the 
screen or the test, or what have you, across a wide variety of 
the population, not just the subset of the population for which 
it will make a difference. And that entails cost, too.
    When you incorporate all of those effects, the evidence on 
preventative medicine's actually reducing costs as opposed to 
improving quality is not as hard as we would like, and we are 
constantly looking for better information.
    So, again, I want to hold it out as a possibility and just 
say CBO is constantly monitoring developments.
    Mr. Hensarling. If I could, also in your testimony you talk 
about, over long periods of time, cost growth per beneficiary 
in Medicare and Medicaid has tended to track cost trends in the 
private sector health market. When I looked at the size of 
Medicare, Medicaid, the VA health care system, isn't this 
possibly a case where the tail is wagging the dog, that 
government is so involved in our health care system that they 
are driving the cost trend?
    Mr. Orszag. The point of that sentence was to say the two 
systems are so integrated it is not plausible to me that you 
are going to reduce Medicare and Medicaid costs sustainably 
over a long period of time unless you are affecting overall 
health care costs.
    And I would agree, in many situations the public programs 
are large enough to affect how medicine is practiced. So, for 
example in Medicare, moving to the DRG system, that is, a fixed 
payment per episode for inpatient hospitalizations, created 
incentives to shorten hospital stays for Medicare patients; it 
wound up shortening hospital stays not just for Medicaid 
patients, but for everyone because it affected how hospitals 
operated.
    Chairman Spratt. Mr. Cooper.
    Mr. Cooper. I want to thank both witnesses for the 
excellent work of their groups, both CBO and MedPAC are 
essential for our understanding of these entitlement programs.
    I would like to focus first on Dr. Orszag's slide No. 2, if 
that could be put up there. It seems like the core abuse are 
these private fee-for-service plans that receive the higher 
reimbursement, and in return, don't really offer any of the 
managed care improvements that we thought we were paying for.
    So I would like to ask if we can quantify how much savings 
it would be if we eliminated the excess reimbursement for these 
private fee-for-service plans.
    Mr. Orszag. Yes.
    For example, if you took private fee-for-service plans and 
you paid them at 100 percent of local fee-for-service costs, we 
estimate that the budget savings over 5 years would be $14 
billion and the budget savings over 10 years would be $43 
billion.
    And as I mentioned in my oral, and it is also in my written 
testimony, one gets almost as much as those numbers by changing 
the way that private fee-for-service is allowed to operate and 
not allowing the so-called deeming provisions where private 
fee-for-service plans automatically get access to the payment 
rates that have already been negotiated by Medicare itself in 
the traditional fee-for-service part of the program.
    Mr. Cooper. So if we were to eliminate the worst abusers of 
the system, the savings would be a fraction of the overall 
savings that you have listed in your Chart 3?
    Mr. Orszag. That is correct.
    And part of the reason there again is, even though private 
fee-for-service is growing really rapidly, it is still the case 
even in 2017, under our projections, that HMO and PPO-type 
plans account for more people than private fee-for-service 
plans, even in 2017, as I think you can see from the chart.
    Mr. Cooper. I was just looking at the chart. It looks like 
a larger piece of the puzzle than the numbers suggest.
    Mr. Orszag. Well, again, one way of--sorry, if you go back 
to that, again, if you are looking at, let's call it--$43 
billion compared to roughly $150 billion for the 10-year 
figures overall, is, you know, a little under a third. It is 
not that disproportionate from the relative enrollment rates.
    Mr. Cooper. Is there a way to distinguish between managed 
care Advantage plans that are appropriate and fee-for-service 
plans that are inappropriate? Do they declare themselves and 
say, hey, I am committing fraud on the system? I don't think 
so.
    What other disguises could these private fee-for-service 
plans use in order to gain the extra reimbursement without 
doing the work?
    Mr. Orszag. Well, again, one of the things that is 
interesting about this option that I mentioned in my testimony: 
By taking away this deeming provision, by necessity, the 
private fee-for-service plans or whatever they would then be 
called would have to negotiate--basically create their own 
network. So they would effectively become something akin to a 
PPO-type of organization.
    So the distinction between private fee-for-service and 
other types of Medicare Advantage plans has a nontrivial amount 
to do with the fact that the private fee-for-service plans can 
just piggyback off of the rates that Medicare has already 
negotiated.
    Mr. Cooper. In earlier versions of Medicare managed care, 
we only reimbursed at roughly the level of 95 percent of fee-
for-service.
    Mr. Orszag. Correct.
    Mr. Cooper. How much would the savings be if we took it 
back to that level? They would be larger than the numbers you 
have on the chart.
    Mr. Orszag. We have not estimated that, but we could 
provide an estimate of that for you.
    Mr. Cooper. That would be very helpful.
    You referred to the overall Medicare price structure, and 
that is on your Slide 4, which you did not use in your 
testimony. I think members of the committee should focus on 
that, if you would put up the slide.
    I think members should find this chart very instructive 
because some areas of the country are reimbursed at much higher 
levels than others. This isn't a recent phenomenon. This has 
existed for the entire history of the Medicare program. This is 
fundamental to all the costs of the program, and if better 
health was correlated with higher reimbursement, that might not 
be a problem, but oftentimes it is an inverse correlation.
    The white areas on the chart with the lowest reimbursement 
have the healthiest populations. So that is a fundamental 
entitlement problem that this committee and others should be 
addressing.
    But obviously with our friend from Texas and Florida and 
other areas of the country that are the darker colored on the 
chart--and Tennessee is somewhat darkly colored--we have 
problems in adjusting this formula, the basic formula, to 
achieve better health outcomes for our people.
    Mr. Orszag. I think that the variation that you can see in 
this chart, which is very substantial and which does not--
cannot be explained by the underlying riskiness of the patients 
in the different areas and which does not translate into better 
health outcomes in the darker regions than the lighter regions, 
presents the most substantial opportunity to reduce health care 
costs without harming health outcomes. It is, I think, very 
compelling evidence in favor of that perspective.
    So it is stunning that embedded in the long-term fiscal 
challenge facing the country is an opportunity like that one.
    Mr. Cooper. Let me say, ``amen,'' Mr. Chairman.
    Mr. Miller. The only thing I would say, this is not a 
managed care point. At the Commission, we try to focus on--we 
do a lot of focus on fee-for-service, and we are trying to move 
the Medicare system to payment mechanisms that are sensitive to 
these differences that would reward those areas of the country 
that have high quality outcomes and low resource use under the 
fee-for-service system so that you would see some of this 
change and then would also make the case for--I have to raise 
these--take away the need to raise some of these floors on the 
managed care side.
    Chairman Spratt. Mr. Conaway of Texas.
    Mr. Conaway. Thank you, Mr. Chairman.
    Dr. Miller, you have in your testimony, as well as in the 
written information, used the word ``efficiency.'' It seems to 
be related directly to cost.
    Can you flesh that out for me a little bit.
    Mr. Miller. Efficiency--and you are correct, I have been 
using it in this instance to refer to cost.
    In a perfect world, and in most of our work, we use 
``efficiency'' to refer to high quality, low cost. What I am 
specifically referring to when I say that is, in the bids that 
plans submit, they say how much they would charge or they want 
to be paid to deliver the traditional fee-for-service benefit.
    And, for example, in the private fee-for-service plans, the 
reason I said they are inefficient and definitely a cost 
concept--you are very clear on this--is because we have to pay 
so much more to them to deliver the traditional fee-for-
service. So I think that was the point.
    Mr. Conaway. So you are not saying that the highest 
efficiency plan would be one that costs zero but provides the 
best care. I mean, that is irrational, the highest efficiency 
plan would be one that costs nothing, but provides the best 
care possible.
    Mr. Miller. I would just say it a little bit differently. 
The highest quality with the lowest cost would be the best 
efficiency.
    Mr. Conaway. On Chart 2, it flattens out. There is a big 
jump. Can you tell us why that happened? And why does it go 
flat?
    Mr. Orszag. One of the explanations is that private fee-
for-service plans currently have a variety of opportunities 
that could be taken advantage of in moving into various 
different areas, and we project that as they exhaust those 
easier opportunities, the growth tapers off.
    I would note, however, that I think there is significant 
potential for our projections to be too low on the projected 
growth, including especially in private fee-for-service plans. 
There is very significant potential for it to be higher than 
that.
    Mr. Conaway. My colleague from Tennessee said that dark 
blue area was fraud; is that right?
    Mr. Orszag. I am not going to use terms like that.
    Mr. Conaway. These are folks who are playing by the rules 
we put in place. We have got bad rules in place to allow them 
to manage or orchestrate their business models to take 
advantage of it; but under our current system, that is not 
fraud is it, Jim?
    Mr. Cooper. I think these plans acknowledge that they are 
not even intending to offer the additional services that would 
be offered by an HMO.
    Mr. Conaway. Fraud is a term of art that you as a lawyer 
understand, and it was subject to being reined in by existing 
issues.
    This chart, now, we talk about--this goes from the $32 
trillion for today's unfunded mandates to 54 trillion in 5 
years. Most of our conversations talk about 30 or 40 years out.
    Either of you have recommendations that we could not let 
that happen over the next 5 years?
    Mr. Orszag. I will say the following, and I think this is 
obviously a much broader topic; but CBO is increasingly 
focusing on providing options for you that may help bend that 
curve.
    We do not--over the long term in terms of health care cost 
growth, we do not know enough today to know what would reliably 
help bend that curve, but there are several things that seem 
auspicious that need to be tried and could be tried and then 
examined, including on both the provider and the consumer side.
    On the provider side we are currently paying for Medicare 
on a fee-for-service basis. We don't know whether we are always 
getting the highest value for that payment. Expanded 
comparative effectiveness research tied to changes in 
incentives for providers could help move towards a higher 
value-lower cost combination.
    On the consumer side, one of the striking things that has 
happened over the past three decades is, out-of-pocket expenses 
as a share of total health care spending have plummeted and 
they are now about 15 percent, under half of what they were a 
couple of decades ago. The evidence suggests that has driven up 
health care costs. So reversing that would also help to bring 
down health care costs.
    Mr. Conaway. Take one for the record, because I am going to 
run out of time before you can answer it; and that is, 
physician access across time as baby boomers qualify for 
Medicare, one of the concerns is, there are going to be fewer 
and fewer physicians available who will continue to leave their 
practices open.
    Can you get some information back to the committee about 
your projections, based on the number of folks in school, the 
doctors and all of that stuff--in terms of access when the baby 
boomer bulge hits the 65 bracket?
    Mr. Orszag. We know that the flow of people going through 
medical schools has been pretty flat and the share of general 
practitioners, in particular, coming out is down.
    Mr. Conaway. I yield back.
    Thank you, Mr. Chairman.
    Chairman Spratt. Mrs. Schwartz.
    Ms. Schwartz. I want to follow up on some of the other 
points that were made and see if we can--I will ask a few 
questions.
    You have made the point there are 35 million beneficiaries 
in fee-for-service Medicare, traditional Medicare, and about 8 
million, about 18 percent in this special managed--well, it has 
been called managed care, but Medicare Advantage.
    Isn't it true that the greatest growth in this Medicare 
Advantage is actually in the private fee-for-service?
    Mr. Orszag. Even during this year, as one of my charts 
showed, that subcomponent of Medicare Advantage plans added 
more than 700,000 beneficiaries. So they are growing; they 
started small, but relative to that small base, they are 
growing at a very rapid rate.
    Ms. Schwartz. That is a group that is not claiming to do 
any managed care or coordinated care, but not only that, has 
the least oversight or the least rules and least accountability 
back to Medicare, to CMS, to be sure that they are giving 
anything extra to their beneficiaries.
    Is it true that we don't know whether they are in fact 
providing either additional benefits or better outcomes?
    Mr. Miller. I think there are a couple of things.
    They don't have the same data requirements on quality of 
care. CMS is not--cannot do the same oversight to the bids that 
they submit. They don't have to establish networks. And 
actually there is a provision in law that they are not allowed 
to link provider incentives to managing care.
    So--I mean, they are really structured not to be managed 
care plans and their reporting requirements are different. So 
it will be, as you say, hard to know what they are, but they 
are required by law to provide additional benefits. They do 
submit a bid. They say how much in the actuary value of the 
benefits that are provided. And so I believe benefits are being 
provided.
    Ms. Schwartz. We just don't know what they are.
    Mr. Miller. They vary significantly across plans. You don't 
necessarily know what is being used by beneficiaries.
    Ms. Schwartz. Is it also true that the physicians--we have 
heard the physicians don't know what they are going to be paid 
by these private fee-for-service plans, so when they accept a 
patient, they have no idea.
    Mr. Miller. I think the phenomenon is more this: When the 
patient presents, the patient says I have a--the beneficiary 
has a private fee-for-service plan. At that point, the 
physician has to determine what this plan is paying, which is 
the private--which is the regular fee-for-service rate, and 
they may not know that and they have to sort of search and 
figure out whether they are going to accept the patient at that 
point.
    Ms. Schwartz. A previous question asked about access for 
Medicare recipients and whether, in fact, we have enough 
physicians to provide and accept Medicare patients and accept 
the benefits. I think that is a concern for all of us.
    I assume what we are not getting is--we are paying for for 
these private fee-for-service plans; physicians don't know what 
they are going to get reimbursed; patients--we don't know, 
certainly, how much patients are getting--whether beneficiaries 
are getting more and whether, in fact, there are any better 
outcomes, and it is costing us all more money.
    Could you say also that the amount of money that we are 
spending, that additional $1,000 a person, or the additional 
$10 billion a year, is really coming out of the pockets of 
other Medicare beneficiaries? You pointed out that we really 
don't have enough money today to pay--to meet all of our 
obligations under Medicare. We are now spending $10 billion 
more a year, $1,000 more per Medicare beneficiary, that in some 
ways is coming out of the pocket of the 80 percent of Medicare 
beneficiaries--in order to get a few beneficiaries who are the 
healthier and younger beneficiaries, potentially more benefits; 
and we are not even sure of that.
    Would that be the right framework for the way this is 
working?
    Mr. Miller. We both have testified to the fact that all 
beneficiaries, the other 80 percent who are not enrolled in the 
plans, are paying a Part B premium--a higher Part B premium.
    A different way to say what you are saying is, in a sense, 
what we are watching here is, in this context of the 
sustainability issues that this committee is well aware of, we 
are watching a benefit expansion in progress. And it is not 
targeted; it is whoever presents at the plan. It is not----
    Ms. Schwartz. It is not targeted to the most elderly or 
sickest.
    Mr. Miller. Or the lowest income. The benefits that are 
actually being offered through this expansion are determined by 
the specific plan, and as both of us have said, we don't have a 
consistent data set to know what we are getting out of that.
    Ms. Schwartz. So we are spending a whole lot more money, 
and we are not sure what we are getting.
    Thank you.
    Chairman Spratt. Mr. Bonner.
    Mr. Bonner. I know this hearing was called to focus on 
Medicare Advantage. I want to ask one question that is germane 
to the hearing, but I want to take advantage of your broad 
expertise on health care.
    Consider the following statement: Government health plans 
aim to make sure that everyone who is eligible gets a benefit. 
Private health plans make sure that everyone who gets a benefit 
is eligible.
    Does that strike you as an accurate distinction?
    Mr. Orszag. I don't necessarily have any objection to it. I 
think there are many dimensions along which public programs may 
vary from private insurance plans.
    Mr. Bonner. I don't know if this hearing is being broadcast 
outside of the House, but in the event C-SPAN picks it up and 
someone is stumbling--by chance, they flip from Oprah to Judge 
Judy and they end up with the Budget Committee, they probably 
won't stay for long, but I would like to broaden the question a 
little bit outside of just Medicare Advantage.
    I had a telephone town hall meeting night before last with 
about 10,000 constituents from my district. I was surprised 
that many stayed on the line. And one of the questions that 
came to me, which I think is very appropriate is, why is our 
health care--Medicare and other, why is it so complicated, 
especially the reimbursement aspect of it; and does it have to 
be?
    Because at the end of the day, that is one of the 
challenges we have: How are we going to pay--I think most 
everyone, Democrat and Republican, would agree that we have got 
the best health care system in the world, or most of us believe 
that, but it is certainly not as accessible or as affordable to 
all Americans.
    Does it have to be this complicated? And is there a better 
way to do it?
    Mr. Orszag. I would just say that part of the complexity of 
our current system comes from choices that we have made, in 
particular, to have an employer-based health care system in 
which that is the primary mechanism for the nonelderly to 
obtain health insurance and then to layer on public programs 
around that system.
    There is a lot of fragmentation in our system, and one of 
that may have--that system may have benefits and costs. One of 
the costs is that it is more fragmented, and complexity is 
necessarily sort of part of that framework.
    Mr. Miller. And I think on the public side, the programs in 
Medicare grew up based on the public--or, sorry, the private 
models. Many of them came on at different points in time; 
different benefits arrived at different points in time in the 
program, incremental changes where people who saw an inequity 
stepped in and said, I am going to make that change. And that 
compounds over time, and that is certainly why you have the 
complexity.
    We do think that there are better and, hopefully, clearer 
ways to reimburse, such as having the payments be sensitive to 
the quality outcomes in the use of services that we try to 
push. Hopefully, that is at least clearer incentive-wise. 
Whether it is less complex, you know, those raise issues about 
measures and mechanisms as well.
    Mr. Bonner. If someone from Arkansas or Ohio or Tennessee 
or Alabama or South Carolina has switched from Oprah to this 
hearing and is curious as to where we are going with this--I 
guess the other question I have got is, we have got a 
Presidential election coming up next year. Some of the 
candidates running for President are calling for some type of 
universal coverage for those who don't have health insurance.
    Is there any reason to believe that, as expensive and as 
complicated as this current system is, if we were to have some 
type of universal health care plan to cover all Americans, that 
it would cost us less money than what we are currently arguing 
about that we are spending too much money on?
    Mr. Orszag. I guess I would just say that the net impact of 
just adding people who are currently uninsured into the insured 
population would be a net increase in costs.
    There may well be other changes that could be made to 
reduce costs. But the uninsured currently, on average, spend 
less even--despite the fact that they often wind up in extremes 
with very high-cost situations, they often spend less than the 
insured. Adding them to the pool of the insured would on net 
increase costs.
    Chairman Spratt. Mr. Doggett.
    Mr. Doggett. Thank you very much for your testimony.
    I would like to return to the comments to which our 
chairman referred at the opening.
    The official President Bush selected to run Medicare from 
2001 to 2003, Tom Scully, said of these Medicare Advantage 
plans, quote, ``There has been huge overfunding,'' and I ask 
you if you are able to quantify the amount of ``overfunding,'' 
to use his euphemistic term, that has occurred with Medicare 
Advantage.
    Mr. Orszag. Well, I guess you could do that historically or 
prospectively. One way of----
    Mr. Doggett. I am asking, first, historically. Since this 
program was set up, do you have an estimate of how much 
overfunding there has been of Medicare Advantage?
    Mr. Orszag. I don't believe we have done that analysis.
    Mr. Doggett. And looking at it prospectively, given the 
fact that even the Bush official who ran the program describes 
it as huge overfunding, what is a reasonable amount of savings?
    I realize it depends on the policy choices that are made, 
but what is a reasonable amount of savings to expect we might 
be able to achieve over a 5-year period?
    Mr. Orszag. Well, again, that depends on your policy 
intervention. If you reduce the payments to plans, the 
benchmarks in particular, to 100 percent of local fee-for-
service costs, we estimate budget savings of $54 billion over 5 
years.
    Mr. Doggett. $54 billion over 5 years. And there would be a 
variety of other choices that could be made that might be less 
than that, but that would be kind of the ceiling of reducing it 
to that level.
    Now, having created this huge amount of what his own 
officials call ``overfunding'' and what some of us would call 
``gross waste,'' did President Bush, in his proposal to 
Congress this year, propose to achieve a dollar of savings from 
these Medicare Advantage plans?
    Mr. Miller. I don't believe----
    Mr. Doggett. Not a dollar. Not a penny.
    Did the budget proposal that our Republican colleagues 
submitted to the Congress propose to save a dollar or a penny 
for Medicare Advantage? No. It did not.
    Did President Bush's budget proposal propose to save, 
through its inaction, money by cutting the payments that 
physicians will receive on January 1st of next year? To be more 
specific, if nothing is done, will physicians next year face a 
cut in their reimbursement rates of about 10 percent?
    Mr. Orszag. Yes, sir.
    Mr. Doggett. And there is nothing in the President's budget 
to stop--to fund any change in that?
    Mr. Orszag. I don't believe that the President's budget--I 
am just looking at that.
    Mr. Doggett. Not a penny, not a dollar taken away from 
these insurance companies that his own officials say have 
received huge overfunding where there has been gross waste and 
unnecessary spending, but a 10 percent cut to every physician 
who provides services to seniors and people with disabilities 
and relies on Medicare across this country.
    Now, I agree fully with the point Mr. Conaway made that 
this is not the result of fraud; and I also agree with my other 
Texas colleague that what it does result from is the clash 
between Republican theory and Republican reality. Let me give 
you--some might call it bad judgment.
    Let me give you one example of the way the waste and 
abuse--the term we usually hear at election time in talking 
about the mythical welfare Cadillac. You could imagine what 
would happen, if you were talking about an extra $100 that one 
of these recipients got versus $100 million. Let me talk about 
$100 million example of what has actually occurred.
    The General Accountability Office determined this spring 
that Medicare, the Bush administration, paid out $100 million 
for benefits to insurance companies for poor and disabled 
seniors, when the--this was for retroactive coverage for 5 
months. The only thing is, they never required the insurance 
companies to tell the seniors and the disabled people that they 
were entitled to any coverage, and they didn't get around to 
telling anyone to change their practices until March of this 
year.
    The General Accountability Office estimates $100 million of 
money paid out to these Medicare Advantage plans, to these 
insurance companies, for which little or no service was 
rendered. And that is the kind of example of mismanagement of 
this program which goes right back to its origin of favoring, 
as you put it so well, Mr. Edwards, the conflict between 
theory, between ideology and between reality.
    And we are paying a big price for it.
    Mr. Orszag. Could I offer one small clarification?
    The President's budget did not directly make any changes to 
Medicare Advantage plans, but because of the other changes that 
you mentioned--for example, the update factors, et cetera--
there would be implications for the benchmarks that Medicare 
Advantage plans payments are based off of and, therefore, some 
implications for Medicare Advantage plans.
    Chairman Spratt. Thank you.
    Mr. Tiberi.
    Mr. Tiberi. Thank you.
    Dr. Miller, speaking of realities, let me try to get you to 
answer a question here. In my district, I was visited by a 
nonprofit hospital that set up a Medicare Advantage program. 
And they have seen an incredible boom in that program, just 
incredible growth in enrollment. And part of that enrollment, a 
large part of that enrollment actually they have seen is in an 
urban area of my district--a number of African Americans have 
enrolled in their program and have been very pleased with the 
program, which goes along with something I think you said 
earlier about growth in the Medicare Advantage program; they've 
seen incredible growth, people choosing to go into the program.
    And I met with some of the African American leaders in that 
part of my community, and they are very happy with that 
nonprofit hospital's Medicare Advantage program.
    Why do you think there has been so much growth in the 
Medicare Advantage program since its inception? Why are seniors 
switching to it?
    Mr. Miller. I think that at least part of the reason is 
that because of these payments, plans are able to offer 
additional benefits. We talk about benefits, and benefits can 
mean lower out-of-pocket. And so I think that that, plus the 
benefits that Medicare doesn't offer, is very attractive to a 
beneficiary. And that is urban, rural, you know, high income, 
low income; any beneficiary would find additional benefits on 
top of traditional Medicare attractive and----
    Mr. Tiberi. The CMS study that you provided that said there 
was a 12 percent gap, or differential, between Medicare 
Advantage----
    Mr. Miller. That is analysis that both of our shops have 
done.
    Mr. Tiberi [continuing]. If you factored in those ``extra 
benefits'' you just talked about, whether it is disease 
management, whatever it might be, that attracts people to 
Medicare Advantage from their own personal experiences, if you 
factored that in, could that be part of the 12 percent?
    Mr. Orszag. That is what the 12 percent is supposed to be.
    DCMN NORMAN
    Mr. Miller. Absolutely. It is supposed to be that, and I 
want to clarify something, though.
    You know, this kind of gets missed in the debate 
occasionally. People often come back and say, but I know it is 
more payment but people are getting extra benefits so that is a 
good thing. And I think there is some of that. But remember, 
each one of these benefits is a fully loaded benefit. They 
don't administer themselves.
    So those dollars, the plan gets paid what they bid. They 
retain that part of the additional payment that they use for 
additional benefits. But part of those dollars go to admin, 
marketing, and profit. And so each one of those dollars doesn't 
necessarily travel to the beneficiary in terms of the benefit.
    But having said that, and as Peter just said, yes, part of 
it are those additional benefits.
    Mr. Tiberi. How do you factor in when a nonprofit Medicare 
Advantage program tells me there are larger upfront costs to 
implementing this program that will see a decrease over time to 
Medicare?
    Mr. Orszag. Could I comment on that?
    In order to get a decrease in Medicare costs, okay, you can 
evaluate this along other dimensions. But a decrease in 
Medicare costs, given the current structure of the payment 
systems, one would need the bids that the plans are submitting 
to be roughly one half of local fee-for-service costs in order 
for the net payment from the Federal Government to be lower 
than it would be for someone in traditional fee-for-service. 
That seems to me implausible.
    So there may be some potential longer-term effects or some 
systemwide effects, but from the narrow perspective of the 
Federal budget, the story that the plans will develop enough 
internal efficiencies to actually generate a net reduction in 
budget outlays for the Federal Government, given the current 
structure, seems very difficult to see.
    Mr. Miller. To add to the implausibility part, what you are 
basically saying is that the beneficiaries will have more 
benefits, the current payments don't put pressure----
    Mr. Tiberi. I understand. I am running out of time.
    How do you mirror or how do you merge both of you 
gentlemen's concern about the cost of Medicare Advantage? 
Because I know where you both are, versus, at least in my 
district, constituents who have long complained about Medicare 
fee-for-service, including my mom and dad, long complained 
about it with an incredible liking of Medicare Advantage and 
what Medicare Advantage is providing them. How do you mirror 
those two things?
    Mr. Orszag. I want to just clarify. I hope I am not 
betraying concern. I am just trying to communicate our analysis 
to you.
    I think the real question that one needs to ask is I have 
no doubt that many Medicare Advantage beneficiaries enjoy or 
like the plans that they are in. Those plans do cost the 
Federal Government more than traditional fee-for-service, and 
so there is this question of there is a subset of beneficiaries 
who are getting expanded benefits and reduced premiums that are 
being financed by the rest of the beneficiaries and by 
taxpayers. And that is a trade-off that, you know, is for you 
to evaluate.
    Mr. Miller. I agree with all of that. I would go at the 
question a little bit differently.
    First of all, I believe that there are plans who can 
provide additional benefits through their efficiencies. And in 
fact, you know, one way to look at this is that if I am an HMO 
and I have to create a network and report quality data, and 
then the private fee-for-service plan shows up and it doesn't 
have to do any of that, it is like I have been working to dig 
out these efficiencies in order to offer these benefits, and 
this other competitor has a much easier time of it.
    So my first answer is I believe this model has the 
potential, and there actually are plans who can do it; maybe 
not as generous as when there is a subsidy present, but can 
still do it.
    Then on the fee-for-service side, which you are absolutely 
right about, it is a system that is in need of repair. I will 
say we have made recommendations, which I won't go through now, 
but to make the payments reward high quality and low 
utilization so that the same kinds of incentives are being 
driven on that side as well.
    Chairman Spratt. Let me tell everyone that we have about 13 
votes coming up at 1 o'clock. So what I would like to do is try 
to finish this up as soon around 12 o'clock as possible, then 
move to the second panel.
    I would ask our remaining members to limit their questions 
to 3 minutes, if you could. I will recognize you first for the 
additional panel. Won't apply to Mr. Blumenauer, since I am 
sure he has got more to ask. But it is simply precatory. If you 
can do it, fine.
    Mr. Blumenauer. I come at this from a slightly different 
perspective.
    I voted against both Medicare prescription drug programs 
because I didn't think that they were focused and thought they 
were too expensive. But I represent a State that I think has 
the highest market penetration, and I think I have the 
legislative district that probably has more in the State. I 
think it is over 50 percent in the places that I represent.
    Part of it gets to what Mr. Cooper was talking about a 
moment ago. In fact, I look around the room and other than the 
Texans, we are all States where our people are paying the same 
Medicare taxes as everybody else in the country and they are 
getting back a much reduced amount. We are being penalized--
some of us are being penalized for being low-cost States.
    Mr. Ryan, I think you are the only State on the list here 
of anybody represented that is actually getting back less in 
the fee-for-service.
    So I am having people that are being driven to these 
programs because we have such a low reimbursement rate that 
physicians are feeling very uncomfortable with it.
    And I get a little nervous when I hear people talking about 
substituting the average benchmark fee-for-service, just sort 
of plugging that in, when we have wild areas of differential in 
terms of the local costs.
    What would be the impact if we substituted the average fee-
for-service nationally for everybody? You have got a range here 
where people in Louisiana are getting $950 a month, on average. 
Why should--if we are going to drive the market for 
efficiencies and if we really care about entitlements, if we 
care about entitlements, why don't we do something that starts 
driving average reimbursement towards a national level that is 
lower, rather than keep piling it on the expensive States 
because--and where I disagree with Mr. Barrett, there is no 
evidence that we have the best health care system in the world; 
if we had lower child mortality; if we lived long. We are right 
in the middle of the pack.
    So can we kind of not come back here and whack low-cost 
States, Arkansas, North Carolina, Tennessee, Kansas, Wisconsin? 
If we are going to be adjusting Medicare Advantage, why can't 
we just come back and do a little adjustment with the national 
average, which would seem to be to be much more fair, and then 
see what the market can do?
    Mr. Miller. I am not sure I follow your point on the 
national average, but I do want to say something about what you 
have said.
    I absolutely----
    Mr. Blumenauer. Let me clarify it, because I think it is 
important.
    You are talking about the local average benchmark and so 
adjusting, you would adjust the $950 that Louisianians get and 
then you are trying to whack Oregonians at 750 when we are only 
getting 582 right now. So why not whack everybody the same?
    Mr. Miller. When we have talked about transitions to the 
benchmarks, there are different ways that you can do this, and 
there are different ways that you can achieve the 100 percent 
of the--of fee-for-service across the country.
    And so ideas like that and options like that are 
possibilities, and we do talk about them.
    And I also want to address your underlying concern because 
I think your point is really well taken.
    Peter put the map up showing the dramatic geographic 
variations.
    We are well aware of these things, and I don't think this 
fits entirely in a managed care issue. We have fee-for-service 
inequities across the countries that our payment systems 
continue to perpetuate, and we have made recommendations that 
would drive fee-for-service dollars into areas that have low 
utilization and high quality. If that is your area, you would 
benefit from that.
    Mr. Blumenauer. But why couldn't--it is going to take a 
while to get to where you are going.
    Mr. Miller. I have acknowledged the other point.
    Mr. Blumenauer. Why isn't the simplest way to start moving 
towards equity and efficiency to just benchmark the average 
fee-for-service and make that the cost for Medicare Advantage 
and get us moving in both areas?
    Mr. Miller. Because part of the response, I think, is also 
these underlying differences in the country should probably be 
addressed as well; as Peter said, they represent an opportunity 
for the entire health care--or at least all of Medicare to run 
in a much more efficient way.
    Mr. Blumenauer. Can we have a number from you about what it 
would be if we benchmarked to the national average, what the 
savings would be for fee-for-service?
    Mr. Orszag. I believe we can do that.
    Chairman Spratt. If we could get that, we would like it for 
the record. But let's move on.
    Mr. Moore, Dennis Moore.
    Mr. Moore of Kansas. We are getting the number that was 
just asked for; is that correct?
    Mr. Orszag. We will do that.
    Let me note, one of the things about putting in a national 
average given these patterns without affecting these underlying 
patterns is that, of course, you would create a strong 
incentive for Medicare Advantage plans to enter into the lower-
cost areas and drive enrollment growth there, which I am not 
saying is a good or bad thing but, I am saying is a 
consequence.
    And the result would be that if you are paying the national 
average in those lower-cost areas, that does drive--given this 
underlying existing pattern of enrollment and costs, does drive 
up cost for the system.
    In other words, if what you did was--you only moved the 
lighter regions towards the average and didn't do anything 
else, you wind up raising cost.
    Mr. Blumenauer. But you are driving the darker regions 
down.
    Mr. Orszag. Right. But part of the response will depend on 
exactly the distribution of beneficiaries and the response of 
the plans to that kind of incentive. I can't give you an answer 
right now, but I will get back to you with one.
    Mr. Moore of Kansas. The number of enrollment, persons 
enrolled in traditional Medicare, is about 35 million 
nationwide.
    The number of enrollees in traditional Medicare is about 35 
million nationwide; is that correct?
    Mr. Orszag. That is approximately correct.
    Mr. Moore of Kansas. And the number in Medicare Advantage 
is about 8.7 million; is that correct?
    Mr. Miller. That is right.
    Mr. Moore of Kansas. And the cost of the Medicare Advantage 
far exceeds the cost per person of traditional Medicare, 
correct?
    Mr. Orszag. Correct.
    Mr. Moore of Kansas. And how much is that cost per person 
in excess?
    Mr. Orszag. As we said earlier, something like $1,000 per 
beneficiary.
    Mr. Moore of Kansas. Who do you suspect would object if we 
were to say we are going to have everybody enrolled in 
traditional Medicare and discontinue Medicare Advantage?
    Mr. Orszag. Well, obviously, the people who are 
beneficiaries today under Medicare Advantage would, by 
observation, prefer that to traditional fee-for-service. So 
they presumably would object.
    Mr. Moore of Kansas. But there is, I think, general 
consensus here that a lot of money is being wasted; not fraud, 
but wasted on this Medicare Advantage program.
    Mr. Orszag. I would say that the program is increasing 
Federal costs.
    Mr. Miller. I think it is a judgment of what you call 
``waste,'' and I think the objections would come from the 
beneficiaries enrolled, the plans that are providing the 
service. And I would say as an organization, we think there 
should be an option. So we don't think that--we are not saying 
that the managed care option should be eliminated.
    Mr. Moore of Kansas. All right. Thank you.
    Chairman Spratt. Mr. Etheridge.
    Mr. Etheridge. Thank you, Mr. Chairman, and let me thank 
you both for staying.
    Let me follow up on that question just a minute, if I may, 
because I think that is the heart of it.
    If Congress put Medicare Advantage on a level financial 
playing field with fee-for-service as MedPAC recommends, what 
will happened to Medicare Advantage's market? Will Medicare 
Advantage plans and the extra benefits they provide disappear? 
Do you think it will? Or will beneficiaries still have the 
opportunity to receive some extra benefits?
    As has been stated here this morning, or alluded to, that 
there would still be some money within that system, and how can 
we minimize the disruption of how--to the Medicare Advantage 
enrollees if the plan should disappear.
    Mr. Orszag. Let me say first, under our estimates, moving 
to 100 percent of local fee-for-service would not eliminate the 
Medicare Advantage program. It would in 2012 reduce enrollment 
by about half. So there would still be roughly 6 million or so 
beneficiaries in Medicare Advantage plans. And the reason, 
presumably, that they were in those plans is that somehow the 
plans offered some combination of supplemental benefits or 
reduced premiums to them that made it attractive for them to be 
in that plan, as opposed to traditional fee-for-service, 
despite the fact that the benchmarks were set at 100 percent of 
local fee-for-service.
    Mr. Miller. And just to back right into that, too. I mean, 
in our analysis that we present in the June chapter, we have 
evidence that we think that certain plan types, on average, the 
HMO plans, deliver the traditional fee-for-service benefit at 
below what the traditional fee-for-service benefit costs 
Medicare. That represents the opportunity for the plan to 
provide additional benefits, and that is why I think you still 
would see enrollment in these plans and still have some 
additional benefits, but not as many plans as now and not as 
generous a benefit package as you are seeing now.
    I want to acknowledge that.
    Mr. Etheridge. So in effect what you are saying is we would 
start to level the playing field.
    Mr. Miller. The payments would level--you would level the 
playing field between fee-for-service payments and the managed 
care payments, yes.
    Mr. Etheridge. Thank you. I yield back.
    Chairman Spratt. Mr. Berry.
    Mr. Berry. Thank you, Mr. Chairman. I think that it should 
be said that this Medicare Advantage part of the Medicare 
Modernization Act of 2003 was written by
    the insurance companies. And I served on that conference 
committee; and the insurance companies--it turned out just 
exactly just like they wanted it to, and we should not be 
surprised at the result.
    Having said that, my question is, and it was mentioned 
earlier, I think by the Ranking Member, that there is some 
advantage to having all of your coverage in one place, with one 
Medicare Advantage plan, where you get your drug plan and all 
of that.
    Have you done any analysis of the cost of whether or not we 
could lower the cost of the Part D program if we had Medicare, 
offer a Medicare-only plan as part of the A and B and make it a 
Medicare Part D, where one card served all of those purposes, 
and negotiated the prices for the people that would receive the 
medicine?
    Mr. Orszag. There would be a variety of ways of doing that. 
CBO has spoken, I guess at some length, about the role of the 
Medicare program, or the Secretary of HHS, in obtaining price 
discounts, for example, within Part D.
    But the details matter here. It depends on exactly how it 
is structured.
    I would also note with regard to benefits from that 
integration within Medicare Advantage plans that you referred 
to, again we need more data. CBO has been asking for and I 
would welcome evidence from the Medicare Advantage plans on the 
degree to which that integration is actually generating 
internal efficiencies and cost savings.
    Mr. Berry. Thank you, Mr. Chairman. I yield back.
    Chairman Spratt. Thank you.
    Thank you for your excellent testimony and for the fine 
work each of you does at your respective agencies, CBO and 
MedPAC. We very much appreciate your service and your 
contribution made today in understanding this complex problem.
    Thank you.
    We now have the second panel, which consists of Dr. Mark 
McClellan, former director of CMS, now at AIE Brookings; 
Barbara Kennelly, who is the chief executive officer of the 
National Committee to Preserve Social Security and a former 
Member of the House; Patricia Newman who is the director of 
Medicare Policy, the Henry J. Kaiser Family Foundation; Ardis 
Hoven of the AMA, the American Medical Association; and 
Catherine Schmitt of Blue Cross Blue Shield of Michigan.

  STATEMENTS OF MARK McCLELLAN, M.D., AIE BROOKINGS; BARBARA 
KENNELLY, CHIEF EXECUTIVE OFFICER OF THE NATIONAL COMMITTEE TO 
   PRESERVE SOCIAL SECURITY, AND FORMER MEMBER OF CONGRESS; 
  PATRICIA NEUMAN, DIRECTOR OF MEDICARE POLICY, THE HENRY J. 
 KAISER FAMILY FOUNDATION; ARDIS HOVEN OF THE AMERICAN MEDICAL 
 ASSOCIATION; AND CATHERINE SCHMITT, BLUE CROSS/BLUE SHIELD OF 
                            MICHIGAN

    Chairman Spratt. Dr. McClellan, do you have a time 
constraint?
    Mr. McClellan. I do, but I will push it back.
    Chairman Spratt. Some time the bell is going to ring around 
1 o'clock.
    I tell you what we will do. To accommodate your situation, 
we will let you go first. Thank you for coming. We look forward 
to your testimony, and I will say to all of the witnesses, the 
statements you filed will be made part of the record, and you 
can summarize them as you see fit.
    Thank you very much again, and Dr. McClellan.

               STATEMENT OF MARK McCLELLAN, M.D.

    Dr. McClellan. Mr. Chairman, thank you very much, Mr. 
Ranking Member, for the opportunity to be here. It is a real 
privilege to be back with many of you on this important issue 
of Medicare Advantage and the Federal budget.
    As you know, how Medicare pays for health care not only has 
important implications for the Federal budget, it has a major 
impact on how quickly and how effectively we can create a 
health care system that fulfills the promise of modern 
medicine: more prevention, better health at the lowest possible 
cost.
    In fulfilling this goal, Medicare Advantage Health plans 
pay a critical role. They bring greater value to our overall 
health care system in terms of enabling beneficiaries to get 
more up-to-date, higher quality care at a lower total cost. 
They are achieving higher rates of use of preventative 
services, they are providing greater access to care 
coordination services, improving compliance to prevent 
complications of chronic diseases, keeping beneficiaries 
healthier.
    This adds up, as we talked about earlier today, to $86 a 
month in savings for beneficiaries. That is more than $1,000 a 
year. And it is particularly important for beneficiaries with 
limited means who have no options, who aren't eligible for 
Medicaid, who don't have employer-provided retiree coverage, 
and who are facing out-of-pocket costs that exceed $3,000 a 
year.
    As Ken Thorpe at Emory University and other experts have 
noted, the average savings from the Medicare Advantage plans 
exceed reasonable estimates of the higher Government payments.
    There are also a number of reasons why the payment 
differences that we have been discussing today for most 
Medicare Advantage plans may not be as large in 2008 and beyond 
as the recent CBO, MedPAC, and other estimates would suggest, 
or at least why these--the reasons for the differences may 
change.
    These estimates only look at Part A and Part B costs in 
Medicare, not the Part D drug costs. And Part D costs are much 
less expensive in Medicare Advantage and these differences seem 
to be increasing over time.
    Also, I am not sure that all of these estimates fully 
incorporate traditional Medicare administrative costs, 
including the higher cost of preventing fraud and abuse, 
because of the very detailed administration of the program. 
Many of these estimates are based off what are called APCC 
costs which include most of the costs within a particular 
county of the Medicare benefits themselves, but not some of 
these other administrative costs that I mentioned.
    Also the estimates, looking forward, tend to understate the 
expenses in traditional Medicare that will be associated with 
physician payments. As we talked about this, we are scheduled 
for a 10 percent reduction next year. If Congress acts to 
address that--and they should to provide adequate access for 
seniors--then the payments in fee-for-service will be higher 
relative to Medicare Advantage and that is not taken account of 
yet in the projection.
    Also, the budget neutrality phase-out which was mentioned 
before is going to be a less important component of payment 
differences going forward. And, finally, there are a lot of 
studies that health economists have done showing there are 
spillover effects of health plans that provide coordinated care 
on the rest of the health care system, and in particular on 
Medicare fee-for-service, by promoting preventative care, by 
promoting care coordination that make it easier for providers 
to change their practice in that direction overall, leading to 
health care savings as well.
    So if you add all of this up, what looks like is going to 
happen in the years ahead is that the main factor accounting 
for payment differences in 2008 and beyond will be the higher 
payments in counties that historically have had low access to 
coordinated care and innovative benefits, that have had lower 
fee-for-service costs and were the subject of explicit 
decisions by Congress--not in the Medicare Modernization Act 
but in the Balanced Budget Act of 1997, BIPA 2000 and beyond, 
bipartisan decisions by Congress to increase payments to 
Medicare Advantage plans to improve access to these kinds of 
coordinated care benefits and more extensive benefit plans.
    So reducing Medicare Advantage payments further than what 
is already scheduled to happen in the next couple of years--and 
the payment updates for Medicare Advantage are going to be well 
below the rate of medical inflation next year, just like they 
were this year--may go too far to restrict access to savings 
and, importantly, to up-to-date health benefits that keep 
beneficiaries healthier and enable them to survive their 
chronic diseases more effectively.
    It would leave many beneficiaries not only with much higher 
out-of-pocket costs but also with no better alternative to 
either traditional Medicare, with all of its gaps, or to having 
to sign up for a very inefficient Medigap plan where 
beneficiaries pay much more in premiums than they get out in 
benefits.
    Seniors, I think, deserve better than that. They deserve 
more up-to-date options than that, and so policy reforms to 
address this looming Federal entitlement crisis should not 
start with shifting costs from the Federal Government to 
Medicare beneficiaries, who disproportionately have limited 
means and don't have access to Medicaid or employer or retiree 
coverage. Those are the people who primarily enroll in Medicare 
Advantage.
    Now, while finding ways to reduce costs and improve value 
in the overall health care system is very important, so, 
obviously, is finding ways to reduce Medicare spending growth. 
The best policy reforms will cause both Medicare expenditures 
and total health care expenditures to go down without 
compromising beneficiary health. And while some of the proposed 
payment reductions from Medicare Advantage don't meet that 
test, there are promising approaches to improve the performance 
of Medicare Advantage and also of traditional fee-for-service 
Medicare.
    Effective marketing and oversight, improving the 
availability of information on planned quality and costs, 
including better measures for traditional fee-for-service 
Medicare and Medigap as well, and providing more support to 
beneficiaries to use this information to make informed 
decisions about their coverage and their care can all help.
    In addition, adjusting the rules affecting the private fee-
for-service plans has been the subject of so much discussion 
this morning to limit the use of physician deeming, perhaps 
after an initial start-up period or when a range of options of 
plans that do not significantly restrict access if treatments 
are available in an area, that can achieve significant savings, 
according to Peter Orszag's testimony just a little while ago.
    Similarly, there are many opportunities to improve the 
efficiency of payments in fee-for-service Medicare you have all 
already discussed this morning. All of these steps can help 
achieve greater savings in Medicare with budgetary reductions, 
without raising beneficiary costs substantially.
    The best solution to Medicare's financing problems isn't to 
take away innovative coverage options and to shift costs to 
beneficiaries, particularly those with limited means who are 
struggling with out-of-pocket costs today.
    The main opportunities for improving care, as 
Representative Cooper pointed out, is the huge overuse, 
underuse, and misuse of treatments that is occurring around the 
country in the Medicare program overall today.
    As Peter Orszag said, this is the most substantial 
opportunity to reduce health care costs without compromising 
quality.
    So there are better ways to address the long-term 
sustainability of the Medicare program, or at least better 
places to start, while promoting more efficient health care. 
And I look forward to supporting this committee's continuing 
efforts to achieve this absolutely critical public health goal.
    Thank you very much, Mr. Chairman.
    Chairman Spratt. Thank you very much.
    [The prepared statement of Mark McClellan follows:]

    Prepared Statement of Mark McClellan, M.D., Ph.D., AIE Brookings

    Chairman Spratt, Ranking Member Ryan, and distinguished members of 
the Committee, thank you for the opportunity to testify today on 
Medicare Advantage and the Federal Budget.
    My testimony makes a number of points. First, Medicare Advantage 
(MA) health plans play a critical role in bringing greater value to our 
overall health care system, in terms of enabling beneficiaries to get 
more up-to-date, higher-quality care at a lower cost. Second, policy 
reforms to address the looming Federal government entitlement crisis 
should not start with shifting costs from the Federal government to 
Medicare beneficiaries with limited means, and they should seek to 
avoid reducing access to benefits like preventive services, more 
comprehensive drug coverage, and care coordination services that both 
reduce costly complications and help beneficiaries lead healthier 
lives. In fact, such changes may meet the definition of reduced 
efficiency, properly defined from the standpoint of the overall value 
of the care provided in our health care system. Third, any differential 
payments for most types of MA plans may well be smaller in 2008 and 
beyond than some recent estimates based on 2007 data would suggest. As 
a result of recent changes in law and regulation, MA plans overall will 
have relatively modest payment increases in 2008 and possibly in 
subsequent years. Remaining differences in payment rates are largely 
the direct result of bipartisan Congressional action to address 
concerns about reduced access to up-to-date coverage options in rural 
and certain urban areas. Thus, any changes should be approached 
cautiously. Fourth, while the MA program is a key element in achieving 
the overall policy goal of improving the quality and efficiency of 
Medicare and our health care system, there are some important 
opportunities to improve it and help reduce Federal costs.
              the value of the medicare advantage program
    Before discussing the efficiency of Medicare Advantage plans, I 
would like to start with a comment on the importance of considering 
value--which is the way economists define efficiency--in the context of 
our health care system. Economic efficiency is not simply reducing 
costs to the government. For example, consider two kinds of health care 
coverage. One kind generally pays for complications of health problems 
after they happen, but limits coverage of preventive care, services to 
help people with chronic disease stay well, and other benefits that 
improve health, resulting in higher costs to patients. The other kind 
of coverage is more in line with 21st-century health care: it provides 
more personalized medical services, such as helping people understand 
their risk factors, comply with drug therapies and other treatments to 
prevent complications, avoid duplicative services, and as a result it 
achieves better health outcomes. Even if these two kinds of coverage 
cost the same amount to the government, they are by no means equally 
efficient. Because the latter type of coverage achieves better quality 
for the same amount of government payment--because it delivers greater 
value--it is the more efficient approach. In fact, even if the more up-
to-date coverage were somewhat more costly, because it delivers better 
health, it may still be the more efficient plan. Moreover, economic 
efficiency cannot be determined simply by looking at costs to the 
government. Efficiency depends on overall costs, including costs paid 
by beneficiaries as well as the government. Coverage that shifts costs 
to beneficiaries without lowering overall costs--or perhaps increasing 
them--does not increase efficiency.
    If we want to achieve a high-value, efficient health care system, 
then Federal policies must encourage high-value health care. With this 
background in mind, I would like to describe how the Medicare Advantage 
program overall is performing.
    Overall, compared to fee-for-service Medicare, beneficiaries in 
Medicare Advantage plans have much lower out-of-pocket costs; they 
receive significantly more preventive benefits, drug coverage, and 
services to help them better manage their chronic diseases; they have 
very high satisfaction rates; and in most cases, their overall care 
costs (Medicare plus beneficiary) are lower.
    For example, Medicare Advantage beneficiaries receive preventive 
services like mammograms, colorectal cancer screening, prostate 
screening, and immunizations at significantly higher rates than 
beneficiaries in traditional fee-for-service (FFS) Medicare. In 
addition, compared to other Medicare beneficiaries without supplemental 
``Medigap'' coverage, MA beneficiaries are only one-third as likely (6 
percent versus 17 percent) to report delaying the use of needed care 
due to cost.\1\
    MA beneficiaries also receive higher quality of care in many areas; 
for example, a study in the Journal of the American Medical Association 
found that beneficiaries in MA plans received higher quality of care 
than beneficiaries in traditional FFS Medicare in five of seven HEDIS 
quality measures studied.\2\ Quality is reflected in overall high 
beneficiary satisfaction rates with their coverage: Consumer Assessment 
of Health Plans Surveys (CAHPS) generally rate MA plans highest among a 
range of types of health plans.\3\
    These quality of care results are the consequence of how most MA 
plans provide coverage. Plans receive a single, risk-adjusted payment 
from Medicare, and they compete to attract and keep beneficiaries by 
using this subsidy to provide the most attractive benefits at the 
lowest overall cost. In contrast, in traditional FFS Medicare, benefits 
are determined by statute and cannot easily include many innovative 
approaches to benefit design, provider payment, care coordination 
services, and personalized support for beneficiaries. Through MA plans, 
beneficiaries across the country have access to plans with lower or 
zero copays for preventive services; they have widespread access to 
wellness programs; they have access to dental and vision services that 
not only reduce costs but also help beneficiaries live better and 
improve their overall health.
    Importantly, MA plans are also providing drug coverage that is more 
extensive and much less costly than in traditional FFS Medicare. This 
difference in generosity and cost, which increased between 2006 and 
2007 and may continue to increase in the future, is likely the result 
of several factors. First, most MA plans can manage the use of 
prescription drugs more effectively, as part of their efforts to 
support the overall coordination of care for a patient's health. 
Second, higher compliance with drugs has been shown to reduce other 
health care costs,\4\ and because MA plans have incentives to keep 
overall costs down that do not exist in traditional FFS, they can 
capture the savings in hospital, physician, and other costs from the 
greater compliance that comes with more comprehensive drug coverage. 
Again, this is a more efficient approach to health care coverage.
    Finally, most MA plans provide much more support for patients with 
chronic diseases than is available in traditional FFS Medicare. This is 
critically important, since the vast majority of costs in Medicare--and 
most of the cost growth in Medicare--relates to treating the 
complications of a limited number of serious chronic diseases. Our 
health care system has huge and persisting quality gaps in the 
prevention and treatment of chronic diseases. There is no population in 
this country that needs such personalized services to improve 
coordination and prevent complications from chronic diseases more than 
Medicare beneficiaries.
    All of these features--better preventive care, lower out-of-pocket 
costs, better drug coverage, better support for quality care for 
chronic diseases--are signs of more efficient health care. Not 
surprisingly, they add up to very large savings for beneficiaries--on 
average, out-of-pocket costs are $86 a month less in MA, compared to 
traditional FFS Medicare with Medigap (counting beneficiary premiums) 
or no supplemental coverage. That's more than $1000 a year in savings. 
This is why a recent analysis by Adam Atherly and Ken Thorpe of Emory 
University concluded that even though MA payments increase Medicare 
costs, ``the size of the increase in costs will be less than the value 
of the supplemental benefits provided to beneficiaries''--that is, 
overall costs to beneficiaries and the Federal government are lower in 
the MA plans.\5\ (Similarly, according to MedPAC testimony before the 
Ways and Means Committee in May, average bids across all Medicare 
Advantage plans for Part A and B services are lower than the average 
cost of traditional FFS Medicare\6\ --and when Part D benefits are 
included, the cost differences are larger.)
    To achieve the goal of reducing overall health care costs while 
improving quality--that is, to improve efficiency from the standpoint 
of our overall health care system, and to spend beneficiary as well as 
tax dollars more effectively--Medicare Advantage is providing very 
important options to Medicare beneficiaries.
estimated payment differences between ma and traditional medicare, and 
                    implications for payment reforms
    While finding ways to reduce costs and improve value of the overall 
health care system is very important, so is finding ways to reduce 
Medicare spending growth. The best policy reforms will cause both 
Medicare expenditures and total health care expenditures to go down, 
without compromising beneficiary health. With all the overuse, 
underuse, and misuse of medical care in our health care system, there 
are plenty of opportunities to do this. But reductions in MA payment 
rates would not do it: they reduce Medicare spending by reducing the 
benefits and the beneficiary savings just described. So an important 
question is: what is the likely impact of reducing MA payments?
    As a preliminary step, it's important to review what the overall 
Medicare payment differences are between MA plans and traditional 
Medicare. There are some reasons why the 12 percent estimate of cost 
differences from CBO and MedPAC may not be indicative the payment 
differences in 2008 and beyond, and thus the impact of payment reforms 
to ``equalize'' payments, especially for the coordinated care plans 
(HMOs and PPOs) that continue to make up the vast majority of MA 
enrollment. First, the estimated payment differences do not include a 
number of factors that affect the overall cost comparisons:
     The analyses generally focus on Part A and B benefits 
only.\7\ But MA plans are providing Part D coverage at substantially 
lower costs than in traditional Medicare, for the reasons described 
above, and these cost differences are increasing. As a result, MA plans 
are likely to exert a growing impact on holding down the Part D 
``benchmark'' and thus holding down Part D costs for the entire 
Medicare program. Accounting for the complete costs of A, B, and D 
benefits results in a significantly smaller difference in total 
Medicare costs.
     The analyses include the administrative costs of MA plans 
(these costs, along with care coordination and other patient management 
costs, are included in the MA bids) but the administrative costs 
(including the administrative costs to combat fraud and abuse) of 
traditional FFS Medicare are not included. These costs likely amount to 
2 percent or more in additional traditional FFS costs.
     The forecasts of spending differences and savings for 2008 
and beyond do not account for the artificially low forecasts for 
physician spending in traditional Medicare. The large spending 
reductions required under current law, including a 10 percent cut in 
payment rates for 2008, are not sustainable. Physicians cannot provide 
adequate services for beneficiaries with these payment reductions. When 
Congress addresses the physician payment reduction for 2008, payments 
in traditional Medicare will go up significantly, and would not be 
accounted for in the MA rates until 2009 (by which time Congress may 
have enacted another one-year physician payment ``fix'' that increases 
traditional FFS costs again).
     An important source of additional payments to MA plans 
right now, the so-called ``budget neutrality'' adjustment to the risk-
adjusted payments to MA plans, is being phased out. Other things equal, 
it will be substantially smaller in 2008 and beyond, particularly if MA 
plans continue to increase their efforts to design benefits that 
attract chronically ill beneficiaries.
    In addition to these four factors, some reports have also pointed 
out other potential factors that may incrementally affect the estimated 
differences, such as costs not included in the county ``AAPCC'' amounts 
behind the traditional FFS payment estimates, and the way that payments 
for medical education are counted.\8\
    From the standpoint of overall health care efficiency, another 
important factor to consider in evaluating the cost impact of the MA 
program is known as the ``spillover effect'' of a growing presence of 
plans that emphasize prevention and coordinated care. As every health 
care provider knows, how traditional Medicare pays is an important 
influence on how overall health care is delivered. For example, when 
providers are paid more when patients have more duplicative tests and 
more preventable complications--as is the case in fee-for-service 
payment systems--it is more challenging to take steps like adopting 
health IT or reorganizing practices in other ways to deliver care more 
efficiently. In reviewing a broad range of studies of the impact of 
managed care plans on overall health care spending in different regions 
of the country, Laurence Baker of Stanford University concluded that 
``despite some, generally early, studies that do not find strong 
effects, this literature as a whole suggests that managed care is 
capable of having broad influences on the health care delivery system, 
and that these effects have been in the direction of driving down 
health care costs. Some of this evidence, particularly that focused on 
traditional Medicare enrollees, clearly indicates the ability of 
managed care activity to influence spending patterns for patients well 
outside the boundaries of managed care plans.'' \9\ Thus, increasing 
access to coordinated care plans through higher payments is an 
important policy lever for the Federal government to help influence the 
overall efficiency of the health care system, with potentially 
important ``external'' efficiency benefits in traditional FFS Medicare 
and even beyond the Medicare program.
    Similarly, the estimate of a $2 higher Part B beneficiary premium 
resulting from MA payments is offset by the lower average Part D 
premiums resulting from MA plans. Indeed, reducing enrollment in MA 
plans would exacerbate another kind of inefficency that increases 
overall Medicare spending and total beneficiary premiums. Most 
beneficiaries in traditional Medicare are also enrolled in ``Medigap'' 
supplemental coverage. This coverage, particularly the individual 
Medigap plans, is quite inefficient: not only does it have a high 
``load factor''--meaning beneficiaries have to pay much more in 
premiums than they get out in benefits--but the Medigap options are 
also designed in a way that encourages ``first dollar'' coverage that, 
according to the CMS Actuaries and CBO analysts, adds billions to 
Medicare costs each year.\10\ Such Medigap plans not only promote 
inefficient spending; Medigap premiums have been rising rapidly, and 
are much higher than Part B and Part D premiums combined. Yet except 
for MA plans, the Medicare program gives beneficiaries in traditional 
FFS Medicare few options besides this costly and inefficient approach 
for lowering their out-of-pocket medical costs and protecting 
themselves against devastatingly high expenditures.
    Finally, the principal MA payment policy associated with this 
year's increase in CBO's forecast of cost savings from revising MA 
payment rates is the higher payment rates in rural and urban ``floor'' 
counties. These payment rates were the result of explicit, bipartisan 
policy decisions in several Medicare laws preceding the Medicare 
Modernization Act. The stated goal of the Congress in creating and 
increasing the floor county payment rates was to promote access to more 
comprehensive health plan choices, and a broader range of choices, in 
areas that might not otherwise have MA plan availability. With the 
competitive reforms enacted in the MMA, these law changes are finally 
having that effect: for the first time ever, virtually all Medicare 
beneficiaries have a choice of health plans, including HMO and/or PPO 
plans and private FFS plans, and access to other options like MSA plans 
is increasing as well.
  reductions in ma payment rates will increase beneficiary costs and 
        reduce the overall efficiency of the health care system
    Reductions in payments to the MA plans would increase beneficiary 
health care costs, reduce the overall availability and use of 
preventive services and care coordination services in Medicare (and 
likely in the overall health care system), and reduce many aspects of 
the quality of care received by millions of Medicare beneficiaries. 
According to estimates by Adam Atherly and Ken Thorpe,\11\ these 
impacts may be large: limiting MA payment increases to 1 percent would 
increase MA beneficiary costs by $412 by 2009, and approximately 1.8 
million beneficiaries would lose HMO/PPO coverage and face out-of-
pocket cost increases of $825 per year. In considering these impact 
analyses, it is important to note that statutory and regulatory changes 
in MA payment rates are already holding down MA payment increases. For 
2007, the relatively small payment increases accounted for a negligible 
share of the increase in the Part B premium, and for 2008, plan payment 
increases will generally be well under the rate of overall medical 
inflation and Medicare FFS spending growth.
    Moreover, the beneficiaries who enroll in Medicare Advantage plans 
are those who most need lower-cost, efficient coverage options. 
According to another analysis by Ken Thorpe,\12\ as well as other 
studies, MA enrollees are more likely to have limited means (i.e., 
incomes under $20,000 to $30,000), are much less likely to have 
employer-provided supplemental coverage, and are more likely to be 
racial and ethnic minorities. For these beneficiaries, the alternative 
choices of the gaps and financial exposure of traditional FFS Medicare 
alone or of the high costs of traditional Medicare plus Medigap are not 
good choices.
    If our nation is going to close the huge gap in prevention and in 
quality of care for chronic diseases, it is essential that we promote 
access to coverage like that available in most MA plans, which 
emphasizes preventing illness in the first place, avoiding preventable 
complications of chronic diseases, and using health services more 
efficiently. As Administrator of CMS, I was a strong supporter of 
greater prevention and greater focus on prevention and improving care 
for chronic diseases within the traditional Medicare program as well. 
Over the past several years, CMS has implemented many steps in 
traditional FFS Medicare to improve quality and efficiency. These steps 
include a major ``My Health, My Medicare'' prevention initiative to 
encourage beneficiaries take advantage of the expanded coverage of 
preventive services, the Medicare Health Support program to pilot the 
availability of disease and care management programs in traditional FFS 
Medicare, and initial steps toward providing better information on 
quality and efficiency and paying more for better care not just more 
care, to encourage better health and greater efficiency. But progress 
has been slow, because it is challenging to encourage the kinds of care 
coordination and integration that promote quality and efficiency, and 
that get the right care to the right patient at the right time, in a 
FFS payment system. In contrast, as described above, most MA plans have 
clearly demonstrated the capacity to achieve higher levels of quality 
without increasing overall health care costs, and in many cases 
reducing overall costs.
    I am particularly concerned that, in the current policy debate 
about MA plans, there has been little discussion of alternative 
policies that can improve prevention, care coordination, and overall 
health care costs and that could achieve similar savings for Medicare 
beneficiaries. For example, some have proposed using MA payment 
reductions to ``pay for'' increased Part B payments to physicians. If 
Congress took this step, Medicare beneficiaries would face a ``double 
hit'' on their out-of-pocket costs, first from their loss of MA 
benefits and savings and second from the higher copays and premiums for 
Part B services. Medicare physician payment needs to be addressed, but 
there are better alternatives than taking away benefits and savings 
from seniors, particularly the many beneficiaries with limited means 
who can least afford this kind of Medicare reform.
                     private fee-for-service plans
    Understandably, Members of the Committee and many other Members of 
Congress have been particularly concerned about trends in private fee-
for-service (PFFS) enrollment. PFFS plans were created by Congress in 
the Balanced Budget Act of 1997 to fulfill an important role: giving 
beneficiaries access to coverage that would not impose substantial 
utilization review or other regulatory restrictions on access to care. 
PFFS plans are the least efficient kind of MA plans and they are now 
growing rapidly, spurred by selectively entering ``floor'' counties 
with very favorable reimbursement rates and offering essentially the 
same fee-for-service payment schedule as traditional Medicare, plus 
some additional benefits and cost sharing reductions. Some of these 
plans have claimed that they are implementing a multi-year strategy to 
serve beneficiaries effectively in areas that previously have not had 
much if any private plan participation. That is, when they have started 
enrolling beneficiaries, they look very similar to traditional FFS 
Medicare; but over time, they expect to build beneficiary familiarity, 
provider networks, and other features that will enable them to increase 
the quality and efficiency of care. Other plans appear simply to be 
mimicking traditional FFS Medicare with some additional cost savings, 
which does not create the same kind of quality improvements and overall 
efficiency gains as other types of MA plans and is not what extra 
Federal spending should be supporting in the years ahead.
    Some policy reforms have been discussed which might address 
concerns about the impact of PFFS growth on program efficiency without 
eliminating access to this option, and reduce Medicare costs without 
undermining the positive features of the MA program. One step, which 
CMS has already initiated, is aggressive enforcement of proper 
marketing practices. Satisfaction rates overall in MA remain high, but 
keeping them high will require ongoing, effective Federal oversight and 
responses to beneficiary complaints, especially when patterns of abuse 
are apparent. The AMA and other physician organizations have also 
criticized the availability of ``physician deeming'' to PFFS plans. 
While new PFFS plans may need this authority to establish a market 
presence and ``get off the ground'' with beneficiaries and health care 
providers, the long-term use of deeming authority may not be necessary 
for a well-run PFFS plan. To address this, deeming authority for a PFFS 
plan might end after an initial plan startup period, perhaps several 
years, or after a substantial presence of PFFS, PPO, MSA, and other 
plans that do not impose strict utilization management techniques has 
been established in an area. Similarly, PFFS plans might be required to 
establish contracts with providers and post the resulting provider 
lists after a reasonable time period. Finally, PFFS plans might be 
required to undertake steps that go beyond simply replicating 
traditional FFS benefits with lower cost-sharing, such as providing 
wellness services or support services for beneficiaries with chronic 
diseases. Properly implemented, steps like these would help avoid 
excess Medicare costs and assure that PFFS plans are both available to 
beneficiaries who want them and are a good investment for the Federal 
government.
                          special needs plans
    Another rapidly growing component of the MA program is Special 
Needs Plans (SNPs), which are MA plans that target beneficiaries with 
particular, distinctive health needs that offer services tailored to 
those needs. Today, the largest number of such plans are designed for 
``dual eligible'' Medicare-Medicaid beneficiaries, who have much to 
gain from care coordination services. However, plans for beneficiaries 
with institutional levels of care needs and for beneficiaries with 
particular kinds of chronic diseases are also growing rapidly; for 
example, 23 organizations are offering 83 chronic-disease SNPs this 
year.
    Clearly, these plans create important opportunities to customize 
services, improve care, and reduce costs for beneficiaries who have the 
most to gain from such services. SNPs for dual-eligible and 
institutionalized patients have enabled beneficiaries to simplify their 
medication regimens and avoid costly, preventable hospitalizations, 
while reducing costs and improving quality in state Medicaid programs. 
Chronic-care SNPs help beneficiaries with chronic illnesses manage 
their conditions more effectively, through more generous drug coverage 
and assistance with medication compliance, diet and behavior changes, 
information technology (IT) support for care coordination, and other 
steps intended to prevent costly complications and disease progression. 
None of these benefits and services is available in traditional FFS 
Medicare, and many states have turned to SNPs to provide these services 
to their dually eligible beneficiaries. By focusing on high-cost, 
complex patients, SNPs show that--with proper payment incentives and 
oversight that promotes effective competition to serve even the most 
vulnerable Medicare beneficiaries--the traditional criticism that 
private plans only want healthy patients is being turned on its head. 
Because the beneficiaries served by these plans account for a large 
share of Medicare spending, the SNP program can have an important 
impact on the overall quality and efficiency of Medicare and our health 
care system's ability to serve those who need the most help.
    While the initial experience with SNPs has had many positive 
features, indicating that the program should be reauthorized, the 
proliferation of a diverse range of SNP plans is beginning to provide a 
richer basis for evaluating the SNP program and improving it. For 
example, CMS is working with outside expert groups to develop improved 
performance measures for the various types of SNPs. In addition, some 
SNPs may be targeting conditions like high cholesterol that, by 
themselves, may not represent a truly distinct cluster of patient 
health needs where specialized benefits and management can achieve 
significant improvements in quality and efficiency. And some of these 
plans may not offer many specialized, targeted services compared to 
typical MA plans that must market and provide appropriate services for 
the general Medicare population. CMS or Congress should consider 
minimum standards for the conditions and types of beneficiaries treated 
by SNP plans. In particular, the plans should be targeted to 
beneficiaries where distinctive, complex health care needs create a 
real opportunity to achieve significant overall cost savings and 
quality improvement, and the plans should be expected to provide 
significant specialized benefits and services. Conditions like 
congestive heart failure, diabetes, chronic lung disease, HIV/AIDS, and 
certain cancers, as well as high-cost combinations of such conditions, 
are examples of clinical areas where targeted, specialized services and 
expertise are likely to be appropriate.
                               conclusion
    Mr. Chairman, Mr. Ranking Member, and Distinguished Members, we are 
living in era when the opportunities for preventing diseases and their 
complications have never been greater, and at the same time, when the 
challenge of promoting effective and efficient use of all of the 
increasingly diverse and sophisticated treatments available has never 
been greater. Increasingly, efficient health care is about prevention, 
personalization, and coordination of services around the needs of each 
individual patient. How we pay for health care has an important impact 
on how quickly and effectively we can create a health care system that 
fulfills the promise of modern medicine at the lowest possible overall 
cost. With Americans generally and Medicare beneficiaries in particular 
getting only about half of the preventive care they need, and with poor 
care coordination and preventable complications accounting for more and 
more spending in the Medicare program, it is more urgent than ever for 
Medicare payment policies to promote high-value, personalized care. To 
achieve a high-value health care system--the most important kind of 
``efficiency'' in health care--Congress should continue to support the 
Medicare Advantage program, which is our best, proven avenue for 
improving prevention and chronic disease management in Medicare.
    At the same time, there are promising approaches to improve the 
performance of Medicare Advantage, and of traditional FFS Medicare as 
well. Effective marketing enforcement and oversight, improving the 
availability of information on plan quality and costs (including better 
measures for traditional FFS Medicare and Medigap, as well as all types 
of MA plans, to help beneficiaries make more informed choices about 
their coverage), providing more support for beneficiaries to use this 
information to make informed decisions about their coverage and their 
care, and adjusting the rules affecting PFFS plans and SNPs are all 
examples of such policies. Similarly, there are many opportunities to 
improve the efficiency of payments in traditional FFS Medicare. All of 
these steps can help achieve greater efficiency in Medicare, leading to 
budgetary savings without raising beneficiary costs substantially.
    The best solution to Medicare's financing problems isn't to take 
away innovative coverage options and shift costs to beneficiaries--
particularly those with limited means who are struggling with out-of-
pocket costs today. There are better ways to address the long-term 
sustainability of the Medicare program while promoting more efficient 
health care, and I look forward to supporting the Committee's efforts 
to achieve this critical public health and fiscal goal.
                                endnotes
    \1\ Centers for Medicare and Medicaid Services, Overview of the 
Medicare Advantage Program, May 2007.
    \2\ Jencks, SF, et al., Journal of the American Medical 
Association, 289: 305-312, Jan. 15, 2003.
    \3\ CMS, op. cit.
    \4\ Sokol, MC, McGuigan, KA, Verbugge, RR, Epstein, RS. Impact of 
Medication Adherence on Hospitalization Risk and Healthcare Cost. 
Medical Care 2005; 43: 521-530.
    \5\ Atherly, A, and Thorpe, KE, The Impact of Reductions in 
Medicare Advantage Funding on Beneficiaries. Atlanta, GA: Emory 
University Rollins School of Public Health, April 2007.
    \6\ Miller M, Private Fee-for-Service Plans in Medicare Advantage. 
Statement on behalf of MedPAC before the Subcommittee on Health, 
Committee on Ways and Means, U.S. House of Representatives, May 22, 
2007.
    \7\ MedPAC, Medicare Advantage Benchmarks and Payments Compared 
with Average Medicare Fee-for-Service Spending, June 2006.
    \8\ See, e.g., the detailed report in Centers for Medicare and 
Medicaid Services, Medicare Advantage in 2007. Baltimore, MD: May 2007, 
http://www.cms.hhs.gov/MCRAdvPartDEnrolData/Downloads/
MedicareAdvantageIn2007.zip.
    \9\ Baker L, ``Managed Care Spillover Effects,'' Annual Review of 
Public Health 24: 435-56, 2003.
    \10\ According to CBO's Budget Options (February 2007), replacing 
the current first-dollar Medigap coverage options with supplemental 
coverage that required limited cost sharing (with an out-of-pocket 
spending limit) to levels more like that seen in MA plans would save 
over $14 billion.
    \11\ Thorpe, op. cit
    \12\ Atherly, A, and Thorpe. KE, Value of Medicare Advantage to 
Low-Income and Minority Medicare Beneficiaries. Atlanta, GA: Emory 
University Rollins School of Public Health, 2005.

    Chairman Spratt. Before turning to Barbara Kennelly, let me 
recognize Dr. Robert M. Wah who is taking the place of Ardis 
Hoven of the American Medical Association. I am sorry for the 
initial mistake I made.
    Ms. Kennelly, you are welcome any time. Good to see you 
again. Thank you for coming to testify.

                 STATEMENT OF BARBARA KENNELLY

    Ms. Kennelly. Thank you, Chairman Spratt, and thank you 
Ranking Member, Mr. Ryan. And thank you members of the 
committee for inviting me to testify today on this important 
issue of the impact of Medicare Advantage overpayments on the 
Medicare program.
    As President of the National Committee to Preserve Social 
Security and Medicare, I represent 4 million members and 
supporters who are vitally committed to the preservation of 
Social Security and Medicare, programs that are crucial to our 
Nation's retirement security.
    Mr. Chairman, while the groups like us, like the National 
Committee, were concentrating on stopping the privatization of 
Social Security, Medicare was already undergoing a 
transformation into a privatized program, thanks to the 
Medicare Modernization Act.
    I listened very carefully to Dr. Orszag this morning and 
Dr. Miller, and I certainly appreciate what they were saying: 
that there are managed care plans that before this bill was 
passed, did a very good job and will continue to do a very good 
job. In fact, people on this panel represent some of those 
proposals.
    But I truly feel that the way the bill was designed that it 
is truly a--it is looking right at the heart of Medicare--to do 
away with Medicare as we know it. In fact, I will go so far as 
to say this morning that it was designed to accomplish the goal 
expressed by our former Speaker, Mr. Gingrich, to lure seniors 
voluntarily out of Medicare so that it would eventually--
Medicare would eventually wither on the vine.
    Now, I know much time has been spent debating the long-term 
affordability of both Social Security and Medicare. In fact, 
the administration has people on the Hill almost weekly telling 
us that we can't afford these entitlements. We can't afford 
Medicare. And this committee has spent--and I know how much 
time it has spent, considering these situations and looking at 
Medicare very seriously, and they certainly will do that again 
next year because of the 45 percent trigger.
    We know that many of Medicare's costs are not unique to 
Medicare. They reflect the same factors that are causing 
skyrocketing increases in health care costs for the under-65 
population. Many experts continue to struggle with ways to 
solve these problems. But unlike these complex technical 
challenges, overpayments to Medicare Advantage plans are much 
more straightforward. They are also one cost that you can 
control.
    Congress created the expanded subsidies in the MMA. 
Congress can vote to eliminate them or at least reduce them to 
a certain extent.
    I cannot overstate the damage these Medicare Advantage 
overpayments will cause to the traditional Medicare program if 
they are not addressed.
    Ultimately, overpaying Medicare Advantage plans will 
shatter the risk pool that made Medicare work. Medicare 
Advantage plans tend to attract healthier seniors because of 
their benefits.
    As more of these seniors are lured out of the traditional 
Medicare, they leave behind the frailest and most vulnerable to 
pay higher and higher premiums. Also, as Medicare Advantage 
enrollments grow, so do taxpayer subsidies. Over time, this 
cycle will cause Medicare to become unaffordable for both 
taxpayers and beneficiaries. Eventually, political support for 
the program will shift.
    Today's social insurance concept of shared risk will be 
replaced by the ownership society, a concept of individual 
risk, a concept that has been already pushed very hard by our 
President, and hand-in-hand with individual risk will come an 
individual payment system called vouchers.
    We know that vouchers save money for healthy beneficiaries 
and shift the burden of health care to the frailest and sickest 
among us, and they also provide no containment for health care 
costs. Eventually, we will find ourselves in a world much like 
it was before Medicare was created, and health care will be 
unaffordable for the average senior.
    At a time when our Nation is struggling with how to create 
affordable health care coverage for all Americans, it is simply 
incomprehensible to me why we would destroy the one affordable, 
universal health care system that already exists, known as 
Medicare. Now, I know that you will hear arguments that the 
Medicare Advantage overpayments are necessary to provide 
improved health care services to groups such as those with 
multiple and chronic conditions, minorities, those living in 
rural areas, and the poor.
    Of course, we do not always know whether the Medicare 
Advantage plans actually provide significant benefits to these 
groups because of lack of reporting and claims of proprietary 
information, but if Congress believes higher payments are 
needed to improve the health of beneficiaries in these groups, 
it would be much more simple and it certainly would be less 
expensive to increase resources targeted to the groups that we 
are talking about by expanding and improving low-income 
programs.
    Mr. Chairman, the vast majority of Medicare beneficiaries 
remain in the traditional program. You may not hear their 
voices as loudly as you hear the insurance industry's, but 
believe me when I tell you they will be seriously hurt if 
Congress does not eliminate Medicare Advantage subsidies. The 
decision you make this year will be impacting on the people of 
this country for decades to come.
    Thank you for inviting me here today, and thank you very 
much for listening to me, and I look forward to working with 
you.
    [The prepared statement of Barbara Kennelly follows:]

  Prepared Statement of Hon. Barbara B. Kennelly, President and CEO, 
  National Committee to Preserve Social Security and Medicare, Former 
                           Member of Congress

    Mr. Chairman and Members of the Committee: Thank you for inviting 
me to testify this morning on the important issue of the impact of 
Medicare Advantage overpayments on the Medicare program. As President 
of the National Committee to Preserve Social Security and Medicare, I 
represent 4 million members and supporters who are vitally committed to 
the preservation of Social Security and Medicare--programs that are 
critical to our nation's retirement security.
    The National Committee advocated in favor of adding a prescription 
drug benefit to the Medicare program for many years. We shared many 
seniors' expectations that a drug benefit would take the form of a 
simple expansion of the traditional Medicare program. Providing 
prescription drug coverage through traditional Medicare would have 
given beneficiaries a simple, standardized benefit, and allowed the 
federal government to leverage the purchasing power of millions of 
beneficiaries to lower drug prices.
    As you know, this benefit structure is not what seniors received. 
The current Medicare Part D benefit is complicated, confusing and 
fragmented, and whatever competition exists between private plans has 
not been sufficient to slow the continued upward spiral of prescription 
drug prices. Because the drug benefit is provided entirely through 
private plans, it also represents the first major step toward the full 
privatization of the Medicare program.
    The Medicare Modernization Act (MMA) is not only a mechanism for 
enacting a drug program that provides considerable financial benefit to 
the drug and insurance industries. For many, offering seniors 
prescription drug coverage for the first time was the ``sweetener'' 
intended to mask the taste of the medicine of privatization. As it has 
turned out, the drug benefit itself was a bitter pill for many seniors. 
But for the designers of the MMA, it was conceived as a way to smooth 
the passage of massive long-term changes leading to the privatization 
of the Medicare program. This was done despite the success and 
popularity of the traditional fee-for-service Medicare program, and 
despite the failure of past privatization efforts such as 
Medicare+Choice.
    Mr. Chairman, the Medicare Modernization Act is a weapon aimed at 
the heart of the traditional Medicare program. It was designed to 
accomplish the goal expressed by former Speaker Newt Gingrich--to lure 
seniors voluntarily out of Medicare so that it would eventually wither 
on the vine. The overpayments to Medicare Advantage plans that you are 
exploring today represent one of the tools by which to achieve this 
end.
    The National Committee believes that privatizing Medicare is just 
as likely to ultimately destroy the health care safety net for seniors 
as privatizing Social Security is to dismantle the foundation of 
retirees' income security. Through much hard work and education, groups 
such as ours have been able to temporarily halt the march of Social 
Security privatization. Unfortunately, we were not similarly successful 
with Medicare, so our efforts must be concentrated on reversing the 
most egregious provisions of the Medicare Modernization Act.
    Privatization in the MMA takes a number of forms. First, there is 
the privatized nature of the drug benefit itself, which is only 
available through private plans and not through traditional Medicare. 
In addition, the MMA provided massive subsidies to the private sector, 
most of them in the form of the overpayments to private Medicare 
Advantage plans that the Committee is exploring today. Finally, we 
would note some of the lesser understood elements of privatization such 
as the 45% limit on federal funding, the privatization demonstration 
project known as the ``comparative cost adjustment demonstration 
project'' or ``premium support'', and the new provision means-testing 
the Medicare Part B program for the first time in the history of 
Medicare. All of these provisions collectively undermine the 
traditional Medicare program.
    Private health plans, now called Medicare Advantage plans, were 
first allowed to participate in Medicare because some policymakers 
believed they could provide better services at a lower cost than 
traditional Medicare. In fact, because it was anticipated private plans 
would be so efficient, the government initially paid them 5 percent 
less for each beneficiary they enrolled than it would have cost to 
cover that same beneficiary in traditional Medicare.
    In 25 years time, the powerful health insurance industry lobby has 
been extremely successful in turning this rationalization on its head. 
Instead of paying private plans less to reflect the efficiencies they 
argued would save the government money, Medicare now pays them 
significantly more than it would cost to cover the same beneficiaries 
through traditional fee-for-service Medicare. In fact, today the 
government pays an average of 12 percent more to cover a beneficiary in 
a private Medicare Advantage plan than it would cost to cover that same 
beneficiary in traditional Medicare. And some types of private plans 
can receive much larger payments. For example, Private Fee-For-Service 
plans are paid about 19 percent more than traditional Medicare and 
plans in some localities are paid 50 percent more than traditional 
Medicare. In simple dollar terms, Medicare pays about $1,000 more a 
year to cover a beneficiary in a private plan than it would cost to 
provide care to that same beneficiary under traditional Medicare.
    All beneficiaries, whether they enroll in a private plan or not, 
subsidize payments to private companies by paying higher Part B 
premiums. Today, these premiums are almost $50 per year higher per 
couple than they should be because of overpayments to private plans. 
This number will clearly continue to grow exponentially in future 
years. These increases are in addition to the record-setting increases 
in Part B premiums beneficiaries have already experienced--and which 
are expected to continue--as a result of increases in the cost of 
health care.
    In addition to adding costs for individual beneficiaries, 
overpayments to Medicare Advantage plans result in higher costs to the 
federal government. Medicare's Actuaries estimate that eliminating 
these overpayments would add two years of solvency to Medicare's 
hospital insurance trust fund. These additional costs are absorbed by 
the Medicare program at a time when health care costs are growing 
dramatically, both for the federal government and for beneficiaries. In 
fact, President Bush and some others have insisted that the federal 
government cannot afford to continue supporting entitlement programs 
such as Medicare over the long-term. President Bush has included deep 
cuts to Medicare in his past two budgets, and many of his supporters in 
Congress have pushed to include sizeable Medicare cuts in the budget 
process this year. In addition, the automatic triggering mechanism 
included in the Medicare Modernization Act of 2003 has initiated a 
process designed to result in significant cuts in Medicare as early as 
2009.
    Many of the causes of increased Medicare costs are difficult to 
tackle--they reflect the same factors that have resulted in 
skyrocketing increases in health care costs for the under-65 population 
that have proven so intractable. Many experts continue to struggle with 
ways to solve this problem.
    But I can point out one cost reduction that is obvious and can be 
addressed by this Congress quite simply--the overpayments to Medicare 
Advantage plans. Overpaying private plans adds to the cost of the 
Medicare program for both beneficiaries and for taxpayers. Unlike the 
more complex challenges of curbing the overall growth of health care, 
it is the one cost that is easiest to control. Congress created the 
expanded subsidies in the Medicare Modernization Act. Congress can vote 
to eliminate them.
    The National Committee believes that Medicare should equalize 
payments between the traditional program and private plans. We support 
the Medicare Payment Advisory Commission's (MedPAC) recommendation of 
financial neutrality between payments in the traditional fee-for-
service program and payments to private plans. Equalized payments would 
level the playing field and remove private plans' unfair advantage in 
attracting beneficiaries.
    Continuing to overpay private insurance companies to provide 
services that could be more affordably and efficiently provided by the 
traditional Medicare program is unconscionable. According to the 
Congressional Budget Office (CBO), leveling the playing field could 
save taxpayers $149 billion over the next ten years. Congress should 
remove these unwarranted subsidies and use a portion of the savings to 
improve benefits for low-income Medicare beneficiaries.
    I cannot overstate the damage these Medicare Advantage overpayments 
will cause to the traditional Medicare program if they are not 
eliminated. Medicare Advantage plans tend to attract healthier seniors 
because of their benefit structures. As more of these seniors are lured 
out of traditional Medicare, overpayments to the private plans will 
continue to grow dramatically. That will result in even higher costs 
for taxpayers, and increasing premiums paid by those remaining in the 
traditional program. Over time, this cycle of higher payments and 
growing costs will simply become unaffordable--for both taxpayers and 
beneficiaries.
    Ultimately, this cycle will shatter the risk pool that makes 
Medicare work. Increasing numbers of healthier seniors will abandon 
traditional Medicare for the private sector, leaving the frailest and 
most vulnerable to pay the price not only for their own care, but also 
for the growing subsidies to the private plans. Over time, political 
support for the program will shift. Today's social insurance concept of 
shared risk will be replaced by the ownership society's concept of 
individual risk. And hand-in-hand with individual risk will come an 
individualized payment system such as vouchers.
    Vouchers save money for healthy beneficiaries and shift the burden 
of health care to the frailest and sickest among us. They shift risk 
from shared pools to individuals. And they provide no containment for 
health care costs. Eventually we will find ourselves in a world much 
like that before Medicare was created, and health care will be 
unaffordable for the average senior. At a time when our nation is 
struggling with how to create affordable, universal health care 
coverage for our workers and their families, it is simply 
incomprehensible to me why we would destroy the one affordable, 
universal health care system that already exists in Medicare.
    You will hear arguments that the Medicare Advantage overpayments 
are necessary to provide improved health care services to groups such 
as beneficiaries with multiple, chronic conditions, minorities, those 
living in rural areas or the poor. Of course, we don't really know 
whether Medicare Advantage plans actually provide any significant 
benefits to these groups because of the lack of reporting and claims of 
proprietary information. What we do know is that the numbers the 
insurance industry is using about the impact of Medicare Advantage 
plans on these vulnerable groups are misleading. We also know that 
private industry is insisting on being overpaid to provide these 
services--clear proof that this is not the most efficient way to 
deliver benefits.
    If Congress believes higher payments are needed to improve the 
health of beneficiaries in these groups, it would be much simpler and 
less expensive to increase resources targeted to the groups directly, 
by expanding low-income programs. Instead of giving private plans extra 
money and simply hoping some if it finds its way to these vulnerable 
populations, Congress should improve the Medicare Savings Programs or 
the low-income prescription drug subsidy.
    Mr. Chairman, the vast majority of Medicare beneficiaries remain in 
the traditional program. You may not hear their voices as loudly as you 
do the insurance industry's but believe me when I tell you they will be 
seriously hurt if Congress does not eliminate Medicare Advantage 
subsidies immediately. The decisions you make this year will impact the 
Medicare program for decades to come.
                               background
    Overpayments to private plans increase Part B premiums for all 
Medicare beneficiaries. The Medicare program finances overpayments to 
private plans with money collected by general revenues and beneficiary 
premiums. MedPAC has estimated that every Medicare beneficiary pays $24 
a year in higher Part B premiums just to fund excess payments to 
private plans. In other words, the majority of Medicare beneficiaries--
the 81 percent of beneficiaries choosing to remain in traditional 
Medicare--are paying to subsidize the private plans that provide 
benefits to the remaining 19 percent of beneficiaries. Because 
subsidies are projected to continue rising, all Medicare beneficiaries 
can expect to pay dramatically higher premiums in the future, and can 
expect increasing portions of those premiums to be diverted to private 
plan subsidies.
    Eliminating overpayments would save billions of dollars and improve 
Medicare's financial outlook. The Congressional Budget Office (CBO) 
projects that Medicare will pay $75 billion to private plans in 2007 
and $1.31 trillion to private plans over the next ten years. Federal 
spending on Medicare Advantage plans will continue to grow as more 
beneficiaries are lured out of traditional Medicare as a result of the 
excessive payments made to private plans. According to CBO, paying 
private plans at the same rate as traditional Medicare would save $54 
billion over the next five years and $149 billion over the next ten 
years. Not only would eliminating these large overpayments save 
billions of dollars, it would also add two years of solvency to 
Medicare's hospital insurance trust fund.
    Overpayments are used to improve insurance industry profits and are 
not completely passed along to beneficiaries. When Congress approved 
the system which overpays private plans, policymakers intended that the 
excess payments be returned to beneficiaries in the form of additional 
benefits or reduced cost-sharing. It is not at all clear to what extent 
this is occurring. Private plans are subject to few public reporting 
requirements, so it has been extremely difficult to determine what 
percentage of the overpayments has inflated the profit margins of the 
private insurance companies offering the plans, or has been used for 
marketing, rather than being returned to beneficiaries. In the case of 
Private Fee-For-Service plans, MedPAC found that only about half of the 
excess payment is used to deliver extra benefits for enrollees. The 
remainder of the payment is used to finance the administrative costs, 
marketing, and profits of private plans.
    Overpayments are driving unscrupulous agents and private plans to 
use aggressive sales tactics and misrepresentations to sell their 
products to beneficiaries. A recent survey of state insurance 
departments found that 39 of 43 states had received complaints about 
misrepresentations and inappropriate marketing practices of Medicare 
Advantage plans. In most cases, these practices led to Medicare 
beneficiaries enrolling in a private plan without adequate 
understanding of the plan or their ability to stay in traditional 
Medicare. The inflated payments to private plans allow them to offer 
exceedingly large commissions to agents who enroll beneficiaries into 
Medicare Advantage plans, regardless of whether the plan meets their 
needs. To receive their commissions, some insurance agents have engaged 
in fraudulent activities including: forging signatures on enrollment 
documents; mass enrollments and door-to-door sales at senior centers, 
nursing homes, or assisted living facilities; and enrolling 
beneficiaries with dementia into inappropriate plans. Removing 
overpayments, increasing oversight and regulation, and limiting large 
commissions would help to prevent beneficiaries from falling victim to 
unethical and illegal sales tactics.
    Eliminating overpayments would not adversely affect low-income and 
minority beneficiaries. Contrary to insurance industry claims, private 
plans do not attract a disproportionate number of low-income and 
minority beneficiaries. A recent analysis by the Center on Budget and 
Policy Priorities found that these Medicare beneficiaries are far more 
likely to receive supplemental coverage through Medicaid than to be 
enrolled in Medicare Advantage. The Center found that nearly half (48 
percent) of all Medicare beneficiaries with incomes under $10,000 
receive Medicaid, compared to only 10 percent who are enrolled in 
private plans. Similarly, they found that most Asian American Medicare 
beneficiaries (58 percent), and a plurality of African American (30 
percent) and Hispanic beneficiaries (34 percent) receive Medicaid, 
compared to the 14 percent of Asian Americans, 13 percent of African 
Americans, and 25 percent of Hispanics enrolled in private plans. If 
Congress believes higher payments are needed to improve the health of 
beneficiaries in these groups, it would be much simpler and less 
expensive to increase federal resources targeted to these groups 
directly by expanding low-income programs. Instead of giving private 
plans extra money and simply hoping some of the funds find their way to 
these vulnerable populations, Congress could improve the Medicare 
Savings Programs or the low-income prescription drug subsidy.
    Eliminating overpayments would not adversely affect beneficiaries 
living in rural areas or inner cities. Proponents of private plans have 
argued that beneficiaries living in areas that are difficult or 
expensive to serve need an expanded and overpaid Medicare Advantage 
program to continue receiving services. In fact, in many rural and low-
income inner cities exactly the opposite is true: the expansion of 
bloated private plans accelerates the deterioration of traditional fee-
for-service providers, and undermines the ability of hospitals and 
other providers to continue operating. Medicare payments to hospitals, 
doctors and other providers who care for beneficiaries in traditional 
Medicare today are partly based on geographic differences in the cost 
of providing health care. If Congress believes even higher payments are 
necessary to ensure beneficiaries in some parts of the country receive 
adequate services, it would be much more efficient to modify Medicare's 
geographic cost adjustment or provide additional payments to areas 
where Medicare providers are particularly scarce or have costlier 
expenses. This way plans in counties with greater need could receive 
higher payments without harming the traditional Medicare system in 
those areas or the beneficiaries who chose to remain in it.
    Despite receiving inflated payments, Medicare Advantage plans can 
provide inferior health coverage compared to traditional Medicare. 
Private plans do not necessarily provide benefits that are fully 
equivalent to traditional Medicare. They are required to cover 
everything that Medicare covers, but they do not have to cover every 
benefit in the same way. For example, private plans may create 
financial barriers to care by imposing higher cost-sharing requirements 
for benefits such as home health services, hospitalization, skilled 
nursing facilities, inpatient mental health services, and durable 
medical equipment that protect the sickest and most vulnerable 
beneficiaries. In many cases, beneficiaries are lured into the private 
plans based on improved coverage of relatively inexpensive services 
such as expanded dental or vision care, only to discover after it is 
too late that their plans shift significantly more of the higher costs 
of major illnesses onto their shoulders. Preventing private plans from 
imposing greater cost-sharing requirements than traditional Medicare 
would better protect beneficiaries from high out-of-pocket costs.
    Failure to rein in overpayments to private plans will lead to the 
privatization of Medicare. Continuing to dole out excessive and 
unwarranted payments to private plans will undermine traditional 
Medicare. Private plans use these overpayments to offer additional 
benefits like gym memberships that attract healthier enrollees. They 
can also discourage sicker beneficiaries from joining their plan by 
charging higher cost-sharing for hospitalization and home health 
benefits. Eventually, Medicare's risk pool will be shattered as those 
with greater health care needs remain in the traditional program, 
paying increased taxes and higher Part B premiums to subsidize 
overpayments to private plans. Eliminating overpayments would allow 
traditional Medicare to provide efficient and affordable health 
coverage to all beneficiaries for generations to come.
                      national committee position
    Medicare should equalize payments between the traditional program 
and private plans. The nonpartisan Medicare Payment Advisory Commission 
(MedPAC) has recommended that Medicare pay the same amount regardless 
of whether a beneficiary enrolls in traditional Medicare or Medicare 
Advantage. Instead of being paid up to 50 percent more than traditional 
Medicare, private plans should be paid at a rate equal to the costs of 
traditional Medicare in every part of country. Equalized payments would 
level the playing field and remove private plan's unfair advantage in 
attracting beneficiaries.
    Savings from eliminating overpayments should be used to help low-
income Medicare beneficiaries. The most cost-effective and efficient 
way to help low-income and minority beneficiaries is to use a portion 
of the savings collected from eliminating Medicare Advantage 
overpayments to strengthen the Medicare Savings Programs and improve 
Medicare Part D's Low-Income Subsidy program.
    Private plans should be prohibited from charging higher out-of-
pocket costs for benefits than traditional Medicare. It is particularly 
egregious for private plans to receive excess payments while providing 
lesser coverage. To better protect Medicare Advantage beneficiaries 
from high out-of-pocket costs, policymakers should prevent private 
plans from imposing higher cost-sharing requirements than traditional 
Medicare.
    Traditional Medicare is an option that must be preserved. The vast 
majority (81 percent) of Medicare beneficiaries choose to remain in the 
traditional program. The special treatment of Medicare Advantage plans 
allows them to receive higher payments than traditional Medicare and 
allows them to impose higher cost-sharing on beneficiaries. This 
treatment is particularly unwarranted because there is no available 
data to suggest that private health plans deliver any better health 
outcomes than traditional Medicare. If Medicare continues to fund large 
overpayments to private plans, the program will face growing fiscal 
pressure to cut benefits or increase beneficiary cost-sharing.
    Thank you for inviting me to testify today, Mr. Chairman. I look 
forward to working with you and the other members of this Committee to 
reverse the privatization of Medicare that has been imposed through the 
Medicare Modernization Act. Eliminating overpayments to Medicare 
Advantage Plans is the first important step toward achieving that goal.

    Chairman Spratt. Thank you very much for your excellent 
statement.
    Dr. Neuman.

              STATEMENT OF PATRICIA NEUMAN, SC.D.

    Ms. Neuman. Thank you, Chairman Spratt, Mr. Ryan, and 
distinguished members of the committee. It is an honor to be 
here to talk about the Medicare Advantage program. I am 
Patricia Neuman. I am a Vice President of the Kaiser Family 
Foundation.
    The proliferation of private health plans under Medicare is 
fundamentally changing the coverage landscape for the 44 
million people on Medicare.
    If I could have slide 1. Enrollment in Medicare Advantage 
plans is at an all-time high and is projected to rise rapidly, 
as you have heard already this morning.
    Slide 2. Enrollment today is highly concentrated among a 
small number of organizations. UnitedHealth leads other firms, 
covering 1 in 6 Medicare Advantage enrollees nationwide. 
Together, UnitedHealth, the Blue Cross/Blue Shield affiliates, 
Humana, and Kaiser Permanente account for more than half of the 
total enrollment today.
    Medicare Advantage has emerged as a front burner issue for 
many reasons, not the least of which is that MedPAC, the 
Congressional Budget Office, and the HHS Office of the Actuary 
report that the shift in beneficiaries from traditional 
Medicare to Medicare Advantage plans has the effect of 
increasing Medicare spending.
    Recent discussions have focused on whether Medicare 
Advantage plans serve a disproportionate share of people who 
are among the most vulnerable on Medicare, focusing on income, 
race and ethnicity, and rural locations.
    Our analysis of the most recent data available from the 
Center for Medicare and Medicaid Services finds first, if I 
could have slide 5, Medicare Advantage enrollees are neither 
disproportionately low-income nor high-income. Roughly the same 
share of beneficiaries in traditional Medicare and in Medicare 
Advantage plans, about half, live on incomes below $20,000. 
This is not surprising. The Medicare Advantage program was not 
designed as a program for people with low incomes.
    For these beneficiaries--and if I could have slide 6--
Medicaid has been and continues to be the primary source of 
supplemental assistance. So the extra benefits that you have 
heard about today, this morning, do not just go to those with 
modest incomes. They are distributed to people with low incomes 
and higher incomes who are in Medicare Advantage plans.
    Second, slide 7, enrollment rates are actually similar for 
white and African American people on Medicare. Thirteen percent 
of white and 15 percent of black beneficiaries were enrolled in 
the Medicare Advantage plan, again using the most recent data 
we have available, which is 2005. Rates are higher among 
Hispanic beneficiaries at 25 percent, and that is because they 
tend to live in areas of the country, like Florida and 
California, with a relatively high concentration of Medicare 
Advantage plans. Clearly, as you can see, the majority of all 
beneficiaries, regardless of race or ethnicity, are in 
traditional Medicare.
    Third, just 7 percent of all beneficiaries living in rural 
areas are now on a Medicare Advantage plan although access to 
Medicare Advantage plans has clearly increased in rural areas 
over the past few years.
    Fourth, slide 9, Medicare Advantage enrollees tend to be 
healthier than their counterparts in traditional Medicare, and 
you can see this is true across a number of measures--looking 
at self-assessed health status, looking at the rates of people 
who are under 65 with permanent disabilities in Medicare 
Advantage plans and the percent living in institutions.
    Now, while Medicare Advantage enrollees are generally 
healthier than those in traditional Medicare, 24 percent do say 
their health status is fair or poor, and a concern for this 
group is likely to be the adequacy of their plan's coverage and 
the out-of-pocket costs associated with their medical care. 
Out-of-pocket costs depend on many factors, including an 
individual's medical needs and the particular plan they choose. 
On the one hand, as you have heard this morning, Medicare 
Advantage plans often waive deductibles. They reduce cost-
sharing requirements. They offer additional benefits and 
sometimes include a valuable stop-loss limit on catastrophic 
spending. On the other hand, some Medicare Advantage plans 
impose daily hospital copays, daily copays for home health 
visits and daily copayments for the first several days in a 
skilled nursing facility, unlike traditional Medicare. Of 
course, extra benefits help to reduce out-of-pocket costs for 
many beneficiaries in Medicare Advantage plans. Yet, even with 
these extra benefits, some enrollees could end up paying more 
in a Medicare Advantage plan than they would pay under 
traditional Medicare, and that probably sounds a little 
counterintuitive to you.
    If you would look at slide 10, my written testimony 
illustrates how a hypothetical senior using inpatient and post-
acute care could end up with higher out-of-pocket costs under a 
Medicare Advantage plan than under traditional Medicare.
    In Oakland, for example, our illustrative senior could 
spend between about $2,500 and $5,200 under an Advantage plan 
and about $3,000 in traditional Medicare. She would definitely 
spend less in five of the Medicare Advantage plans than under 
traditional Medicare but more, and in some cases substantially 
more, under the majority of Medicare plans in her areas.
    For seniors living on fixed incomes, the difference between 
the highest and the lowest plans, $2,700 in this example, is 
not trivial. In the current system, it is clearly up to the 
individual beneficiary, the senior, to choose which plan is 
going to end up saving them the most money, and given the 
number of plans that are in their area and the wide variety of 
benefits, that can sometimes be a tall order.
    The current payment system translates into extra benefits 
for up to 1 in 5 beneficiaries in Medicare Advantage, and some 
of these benefits, as we have noted, are highly valued, but the 
allocation of resources raises questions about whether Medicare 
is distributing benefits equitably across the entire 
population, including the 4 out of 5 beneficiaries who are in 
traditional Medicare.
    A second equity issue relates to financing. The current 
payment system results in higher part B premiums paid by 
beneficiaries to help fund higher payments to Medicare 
Advantage plans. This is according to the HHS Office of the 
Actuary. As a result, the majority of beneficiaries who are in 
traditional Medicare are asked to pay higher monthly premiums 
to help support this system for Medicare Advantage plans, but 
of course they do not receive the extra benefits that are 
provided to the enrollees of Advantage plans.
    A third issue concerns future generations. Again, according 
to the Office of the Actuary, the current payment system cuts 
short by 2 years the life of the part A trust fund, potentially 
affecting coverage for future generations of beneficiaries who 
are looking forward to having Medicare and its benefits when 
they retire.
    In summary, Mr. Chairman, Medicare Advantage plans do play 
an important role as an alternative to traditional Medicare. 
However, the on-budget costs associated with the current 
payment policies coupled with rapid enrollment growth in 
relatively high-payment areas underscore a number of important 
policy considerations. Clearly, critical questions relate to 
whether the positive attributes of the Medicare Advantage 
program are balanced by the higher costs associated with the 
current payment system and whether the current payment system 
is affordable for beneficiaries and taxpayers in light of the 
long-term fiscal challenges facing Medicare and in light of 
competing national priorities.
    Thank you very much, and I look forward to your questions.
    [The prepared statement of Patricia Neuman follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
        
    Chairman Spratt. Thank you, and thank you in particular for 
the points you have made.
    Dr. Wah.

                STATEMENT OF ROBERT M. WAH, M.D.

    Dr. Wah. Thank you, Chairman Spratt, Mr. Ryan, and members 
of the committee. Thank you for inviting the AMA to speak with 
you regarding the impact of the Medicare Advantage program on 
Medicare's financial viability and the delivery of quality care 
for Medicare patients. I am Robert Wah. I am a practicing 
physician and a member of the Board of Trustees of the American 
Medical Association.
    The AMA supports competition in the Medicare program. Real 
competition would increase patient choice and Medicare's 
financial sustainability. Seniors should be able to choose from 
Medicare options based on their health care needs and with 
accurate information on each option. The AMA staunchly supports 
fiscal neutrality between Medicare Advantage plans and regular 
Medicare.
    Currently, there is not fiscal neutrality between them 
because the government provides Medicare Advantage plans, as we 
heard this morning, with an average 12 percent subsidy per 
enrollee. Instead of making Medicare more sustainable as the 
baby boom generation reaches the age of Medicare eligibility, 
this subsidy will have the opposite effect. The Medicare 
actuary has stated--and we have heard it again this morning--
that the Medicare Advantage subsidies will shorten the solvency 
of the hospital insurance trust fund. However, adopting fiscal 
neutrality between Medicare Advantage and regular Medicare 
would extend that insolvency date by about 2 years.
    The Medicare Advantage add-ons averages almost $1,000 per 
Medicare Advantage enrollee, and the CBO reports this amount is 
only expected to climb. So Medicare Advantage costs taxpayers 
more. In addition, all seniors, not just those in Medicare 
Advantage, are paying about $2 a month in higher premiums to 
help fund these subsidies.
    There are real trade-offs involved in public policy choices 
that face Congress today. The government here is providing 
billions of dollars in subsidies to Medicare Advantage plans 
that only serve 1 in 5 beneficiaries. At the same time, 
physicians in the regular Medicare plan, which serves 80 
percent of seniors and disabled beneficiaries, are facing a 10 
percent cut. There are also questions about the access to 
health care provided by Medicare Advantage. Patients and 
physicians are being shortchanged by a significant number of 
Medicare Advantage plans that are luring their enrollees in 
with false promises, then skimping on coverage and payments and 
using the subsidies primarily to increase profits.
    The picture painted by responses of an AMA survey of our 
physicians who have treated Medicare Advantage patients is 
startling. An overwhelming number of physicians--8 out of 10--
reported that their patients have difficulty understanding how 
Medicare Advantage plans work. As for the physicians who deal 
with multiple health plans every day, 6 out of 10 of those 
physicians reported that they also have a hard time 
understanding how Medicare Advantage plans work. Clear 
information on the plans is scarce and often inaccessible to 
both patients and their physicians. About half of the 
physicians reported that Medicare Advantage plans have denied 
services that are typically covered by regular Medicare, and 
half also indicated that they have received payments from 
Medicare Advantage plans that were lower than regular Medicare. 
These survey results corroborate reports by the Medicare Rights 
Center, the State insurance commissioners and others.
    Furthermore, all Medicare Advantage beneficiaries--
minority, low-income and rural beneficiaries--face the same 
problems. For example, the National Rural Health Association 
reported that Medicare Advantage private fee-for-service plans 
often pay rural health clinics at a rate far below regular 
Medicare rates and, quote, ``have the potential to destabilize 
the existing rural safety net.'' So the government is paying 
more for Medicare Advantage plans, but there is mounting 
evidence that these subsidies in many cases are not buying 
better health care coverage for our patients and for your 
constituents.
    Until Medicare Advantage is placed on equal footing with 
regular Medicare, the market distortions will continue to 
encourage inefficient behavior by Medicare Advantage plans. 
Patients and physicians will face additional financial risks. 
The delivery of health care will be compromised, and taxpayers 
will pay more and get less. Clearly, these Medicare Advantage 
subsidies do not advantage patients or physicians.
    The AMA looks forward to working with the committee to 
achieve our shared goals of strengthening the Medicare program 
and providing quality care to patients.
    Thank you for the opportunity to be here today.
    Chairman Spratt. Thank you for coming and testifying.
    Now, Ms. Schmitt, we left you a little piece of the table 
back there. Can you pull the microphone up? That is good. Thank 
you for coming. We look forward to your testimony.

                 STATEMENT OF CATHERINE SCHMITT

    Ms. Schmitt. Thank you, Mr. Chairman, Representative Ryan, 
and members of the committee. My name is Catherine Schmitt, and 
I am Vice President of Federal Programs at Blue Cross and Blue 
Shield of Michigan. I appreciate the opportunity to testify on 
the Medicare Advantage program.
    Blue Cross/Blue Shield of Michigan is a nonprofit health 
plan that serves nearly 5 million members, of which 440,000 are 
Medicare beneficiaries. We offer government contracted MA, 
private fee-for-service, part D, and supplemental products in 
every county in Michigan. My testimony today focuses on the 
importance of the private fee-for-service option in meeting the 
needs of employer and union retirees.
    We believe that it is critical to preserve the viability of 
the private fee-for-service option because it is the only 
Medicare Advantage product available today for bringing uniform 
integrated health benefits to the retirees of major employers 
and unions nationwide. This option allows employers to provide 
nationwide retiree health care plans that are identical to the 
benefit programs they offer for their other group members, 
incorporating the same care management features through a 
single plan. There are three key reasons why it is important to 
preserve this product.
    First, care coordination. There is a common misperception 
that these plans cannot provide any advantages with regard to 
improving member health. In fact, this is one of the key 
reasons why employers are interested in this product. Our plans 
offer care coordination and management for diseases that 
commonly afflict the elderly through an integrated benefit 
package. For example, we provide access to 24x7 nurse 
consultants, personal health care coaches for chronic 
conditions, as well as complex case management programs.
    The second key reason is that these products provide access 
in rural areas. For the first time, all Medicare beneficiaries 
have access to private Medicare plans.
    Third, private fee-for-service plans offer members enhanced 
benefits. In addition to filling gaps in traditional Medicare, 
with these benefits customized, care management plans can be 
developed for the most complex cases. The comprehensive 
benefits offered by MA plans are very important to lower income 
individuals who make too much to qualify for Medicaid but who 
cannot afford Medigap.
    I would also like to address some of the criticisms of 
private fee-for-service plans, starting with the most 
discerning, unscrupulous and even fraudulent sales tactics. I 
can only imagine the trauma to victimized beneficiaries. We 
commend CMS for taking decisive actions to strengthening the 
enforcement of marketing standards to address these problems. 
We have a zero tolerance policy for agents who do not follow 
the rules, but please note that these sales problems are not an 
issue with employer and union accounts.
    Some have questioned the care management exemption private 
fee-for-service plans have from requirements that do apply to 
HMOs and to PPOs. We believe that private fee-for-service plans 
should be required to report quality data to enable Medicare 
beneficiaries to make informed health plan choices. Plans 
should be required to establish chronic care improvement 
programs with participation voluntary by members.
    Others have indicated a lack of provider acceptance and 
satisfaction as an issue. Our experience has been that, through 
education on both the provider fee-for-service option and how, 
in fact, one I.D. card and a single check from one payor 
benefits the provider, there has been generally very widespread 
acceptance. These are also advantages to the beneficiaries.
    Another concern identified by MedPAC is that the average 
payments for private fee-for-service plans are 19 percent more 
than traditional Medicare compared to 12 percent more for all 
MA plans. Our actuaries have found that payments for our 
employer and union products are not higher than the average. 
For groups, all retirees, regardless of the county-specific 
reimbursement, are enrolled. Many of the members are in urban 
areas, but the very reason that the program works for employers 
is that retirees in rural areas also have access to care. I 
urge you to reject further cuts in funding for this program.
    Congress improved payments under the Medicare Modernization 
Act to ensure broader access in rural areas and to stabilize 
the program. Achievement of these goals will pave the way for 
following the industry movement towards more integration and 
coordination of care in order to improve quality and member 
health outcomes. Yet, every time the Federal Government makes a 
significant investment in these programs in a meaningful way, 
the funding is threatened, and the momentum is lost.
    I can assure you that members whose care we are 
coordinating would have been far less likely to participate 
with an unknown care management vendor than with the local Blue 
plan that has been their health carrier their entire lives. 
They know the Blues when they call.
    The $6.5 billion in cuts already enacted under the Deficit 
Reduction Act has resulted in MA rates that are rising 
significantly below the growth in medical costs. If Congress 
cuts MA funding, the private fee-for-service product is 
unlikely to remain a sustainable product in many areas. The 
result may well be that most, if not all, of the 1.3 million 
enrollees in this product will have a disruption in care, lose 
access to the enhanced benefit, and lose the opportunity for 
care coordination.
    What would the loss of the private fee-for-service mean for 
beneficiaries? It will mean that beneficiaries who do not 
qualify for Medicaid and who cannot afford a Medigap policy 
will be left without supplemental coverage. It will mean that 
employers and unions will be forced to make hard choices about 
reducing benefits, and it will mean that beneficiaries lose 
confidence in Congress, CMS and their health plans to ensure 
continuity of care and to help them maintain predictable 
coverage and premiums.
    Thank you for considering my perspective on the MA program 
and the private fee-for-service option.
    [The prepared statement of Catherine Schmitt follows:]

   Prepared Statement of Catherine Schmitt, Vice President, Federal 
              Programs, Blue Cross Blue Shield of Michigan

                            i. introduction
    Mr. Chairman, Representative Ryan, and members of the committee, my 
name is Catherine Schmitt and I am Vice President of Federal Programs 
at Blue Cross and Blue Shield of Michigan. I appreciate this 
opportunity to testify on the Medicare Advantage program.
    Blue Cross and Blue Shield of Michigan (BCBSM) is a non-profit 
health plan that serves nearly five million members, of which 440,000 
are enrolled in government contracted Medicare or supplemental 
programs. Nearly 70 years ago, Blue Cross Blue Shield of Michigan 
started with a purpose to provide people with the security of knowing 
they have health care when they need it. Today, we're accomplishing 
that mission in many ways, including offering access to health care 
coverage for everyone, regardless of circumstances, as the insurer of 
last resort.
    Blue Cross Blue Shield of Michigan is committed to offering 
Medicare products that meet the needs of the individual members, 
employers and unions that we serve. We offer a range of plans to 
Medicare beneficiaries in every county of the State of Michigan, 
including Medicare Advantage (MA) Private Fee-For-Service (PFFS) plans, 
Medicare Part D coverage, and supplemental coverage. The BCBSM 
enterprise also offers a MA HMO product in counties where an adequate 
network could be developed. Our Medicare Advantage plans play an 
important role in providing comprehensive, coordinated benefits for 
seniors and disabled members who might not otherwise have affordable 
options for supplemental benefits.
    In my testimony today, I will provide an overview of the importance 
of Medicare Advantage with a primary focus on the role of the PFFS plan 
in meeting the needs of Medicare eligible beneficiaries who are 
retirees of employers and unions. We believe that it is critical to 
preserve the PFFS option because it is the only product available today 
for bringing integrated health benefits to the retirees of employers 
and unions nationwide under Medicare Advantage.
        ii. why did bcbsm offer a private fee-for-service plan?
    BCBSM has traditionally served the Medicare population through 
Medicare supplemental plans, or Medigap. However, with the passage of 
the Medicare Modernization Act (MMA), which addressed inadequate 
payment levels in Michigan that had made Medicare+Choice plans 
unsustainable, we saw an opportunity to make comprehensive coverage 
through Medicare Advantage and Part D plans available to our customers.
    We chose the private fee-for-service plan for a number of reasons. 
In the individual market, we needed a less costly alternative to 
Medigap, which had become too expensive for many of our customers. Even 
with a dedicated contracting team, network health plans take years to 
develop as health care providers will not contract initially for the 
Medicare allowable amounts. They want higher payments and re-
contracting would have taken considerable lead time. So, we found 
ourselves with Medicare members who have been with Blue Cross and Blue 
Shield their whole life and we wanted to continue to serve them if they 
were interested in Medicare Advantage.
    At the same time, employers were asking for alternatives to their 
current arrangements which supplement Medicare but do not coordinate 
care or focus on health improvement. Our employer and union customers 
needed a solution for serving retirees all over the country and using a 
state-wide PPO would leave no choices for the group with retirees 
residing in different parts of the country like Arizona, California, 
Florida and New Mexico. Due to a combination of regulations that 
prevent PPOs and HMOs from offering coverage to retirees outside of 
their state and the lack of nationwide acceptance by providers to 
participate in networks for Medicare Advantage products, PFFS is the 
only option available for serving these members.
    Medicare Advantage private fee-for-service plans allow our 
employers to provide retiree health care plans identical to the benefit 
programs they offer active and non-Medicare eligible retirees 
nationwide incorporating the same care management features such as care 
coordination and disease management programs through a single Plan, 
eliminating the need to stitch together multiple HMOs or PPOs that 
would cover only a portion of their retirees nationwide.
    I would like to share with you an example of our largest group 
account enrolled in PFFS and explain why this coverage is so valuable 
to them. The Michigan Public School Employees Retirement System 
(MPSERS) implemented a Medicare Part D Prescription Drug Plan in 2006 
and a Medicare Advantage private fee-for-service plan in 2007 in order 
to lower health care costs and improve health care management and 
outcomes for their Medicare eligible retirees.
    There are more than 115,000 MPSERS members in the Medicare 
Advantage private fee-for-service plan. Many include lower-income 
retired clerical staff, bus drivers, janitors and cafeteria workers. 
Medicare Advantage provided MPSERS with an opportunity to reduce the 
System's cost and integrate coordinated medical and drug management 
programs. This option also allows them to manage health care costs 
without reducing school programs for the students.
         iii. the importance of maintaining medicare advantage
    I would like to stress three reasons why it is important for 
Congress to maintain funding for the Medicare Advantage program and 
preserve the private fee-for-service product: enhanced benefits and 
cost savings for beneficiaries, opportunities for care coordination, 
and providing access in rural areas.
          enhanced benefits and cost savings for beneficiaries
    Medicare Advantage plans provide beneficiaries with substantial 
protection from the high cost-sharing in traditional Medicare plus 
additional benefits not offered under Medicare. According to CMS, 
Medicare beneficiaries receive an average additional value of $86 per 
month--or $1,032 per year--from enrolling in an MA Plan. The majority 
of that value comes from reduced out-of pocket costs because plans 
generally fill deductibles and co-payments in original Medicare and 
provide protection against catastrophic costs.
    Our PFFS plans offer members benefits that are more generous than 
Medicare alone, especially in the group market. We estimate that the 
value of benefits offered among our plans is 21-33 percent more 
generous than original Medicare. This is because our employer and union 
accounts generally want to offer their retirees the same benefits they 
provide to their active workers and are willing to subsidize the group 
product. We also offer individual products with an actuarial value of 
up to 27 percent more than traditional Medicare.
    Our lowest cost plan (with premiums of $0-$61 per month depending 
on one's area) offers a number of additional benefits not available in 
traditional Medicare. This plan has an annual out-of-pocket limit of 
$5,000 that offers the peace of mind that an unexpected illness won't 
result in bankruptcy. This is a benefit that is not available in 
traditional Medicare as FFS cost sharing on one significant hospital or 
skilled nursing admission can easily exceed $5000. Our plan has a $20 
copay for doctor visits instead of the 20% coinsurance in FFS Medicare. 
In order to foster good preventive care, our plan has no cost sharing 
for services such as bone mass measurement, mammograms, prostate and 
colorectal cancer screenings and immunizations. We also provide much 
more generous benefits for inpatient and outpatient mental health care.
    Another advantage is that MA plans have flexibility to offer 
innovative benefits that are not permitted under the Medicare program 
and that better meet the needs and preferences of beneficiaries. For 
example, we can offer the member the option of obtaining care in the 
setting of their choice following a hospitalization, when traditional 
Medicare might only have provided the payment for care in a skilled 
nursing facility.
    All of our individual plans are comprehensive MA-PD plans and 
groups can select either an MA-PD plan or an MA plan with the Retiree 
Drug Subsidy. In either case, we can provide comprehensive, fully 
integrated programs. Additionally, members like the fact that, as 
Medicare Advantage members, they can continue to carry a single Blue 
card for their Medicare A and B benefits, supplemental and drug 
coverage.
    If Congress cuts MA funding, plans will be forced to increase cost-
sharing for these services, cut benefits, or increase premiums. This 
will most affect those seniors who are living on lower-to-modest 
incomes who may lack affordable alternatives. The average premium for 
Medigap Plan C in Michigan is $2,355 annually (or nearly $200 a month) 
and the average premium for Medigap Plan C nationally is $1,766 
annually (nearly $150 a month). These premiums may be out of the reach 
of many seniors who have purchased Medicare Advantage products.
                           care coordination
    Medicare Advantage holds promise for meeting one of the biggest 
challenges facing Medicare: coordinating care for those with chronic 
illnesses. Today, 82% of Medicare beneficiaries have at least one 
chronic condition, with 65% having multiple chronic conditions. 
However, according to a report by the Institute of Medicine, FFS 
Medicare does little to encourage coordinated, preventive and primary 
care that could produce better outcomes for beneficiaries.
    Medicare Advantage plans can play a critical role in addressing 
this challenge through offering care coordination and management for 
diseases that commonly afflict the elderly through an integrated 
benefit package. Employers are turning to our PFFS product because they 
can provide the same care coordination programs that are available to 
their active and non-Medicare eligible retirees. The importance of the 
integrated benefits available under Medicare Advantage plans cannot be 
understated. With a Medicare supplemental plan, inadequate and untimely 
claim information does not allow for meaningful coordination. By the 
time information is received, it may be too long after a major event to 
reach out to a member, their family or providers.
    Our Medicare Advantage members benefit from a variety of voluntary, 
patient-centered programs designed to improve their health through our 
BlueHealthConnection(r) program. BlueHealthConnection provides a 
spectrum of wellness, disease and symptom management, and case 
management opportunities for PFFS Medicare Advantage beneficiaries to 
take an active role in improving their health.
    For example, we provide access to personal health care coaches to 
assist members in the management of chronic conditions, such as asthma, 
diabetes, coronary artery disease, congestive heart failure, chronic 
obstructive pulmonary disorder, cancer, benign uterine conditions, and 
back pain. The program is focused on building self-reliance and seeks 
to inform members by providing a range of information, transferring 
skills, building confidence, and enabling members to take action to 
improve their health.
    We also provide access to a case management program that focuses on 
members with multiple co-morbidities, those who are the most difficult 
to care for. These initiatives provide telephonic and face-to-face 
assessments, develop collaborative care plans with both physicians and 
members, and use evidence-based guidelines to measure success. Through 
this program, we also provide telemonitoring devices to assist health 
care professionals in the management of complex conditions, such as 
congestive heart failure.
    We believe that programs offered by the plan a member has selected, 
such as BCBSM, and is familiar with, will be far more successful than 
efforts by other third-party companies contracted by CMS where the 
beneficiary does not know or trust the party contacting them about 
their health care needs.
                     access for rural beneficiaries
    Historically, the existence of private plan options in rural 
America has been virtually non-existent with the benefits of private 
plans only available to beneficiaries in urban cities. Congress sought 
to reverse this trend by raising rates in rural areas over the past 
decade. The intent was to increase payments so plans could operate more 
viably in rural America so that all Medicare beneficiaries would have 
access to a private plan option.
    Network-based products are difficult to construct in rural areas 
with sparse populations and limited provider availability. In rural 
areas of the country, where traditional Medicare rates are very low, 
providers often refuse to join a plan's network unless reimbursement 
from the plan far exceeds what the Medicare rate would be. Unless plans 
can meet the network adequacy requirements of CMS, they will not be 
approved to participate in the MA program.
    Due to the availability of PFFS plans in 2007, for the first time 
all Medicare beneficiaries in the country have the choice of a private 
Medicare plan option: a significant increase from 2004 when one-quarter 
of beneficiaries did not have that option. Between 2005 and 2006, 
enrollment in PFFS plans by rural beneficiaries accounted for 39 
percent of total MA enrollment growth.
    If Congress equalizes MA and traditional Medicare payments, this 
would have a disproportionate impact on rural areas by eliminating the 
increased payments in rural areas. Some rural states would have no 
access to MA options at all if these cuts were enacted.
        iv. responding to criticisms of medicare advantage plans
    A number of criticisms have been raised regarding the Medicare 
Advantage program over the last few months. I would like to respond to 
several of the issues you may hear today.
     Comprehensiveness of coverage relative to traditional 
Medicare. Some have argued that MA plans modify benefits in traditional 
Medicare and create financial barriers for high cost beneficiaries. We 
use the flexibility we have to tailor our plans to meet the preferences 
of our members for predictable cost-sharing, protection from 
catastrophic expenses, and benefits not covered under FFS Medicare. MA 
plans return an additional $6.8 billion dollars in supplemental 
benefits, according to CMS. Those who consume more services will 
generally benefit more from the financial protections in our MA plans.
    A recent analysis published in Health Affairs found that the 
average out-of-pocket cost for all MA plans was $268 (Gold, 2007). 
Average out-of-pocket costs for members in poor health were estimated 
at $1,656 for all MA plans. The Blue Cross and Blue Shield Association 
applied the same methodology to spending under traditional Medicare 
with prescription drug plan coverage and found the costs for those in 
poor health was $5,408--more than three times the estimate for all MA 
plans in the Health Affairs article.
    While it may be theoretically possible to choose selected services 
for which an individual could pay more under an MA plan, this would 
generally not be the case if one looked at the total distribution of 
claims for an individual over an entire year that includes all doctor, 
hospital and other services. Thus, I would caution against looking at 
outliers and focus instead on the vast majority of beneficiaries who 
see better value under MA.
     Specific issues with private fee-for-service plans. Over 
the past couple of months, a number of criticisms have been leveled 
against PFFS plans. Some of these concerns involve legitimate issues 
that industry and regulators are working to address to ensure 
confidence in this product. My message is simple: let's stop vilifying 
PFFS plans and instead focus on correcting the legitimate issues and 
improving the program.
    The most troubling concerns leveled against PFFS plans involve 
instances of unscrupulous and even fraudulent sales tactics involving 
sales of individual PFFS plans. Some of the incidents were appalling 
and should never have happened. CMS has acted decisively to strengthen 
enforcement of marketing standards to address these problems. We 
continue to strengthen our agent training requirements and have a zero 
tolerance policy for agents that do not follow the rules. Our complaint 
ratio regarding agents is less than 1 for every 2,000 enrollees. It is 
important to note that these sales problems simply are not an issue 
with employer and union accounts. Group PFFS products do not involve 
the use of agents or brokers for individual sales to their members. 
Employers and unions work with us to ensure that retirees understand 
these products.
    Some have questioned the value of PFFS plans, given the exemptions 
that they have from certain requirements that apply to Medicare HMOs 
and PPOs. Some of the current PFFS exemptions make sense, given the 
very different nature of PFFS plans as compared to HMO and PPO plans. 
However, we recommend ending three exemptions to inject more 
accountability and provide increased value to beneficiaries. We should 
require PFFS plans to report quality data, establish chronic care 
improvement programs (which would remain voluntary on the part of 
beneficiaries), and allow CMS to review PFFS bids.
    Some have also raised questions about provider acceptance of PFFS 
plans. The PFFS product is unique in that it does not require use of a 
defined network of providers like a PPO or HMO. While this enables us 
to serve retirees in every area of the country, it also means that 
there is no guarantee that a given provider will see a patient. Our 
rate of provider acceptance is very high. We respond to these incidents 
by working to educate providers on the benefits of participation, 
including receipt of a single payment from the health plan for all 
services rather than waiting for transfer, processing and payment of 
the supplemental claim after the Medicare claim is paid. We have found 
that physician offices we contact almost always decide to accept our 
PFFS patients once they understand our products. When a provider still 
refuses to participate, we make every effort to locate an alternative 
provider for the member.
     Risk selection in MA and the traditional program. Some 
have suggested that MA plans are eroding the risk pool in traditional 
Medicare by attracting healthier seniors through benefit design. While 
there may have been some evidence of this in the early years of this 
program, the reality today is that health plan enrollees have similar 
health status to the overall Medicare population. MA payments are also 
fully risk adjusted which removes any incentive to enroll healthy 
beneficiaries. Risk adjustment pays plans more for enrolling sicker 
individuals and less for healthy ones, providing an incentive to enroll 
the sickest beneficiaries and manage their care appropriately. 
Moreover, there is significant growth in MA Special Needs Plans that 
are specifically designed to allow a plan to enroll those who are 
institutionalized or have specific chronic conditions. These tend to be 
the sickest and most costly beneficiaries in Medicare.
     Arguments that MA plans are ``overpaid''. One concern 
leveled at MA plans is that their average payments are 12% more than 
claims costs under traditional Medicare (19% more for PFFS plans) 
according to MedPAC. In reality, comparing MA and FFS costs is an 
apples to oranges comparison that fails to take into account the 
significant differences between the two programs. Traditional Medicare 
pays claims for an uncoordinated package of benefits that includes high 
beneficiary cost-sharing. Medicare Advantage plans provide a more 
comprehensive package of benefits with care coordination, disease 
management, quality accountability, and usually with integrated drug 
coverage.
    The question that continues to go unanswered in the current 
Congressional debate is what type of Medicare program do we want over 
the long-term? On an industry-wide basis, there is a clear movement 
toward more integration and coordination of care in order to improve 
quality and member health outcomes. Yet every time the federal 
government invests in these programs for Medicare in a meaningful way 
the funding is threatened.
    Congress has already cut MA base funding by $6.5 billion in the 
Deficit Reduction Act (cuts that will be phased in through 2010). This 
is having an impact on our payments in Michigan, which are rising at a 
rate that is below growth in medical costs, which over time will result 
in increased year-to-year costs or reduced benefits for our members.
    This is exactly what happened in the years prior to the MMA, when 
Medicare+Choice became unsustainable in many counties after years of 
medical cost increases outstripped growth in plan payments. The result 
was widespread loss of coverage for Medicare beneficiaries. Congress 
should not backtrack on its promise of broader access to health plan 
options for beneficiaries.
    If Congress adopts MedPAC's recommendations for cutting MA funding, 
the PFFS product is unlikely to be viable in many states. The result 
may well be that most, if not all, of the 1.3 million enrollees in this 
product will lose access to the enhanced benefits and opportunities for 
care coordination that come with these products. According to a study 
by Professors Ken Thorpe and Adam Atherly at Emory University, adopting 
MedPAC's recommendations could result in 3 million people losing their 
MA coverage, including more than 180,000 in Michigan.
    What would the loss of the PFFS option mean for Michigan? It will 
mean that many Medicare beneficiaries who make too much to qualify for 
Medicaid, but cannot afford a Medigap policy, will be left without an 
option for obtaining affordable supplemental coverage. It will mean the 
loss of care coordination and health improvement opportunities. It will 
mean that employers and unions struggling to maintain retiree benefits 
in light of new accounting rules will be forced to make hard choices 
about reducing or even eliminating retiree benefits. It will mean more 
confusion for beneficiaries who will lose trust in Congress, CMS and 
plan sponsors.
                             v. conclusion
    Thank you for considering my perspectives on the Medicare Advantage 
program. I appreciate this opportunity to testify about the importance 
of the private fee-for-service product. Medicare beneficiaries need 
stable options for supplemental benefits and PFFS plans are a major 
source of that coverage in many areas of the country. We urge the 
committee to ensure the continued viability of this product and to 
support adequate funding for the Medicare Advantage program.

    Chairman Spratt. Thank you very much for participating and 
for the contribution you have made. We greatly appreciate it. I 
have one question in the interest of allowing others to ask 
questions.
    One question, Dr. McClellan. Your predecessor, Tom Scully--
maybe he was caught off guard--said there has been huge 
overfunding in this program and Congress ought to take some of 
it back.
    Would you agree that, when you created it, you did not 
foresee excess payments to this extent and that your objective 
originally was more competition, better services, better plans, 
and lower costs as well and at least that part of the quest in 
creating these plans has not been achieved and should be 
reconsidered?
    Dr. McClellan. Well, Mr. Chairman, Tom says a lot of 
things, and I think if we put it in a little bit broader 
context and, if you look at my written testimony, I did talk 
about some ways to reduce the costs both in the Medicare 
Advantage program and, more generally, in Medicare without 
starting by taking away benefits from people who do not have 
any good alternatives, and my own preference would be to try to 
take steps like many of the members here have discussed--to 
address the overuse and underuse and misuse of treatments, to 
promote more prevention, to promote better quality of care for 
chronic diseases. We do a lousy job overall in many respects in 
this country, and we do a not very good job in the traditional 
Medicare program of providing support for efforts to get better 
quality care at a lower cost.
    I also made the point in my testimony that, while it is 
important to get budget costs down, it is also important to get 
overall health care costs down. If we are just shifting costs 
from the Federal Government to beneficiaries, 
disproportionately with limited means, who have no better 
alternatives than a traditional Medicare plan with many gaps in 
it or a Medigap insurance plan that is very costly and very 
inefficient, well, I think we can do better than that.
    So that is why, hopefully, just as the payment reforms that 
got us to this point had a lot of bipartisan support, looking 
ahead, it is those floor county payment rates, those higher 
payment rates for private plans in counties with low fee-for-
service costs that did not historically have access to these 
plans, and there is bipartisan effort that----
    Chairman Spratt. In setting up the original benchmarks, you 
were giving incentives to certain areas, in sparsely populated 
areas, for example, where it was difficult to build a 
comprehensive medical care network, but did you intend that to 
be a permanent and even widening differential?
    Dr. McClellan. I think the goal ought to be getting overall 
costs in our health care system down while improving quality. 
There are plenty of opportunities to do that. Some of those 
opportunities involve reforms in the Medicare Advantage plans 
like the ones that I talked about in my testimony. I do not 
think I would start by cutting payments that are going to have 
a direct effect on reduced access to up-to-date benefits like 
prevention, like better care for chronic diseases for seniors 
with limited incomes.
    Chairman Spratt. Mr. Ryan.
    Mr. Ryan. Thank you, and I will try and be brief as well 
because I want to get to everybody before votes happen.
    This is a strange conversation because, every time we have 
this conversation, we just think about it within the context of 
just this program, just Medicare, and we simply cannot ignore 
the underlying premise of the issue, which is health care 
inflation, itself, is running at about triple the rate of 
regular inflation.
    Mr. Blumenauer expressed a lot of the frustration that a 
lot of us have from these lower cost States. You know, we 
always point to Louisiana--I guess they must be the highest 
cost--and it is important that we address the root cause of 
health care inflation first and foremost.
    Also, as we take a look at, you know, payments and things 
like this, how do we get best practices out there? How do we 
get transparency in the metrics on cost and quality and best 
practices so that providers--hospitals and doctors--gravitate 
towards those norms and get to those best practices so that we 
can wrench out those inefficiencies, those overpayments so that 
the Louisiana model where the quality is no better than, say, 
it is in Wisconsin--I think, statistically speaking, it is not 
as good; the cost inefficiencies are there. So we have to go at 
that which is outside of Medicare, and that is probably more 
important than anything we could do to save money for the 
taxpayer here.
    Dr. McClellan, you just ran this agency until recently, so 
I want to direct most of my questions to you. You know, we can 
come through all of these different statistical contortions. We 
can say it is 12 percent over. It may be. I just do not know. 
When you take a look at the fact that the doc fix is not put on 
that baseline--and that is $22 billion just this year to stop 
the doctors from getting cut, which we should do, what would be 
the 10-year cost of freezing the doc payment, and preventing 
the cuts would be far, far more than the $150 billion we would 
save from freezing, you know, the private fee-for-service or 
all of the Medicare Advantage plans at 100 percent of fee-for-
service.
    So, when we see the fact that there are just glaring 
anomalies or glaring missing links in these statistics, we need 
to proceed with caution on this, and the reason we need to 
proceed with caution is I think it is important we go toward a 
comprehensive care model where we know intuitively that getting 
people into preventative medicine, getting people into disease 
management, continuation of care, and comprehensive care, we 
know it works. The problem is we do not have the statistics, 
the models, the measuring sticks to prove that it works, and 
the problem with legislating--and we do this in Ways and Means 
every day--is the only numbers we can use are what the 
scorekeepers give us. So, therefore, we legislate based on the 
stuff we get on paper from CBO and Joint Tax regardless of 
whether it is really good policy or not. Regardless of whether 
or not we really think it is going to save money in the long 
run or not, that is what we do.
    So, Dr. McClellan, you have been on all sides of this 
issue. Where are we missing in this conversation? What are the 
key elements we need to bring into this conversation so that we 
get to this $32 trillion unfunded liability and make sure we 
are not overpaying for things that a taxpayer should not be 
overpaying for?
    Dr. McClellan. Congressman Ryan, I think you start by 
asking the question of:
    Are the policy reforms that we are considering going to get 
at those underlying fundamental drivers of low-quality and 
high-excess cost in our health care system?
    There are things that can be done in both traditional 
Medicare and in supporting a Medicare Advantage program more 
effectively to drive out inefficient practices to do something 
about these huge variations in costs across areas. 
Unfortunately, I do not think the solution is simply cutting 
the Medicare Advantage payment rates across the board. That is 
going to result in more beneficiaries ending up in the 
traditional fee-for-service plan, which is an incredibly 
important plan that most seniors depend on and that we need to 
keep strengthening.
    In fact, a lot of the attention in the last few years has 
been on these competitive reforms, and we have put a lot of 
effort into strengthening traditional Medicare as well: 
bringing in more preventative benefits and making seniors aware 
of them, trying to take steps to not simply pay more for more 
care but pay more for better care and better results and better 
use of preventative services and better outcomes for patients 
with chronic diseases.
    So I would start with the reforms that help accomplish that 
goal, and while there are some changes in Medicare Advantage 
that can move in that direction, the Medicare Advantage program 
itself has taken some important steps to make available 
preventative care and disease management and all of the kinds 
of services that you were just describing for beneficiaries who 
otherwise would have no access to those kinds of services. More 
and more people in the Medicare program with chronic diseases 
who are frail are enrolling in Medicare Advantage plans, 
including special needs plans, that turn the criticism of 
attracting only healthier beneficiaries on its head. These are 
plans that only enroll people with institutional levels of care 
or who are also in Medicaid or who have serious chronic 
diseases, and they are offering a lot of this kind of support 
to help reduce those overall variations in quality and those 
missed opportunities to improve care while keeping costs down.
    Mr. Ryan. Yes, that is my concern that we are going to cut 
off our noses and spite our face, because we can get a good 
score from CBO that says ``you are going to save this much if 
you do that'' without thinking into terms the comprehension of 
care that is beginning to evolve, without integrating these 
benefits and incentivizing preventative medicine and disease 
management. We know that most of the costs in Medicare and in 
health care itself are chronic care, when a person is in the 
hospital, in-patient stuff. If we can keep them out of the 
hospital and keep them off of the operating table, we are going 
to improve their lives and save taxpayer money and society 
money.
    So when we sort of arbitrarily use statistics that are not 
comprehensive, you know, I worry that we are going to go down 
the wrong path and send people into plans that just do not give 
them that kind of preventative medicine, that kind of disease 
management, and so that is just something where I think we need 
to proceed with caution as we move down this road.
    I thank the chairman for his indulgence, and I yield.
    Chairman Spratt. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    I appreciate all of our witnesses being with us today.
    There is one question that I thought I heard that had 
occurred to me when the previous panel was testifying that I 
did not get a chance to ask, and that is they said if the 
Advantage plans could use the Medicare provider reimbursement 
rate, that they could save money. Did I hear that right? Do the 
Medicare Advantage programs reimburse physicians at the same 
rate that Medicare reimburses them at?
    Dr. McClellan. I think it may have been around the 
discussion with the private fee-for-service plans which have 
this authority, as I mentioned, called ``physician deeming,'' 
where basically if the physician sees the patient and could 
have found out about the plan's terms, then the plan can bill 
that physician at the traditional Medicare rate, and that has 
been a source of some confusion, and it is an area where you 
all may look at potential changes, but as a general matter the 
Medicare Advantage plans do not use the--at least the HMO plans 
and the PPO plans and so forth, do not use the traditional 
Medicare rates. In fact, they have often very different benefit 
designs with things like pay for performance and wellness 
benefits and things like that.
    Mr. Scott. Do they get paid more or less than Medicare?
    Dr. McClellan. I think they get paid differently. You heard 
from Dr. Wah. In some areas for some services physicians get 
paid less, but many plans have started care coordination 
programs, medical home pay-for-performance models where they 
pay physicians significantly more for providing better care and 
for preventing complications of diseases.
    Mr. Scott. Could you provide these medical delivery options 
without privatization?
    Dr. McClellan. Well, I hope so. Over the last few years, we 
took a lot of steps in traditional Medicare to create care 
management programs and things like that. Peter Orszag 
mentioned earlier the Medicare Health Support program, which 
was a pilot effort to bring disease management services into 
traditional Medicare.
    Mr. Scott. Well, we are spending $150 billion to get these 
options available to people. Could we do it cheaper if Medicare 
just did it?
    Dr. McClellan. Well, the challenge in traditional Medicare 
is that it is hard to put an emphasis on keeping people well 
and coordinating care in a purely fee-for-service payment 
system where, you know, the doctors and providers----
    Mr. Scott. The question is could we have the different 
delivery options under Medicare without privatization and 
without the subsidies?
    Dr. McClellan. I think the others may have different views, 
but my own view is that we ought to try as hard as we can to 
put the emphasis on prevention and better quality through the 
Medicare Advantage program and also to try as hard as we can 
through the fee-for-service program, but the fee-for-service 
program does present some different challenges in promoting 
coordination and integration----
    Mr. Scott. You are comparing apples and oranges.
    What I am suggesting is what is the barrier to Medicare's 
running a prevention-type service rather than just a fee-for-
service program, and we are spending $150 billion to get these 
services. For the same amount of money, could the beneficiaries 
of Medicare get the same benefit if Medicare did it rather than 
through somebody else?
    Ms. Kennelly. Yes, Congressman, you could. I think that is 
the point.
    Mr. Scott. Are we getting $150 billion worth?
    Ms. Kennelly. You are getting many more people involved in 
spending those dollars. The problem with--Mark and I have 
talked about this many times. We talk about improving the 
traditional Medicare program. You can only spend a dollar once, 
and if you put all of the available dollars into the Medicare 
Advantage program, all of these wonderful things we could do in 
the traditional program will not be done.
    Mr. Scott. The problem is that, with Medicare, you do not 
have all of the commissions, fees, profits, advertising, and 
everything else, and the money would go just to the service.
    Dr. Neuman.
    Ms. Neuman. Yes, that is right. I mean it could well be 
that the private fee-for-service plans--now, while all of them 
do not provide care coordination and they are not required to 
provide care coordination, maybe there are some lessons that 
can be learned from those plans that do that could be applied 
to traditional Medicare so that traditional Medicare has the 
benefit of care coordination models to the extent that they 
seem to be working.
    You know, I just want to amplify the broader issue here of 
the question that you face of whether you want to invest 
resources to provide preventative benefits and care management 
to the minority of people on Medicare who are choosing Medicare 
Advantage plans, really leaving the majority, the 4 out of 5, 
without the same set of benefits, and many of these people are 
low-income, have modest incomes, and are paying higher premiums 
as a result of the system.
    Mr. Scott. Well, the choice is whether we could do--you 
have got $150 billion leaving the system, and whether you could 
get that done within the system for $150 billion is the 
question.
    Dr. Wah. Yes. I think the other speakers pointed out that 
not every dollar is traveling to the beneficiary here. There is 
load, there is admin, there is marketing, and there is profit 
involved, and that is one of the things we are talking about. 
If there were a more level playing field here between Medicare 
Advantage and regular Medicare, the competitive marketplace 
would drive those players to squeeze those loads down, but 
right now they are able to just load them on without the 
competitive forces to drive them down.
    Dr. McClellan. If I could make two more points on this.
    One is that, if you look at the total savings that 
beneficiaries in Medicare Advantage are getting, they exceed 
these total overall payments. Why? Because in a coordinated 
care program, it is easier to target the beneficiaries, to 
target the benefits of people who need them the most. It is 
hard to do in a fee-for-service system.
    Second, I think your emphasis on finding ways to spend 
dollars better and maybe more dollars in fee-for-service on 
prevention and care coordination is great. Unfortunately, there 
has been very little discussion of that around this Medicare 
Advantage payment reform debate. Most of the money in the 
proposals would go to things like paying more for physician 
services in the existing program. That is a very important 
goal, but it amounts to a double hit on beneficiaries in terms 
of increased payments, and it does not, by itself, do anything 
about these variations in practices or about the problems with 
access to preventative and coordinated care benefits.
    Mr. Scott. Mr. Chairman, can I ask one other question that 
they could respond to in writing? Because I know my time is up.
    Chairman Spratt. Sure.
    Mr. Scott. That is that I understand that the risk pool in 
the Advantage plans is healthier than the others. How does that 
calculate into all of this? Because that should be where they 
get their profits from, not from the subsidies. If I could get 
that in writing because I am way over my time, I would 
appreciate it, Mr. Chairman.
    Chairman Spratt. If those of you who are able to respond to 
that question would supply us an answer for the record, we 
would appreciate it.
    Now, Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    I know time is limited, so I just wanted to stress one 
point. I thought it was the most interesting thing in any of 
the testimony we received, and that is Dr. McClellan is opening 
a new front in the debate on how to improve health insurance. 
These are his comments, and let me quote.
    ``most beneficiaries in traditional Medicare are also 
enrolled in Medigap supplemental coverage. This coverage, 
particularly the individual Medigap plans, is quite 
inefficient. Not only does it have a high load factor, meaning 
that beneficiaries have to pay much more in premiums than they 
get out in benefits, but the Medigap options are also designed 
in a way that encourages first dollar coverage that, according 
to CMS actuaries and CBO analysis, adds billions of Medicare 
costs each year. Such Medigap plans not only promote 
inefficient spending, but Medigap premiums have been rising 
rapidly and are much higher than part B and part D premiums 
combined.''
    That is the most direct frontal attack on Medigap coverage 
I have ever seen or read. I congratulate you, personally. I was 
curious if you did anything about this while you were CMS 
Director.
    Dr. McClellan. We did, and thank you for highlighting that 
point.
    With the Medicare Modernization Act, some other Medigap 
plans became available that did have more reasonable copay 
limits and designs, but the way that Medigap is set up--I think 
it is implicit in your comment--is that seniors often have very 
little alternative between the traditional Medicare program 
with all of its gaps and going into a Medigap plan that might 
provide first dollar coverage, and seniors are risk-adverse. 
They do not like to be looking at a lot of potentially 
unlimited out-of-pocket spending. That is what you get in the 
traditional Medicare plan. So because they have no better 
alternative, they will spend hundreds of dollars a month out of 
their limited incomes to get into these plans that are costing 
a lot more than they are paying out and that are promoting this 
kind of inefficient delivery of health care that you were 
talking about. So we took some limited steps, but the Medigap 
plans are there by statutory design. It would take legislation 
to change that.
    Mr. Cooper. Did the administration propose any fundamental 
adjustment of the Medicare-Medigap coverage while you were at 
CMS?
    Dr. McClellan. I believe they have proposed--there were a 
lot of proposals in the past, but I believe in the past the 
administration has proposed reforms in Medigap coverage to get 
rid of or at least require higher payments for those who sign 
up for the first dollar plans and to try to encourage the 
availability of some reasonable plans that provide real 
protection but that do it at a lower cost.
    Dr. Wah. Could I just add also, though, that sometimes 
these Medicare Advantage plans are, in fact, billed as a 
replacement for a regular Medicare plus a Medigap plan, and 
there is so much variation in the Medicare Advantage plans. For 
instance, the Blue Cross private fee-for-service in South 
Carolina, for instance, provides no more coverage for drugs or 
for home care than if you had Medigap and regular Medicare. In 
fact, it provides less. So it looks attractive for some 
features of the Medicare Advantage plan, but in fact if you get 
really sick, when the high-dollar amounts start kicking in, it 
actually pays less, and so I just want to make sure it is clear 
that Medigap plus regular Medicare, as we have said, is not 
always optimal. These Medicare Advantage plans are not always a 
perfect replacement for those either.
    Ms. Schmitt. What we find is that what beneficiaries 
particularly like is where you can give them fixed cost-sharing 
because they want to know that, instead of having some 
percentage of something that is going to cost them, if they 
know that they are selecting this plan and know that they have 
a set stop-loss and an office visit is going to cost them $10, 
they consider that a strong advantage because their costs are 
then predictable.
    Mr. Cooper. Ms. Schmitt, in your testimony, you also decry 
fraudulent marketing practices that are employed on behalf of 
some private fee-for-service Medicare Advantage plans.
    I thank the Chair. I see that my time has expired.
    Mr. Scott. Mr. Chairman.
    Chairman Spratt. Mr. Scott.
    Mr. Scott. Could I ask unanimous consent that a statement 
from AFSCME be entered into the record of the hearing?
    Chairman Spratt. Without objection.
    Mr. Scott. Thank you.
    [The information follows:]

  Prepared Statement of the American Federation of State, County and 
                      Municipal Employees (AFSCME)

    The American Federation of State, County and Municipal Employees 
(AFSCME) represents 1.4 million employees who work for federal, state, 
and local governments, health care institutions and non-profit 
agencies, and an additional 230,000 retiree members. AFSCME and its 
members are proud of labor's historic role in the creation of Medicare 
and we remain strong defenders of the Medicare program from those who 
would undermine its foundations.
    When President Johnson signed Medicare into law on July 30, 1965, 
he spoke of the profound promise of Medicare to our nation and its 
citizens:
    ``No longer will older Americans be denied the healing miracle of 
modern medicine. No longer will illness crush and destroy the savings 
that they have so carefully put away over a lifetime so that they might 
enjoy dignity in their later years. No longer will young families see 
their own incomes, and their own hopes, eaten away simply because they 
are carrying out their deep moral obligations to their parents, and to 
their uncles, and their aunts.
    And no longer will this Nation refuse the hand of justice to those 
who have given a lifetime of service and wisdom and labor to the 
progress of this progressive country.''
    For today's 42 million Medicare beneficiaries and our nation, the 
need for Medicare to remain a sanctuary against financial ruin caused 
by the vicissitudes of illness and disability rings as true in 2007 as 
it did nearly 42 years ago.
    Today, the financial security of Medicare is threatened by the 
drive to privatize the program. Overpayments to Medicare Advantage 
plans are causing a shift of beneficiaries out of the more efficient 
government-administered program into more costly private plans. 
Overpayments to these private plans may make them highly profitable, 
but they also have a deleterious impact on the federal budget, the 
Medicare program and the Medicare benificiaries.
 overpayments to private medicare advantage plans threaten medicare's 
                           financial solvency
    When Congress opened up Medicare to private plans, it was based on 
the claim that the private health insurance industry would be more 
efficient, provide more coordinated care for seniors and the disabled, 
and do so with less cost to the taxpayers and beneficiaries than the 
traditional Medicare program. The promises of efficiencies and lower 
costs have been illusory; Medicare now pays private Medicare Advantage 
plans more than it would cost to cover the same beneficiaries through 
the traditional Medicare program. According to the Medicare Payment 
Advisory Commission (MedPAC), these private plans are paid an average 
of 12 percent, or $1,000 per year, more to cover a Medicare beneficiary 
than the cost of traditional Medicare to cover the same beneficiary. 
Private Medicare Advantage fee-for-service plans are paid on average 19 
percent more than the traditional Medicare fee-for service program.
    Overpayments to the private insurance industry are worsening 
Medicare's financial health. Enrollment in the private plans is growing 
rapidly and enrollment is growing the fastest among plans receiving the 
largest overpayments. Over the next 10 years, these overpayments to 
insurance companies will cost an additional $160 billion. These 
overpayments shave two years off the financial solvency of Medicare's 
hospital insurance trust fund. The ballooning growth in overpayments to 
private plans will drive premiums even higher for beneficiaries, erode 
Medicare's financial solvency and ultimately force major changes in the 
Medicare program, including substantial cuts in benefits. If left 
unchecked these overpayments will ultimately lead our nation backwards 
to a time when seniors were one illness away from poverty and were 
denied reasonable and necessary medical care because they could not 
afford to pay doctors or hospitals.
 overpayments to private medicare advantage plans are increasing state 
                             medicaid costs
    The overpayments to private plans come out of the Medicare hospital 
trust fund, Part B premiums and general revenues. Medicaid, which is 
jointly funded by states and the federal government, subsidizes Part B 
premiums for low-income Medicare beneficiaries. Because the 
overpayments push Part B premiums higher, states are forced to pay more 
for Part B premiums to subsidize these overpayments to private plans. 
Nationally, states and the federal government will be forced to pay an 
extra $168 million in FY 2007 in Part B monthly premiums for all low-
income Medicare beneficiaries as result of the overpayments to private 
Medicare plans. Attached is a table showing the additional cost to 
Medicaid, by state, to subsidize overpayments to private Medicare 
plans.
           all medicare beneficiaries are already paying more
    Because Medicare Advantage overpayments drive up premiums paid by 
Medicare beneficiaries, all seniors, not just those in the private 
plans, are paying more now. In 2007, each beneficiary in traditional 
Medicare paid an extra $24 per year for the Part B premium to subsidize 
the overpayments to the private plans.
                      medicare disadvantage plans
    Advocates for Medicare beneficiaries, beneficiaries and state 
insurance commissioners have been reporting that private plans have 
used abusive, misleading and fraudulent sales tactics to shift seniors 
out of Medicare and into their private insurance policies. The billions 
and billions in extra costs coming out of the pockets of taxpayers, 
states and beneficiaries to fund overpayments to Medicare Advantage 
plans explains the gold rush fever of health insurance companies to 
sign up seniors, even if it means these companies step far over the 
line in their sales and marketing practices. With 27 percent of all 
Medicare beneficiaries having cognitive or mental impairments, these 
elderly and disabled beneficiaries are a vulnerable target of abusive, 
confusing, misleading and fraudulent sales tactics. According to press 
reports, beneficiaries are told that ``Medicare is going private'' or 
that they will lose their Medicare or Medicaid unless they sign up for 
a particular plan. Insurance company agents show beneficiaries business 
cards which suggest that they are from Medicare, Social Security, or 
other trusted government agencies. Many beneficiaries do not realize 
that when they sign up for Medicare Advantage plans they will lose 
their Medicare coverage and terminate or jeopardize eligibility for 
existing retiree or Medicare supplemental plans.
    Once beneficiaries are in private Medicare Advantage plans they may 
be forced to pay higher co-payments than they would under traditional 
Medicare. Traditional Medicare does not require any co-payments for 
home health care services but many Medicare Advantage plans do. Many 
plans have higher out-of-pocket costs for hospitalization, 
chemotherapy, and services needed for those who are chronically ill. 
Medicare Advantage beneficiaries also find they have fewer rights than 
traditional Medicare beneficiaries when things go wrong with their 
health insurance.
    The dizzying array of complex benefits packages and out-of-pocket 
rules vary from plan to plan and can change every year in a Medicare 
Advantage plan. While current law requires these plans to offer at 
least the actuarial equivalent level of benefits as provided in 
traditional Medicare, plans can and do change their benefit and cost-
sharing rules to keep the healthiest, and least costly, beneficiaries 
in their plans. MedPAC reports that Medicare Advantage plans are 
enrolling beneficiaries who are healthier than average. By targeting 
healthier beneficiaries through marketing or winnowing out sicker, and 
more costly, beneficiaries through increased costs and changes in 
benefits, Medicare Advantage plans raise their own profit margins at 
the expense of beneficiaries and the Medicare program.
    It is not at all clear that the additional payments made to 
Medicare Advantage plans are indeed being returned to beneficiaries in 
the form of additional benefits or reduced cost-sharing. With little 
accountability and reporting requirements it has been extremely 
difficult to identify what percentage of the overpayments are being 
used to boost profits of the private insurance companies, to pay 
insurance commissions, marketing or administrative costs, rather than 
improve benefits.
    Medicare Advantage fee-for-service plans are the least efficient 
private plans and receive the highest overpayments from Medicare. 
Because these types of private plans are exempt from most quality 
measurements, taxpayers have no assurance that these excessively costly 
plans are truly protecting the health of beneficiaries. For example, 
these plans are not required to coordinate care of enrollees with 
complex or serious medical conditions. These plans are not required to 
work with community and social service programs to ensure continuity of 
care and integration of services.
    In sum, taxpayers have little to no assurance that the billons in 
extra payments to private insurance companies are actually providing 
meaningful benefits to the sickest and frailest beneficiaries. It would 
be more accurate to call many of these private insurance plans Medicare 
Disadvantage Plans.
    congress must stop the insurance industry's fleecing of medicare
    Overpayments to insurance companies prime the Medicare 
privatization pump and put the security of the Medicare program at 
risk. Congress must act to secure Medicare by reining in the runaway 
overpayments to Medicare Advantage plans. Recalibrating Medicare 
Advantage overpayments will improve the efficiency of the program, 
reduce incentives for abusive tactics and strengthen the financial 
health of Medicare. The savings realized from reducing these escalating 
overpayments can be used to improve the prescription drug benefit, 
improve health services for low- and moderate-income beneficiaries, 
prevent a cut in the Medicare reimbursement to physicians and help pay 
to cover more children under the State Children's Health Insurance 
Program (SCHIP). Congress must act now to stop the insurance industry's 
fleecing of Medicare.
amount of extra part b monthly premiums medicaid must pay in 2007 as a 
       result of overpayments to medicare advantage private plans

  (Based upon CMS Part A and Part B state buy-in data for April 2007 
                             billing cycle)

Alabama.................................................      $4,291,296
Alaska..................................................        $283,032
Arizona.................................................      $2,878,824
Arkansas................................................      $2,367,336
California..............................................     $25,669,416
Colorado................................................      $1,618,200
Connecticut.............................................      $1,624,440
Delaware................................................        $474,456
District of Columbia....................................        $375,744
Florida.................................................     $11,185,992
Georgia.................................................      $5,217,192
Hawaii..................................................        $619,752
Idaho...................................................        $618,360
Illinois................................................      $5,327,688
Indiana.................................................      $2,871,144
Iowa....................................................      $1,569,024
Kansas..................................................      $1,220,520
Kentucky................................................      $3,276,744
Louisiana...............................................      $3,349,296
Maine...................................................      $1,353,312
Maryland................................................      $2,035,992
Massachusetts...........................................      $4,549,560
Michigan................................................      $4,423,368
Minnesota...............................................      $1,984,248
Mississippi.............................................      $3,275,712
Missouri................................................      $2,720,832
Montana.................................................        $369,504
Nebraska................................................        $613,296
Nevada..................................................        $712,824
New Hampshire...........................................        $316,992
New Jersey..............................................      $4,071,888
New Mexico..............................................      $1,280,256
New York................................................     $11,919,048
North Carolina..........................................      $6,238,728
North Dakota............................................        $180,072
Ohio....................................................      $5,570,664
Oklahoma................................................      $1,970,544
Oregon..................................................      $1,785,216
Pennsylvania............................................      $6,365,112
Rhode Island............................................        $655,080
South Carolina..........................................      $2,974,632
South Dakota............................................        $367,824
Tennessee...............................................      $5,549,664
Texas...................................................     $11,299,296
Utah....................................................        $588,312
Vermont.................................................        $516,000
Virginia................................................      $3,349,392
Washington..............................................      $2,913,624
West Virginia...........................................      $1,398,744
Wisconsin...............................................      $2,090,064
Wyoming.................................................        $193,392

    Chairman Spratt. Mr. Doggett.
    Mr. Doggett. Thank you.
    Dr. Wah, I certainly agree with your concluding comment in 
your earlier testimony that what we have here is a pay-more-
and-get-less system.
    As it relates to the health of your patients, did I 
understand your testimony to be that there is mounting evidence 
that this excessive payment to Medicare Advantage is not 
producing better health care outcomes?
    Dr. Wah. Well, I think that there are concerns.
    For instance, like I mentioned, the Rural Health 
Association noted that because of the lower payment rates that 
the safety net for rural health care is likely to be put at 
risk because of that. I would be happy to, in written 
testimony, provide more detail about actual outcomes as I do 
not have those details in front of me, but there is a concern 
that--and it is partly because of the confusion of just this 
blizzard of different terms and conditions that are out there 
in the Medicare Advantage programs. They have all of the 
shortcomings of the commercial products that are out there, and 
physicians and patients are literally just besieged by these 
little fine print details that make it very hard to understand 
what they are signing up for or what they are being involved 
in, and so that can lead to patients who think they signed up 
for something good, and then the fine print comes around at the 
end and gets them because it turns out, like I said before, 
they actually do not get coverage for home health care when 
they get really sick. If they get cancer, their chemotherapy 
drugs are only covered up to 80 percent, and they have to come 
up with the other 20 percent. They did not read that fine 
print. They read that, oh, they get dental; they get vision, 
all of the things that were in bold print that sounded really 
good.
    So it is hard to articulate or to actually quantify whether 
the health is better or worse because of that, but I am 
concerned that they end up paying more overall because of these 
expenses that they did not see in the fine print.
    Mr. Doggett. Exactly, and I note in your written 
testimony--and I welcome any supplementation that you might 
want to do--that you report or say that there has been rampant 
Medicare Advantage plan marketing abuse reported by physicians 
all over the country and that there is mounting evidence that 
the billions of dollars poured into Medicare Advantage are not 
buying better health coverage.
    Let me ask you: If we continue pouring the money there and 
we cut physician reimbursement by 10 percent as a New Year's 
Day present to seniors and to individuals with disabilities 
across this country, what will the impact be?
    Dr. Wah. Well, I appreciate your bringing this up, and I 
appreciate Mr. Ryan's saying the Medicare physician payment 
problem does need to be fixed. I think, obviously, we are 
concerned about that. In polling our physicians, a high 
percentage--60 to 80 percent--will find it very difficult to 
continue to care for their existing Medicare patients, but more 
importantly, it is going to be financially very difficult for 
them to accept new patients, and I think there have been 
numerous studies that have shown that new patients coming into 
the Medicare system are having a great deal of difficulty 
finding physicians to take care of them because it is just 
fiscally difficult for them to accept new patients at this 
time, and with these impending cuts that we have talked about 
coming in 2008, that will only get much worse in terms of 
patients being able to find the care they need, and that is our 
concern, is making sure that the patients can get the care they 
need that is out there.
    Mr. Doggett. Well, thank you very much for your comments.
    Ms. Kennelly, I appreciate so much your efforts overall to 
prevent those who are determined to let Medicare wither on the 
vine, and that was not a very hidden agenda in promoting this 
form of the prescription drug plan. Just as there is a limited 
amount of money to decide how much is wasted in Medicare 
Advantage and how much is available to meet the cost of health 
care provided by physicians and other health care providers, 
there is also a question about what our priorities will be in 
monies available to the poorest of our seniors, and I know some 
of these insurance companies have been rounding up poor people 
to say how much they will be disadvantaged if the insurance 
companies do not get the advantage in Medicare Advantage. I 
believe Dr. Neuman's testimony pointed to some of that.
    Wouldn't we be better off if we used some of the money that 
we can save in these excessive payments to address the Medicare 
savings program and the prescription coverage now, the 
improvements in extra help in the legislation that I know you 
have endorsed and that I have offered?
    Ms. Kennelly. Absolutely, Congressman. Yes, you are 
absolutely right about the Medicare savings program. It is 
perfectly set up just for this, and we absolutely should have 
more subsidy for the part D prescription drug, but I sit here, 
and it washes over me, my history.
    I was born and brought up in Hartford, Connecticut, and 
then I represented Hartford, Connecticut in the Congress, the 
capital, the insurance capital of the world.
    And I just ask you Congressmen that are here to remember, 
that before 1965 there was no Medicare, and then all of a 
sudden it was realized, if you put all of the people over 65 in 
a pool, it works, and they will be covered, and since 1965, the 
demographic for those people who are 65 and over, having health 
insurance is the highest. Before 1965, it was the lowest. So I 
know absolutely that we should have managed plans, and we 
should have competition, but what has happened in the 2003 
bill--and you know, Mark, and I know, and we know people who 
saw the prescription part D as a sweetener, and these are 
things that they wanted to do over the years. It is a 
philosophical thing, but I just absolutely urge you do not just 
look at the arcane things that we talk about today. Look at the 
traditional program. Any country like the United States has to 
have that program. Then go on and have the competition. But 
these robust, absolutely almost unbelievable subsidies, with 
the deficit situation we have today, we are just going down a 
road where we will not have Medicare, and I will tell you that 
one of your predecessors, Bruce Platek, he taught me a lot 
about insurance, and he said, ``Barbara, as long as those 
insurance companies have subsidies, they will play the game, 
but as soon as they do not have subsidies, for those over 65, 
they will not,'' and we should remember that.
    Mr. Doggett. Thank you.
    Thank you, Mr. Chairman.
    Chairman Spratt. Thank you.
    Mr. Berry.
    Mr. Berry. Ms. Neuman, do you have something you wanted to 
say?
    Ms. Neuman. Thank you so much.
    I wanted to respond to Mr. Doggett a little bit on the 
question about ways to help low-income beneficiaries because, 
if you look back on one of the slides I presented, there are 
more than 1 million Medicare beneficiaries with incomes below 
$10,000 who have no supplemental insurance. They do not have 
Medicaid; they are not in the Medicare Advantage plans.
    One of the options for assisting these beneficiaries is to, 
one, inform them and get them covered under the programs that 
are out there, but many people may not qualify for these 
programs because the asset requirements, the asset tests, have 
not been indexed over time, and so people may have very low 
incomes, but they could have $6,000 in life savings and not get 
help with their Medicare premiums and cost-sharings. So there 
are other strategies the committee could consider if the goal 
were to improve coverage for people with very low incomes.
    Mr. Doggett. Thank you.
    Mr. Berry. Thank you, Mr. Chairman.
    My question is for Ms. Schmitt. I believe you mentioned, 
when you have unscrupulous marketing abuse and things like 
that, that CMS is doing a good job of regulating that.
    Ms. Schmitt. I indicated that they have added some new 
requirements as of the last week or two.
    Mr. Berry. The reason I raise that is I thought that maybe 
you were getting something in Michigan that we surely are not 
getting in Arkansas. They are completely without any kind of 
oversight at all, and even when we repeatedly report the same 
companies doing the same abusive things to senior citizens who 
basically have no way to protect themselves, over and over 
again, they do nothing, and I thought maybe you had found a way 
to get CMS off the dime and make them actually do something. We 
are completely frustrated with CMS at the moment.
    Ms. Schmitt. Well, actually, there are requirements that we 
oversee the agents and make sure that they follow all of the 
policies.
    Mr. Berry. And maybe you do that, but I assure you that 
there are insurance companies that do not, and I was trying to 
find an easy way to accomplish this. What we are looking at is 
having the State Insurance Commission have oversight 
responsibility over those companies because right now there is 
nobody who has the authority to regulate them but CMS, and they 
are not doing it.
    Ms. Schmitt. I would expect that CMS' requiring that they 
cease selling and marketing their programs until they begin 
this oversight is probably going to have some response from 
those places.
    Mr. Berry. Has CMS done that?
    Ms. Schmitt. Yes.
    Mr. Berry. Okay. I had not realized that. I think some of 
those companies that they told to cease, there are still some 
of them out there, some companies that should have been on that 
list that were not.
    Ms. Schmitt. I cannot respond to that.
    Mr. Berry. Right, I am sure you cannot.
    Ms. Schmitt. May I make a comment on a couple of other 
things that have been said?
    Mr. Berry. Yes, ma'am.
    Ms. Schmitt. Okay. One thing is there was a question of 
whether or not CMS could do the same type of care management. I 
think one of the big components is having all of the data in 
order to be able to look at a person's drug coverage and their 
medical, and I think the entities that are in the best position 
to do that is an MAPD plan that has all of the data in order to 
do that.
    There was also a comment about rural health clinics, and 
under Medicare private fee-for-service, you are required to pay 
the exact same amount as traditional Medicare. So these clinics 
should either be receiving the exact amount as traditional 
Medicare or they have agreed to and have contracted with these 
plans. So I am not exactly sure what it is that they are not 
receiving the plan on.
    Lack of education. Certainly, any new program takes a while 
for people to become familiar with that, and when I say 
``people,'' I am referring to both the providers and the 
beneficiaries, but I think we have certainly gone out of our 
way to have that type of education, and I think that the 
knowledge in that is going to continue to grow so that many of 
those issues will be eliminated fairly quickly.
    So thank you.
    Dr. Wah. Can I just add to that?
    You were talking about the marketing practices and the 
really egregious things have been pointed out. I think that is 
just the tip of the iceberg. Below that is this myriad of 
different terms and conditions that people are trying to sort 
through, and you know, we talk about the really egregious 
things, and we see the headlines in that, but the really day-
to-day problem is a patient will think, looking at the big 
print, like I said before, that this is an appealing program, 
and then one of the things it will say is this is a fee-for-
service, a private fee-for-service; you can go see anybody 
because it is a fee-for-service system, and then they will find 
out that their physician is not part of that, and they can no 
longer see their physician without being charged out-of-network 
charges, and so they end up having to change physicians because 
their current physician does not accept their, quote/unquote, 
private fee-for-service plan.
    So there are a lot of things below the surface that these 
egregious things are just beginning to show, but there is much 
more below the surface that we are not seeing. I just wanted to 
point that out.
    Mr. Berry. When those things happen, they come to us, and 
we are beginning to see an awful lot of that, too, and I do not 
know if you would agree, but there is what I consider to be 
massive confusion between the part D plans and the Medicare 
Advantage plans and managed care plans and fee-for-service 
plans and traditional Medicare. Traditional Medicare is one of 
the few things that pretty well everybody understood and knew 
where they stood with it, knew what it did and what it did not 
do. With all of these other things that have been added through 
the private sector, as much as I am able to determine, great 
confusion has come about because every plan is different. In 
fact, some plans change almost on a monthly basis.
    So we have created a situation which, quite honestly, I 
cannot keep up with. We run into situations like that in our 
office that will just make you want to cry. In fact, some of 
our caseworkers in the district office, you go in there 
sometimes, you want to take them for treatment because they are 
so frustrated with trying to work these constituents through 
these problems, and then you call CMS, and you know, you just 
might as well be calling the railroad station, which actually 
does not exist in my State.
    If you disagree with that, I would sure like to know about 
it, but whatever we do--and we can talk about how much it costs 
and all of that. Whatever we do, there has got to be a better 
way than what we are doing right now.
    Dr. Wah. Yes, sir. I agree. I mean, like I said, the 
frustration you are seeing with your patients and your 
constituents is exactly what our physicians and our patients 
are seeing out there as well, and that is why, to see that in a 
plan where you are already pouring extra money into the system, 
you have got to wonder where all of that extra money is going.
    Mr. Berry. I am convinced that the insurance companies 
wrote this stuff, and this is the way they intended it to be. 
They didn't want people to be able to understand it very well. 
That is why they shouldn't write laws. That should be left up 
to the Congress.
    Ms. Schmitt. We brought up a large group this year. It is 
the Michigan public school retirees, cafeteria workers, 
janitors, as well as the teachers, and our experience was that 
we set up a separate phone bank for people when this program 
first went up, and when they called and said their physician 
would not see them, we made an outreach to the physician's 
office and very frequently, you are correct in that physicians 
did not even--some of them didn't even know that private fee-
for-service existed or thought it was the same as an HMO or 
PPO.
    So we went through the education process with the 
physicians and most of--the vast majority, once they understood 
it, there was acceptance. There were some that would not, at 
which point we then made outreach to other physicians in the 
area and did what we could and probably 99 point some percent, 
we were able to locate alternative providers for the members.
    Mr. Berry. Well, I applaud that, but I am here to tell you 
that doesn't happen very many places. I would say places where 
that happens are a lot less than the places where it does. And 
like I say and it comes back to us, and it comes back to the 
providers. And that is fine. That is my job, and I don't mind 
dealing with it at all, but the problem that is hard to deal 
with is the fact that these people are not getting the care 
that they think they have paid for, and it is because they have 
largely been deceived by hotdog salesmen somewhere. And I wish 
that wasn't the case.
    I know we have already had a discussion about whether or 
not--that was that argument, a while ago--fraud, whether this 
was fraud or not. If it's not fraud, I don't ever want to run 
into fraud because it is as close as you can get without being 
there.
    But--and I do--I applaud you and your company for doing 
good, and I hope you all keep doing it.
    Thank you.
    Mr. Spratt. Thank you. Let me thank each of our witnesses 
for bringing us the knowledge and perspective you provided on 
what is a very complex but vitally important matter. We 
appreciate your participation. Thank you very much.
    I would ask unanimous consent that members who did not have 
the opportunity to ask questions of our witnesses be given 7 
days to submit questions for the record.
    Without objection, so ordered.
    [The prepared statement of Ardis Hoven follows:]

     Prepared Statement of Ardis D. Hoven, M.D., American Medical 
                              Association

    The American Medical Association (AMA) appreciates the opportunity 
to provide our views regarding Medicare Advantage (MA) plans and their 
impact on the Federal Budget. We commend Chairman Spratt and the 
Members of the Budget Committee for your leadership in recognizing the 
need to examine the impact of the MA plans on Medicare patients and the 
long-term financial viability of the Medicare program.
    The AMA supports providing Medicare beneficiaries with coverage 
options so that they are able to select the health insurance plan that 
is tailored to meet their specific needs. The MA option was originally 
conceived as a strategy to promote efficiency, provide enhanced patient 
care through care coordination, and promote private competition. MA 
plans were also devised to increase diverse plan offerings that would 
dovetail with the varied needs of beneficiaries. The AMA has been and 
continues to be a strong proponent of greater competition in the 
Medicare program to help strengthen patient choice and the program's 
long-term financial sustainability. However, seniors' choices should be 
based on their health care needs and not influenced by preferential 
government subsidies to highly profitable insurance companies. The 
average reimbursement to MA plans--112 percent of regular Medicare 
expenditures--has created significant market distortions and undermined 
competition by providing large subsidies to the MA plans at the expense 
of regular Medicare.
                   substantial subsidies to ma plans
    The Congressional Budget Office (CBO) estimates that Medicare 
spending would be reduced by $65 billion from 2008-2012 if the MA 
benchmarks were decreased to the Medicare fee-for-service level. CBO 
estimates that 21 percent of MA spending goes to private plans that 
receive between 120 percent and more than 150 percent of regular 
Medicare rates. The large disparity in payment between MA plans and 
regular Medicare is a particularly troubling development because it is 
difficult to detect enough additional meaningful benefits to patients 
to justify these enormous government subsidies. In fact, there is 
mounting evidence that a significant number of MA plans are luring 
their enrollees with false promises, skimping on benefits and 
reimbursement, and using their government subsidies primarily to 
increase profits for their shareholders.
    There are real tradeoffs involved in the public policy choices that 
Congress currently faces. An average 12 percent add-on payment is being 
provided to plans in which only 19 percent of Medicare beneficiaries 
are enrolled, while the physicians who care for all Medicare 
beneficiaries face a 10 percent cut next year. The Medicare Payment 
Advisory Commission (MedPAC) estimates that all seniors, not just those 
in MA plans, are paying two dollars a month in higher premiums to help 
fund the subsidies being paid to managed care companies. The CBO and 
the Medicare Actuary have noted that Medicare cost growth, which was 
already a cause of major concern, is now projected to rise even more 
rapidly due to its projections of increasing enrollment in MA plans. 
The Medicare Actuary also has stated that overpayments to MA plans 
shorten the solvency of the Part A Trust Fund and concluded that 
setting the benchmarks for MA plans at the regular Medicare fee-for-
service level would extend the insolvency date by about two years. In 
other words, instead of making Medicare more sustainable as the baby-
boom generation reaches the age of Medicare eligibility, the MA 
subsidies are having the opposite effect. The additional payment to MA 
plans averages about $1,000 per beneficiary and the CBO reports that 
the MA overpayment per beneficiary is only expected to climb.
    In addition to subsidizing MA plans by paying more per enrollee in 
MA than for beneficiaries in regular Medicare, Congress established a 
further MA subsidy through the creation of the MA preferred provider 
organization (PPO) stabilization fund (the fund). The fund was designed 
to provide additional financial incentives to insurance companies that 
offer regional PPO plans in areas where regional PPOs would not have 
otherwise been established. (This additional subsidy was not necessary 
to encourage regional PPO participation given that there were such 
plans in 21 of the 26 regions in 2006.) Originally, $10 billion was 
placed in the fund, but Congress has already reduced the fund by $6.5 
billion. If this fund were completely eliminated, the CBO estimates 
that it would save $3.5 billion over a ten year period. Furthermore, 
the CBO Budget options provided to Congress show that MA plans receive 
an additional financial subsidy through a duplicate payment to MA plans 
for Indirect Medical Education (IME). (The MA benchmarks include an IME 
payment even though these payments are already made directly to 
teaching hospitals that treat MA beneficiaries.) The CBO estimates that 
if the IME payments were removed from MA payments, approximately $12.9 
billion would be saved over ten years.
    The AMA joins other health care stakeholders, including the AARP 
and the Medicare Rights Center, as staunch supporters of financial 
neutrality between the regular Medicare program and the MA program. The 
AMA urges Congress to adopt the MedPAC recommendation that ``the 
Medicare program should pay the same amount, adjusting for the risk 
status of each beneficiary, regardless of which Medicare option a 
beneficiary chooses.'' We concur with MedPAC's goal of ``having 
Medicare payments cover the costs that efficient providers incur in 
furnishing care to beneficiaries, while ensuring that providers are 
paid fairly and beneficiaries have access to the care they need.''
    medicare ffs remains the primary medicare option and it must be 
                        solidified and improved
    Although many physicians provide health care to MA patients, they 
have many more patients--81 percent--who are in regular Medicare. Huge 
subsidies are being paid to MA plans that serve 19 percent of Medicare 
beneficiaries, while physicians who take care of all senior and 
disabled patients face cuts of 10 percent in 2008 and about 40 percent 
over the next decade.
    If Congress does not take action to provide Medicare physician 
payment updates that keep up with practice cost increases, then 
physicians will not be able to sustain their practices, resulting in 
significant access problems for all Medicare patients, not just those 
in regular Medicare. In a recent AMA survey of 8,955 physicians, 60 
percent reported that they plan to limit the number of new Medicare 
patients they treat if payment rates are cut 10 percent in 2008. Only 
17 percent of the surveyed physicians said that the MA subsidy should 
continue, while most of the remaining respondents said the subsidy 
would be better spent on preventing physician pay cuts and/or helping 
all low-income patients with their out-of-pocket costs, not just those 
in MA plans. These survey results demonstrate that there is a tradeoff 
in a tight budget environment between adequate payment updates for 
physicians and government subsidies for health insurance plans.
   ama surveyed physicians and patients report problems with ma plans
    Adding to these concerns, there is mounting evidence that calls 
into serious question whether the extra billions of dollars being 
poured into MA are buying better health care coverage for seniors. An 
April 2007 report from the Medicare Rights Center grouped problems with 
MA plans coverage into nine different categories:
     Care can cost more than it would under original Medicare;
     Private plans are not stable;
     Getting emergency or urgent care is difficult;
     Continuity of care is broken;
     Members have to follow plan rules to get covered care;
     Choice of doctor, hospital and other providers is 
restricted;
     Getting care away from home is difficult;
     Promised extra benefits can be very limited; and,
     People with both Medicare and Medicaid can encounter 
higher costs.
    A recurring theme throughout this report and its major conclusion 
is that, ``[e]ven with enhanced payments, private health plans often 
fail to deliver coverage that a patient could obtain from Original 
Medicare.''
    In March 2007, AMA surveyed 2,202 physicians about their experience 
with MA plans. The findings corroborated that patients and their 
physicians are being shortchanged by MA plans. About half of the 
physicians who had patients in MA reported that they have experienced 
denial of services that are typically covered in the regular Medicare 
program. In addition, about half responded that they have received 
payments from the MA plans that were below the regular Medicare rate. 
Contrary to industry claims that MA plans provide more benefits to 
patients, physicians are telling us that their patients who have 
enrolled in MA plans may be getting even fewer benefits than they 
receive in regular Medicare.
    The AMA survey results also lend credence to the reports from 
beneficiary advocates that marketing by MA plan representatives is 
often confusing to beneficiaries or misleading. An overwhelming number 
of physicians--eight out of ten--who treated MA plan patients stated 
that their patients have difficulty understanding how the MA plan 
works. Choice is an important element of a market-driven health care 
system, but patients must have accurate information if they are to make 
decisions that best meet their health care needs. MA plans have failed 
in their obligation to provide patients accurate information in an 
accessible and comprehensible fashion. This failure has real 
consequences for seniors who may have their health care services 
interrupted or incur significant unanticipated costs when they are 
least able to afford it.
    Good information about MA plans is also inaccessible to physicians. 
Six out of ten physicians reported that they have had difficulty 
understanding how the MA plans work. This problem is particularly 
pronounced for PFFS plans. In the AMA survey, over half of the 
physicians treating PFFS patients stated that they did not have access 
to or knowledge of the PFFS plans' Terms and Conditions, even though 
ready access to plans' Terms and Conditions is a cornerstone of the 
PFFS plan design. It should be no surprise that patients have had 
difficulty finding physicians who will accept PFFS plans, despite the 
promises made by sales representatives that patients would be able to 
go to any doctor. The recent action by CMS and several health plans to 
suspend marketing of PFFS plans underscores the validity of these 
complaints. Before the suspension can be lifted, plans will need to 
have a provider outreach and education program in place to ensure that 
physicians have reasonable access to the plan Terms and Conditions of 
payment, and that provider relations staff are readily accessible to 
assist physicians with questions concerning the plan.
    Physicians report a number of additional problems with MA plans, 
including having to overcome additional financial and administrative 
burdens when accepting MA beneficiaries. Nearly six out of ten 
physicians indicated that they had experienced excessive hold times 
when attempting to contact MA plans. The same number reported that MA 
plans have requested excessive or additional documentation for payment 
of claims. Finally, about a third report that MA plans have used 
proprietary claims editing software to down code or bundle claims--
administrative billing practices that Medicare has not approved for use 
in regular Medicare. These responses demonstrate that MA plans have not 
enhanced, but instead have hampered operational efficiency on the front 
lines of health care delivery in physician offices, to the detriment of 
physicians and their patients.
    Surveyed physicians also reported that they have had experience 
with their patients being switched to a MA plan from regular Medicare 
without the beneficiary's knowledge, very restrictive formularies with 
MA prescription drug plans, and customer service outsourced to a 
foreign country.
                      minority and rural patients
    Although the insurance industry has issued reports touting the 
benefits of the MA program to minority and rural beneficiaries, an 
even-handed look at the data and related analysis paints a different 
picture. The Center for Budget and Policy Priorities (CBPP) pointed out 
that Medicaid, not MA, is the main form of supplemental coverage for 
low-income and minority Medicare beneficiaries. It noted that 58 
percent of Asian Americans, 30 percent of African Americans, and 34 
percent of Hispanics receive supplemental coverage through Medicaid. In 
addition, the CBPP analyzed the data offered by America's Health 
Insurance Plans (AHIP) in a report outlining the benefits of MA. The 
CBPP concluded based on the AHIP data that low-income and minority 
beneficiaries participate in MA plans less than other Medicare 
beneficiaries. In 2004, the Center for Policy Analysis and Research of 
the Congressional Black Caucus Foundation reported that the 
``unprecedented amount of financial assistance'' to MA plans will 
divert ``precious resources away'' from regular Medicare. Even then the 
CBC Foundation argued that ``unfair subsidies and other advantages'' 
provided to MA plans should be eliminated ``so that traditional 
Medicare can compete on a level basis.''
    Another AHIP report concluded that the supplemental coverage 
offered by Medigap plans is ``particularly important to low- and 
moderate-income beneficiaries, especially those living in rural 
areas.'' As PFFS plans are the most common MA plan for patients in 
rural areas--the patients who are most reliant on Medigap for their 
supplemental coverage according to AHIP--it is important to note that 
Medigap plans are not allowed to provide coverage for MA services. In 
some cases, therefore, MA plans may actually put patients at higher 
risk for out-of-pocket costs than they would face if they had remained 
in the regular Medicare program and kept their Medigap policy.
    Some of the services where these extra costs are especially 
problematic are cancer care, home health care, and other services 
provided to patients with potentially terminal diseases. For example, 
for a low-income cancer patient with Medicare coverage and a Medigap 
supplemental policy, Medicare would pay 80 percent of their 
chemotherapy costs and Medigap would pay the remaining 20 percent. 
However, many MA plans do not provide more than the 80 percent coverage 
of chemotherapy drug costs that is provided in the regular Medicare 
program and, because these patients are not allowed to purchase Medigap 
policies, cancer patients in these plans must pay the 20 percent 
coinsurance out of their own pockets.
    The National Rural Health Association (NHRA) testified to the House 
Ways and Means Health Subcommittee that while currently only 5.6 
percent of rural Medicare beneficiaries have joined a MA plan, left on 
its current course MA has the ``potential to destabilize the existing 
rural safety net.'' For example, NHRA stated that there was an open 
question as to whether MA plans will honor existing rural add-on 
payments that safety net providers receive under regular Medicare. 
Related to the foregoing, a Texas nurse wrote to the AMA about her 
experience as the practice manager of a rural health clinic (RHC). She 
stated that the RHC received a per visit rate from regular Medicare of 
$68.13--this amount covers everything provided by the RHC and all 
codes. However, an administrative and financial nightmare has ensued 
because while MA plans have informed patients that they can see any 
physician in the clinic, some of the plans have been unwilling to pay 
the RHC at the higher rates that it is entitled to receive because it 
serves a rural community. In fact, the nurse manager wrote that one MA 
plan is paying a rate that is less than half the clinic's RHC rate 
under regular Medicare. Far from increasing access to rural 
beneficiaries, MA plans could well result in fewer rural physicians 
being able to accept Medicare patients.
           ma plans have increased costs to all beneficiaries
    MA has resulted in higher premiums across the board for all 
beneficiaries. MedPAC has estimated that on average every Medicare 
beneficiary pays approximately two dollars per month extra to finance 
the higher MA payments that only benefit 19 percent of beneficiaries. 
For example, only 8 percent of Medicare beneficiaries in South Carolina 
are enrolled in Medicare Advantage plans, but all seniors in South 
Carolina are paying higher Medicare premiums every month so that the 
government can provide subsidies to health plans that serve only 8 
percent of the state's Medicare beneficiaries. This is true across the 
country--a majority of Medicare beneficiaries in all states are forced 
to pay higher premiums to fund overpayments to plans that enroll a 
select subset of beneficiaries.
                          ma marketing abuses
    There have been rampant MA plan marketing abuses reported by 
physicians and other health care stakeholders. In testimony to the 
Senate's Special Committee on Aging, Wisconsin Insurance Commissioner 
Sean Dilweg reported that, in a survey by the National Association of 
Insurance Commissioners, 37 out of 43 states reported receiving 
complaints about inappropriate or confusing marketing practices leading 
Medicare beneficiaries to enroll in a Medicare Advantage plan without 
adequately understanding their choice to remain in regular Medicare or 
without adequate understanding of the consequences of their decision.
    Many reports of marketing abuses focus on PFFS plans, including a 
common practice of signing up patients for plans that end up costing 
the beneficiary more in out-of-pocket expenses and misleading patients 
regarding which physicians accept the PFFS plans. Reportedly, many PFFS 
plans market themselves as providing patients the ''freedom'' to choose 
any provider that accepts Medicare. As a result, regular Medicare 
patients sign-up for PFFS with the expectation that they will be able 
to continue receiving their health care from the same physician they 
have always had. Although CMS allows patients who have been misled to 
drop the PFFS plan and re-enroll in regular Medicare and supplemental 
Medigap plans, this is a difficult, time-consuming process and can 
impact the delivery of health care services. In addition, once patients 
willingly drop supplemental Medigap, they are not able to obtain that 
supplemental coverage if they elect to re-enroll in regular Medicare 
until and unless they demonstrate that they meet a host of criteria. 
Even after meeting these requirements the Medigap plan may have less 
favorable terms. Previously, neither Congress nor CMS have addressed 
these patient burdens. These abuses have both short-term and long-term 
consequences to patients. We hope that the recently announced voluntary 
effort to suspend PFFS plan marketing will lead to more responsible 
behavior in the future.
 ma plans have generated large profits for private insurance companies
    When Congress set up the payment system for MA plans, it may have 
intended for the extra payments to support health care services. In the 
AMA physician survey and reports by patient advocates, MA plans are not 
delivering on this promise. The subsidies to MA plans are substantial, 
create market distortions by creating a preferred government Medicare 
option, and are inefficient. Who then benefits from the subsidies? As 
of November 2006, the MA market was dominated by four firms that 
accounted for 58 percent of all MA enrollment. There have been reports 
that private insurance companies have reaped substantial profits from 
the Medicare program. For example, in February 2007 the Associated 
Press reported that one of the companies ``fourth-quarter profit more 
than doubled on the strength of its burgeoning Medicare business'' and 
the company had ``a record year in revenue and profit.'' Recently, 
Goldman Sachs reported that the same company ``will earn 66 percent of 
its net income from Medicare Advantage this year * * * which comes to 
between $670 million and $705 million.''
    Until MA plans are placed on equal footing with regular Medicare, 
the market distortions will continue to encourage inefficient behavior 
by MA plans, patients and physicians will face added financial risks, 
delivery of health care will be compromised, and taxpayers will pay 
more (seemingly for less). Clearly, the status quo does not advantage 
patients and physicians.
    The AMA appreciates the opportunity to provide our views to the 
Budget Committee concerning MA and the Budget. We look forward to 
working with the Committee and Congress to preserve patient access to 
high quality, cost-effective health care and to find solutions to 
address the long-term financial sustainability of the Medicare program.

    [The prepared statement of Mr. McGovern follows:]

   Prepared Statement of Hon. James P. McGovern, a Representative in 
                Congress From the State of Massachusetts

    Mr. Chairman: About one million people of Massachusetts are 
enrolled in Medicare. Of these, about 16.7% are enrolled in Medicare 
Advantage plans--or 168,000 Massachusetts seniors.
    838,000 are enrolled in traditional Medicare programs--or 84%.
    This is very similar to the national average (80/20 split of 
traditional Medicare/Medicare Advantage).
    I believe there are a few ``bottom line'' problems with Medicare 
Advantage.
    As members of the Budget Committee, we need to be good stewards of 
how our federal dollars are dedicated and spent.
    We need to be promoting economic efficiency----
    The most cost-effective health care----
    And accountability.
    Medicare Advantage appears to be failing us on all three of these 
priorities.
    It fails the efficiency test--because the additional benefits it 
allegedly provides for about 16-20 percent of Medicare seniors are 
being paid for--literally subsidized--by the 80 percent of the elderly 
who are enrolled in traditional Medicare programs.
    It fails the cost-effective test because it's already costing about 
$1,000 more per beneficiary than traditional Medicare.
    And it doesn't even pass the sniff test on accountability because 
the insurance companies won't tell us how much they're skimming off the 
top of Medicare Advantage as profit; and they don't have to comply with 
any of the reporting, monitoring, data collection, or quality measures 
required of all other Medicare plans.
    Finally, CBO projects that Medicare Advantage has actually moved up 
by two whole years the date when Medicare will reach insolvency!
    Mr. Chairman, I ask you, what's wrong with this picture? 
Everything!
    We could save about $140-to-$150 billion over the next 10 years, 
either by returning all beneficiaries to traditional Medicare 
programs--or by leveling the playing field and equalizing the payment 
structure between all Medicare program choices, including Medicare 
Advantage.
    Those funds could ensure that our hospital and physician 
reimbursements were adequately adjusted; and that health insurance 
coverage could be provided to all of America's children; with tens of 
billions of taxpayer dollars to spare.
    And if private plans that now make up Medicare Advantage withdraw 
from the program because they don't want to operate on a level playing 
field--well, that's just fine with me. The efficient programs will 
remain--the inefficient and corrupt will withdraw. It's called market 
efficiency--something I know my Republican colleagues stand fully 
behind.
    I don't have a question--I just wanted to state my concerns on 
behalf of the seniors of Massachusetts--especially when we're 
struggling in Massachusetts to implement our own health-care-for-all 
state plan.
    I'd like to associate myself with much of the testimony provided to 
us today and the previous statements of my Democratic colleagues.
    We have to be better stewards of our federal dollars than this.
    Medicare is supposed to be a not-for-profit, federally-provided 
health care program where every American senior is part of the risk 
pool that allows all of our seniors to receive basic, quality medical 
care and health insurance.
    Medicare Advantage is a wrecking ball undermining the basic 
structure of Medicare.
    We have to do better.

    [Whereupon, at 1:15 p.m., the committee was adjourned.]

                                  
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