[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]






GAO REPORT: THE OBAMA ADMINISTRATION'S $8 BILLION EXTRALEGAL HEALTHCARE 
                            SPENDING PROJECT

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

                                HEARING

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 25, 2012

                               __________

                           Serial No. 112-175

                               __________

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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 25, 2012....................................     1

                               WITNESSES

Mr. James C. Cosgrove, Director, Health Care, U.S. Government 
  Accountablity Office
    Oral Statement...............................................     4
    Written Statement............................................     7
Ms. Edda Emmanuelli-Perez, Managing Associate General Counsel, 
  U.S. Government Accountability Office
    Oral Statement...............................................    14
Mr. Jonathan Blum, Acting Principal Deputy Administrator and 
  Director, Centers for Medicare and Medicaid Services
    Oral Statement...............................................    15
    Written Statement............................................    17

                                APPENDIX

The Honorable Chairman Darrell Issa, a Member of Congress from 
  the State of California, Preview Statement.....................    60
Professor Jeffrey S. Lubbers, Professor of Practice in 
  Administrative Law, Washington College of Law, American 
  University, Written Statement..................................    61
The Honorable Elijah E. Cummings, a Member of Congress from the 
  State of Maryland, Opening Statement...........................    64
Medicare Waiver Demonstration Application........................    66
The Honorable Gerald E. Connolly, a Member of Congress from the 
  State of Virginia, Opening Statement...........................    71

 
GAO REPORT: THE OBAMA ADMINISTRATION'S $8 BILLION EXTRALEGAL HEALTHCARE 
                            SPENDING PROJECT

                              ----------                              


                        Wednesday, July 25, 2012

                  House of Representatives,
      Committee on Oversight and Government Reform,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 9:30 a.m., in Room 
2154, Rayburn House Office Building, Hon. Darrell Issa 
[chairman of the committee] presiding.
    Present: Representatives Issa, Platts, Jordan, Chaffetz, 
Walberg, Lankford, Gosar, Labrador, DesJarlais, Gowdy, Ross, 
Guinta, Kelly, Cummings, Norton, Kucinich, Tierney, Clay, 
Connolly, Davis, Murphy and Speier.
    Staff Present: Brian Blase, Majority Professional Staff 
Member; Molly Boyl, Majority Parliamentarian; Lawrence J. 
Brady, Majority Staff Director; Sharon Casey, Majority Senior 
Assistant Clerk; John Cuaderes, Majority Deputy Staff Director, 
Linda Good, Majority Chief Clerk; Christopher Hixon, Majority 
Deputy Chief Counsel, Oversight; Mark D. Marin, Majority 
Director of Oversight; Mary Pritchau, Majority Professional 
Staff Member; Jeff Solsby, Majority Senior Communications 
Advisor; Beverly Britton Fraser, Minority Counsel; Kevin 
Corbin, Minority Deputy Clerk; Ashley Etienne, Minority 
Director of Communications; Susanne Sachsman Grooms, Minority 
Chief Counsel; Carla Hultberg, Minority Chief Clerk; Una Lee, 
Minority Counsel; Suzanne Owen, Minority Health Policy Advisor; 
Dave Rapallo, Minority Staff Director; Safiya Simmons, Minority 
Press Secretary.
    Chairman Issa. The Committee will come to order.
    The Oversight Committee's mission statement is that we 
exist to secure two fundamental principles. First, Americans 
have a right to know the money Washington takes from them is 
well spent. And second, Americans deserve an efficient, 
effective government that works for them. Our duty on the 
Oversight and Government Reform Committee is to protect these 
rights.
    Our solemn responsibility is to hold government accountable 
to taxpayers. Because taxpayers have a right to know what they 
get from their government. Our job is to work tirelessly in 
partnership with citizen watchdogs to deliver the facts to the 
American people and bring genuine reform to the Federal 
bureaucracy.
    I now recognize myself for an opening statement.
    The Affordable Care Act, often called Obamacare, was 
brought through this Congress in a rushed fashion on a purely 
partisan basis. That doesn't make everything in it bad, but 
certainly it causes many questions to have been unanswered. The 
Speaker herself, at the time, Nancy Pelosi, famously said, we 
have to pass it to find out what is in it.
    Many conceded they had not even read the entire contents, 
choosing instead to learn about the bill's consequences after 
the fact. Sloppy work process produces dire consequences.
    In the case of the Affordable Care Act, or Obamacare, we 
are close to seeing one of those consequences, an $8.3 billion 
consequence. Today's hearing will examine how the 
Administration may have politicized the implementation of 
Obamacare. The Obama Administration promised Americans who like 
their coverage they would be allowed to keep it. We now know 
that nothing could be further from the truth. Whether it is the 
one out of ten employers who plan to drop coverage, and have 
stated so in numerous non-partisan polls, or in fact, the 
Obamacare's forced major cuts in a popular program known as 
Medicare Advantage, which serves exclusively seniors.
    Obamacare's cuts to Medicare mean many seniors will lose 
their coverage they enjoyed under the prior law. These cuts are 
particularly painful to senior citizens enrolled in Medicare 
Advantage. Medicare Advantage relies on private sector 
competition to deliver greater coverage and planned choices to 
seniors when compared to traditional fee for service under 
Medicare.
    The program is widely liked by seniors around the Country 
and actually disproportionately well-liked in California. 
Acknowledging the political nature of these cuts, it is very 
clear that when implementation would have led to massive 
increases in costs and often seniors leaving that program, this 
demonstration project, which is clearly not a demonstration 
project, one that does not follow the rules or the path 
standards for a demonstration project, one that is in fact 
larger than all 85 so-called demonstration projects before, in 
fact was a thinly veiled attempt to call a demonstration 
program in order to shore up votes that surely would be lost 
when October brought higher costs to a program that in fact was 
always intended to be effectively defunded.
    The $8.3 billion is not being taken by appropriated funds. 
In fact, the system that allows for this demonstration project, 
never intended to be this high, allows for the funds to be 
taken around Congress' appropriation process. The funds will 
essentially be taken out of Medicare.
    These funds will have to be backfilled to higher costs in 
the future. But in an election year, very clearly, this will 
shore up President Obama's position on re-election. No ifs, no 
ands, no buts.
    I have not had to make a statement questioning the 
sincerity of a program like this before. Clearly and simply 
put, an imperial president is using the power of his 
administration to play politics with seniors' health care. We 
will hear from the Government Accountability Office, a non-
partisan policy expert, who will testify about concerns their 
watchdog agency has on this program.
    Let's understand, a non-partisan agency has clearly said, 
this may not be legally allowed. This Chairman will say, this 
should not be legally allowed. This clearly does not pass the 
Washington sniff test for legitimate use of funds for 
demonstration purpose.
    I claim not to be a scientist. But it is pretty clear that 
when you put 90 percent of a group into a subsidized funding 
system, you are not comparing 90 to 10. More importantly, CMS 
has not demonstrated any control group of any normal size or 
normal way of doing. If someone wanted to do a demonstration 
project, you could do a demonstration project, but it would not 
shore up the President's re-election the way this $8.3 billion, 
unappropriated bailout of the President's flawed Obamacare will 
do. No question about it, this is pure politics, pure politics 
being played with the taxpayer's money that Congress did not 
appropriate.
    With that, I recognize the Ranking Member for his opening 
statement.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    I would like to thank the witnesses for coming here today 
to testify before the Committee. This is an important topic, 
and I am grateful for the opportunity to hear your views.
    I think we can all agree that we need to continue reforming 
our health care system, so that we are paying for value rather 
than volume, and encourage prevention as well as treatment.
    The Affordable Care Act works toward these goals in a 
number of ways. For example, it provides seniors with free 
preventive care, including wellness visits and cholesterol 
checks. Last year, more than 32 million seniors used at least 
one preventive service under Medicare without paying 
deductibles or co-pays. This saves lives and lower cost to the 
program.
    The Affordable Care Act also makes reforms to the Medicare 
payment system to align payments with better performance and 
outcome. One innovation is the quality bonus payment program 
that provides incentives for Medicare Advantage plans to 
improve the quality of care by establishing bonus payments to 
plans that achieve certain quality standards.
    The Center for Medicare and Medicaid Services, CMS, 
initiated a demonstration program to test an alternative method 
for these bonus payments in order to examine ways to generate 
quicker and more significant quality improvement in the plans. 
The Government Accountability Office has raised a number of 
concerns about this demonstration program. GAO disagrees with 
how CMS structured the program, and it has methodological 
concerns about the way CMS will measure the results.
    CMS responded that it believes the program will incentivize 
plans to improve the quality of care and increase efficiency. 
CMS also believes that GAO's methodological concerns can be 
addressed. As this back and forth demonstrates, there is no 
scandal here. This is legitimate and substantive disagreement 
about how best to structure bonuses to incentivize quality care 
and how to design a demonstration program to achieve its 
intended results in an effective and efficient manner. In our 
efforts to research this issue, we contacted a legal expert, 
Professor Jeffrey Lubbers, Professor of Administrative Law at 
American University. I request unanimous consent to enter his 
statement into the record, Mr. Chair.
    Chairman Issa. Without objection, so ordered.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Professor Lubbers reviewed GAO's concerns as well as the 
legislative history and case law relating to the Secretary's 
authority. He concluded that the disagreement between GAO and 
CMS ``amounts to a methodological disagreement, not a legal 
one.'' He found that ``the law gives HHS very broad authority 
to conduct demonstration programs in this area. And in my view, 
the proposed MA quality bonus payment demonstration fits 
comfortably within the authority.''
    In my opinion, today's hearing title is a little bit 
misleading. It suggests that GAO has accused the Secretary of 
Health and Human Services of doing something illegal. In fact, 
GAO questioned the authority of HHS to conduct this program 
based on GAO's underlying policy and methodology concerns about 
the program design. This type of rhetoric affects the tone and 
tenor of this hearing and makes it more difficult to engage in 
a reasoned debate focused on the merits or flaws of a 
demonstration program.
    We can do better than that. Let's focus on the substantive 
discussion; let's discuss GAO's concerns with the program and 
CMS' response to those concerns. This is the hearing I hope we 
will have today.
    With that I yield back.
    Chairman Issa. I thank the gentleman.
    All members will have seven days to submit opening 
statements for the record and extraneous information.
    We now welcome our witnesses. Mr. James Cosgrove is the 
Director of Health Care at the General Accountability Office. 
Ms. Edda Emmanuelli-Perez is the Managing Associate General 
Counsel at the GAO. And Mr. Jonathan Blum is the Principal 
Deputy Administrator and Director at the Center for Medicare.
    Pursuant to the Committee rules, would you please rise to 
take the oath, and raise your right hands. Do you solemnly 
swear or affirm that the testimony you are about to give will 
be the truth, the whole truth and nothing but the truth?
    [Witnesses respond in the affirmative.]
    Chairman Issa. Let the record indicate all witnesses 
answered in the affirmative. Please be seated.
    Your prepared statement will be placed in the record in 
their entirety. I welcome your summarizing those and including 
additional comments that you may have. It is not a sin to use 
less than five minutes. It is, however, an offense for which 
you can be locked in the House jail if you go far beyond five. 
So do everything you can to use the five minutes for something 
other than simply a written prepared statement, all of which 
will be placed in the record. And again, we haven't yet jailed 
anybody.
    So with that, Ms. Cosgrove, you are recognized for five 
minutes or so.

                       WITNESS STATEMENTS

                 STATEMENT OF JAMES C. COSGROVE

    Mr. Cosgrove. Chairman Issa, Ranking Member Cummings, 
members of the Committee, I am pleased to be here today as you 
discuss the Medicare Advantage Quality Bonus Payment 
Demonstration. As you know, back in March of this year, GAO 
recommended that the Secretary of HHS cancel the demonstration 
and allow the quality bonus payment system established by the 
ACA to take effect.
    This morning, I would like to provide context for that 
recommendation and explain why we believe this demonstration is 
not a wise use of Medicare funds.
    Seeking to improve the quality of health care for Medicare 
beneficiaries is a laudable goal. Currently, the quality of MA 
plans is indicated using a star rating system, five stars being 
the highest possible rating. It was established in 2008 to help 
beneficiaries identify high quality plans. The ACA would have 
added a financial incentive for plans to achieve the highest 
quality by awarding bonuses to plans that receive four or more 
stars beginning in 2012.
    However, instead of implementing the ACA's quality bonuses, 
HHS established a three-year demonstration program intended to 
test the effectiveness of a different quality incentive system. 
This demonstration rewards not just the high quality plans, but 
also extends bonuses to plans of average quality, three and 
three and a half stars. And it dramatically increases the size 
of those bonus payments.
    Thus, the vast majority of plans, which together account 
for more than 90 percent of all plan enrollees, will receive 
bonuses. And this is in sharp contrast to the ACA's bonus 
structure, which would have awarded bonuses only to the highest 
quality plans.
    CMS' actuaries estimate that the demonstration will cost 
more than $8.3 billion every 10 years. And most of the money is 
expected to go to plans of average quality. Bonus payments are 
expected to offset about one-third of the ACA's payment 
reductions that were designed to achieve savings from the MA 
program. The largest offset occurs this year, when the bonuses 
restore about 70 percent of the ACA's reductions.
    The quality bonus payment demonstration dwarfs all other 
Medicare demonstrations in terms of its budgetary impact. It is 
larger than the combined budgetary impact of approximately 85 
demonstrations that have taken place since 1995. In fact, it is 
seven times larger than the largest of those 85 demonstrations.
    Although the cost of this demonstration is unprecedented, 
that is not why GAO recommended it be canceled. We made our 
recommendation because, at the end of the day, after spending 
$8.35 billion, we are unlikely to learn much about the 
demonstration's impact on quality improvement.
    Several design flaws that preclude a credible evaluation of 
the demonstration's effectiveness. One flaw is that in the 
first two years, the demonstration bonuses largely reward plans 
for their pre-demonstration performance. Bonuses in 2012 and 
2013 are completely or mostly based on quality data that were 
measured before the demonstration's final specifications were 
announced. Only in the final year of the demonstration will the 
actions that plans have taken in response to the 
demonstration's incentives have an effect on their bonus 
payments.
    A second flaw is that there is no natural comparison group 
against which to measure the effect of the demonstration. 
Because all plans are participating in the demonstration. HHS 
has suggested that Medicare cost contract plans, commercial 
plans or Medicaid plans may provide a suitable control group. 
However, none of these are eligible for an ACA quality bonus. 
Thus, there is no opportunity to compare and contrast the 
quality improvements made by plans eligible for the 
demonstration with the quality improvements made by plans 
eligible for ACA bonuses.
    Other confounding factors will also make it hard to gauge 
the demonstration's impact. For example, CMS has announced that 
plans receiving less than three stars for three consecutive 
years may be terminated from the program. Therefore, if we 
observe plans improving from two and a half, three stars, we 
cannot determine whether it was the demonstration's bonus 
payments or the threat of termination that was the driving 
factor.
    And finally, the demonstration's bonus percentages do not 
offer all plans better incentives than they would receive under 
the ACA. Plans improving from three and a half to four stars, 
for example, would receive a larger bonus under the ACA. HHS 
has stated that one of the principles of the demonstration is 
to offer financial rewards for quality improvements throughout 
the ratings continuum. But in 2014, the only potentially 
meaningful year of the demonstration, the bonus is exactly the 
same, 5 percent for four star, four and a half, five star 
plans.
    In conclusion, although CMS has said that the goal of the 
demonstration was to test whether a scaled payment structure 
leads to larger and faster quality improvements, the 
demonstration's design is inadequate to determine whether this 
is the case. For that reason, we recommended the demonstration 
be canceled.
    I am happy to answer any questions that you or any of the 
members may have.
    [Prepared statement of Mr. Cosgrove follows:]





    
    Chairman Issa. Thank you.
    Ms. Perez?

               STATEMENT OF EDDA EMMANUELLI-PEREZ

    Ms. Emmanuelli-Perez. Good morning, Mr. Chairman, Ranking 
Member and members of the Committee. Thank you for the 
opportunity to discuss GAO's legal analysis of HHS's authority 
to undertake the Medicare Advantage Quality Bonus Payment 
Demonstration under Section 402 of the Social Security Act 
Amendments of 1967.
    As GAO conducted the work described by my colleague, those 
facts also raised concerns about the legal authority to conduct 
the demonstration under Section 402. So we sought additional 
information and requested HHS's views on its legal authority.
    GAO has concluded that HHS has not established that the 
Quality Bonus demonstration is authorized by law, because it 
has not shown how the demonstration satisfies two elements of 
Section 402. First, it should provide for the creation of 
additional incentives toward efficiency and economy of Medicare 
services. And second, provide for the agency to determine 
whether changes in payment methods increase the efficiency and 
economy of such services.
    Under the first element, GAO has concerns about the 
demonstration's ability to provide additional incentives to 
increase efficiency and economy of Medicare services. For 
example, the majority of the demonstration relies on data that 
predates the demonstration. Instead, as CMS has acknowledged, 
in 2012 and 2013, the payment reward plans for their past 
performance, and thus do not provide incentives to increase 
efficiency or economy.
    According to CMS the increase in payments in those years 
provide a transition period, during which plans can use 
additional bonus payments to improve quality of care. CMS 
assumes that plans will use these additional monies to increase 
quality, even though there is no requirement that plans use the 
demonstration's bonus payments to improve or attempt to improve 
quality.
    In fact, current Medicare regulations preclude plans' 
ability to use additional bonus payments to improve the quality 
of care provided to beneficiaries, an issue CMS has not 
addressed.
    With respect to the only year in which payment changes 
could induce improved quality, 2014, CMS did not revise the 
payment methodology7 for plans with four, four point five or 
five stars. And there are other plans in 2014 that would 
generally receive a larger increase in their bonus under PPACA 
than under the demonstration, which could actually reduce 
incentives to improve quality.
    With respect to the second element of Section 402, the 
demonstration's shortcomings raise concerns about the agency's 
ability to determine whether the payment changes resulted in 
increased efficiency and economy. In order to make that 
determination, the agency must compare the effect of the 
payment methods adopted under the demonstration to the 
effective payment methods in place under current law, in this 
case PPACA.
    Due to the significant time lag between the collection of 
data upon which the plan's star ratings are based, and the 
issuance of those ratings, the demonstration's violation 
appears far more likely to enable the agency to compare plan 
performance during the demonstration to plan performance before 
PPACA, rather than comparing plan performance under the 
demonstration to plan performance under PPACA, as contemplate 
by Section 402.
    In addition, CMS has not explained how the comparison 
groups it has identified would allow it to determine whether 
the demonstration's changes in payment increase efficiency and 
economy compared to current law. CMS identified comparison 
groups as described by Mr. Cosgrove that are outside the 
Medicare Advantage program, ones that may serve different 
populations, they may follow different regulations and 
policies, and importantly, they are not subject to PPACA 
quality bonus provisions, but did not explain how those groups 
would yield a useful comparison.
    Nor has the agency accounted for other Medicare Advantage 
payment and policy changes that may lead to changes in quality. 
CMS did not explain how it would be able to effectively 
identify whether the demonstration payment changes are 
responsible, and if so, to what extent, for any improvements in 
plan quality, economy and efficiency.
    After analyzing these details of the demonstration in light 
of Section 402, GAO concluded that CMS has not established that 
the Quality Bonus demonstration meets the essential elements of 
the law that require the creation of additional incentives 
toward efficiency and economy of Medicare services, and that 
the demonstration allow the agency to determine whether the 
changes in payment methods increase the efficiency and economy 
of such services.
    This concludes my statement, and I would be pleased to 
answer any questions that you and the members may have.
    Chairman Issa. Thank you.
    Mr. Blum?

                   STATEMENT OF JONATHAN BLUM

    Mr. Blum. Mr. Chairman, Mr. Cummings, members of the 
Committee, I want to thank you for the opportunity to talk 
about how CMS is working to improve the overall Medicare 
program.
    Currently, 27 to 28 percent of beneficiaries choose to 
receive the Medicare services through a private plan. Over the 
last 10 years, I think it is fair to say the program has gone 
through dramatic changes during the last 10 years. Prior to 
2010, and prior to the Affordable Care Act, I think there were 
a lot of questions regarding the value that plans provided for 
beneficiaries and for taxpayers.
    On average, the plans were paid 14 percent more than the 
traditional fee for service program, without much confidence, 
without much data that taxpayer beneficiaries were getting more 
value for those extra subsidies. CMS had tremendous compliance 
failures with plans and I think it is fair to say that we had 
both a financial challenge for the program, but also a quality 
and performance challenge for the program.
    In 2010, the program was reformed. The Affordable Care Act 
puts us on a track to phase down those subsidies over the next 
10 years, down on average to the traditional fee for service 
Medicare program. The Affordable Care Act also authorized a 
quality bonus structure to provide higher payments to four 
star, five star plans consistent with the CMS five star system. 
And the law gives CMS more tools to aggressively review plan 
bids to ensure that we had the best possible plans providing 
services to beneficiaries.
    In our view, the ultimate goal of the program is to ensure 
that every Medicare beneficiary has the opportunity to enroll 
into a five star plan. Today we have very few five star plans. 
I think roughly 7 percent of beneficiaries now are in five star 
plans, and most parts of the Country do not have access to a 
five star plan.
    I think it is important to talk about what a five star plan 
is. A five star plan focuses on prevention, focuses on 
wellness. A five star plan demonstrates that they can 
proactively manage chronic conditions, they can keep 
beneficiaries well. A five star plan demonstrates that it is 
best in class in customer service. A five star plan 
demonstrates that they provide more services to beneficiaries 
during their time of need, not less, when they need assistance. 
I think our greatest challenge is two-fold. Number one, to 
reduced dramatically the cost to the Medicare program to keep 
it sustainable for the long-term for current beneficiaries and 
for future beneficiaries.
    But I also believe that we have a quality deficit for too 
long, both in the traditional fee for service program and in 
the private side in Medicare. We have paid for volume, not paid 
for value.
    Our demonstration program is designed to determine the best 
ways both to reduce the overall cost of the program, but also 
to improve the overall quality, so all beneficiaries, as 
rapidly as possible, have access to the best possible plans, 
four star, five star plans. To date, we see very positive signs 
that this overall strategy is working. Today we are paying much 
lower subsidies to the health plans. That 14 percent 
overpayment that was in place prior to the Affordable Care Act 
being passed now is down to 7 percent. We are on track to bring 
that down over the next 10 years, down on average to 100 
percent of fee for service rates.
    We are seeing the program growing at double digit rates. 
The program continues to be popular, beneficiaries continue to 
find value, and from that perspective, we are pleased. And we 
are also seeing dramatic changes in how plans interact with the 
program. I think prior ro the Affordable Care Act, we didn't 
see the commitment to performance, the commitment to quality 
that has changed. I think what the strategy is doing is 
changing the business model for how plans interact with the 
program from being a program where plans were simply paid to 
pay claims and pay more on average than the traditional fee for 
service program to a business model that works to keep 
beneficiaries healthier, that works to keep beneficiaries well, 
that works to better manage chronic conditions and provide the 
best possible value, both to taxpayers and to beneficiaries.
    With that, I yield my time and would be happy to answer any 
questions that you may have.
    [Prepared statement of Mr. Blum follows:]





    Chairman Issa. Thank you. I recognize myself for a few 
questions.
    Mr. Cosgrove, are you a career professional at GAO?
    Mr. Cosgrove. Yes, I am. I have been at GAO since 1989.
    Chairman Issa. Twenty-three years. Congratulations.
    Ms. Perez, are you also a career professional at GAO?
    Ms. Emmanuelli-Perez. Yes.
    Chairman Issa. How long have you been there?
    Ms. Emmanuelli-Perez. I have been there 25 years, Mr. 
Chairman.
    Chairman Issa. So I have nearly half a century of non-
partisan work at the GAO.
    Mr. Blum, how long have you been on the job?
    Mr. Blum. I started at CMS in March of 2009.
    Chairman Issa. Are you a political appointee?
    Mr. Blum. Yes, I am.
    Chairman Issa. So when you tell us that this is lowered 
costs, let me run through a couple of quick questions. First of 
all, put the chart up, if you would.
    That is the ratio between the next biggest demonstration 
plans that have happened versus this one, as Mr. Cosgrove said, 
seven times larger than the next largest. What is your 
demonstration project limit? What is Secretary Sebelius' limit 
to how much she can write on the taxpayers' back without 
appropriations?
    Mr. Blum. From my understanding of the demonstration law, 
the law does not require any set limits to demonstration.
    Chairman Issa. Okay. So the Secretary has unlimited ability 
to take all the money in the world without appropriations 
around Congress. Is that correct?
    Mr. Blum. I think what really the demonstration authority 
is designed to do is to test ways to improve the overall 
economy and efficiency of the program. But there is no overall 
limit.
    Chairman Issa. Okay. So this unlimited authority around 
Congress must come at some price. In your demonstration 
application, Medicare Waiver Demonstration Application at CMS, 
budget neutrality, Medicare waiver only demonstrates must be 
budget-neutral. Budget neutrality means that the expected cost 
under the demonstration cannot be more than the expected cost 
were the demonstration not to occur.
    In other words, by your own application, you have to save 
$8.3 billion. Where are you going to save $8.3 billion when in 
fact, the vast majority of the $8.3 billion is given away for 
no performance change, but retroactively in order to not have, 
essentially, seniors feel the pain of the Not Affordable Care 
Act?
    Mr. Blum. I think a couple of points, Mr. Chairman, in 
response. We are reducing, according to CBO's estimates, over 
$200 billion from the Medicare program.
    Chairman Issa. No, no, wait a second. CBO has already 
scored and rescored the fact that the Affordable Care Act costs 
a whole lot more than it was scored at before, and it continues 
to go up. You are adding $8.3 billion of new costs, not in ACA, 
and you are changing dramatically the law that said four and 
five star, and you are including, essentially, the mediocre 
plans in this bonus plan. You are doing it to 70 percent 
subsidy in the first year, which as Mr. Cosgrove said and Ms. 
Emmanuelli-Perez said, is essentially paying them for what has 
already occurred.
    Where are you going to get $8.3 billion to pay back for 
what you are taking? Because by your own application, you have 
to be able to show you get it back. Where is the demonstration 
that you are going to get $8.3 billion back, by this 
demonstration?
    Mr. Blum. That really is our goal for the demonstration, to 
test.
    Chairman Issa. Okay, so you have no plan to get the money 
back, you have a goal that is the demonstration. But the 
demonstration, according to Ms. Perez, may not be legal. You 
may not have dotted the Is of the legality, including those 
first two years in which the demonstration proves nothing. The 
existing ACA would have caused you to only give a lesser amount 
and only to better performers.
    And if I understand correctly, logically you would have 
given that money only in year three, or in a year in which the 
demonstration that you paid for, they had an opportunity to 
achieve.
    Ms. Perez, I am going to go to you. Wouldn't that have 
essentially taken care of the legal questions, if they 
structured it with the numbers that would be a smaller portion 
and thus more appropriate, in which people that are three could 
become four, in order to achieve the bonus? If I understand 
correctly, the first two years, if you are a two, two and a 
half, you can't become a three in those two years. If you are 
already a four, a three, a four and a half, you are going to 
get this bonus. Is that all correct?
    Ms. Emmanuelli-Perez. Well, Mr. Chairman, it is true that 
in those first two years, 2012, 2013, the plans are being 
rewarded for past performance. So to that extent, we do not 
believe that creates additional incentive. So in terms of 
looking at the year in which changes could occur that would 
incentivize this quality improvement, it would be 2014.
    What we found is that in that year, the demonstration 
actually doesn't change the payment for four, four point five 
and five point programs. And the only ones where there is a 
change would be the three star. So we find that the majority of 
the demonstration does not have this incentive.
    Chairman Issa. So it doesn't meet the smell test, as I said 
in the opening.
    Mr. Cosgrove, Ms. Perez, in your nearly combined half a 
century, have you had to come before Congress with a large 
amount, saying it just shouldn't be done, either legally or 
functionally like this before? Anything that even becomes close 
to this amount prospectively.
    Mr. Cosgrove. To my knowledge, no. We have certainly 
questioned aspects of certain demonstrations. We have never. I 
have never recommended, worked on a study to recommend 
canceling a demonstration. I have never encountered one of this 
size.
    Chairman Issa. Thank you. As I recognize the Ranking 
Member, let us understand, it is not the program. We would like 
Medicare Advantage to succeed. It is in fact the President 
using $8.3 billion of unappropriated funds to buy an election.
    The gentleman is recognized.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    There is no one here that wants to see government funds 
used effectively and efficiently more than the Chairman and 
myself. I just had a lady, about a month ago, I ran into in 
front of my house, ask me to save her life. She has colon 
cancer and has no way to get insurance. So I see it every day. 
I live in the inner city of Baltimore.
    And I must say to you, Mr. Blum, it is extremely important 
that programs run effectively and efficiently and that they do 
what they are supposed to do. To you, Mr. Cosgrove and Ms. 
Emmanuelli-Perez, I want to thank you for your service. I 
thought your report was thorough and well done, and I thank 
you.
    You wrote, Ms. Perez, on July 11th, a letter to GAO 
Secretary Sebelius, is that right?
    Ms. Emmanuelli-Perez. That is correct, Mr. Cummings.
    Mr. Cummings. And just to be clear, this letter was not in 
any way binding on the Secretary, was it?
    Ms. Emmanuelli-Perez. It constitutes our views regarding 
the legal elements of the demonstration, but it is not binding 
on the Secretary.
    Mr. Cummings. Did you or your letter conclude that 
Secretary Sebelius acted illegally by implementing the 
demonstration program?
    Ms. Emmanuelli-Perez. No. We didn't conclude that it was 
illegal. What we found was that as presented to us by CMS 
during the course of our work, the details of the demonstration 
did not meet the elements of the statute. Therefore, we wrote 
to the Secretary to better inform the judgment regarding the 
violation of this demonstration, as well as to inform Congress 
in its oversight.
    Mr. Cummings. And did you get a response to that?
    Ms. Emmanuelli-Perez. No, we did not receive a response.
    Mr. Cummings. And Mr. Cosgrove, is it fair to say that 
GAO's main concern is you believe that the demonstration 
program is unlikely to produce meaningful results because of 
the way it was designed, is that right?
    Mr. Cosgrove. Well, I suspect that there will be quality 
improvements. What we are concerned about is that we won't be 
able to attribute it to the demonstration, we won't be able to 
determine the effectiveness of the demonstration. That is why 
our recommendation was not only to cancel the demonstration, 
but to implement the bonus structure that the ACA provided for, 
and then if that proved inadequate at a future time, design and 
implement a better design demonstration.
    Mr. Cummings. Mr. Blum, you heard the testimony, you also 
heard the Chairman accuse the President, I guess he said, and I 
don't want to put words in his mouth, but of buying an 
election.
    Chairman Issa. Good words.
    Mr. Cummings. Yes, of buying an election. Do you agree with 
that?
    Mr. Blum. I think this demonstration is designed to rapidly 
test ways to improve, to how we can improve the overall 
elements of plans participating in the program. We have 
reviewed very carefully the findings of the GAO. But we also 
believe very strongly that this demonstration can be evaluated.
    I think to the concern regarding the cost contracts, 
whether or not they provide an adequate control test, they do 
not, they are not eligible for the bonus payments per the 
Affordable Care Act. But I think the point is, they have to 
report the same quality information, the same quality data, so 
we can see in a comparison group the rise in quality compared 
to the plans participating in the demonstration.
    I think the ultimate goal is for us to really figure out a 
way quickly, given the fact that we are adding 10,000 new 
Medicare beneficiaries to the program every business day, how 
we can best both lower the cost of the program, and I think----
    Mr. Cummings. Mr. Blum, let me say this. This is a program 
that has been under fierce attack. It was fought every inch of 
the way. And it seems as if we would be extra careful to try to 
make sure that it is done properly and that we try to get the 
results that we need. I know in my district, whenever there is 
any kind of program, we usually go to Johns Hopkins, and there 
is a study of the program as it goes along to make sure it is 
accomplishing what it is supposed to accomplish.
    What these folks are saying is that they don't believe that 
you had the type of study that was appropriate to even measure 
the kind of results, so that you could even determine whether 
it was effective, and second, questioning whether or not it was 
effective at all. They are saying it is kind of hard to tell.
    So how do you answer that?
    Mr. Blum. I think we have to wait for the evaluation to 
make definitive statements whether or not the demonstration has 
worked. The demonstration is three years.
    But what I can say is based upon every interaction the 
agency has had with the health plans participating in the 
program, that they have changed their business models. They 
have changed the way they interact with the program. They are 
investing in new infrastructure to measure up to the assessed 
quality. They have changed their business plans, in my 
judgment, from a program of simply paying for claims, for 
health claims, to a program that keeps beneficiaries well, that 
manages chronic conditions.
    I think at the end of the day, what our ultimate success 
factor will be is every Medicare beneficiary that wishes to 
sign up in a private plan has access or has the opportunity to 
sign up in the four star, five star plan. To me, as the 
overseer of the program, having beneficiaries enroll in low-
performing plans, average quality plans, should not be 
sufficient and should not honor the promise that we have for 
Medicare beneficiaries.
    To our view, every Medicare beneficiary should have the 
opportunity to enroll in a five star plan. Our challenge is, 
how do we make it possible quickly, rapidly, given the 
demographic shift, given how much beneficiaries want to be in 
the program, to have that opportunity.
    So I can say, based on anecdotes, we have seen a dramatic 
change to how plans participate in the program, and their 
overall commitment to beneficiaries. Obviously, we will have to 
wait until the demonstration is complete to make definitive 
statements, did it work. But so far we are seeing very positive 
signs.
    Mr. Cummings. Thank you, Mr. Chairman.
    Chairman Issa. Thank you.
    I would now recognize the gentleman from Utah for his 
statement. Would you yield me 10 seconds?
    Mr. Chaffetz. Yes, I yield to the Chairman.
    Chairman Issa. I think what I heard you say, Mr. Blum, I am 
sure what I heard you say is we have to spend $8.3 billion to 
find out if it is going to work, after GAO said it is a bad 
plan that was unlikely to bear any positive fruit. I am 
positive I heard you say that.
    I thank the gentleman.
    Mr. Chaffetz. Following up on the Chairman's comments, I 
remember the Speaker of the House, Nancy Pelosi, saying, we are 
going to have to pass this bill in order to find out what is in 
it. Now you are saying, even though we have experts who say it 
can't demonstrate any tangible results, that we are actually 
going to have to spend $8 billion in order to test it to see if 
it would actually work, even though we don't believe that there 
is any objective way to come to conclusions, based on the way 
that this is set up.
    Mr. Blum, do you have any non-partisan third party group or 
person or whatever that has gone on the record to claim that 
this demonstration research project is designed to actually 
demonstrate something?
    Mr. Blum. When CMS developed this demonstration, we worked 
very closely with our program staff, who are all career civil 
servants. We worked with our----
    Mr. Chaffetz. Do you have any outside, third party person 
that has gone on the record to say that this is set up 
properly?
    Mr. Blum. What I have heard from----
    Mr. Chaffetz. Pretty much a yes or no question.
    Mr. Blum. I am not aware of any outside. But I think that 
CMS will go through that rigorous review.
    Mr. Chaffetz. Go through that rigorous review. Well, part 
of that rigorous review is going through the GAO.
    Mr. Cosgrove, you have been at the GAO for 23 years, but 
your academic background, could you review for me quickly what 
your academic background is?
    Mr. Cosgrove. Certainly. My Ph.D. is in economics, 
microeconomics. Before I came to GAO, I was teaching economics 
at Marquette University in Wisconsin.
    Mr. Chaffetz. And based on what you have seen, in your 
expertise here, have you seen anything as fundamentally flawed 
or set up like this? You mentioned earlier when Chairman Issa 
was asking you that you, in your 23 years, actually never 
recommended the cancellation, is that correct?
    Mr. Cosgrove. That is correct.
    Mr. Chaffetz. So if this was presented in an academic 
setting, how do you think people would react to how this is 
structured?
    Mr. Cosgrove. I think the concerns would be the same ones 
that I raised. In addition, we don't think there is a good 
control group. And we may see increases in quality among health 
plans, but we may have seen them under the ACA's bonus 
provision, but we will never know, because that was set aside 
to implement this nationwide demonstration program.
    Mr. Chaffetz. Aren't these normally set up on a county 
basis, and if so, why is that?
    Mr. Cosgrove. It is specifically so you can see what 
difference a new payment system makes. So for the durable 
medical equipment, for example, there are demonstrations that 
test competitive bidding for that, a new way of purchasing 
that. So that was done first in one county, expanded to two 
counties, and then it rolled our more slowly.
    That allows you to see what actually the difference in 
going to competitive bidding rather than a fee schedule makes. 
That is not what happened here.
    Mr. Chaffetz. My understanding is that generally these 
demonstration projects are at budget neutrality or at least 
close to budget neutrality. Is that the history of what you 
have seen in the past?
    Mr. Cosgrove. My understanding is that Section 402 does not 
require budget neutrality, but that has been OMB's policy. We 
didn't look at individual demonstrations to determine whether 
they were budget neutral or not.
    Mr. Chaffetz. And is it your understanding that a 
demonstration project has to actually be able to demonstrate 
something in order to qualify under Section 402(a)?
    Mr. Cosgrove. My understanding is a demonstration is 
supposed to test the economy and efficiency of a new payment 
system to achieve something. And that is where we think it 
falls short.
    Mr. Chaffetz. All right, Mr. Chairman, I will yield back. 
Thank you.
    Chairman Issa. Would the gentleman yield?
    Mr. Chaffetz. Yes, I yield.
    Chairman Issa. I understand that there is no requirement. 
Let me rephrase, let me ask it a different way. Mr. Blum, if 
you were to follow ACA's mandate of four, four and a half, 
five, wouldn't that by definition cost less, yes or no?
    Mr. Blum. There would be less overall program spending.
    Chairman Issa. There would be a lot less, because this 
would be less than half of the size of the group. Wouldn't you 
by definition then encourage in year three entities to become 
fours in order to qualify, assuming that you restructured it 
back to where being a four benefitted you versus being a three?
    Mr. Blum. My understanding of the Affordable Care Act, and 
I probably don't have every detail straight in my head, but my 
understanding is the bonus payments are phased in over a five-
year period. I think again, going back to our----
    Chairman Issa. Okay, so let me go back through, final 
question. By definition, if you followed the Affordable Care 
Act, it would cost less. You are choosing something that costs 
more, even though Congress scored this as essentially budget 
neutral when it passed it. So you are essentially changing 
something that was scored one way into something that is going 
to cost $8.3 billion more. Isn't that correct?
    Mr. Blum. I think the real goal of the demonstration is, I 
think an important point----
    Chairman Issa. No, no, I am only concerned with the money 
you are spending without appropriation. So isn't it true that 
what you have done is add substantially $8.3 billion to the 
Affordable Care Act years after it was passed?
    Mr. Blum. I think the key point is that plans are paid 
based up on their bids. So our hope, the demonstration's goal 
is----
    Chairman Issa. Mr. Blum, I did not vote for the man that 
talked about hope. And I am here asking you a question I would 
expect you to answer. Isn't it true you are adding $8.3 billion 
to the Affordable Care Act with this demonstration project, 
outside of that, the program scoring, and you are doing so 
without coming back to Congress?
    Mr. Blum. According to our actuaries, the 10-year estimate 
is $8 billion over the next 10 years. But I think we are on 
track to reduce the subsidies down to the fee for service level 
over that same period.
    Chairman Issa. Right. After the election.
    With that, we recognize the gentleman from Virginia, Mr. 
Connolly, for five minutes.
    Mr. Connolly. Mr. Blum, I proudly did vote for the man who 
talked about hope, and I intend to do it again. And I am very 
glad to have voted for the Affordable Care Act, and I am very 
glad you are here helping us illuminate the intricacies of its 
implementation and the benefits of its implementation.
    We were reminded just yesterday by a CBO report that the 
numbers actually are better even than we predicted when 
originally passing the bill.
    Mr. Cosgrove, let me ask you, you are the GAO, the reckless 
charge has been made that this demonstration project is nothing 
more than an attempt to buy an election. You are the GAO. Did 
you find any evidence of that?
    Mr. Cosgrove. We did not look at the motive behind what was 
driving the demonstration. We looked at the structure of the 
demonstration.
    Mr. Connolly. And in looking at anything, find anything 
suspicious we ought to be worried about politically? And the 
mis-use of these funds or this program for undue political 
influence?
    Mr. Cosgrove. Again, I am sorry, we were just looking at 
the structure of the demonstration itself.
    Mr. Connolly. Mr. Blum, you guys engaged in nothing more 
than a political campaign on behalf of the President?
    Mr. Blum. Again, our goal is to make sure that we can find 
ways quickly, rapidly, given the demographic shift, to ensure 
that every Medicare beneficiary, as rapidly as possible, has 
access to the best quality of care. Our demonstration is 
designed to test that premise; how can we reduce plan subsidies 
on average down to the fee for service level, at the same time 
dramatically improve the overall quality performance of our 
health plans and also keep the program growing.
    So far, we have seen that strategy working. We have cut the 
subsidies to the health plans in half. We are now paying 107 
percent of fee for service with the demonstration, today. We 
are on track to bring those overpayments down to 100 percent of 
fee for service on average.
    We have seen dramatic changes to how plans interact with 
the program. We have seen dramatic focuses on compliance, on 
quality improvements. And so there has been a fundamental shift 
in the overall psychology to how plans interact with the 
program.
    Mr. Connolly. Mr. Blum, if I could just clarify. You said 
you brought it down to 107 percent of fee for service and you 
hope to get to 100 percent, versus what in normal Medicare?
    Mr. Blum. Prior to the Affordable Care Act, the program was 
paying plans 14 percent more than the traditional fee for 
service program on average, without any solid evidence or 
measures that plans were providing 14 percent more value than 
the traditional fee for service program.
    That framework has now changed. We are bringing the 
payments down over time to 100 percent of fee for service. We 
are changing how plans interact with the program, focus on the 
program, to encourage every plan to be a five star plan.
    Mr. Connolly. And far from being something extraneous to 
the Affordable Care Act, it sounds to me like this 
demonstration project is perfectly consistent with the 
Affordable Care Act, one of whose goals, primary goals, was to 
bring down the cost of health care long term, is that not 
correct?
    Mr. Blum. I think the Affordable Care Act's premise 
throughout the Medicare program, both in the traditional fee 
for service program and in the private side of Medicare, the MA 
program, is to reduce costs dramatically through improvement. 
We are doing the same strategies on the fee for service side, 
for hospitals, physicians, all health care providers to reduce 
the cost through straight programmatic changes, but also to 
provide very strong incentives for hospitals, physicians to 
improve the quality of care, to improve the performance.
    We are confident at the end of the day that we can prove 
the premise that we can lower Medicare costs dramatically while 
improving the overall quality of the services. That is our 
fundamental challenge.
    Mr. Connolly. Mr. Blum, how important is it, given the 
complexity of a program like Medicare, to in fact test an 
alternative reimbursement program such as the one you are 
describing?
    Mr. Blum. I think in my experience, my judgment, CMS over 
the past 10, 15 years has not innovated rapidly enough. While 
it is true that the program in the past had very smaller 
demonstrations, I think most people would conclude that the 
program has failed on many measures. There are solvency 
deficits, there are quality of care deficits. I think our goal 
is to lower the overall costs and to improve the overall 
quality, given the fact that we have 10,000 new Medicare 
beneficiaries coming onto the program now every business day 
the program is open.
    I believe the strategy so far seems to be working, showing 
very positive signs. Overall Medicare costs have fallen 
dramatically since passage of the Affordable Care Act. Yet we 
have seen no compromises in the quality of care and very strong 
indications the quality is improving.
    Mr. Connolly. If the Chairman would allow me a simple 
question with a simple answer.
    Chairman Issa. Without objection, the gentleman is 
recognized for an additional minute.
    Mr. Connolly. I thank the Chair.
    Did Medicare premiums go up or down this year?
    Mr. Blum. For the Part C plans, premiums have fallen.
    Mr. Connolly. Mr. Blum, I promised the Chairman a simple 
question with a simple answer. And Medicare Advantage premiums 
in the last two years, did they go up or down?
    Mr. Blum. Down, on average.
    Mr. Connolly. Is there any evidence that that might be 
related to the provisions of the Affordable Care Act?
    Mr. Blum. We see very strong commitments from the health 
plans that participate in the program. To our analysis, they 
are making long-term commitments to this program, and we have 
every confidence this program will remain strong today and well 
into the future.
    Mr. Connolly. Thank you, Mr. Blum.
    Chairman Issa. Would the gentleman yield for a question?
    Mr. Connolly. It is actually the Chairman's time, I am 
done. But thank you, Mr. Chairman.
    Chairman Issa. Is the gentleman concerned, you only asked 
Mr. Blum questions, are you concerned that the other two 
witnesses stated unequivocally that this $8.3 billion will not 
yield any usable data?
    Mr. Connolly. Mr. Chairman, I actually began by asking Mr. 
Cosgrove a question.
    Chairman Issa. But are you concerned about that?
    Mr. Connolly. About his answer?
    Chairman Issa. About the fact that Mr. Blum says that 
everything is rosy, but the non-partisan witnesses make it 
clear that this $8.3 billion will yield no usable data?
    Mr. Connolly. I would be certainly concerned about 
testimony that would say that. But I have heard charges thrown 
around here, Mr. Chairman, that this is nothing but a political 
utilization of a program. Mr. Blum is here to give us technical 
expertise and testimony that actually contradicts that 
assertion.
    And when I asked Mr. Cosgrove, that was my first question, 
he indicated they didn't look at that issue. They found no 
evidence, but they didn't look for it. So I necessarily then 
turned to Mr. Blum as the expert witness to talk about the 
actual aspects of the program and whether they were 
efficacious. And the testimony I think we have just heard from 
Mr. Blum would suggest that the answer to those questions is 
yes.
    Chairman Issa. Mr. Cosgrove, the gentleman mentioned your 
name. Did you in fact say that there is no evidence that this 
won't yield good, usable information as a demonstration?
    Mr. Cosgrove. That is----
    Mr. Connolly. Would the Chairman yield?
    Chairman Issa. I was just allowing the gentleman to 
characterize what you characterized.
    Mr. Connolly. But I think that the Chairman perhaps 
mischaracterized. I didn't assert that. What I asserted was 
that Mr. Cosgrove in answer to my question said, we didn't look 
at whether this program was somehow being used to buy an 
election, which is the charge some have apparently leveled, and 
therefore found no such evidence. When I realized that Mr. 
Cosgrove didn't look at it, I ceased asking him questions in 
that line.
    Chairman Issa. So you didn't ask him if in fact this was 
simply a waste of $8.3 billion.
    Mr. Connolly. If the Chairman wants to give this member 
more time, I would be glad to ask him that question and pursue 
it.
    Chairman Issa. Oh, I don't think we would ever get to those 
questions.
    With that, we now recognize the gentleman from Oklahoma, 
Mr. Lankford.
    Mr. Lankford. Thank you, Mr. Chairman.
    Ms. Perez, I do want to follow up on a letter that GAO did 
send to the Secretary, Kathleen Sebelius. It stated, the 
demonstration's reliance on pre-demonstration performance data, 
the absence of an appropriate comparison group of Medicare 
Advantage plans and the demonstration's design make it unlikely 
that the demonstration will produce meaningful results. In 
other words, we are going to spend $8.3 billion on something we 
are calling a demonstration, but it is very unlikely it is 
going to produce any results that will help us as a 
demonstration at all.
    The second thing I found very interesting which I want to 
ask you about are findings during the course of the evaluation 
of the demonstration also raised concerns about whether the 
demonstration falls within HHS' Section 402 authority. You 
mentioned this, you said there are two things: the 
demonstration must provide additional incentives to increase 
efficiency, and the second thing, the demonstration must enable 
the agency to determine whether the demonstration in fact 
demonstrates increased efficiency.
    So let me ask you about this. How can a demonstration based 
on data collected before the finalized rule was issued create 
incentives for 2012 and 2013? We have 70 percent of the money 
being spent on this $8.3 billion right now to prove the 
efficiency of the changes but the changes haven't happened yet. 
How can that occur?
    Ms. Emmanuelli-Perez. Well, sir, those are exactly the 
concerns and questions that we have with the demonstration as 
designed. Both for 2012 and 2013, it is based on pre-
demonstration data, performance that has already occurred. So 
therefore, those plans would not be able to take any action.
    Mr. Lankford. So we are doing a demonstration and pouring 
$8.3 billion in to demonstrate effectiveness of something that 
it is not possible this year or next year. Do we have the 
criteria established for 2014?
    Ms. Emmanuelli-Perez. For 2014, what we found was that for 
the majority of the demonstration, there still would not be 
additional incentives.
    Mr. Lankford. Has the quality rating, the star quality 
rating, has that been established for 2014?
    Ms. Emmanuelli-Perez. For 2014, the data being collected 
would be collected between January of 2011 and June of 2012.
    Mr. Lankford. The Medicare Advantage plans, do they know 
what the star rating will be for 2014?
    Ms. Emmanuelli-Perez. No, they will be receiving the star 
ratings in the fall of 2012.
    Mr. Lankford. Okay, so let me try to evaluate this. 
Currently we are evaluating, we have an $8.3 billion 
demonstration program that we are pouring the majority of the 
money into this year. But we are not evaluating criteria on 
change, because it is from previous data. And then there is 
another chunk of it for the next year, and then we are trying 
to evaluate their effectiveness of changing into data they 
don't even know what that is yet. So no one even knows what 
2014 data is yet.
    So how do we evaluate the effectiveness of this 
demonstration toward data they don't even know what they are 
directing toward?
    Ms. Emmanuelli-Perez. That is what our concern is, sir. The 
problem is that in this situation, the plans would not have the 
information at a time when they could make changes. So 
therefore, we believe that because of that, they are not 
actually creating additional incentives.
    Furthermore, even in those plans, like three start plans 
for 2014 where there are some changes, CMS still has not shown 
how they would be able to compare whether those changes had an 
effect to increase efficiency and economy. So we see flaws in 
that design.
    Mr. Lankford. Okay, so a demonstration program is to 
demonstrate increased effectiveness. But we are pouring the 
bulk of this money into the first year of it when it is 
impossible to demonstrative effectiveness because there is no 
comparison, another large chunk of it into next year. And in 
trying to evaluate the effectiveness on three years out from 
now when the criteria is not even set yet and how they are 
going to manipulate toward that and change toward that.
    My quandary in this is, the law requires those two things 
to be fulfilled for it to be a legal use of funds, for it to be 
a demonstration process and be legal. You were asked the 
question earlier, and you made the statement, it is not illegal 
but it is outside of the statute. Can you help me understand 
the difference between spending $8.3 billion and it is not an 
illegal use of funds but it is outside of the statute? What is 
the difference?
    Ms. Emmanuelli-Perez. Yes. The reason that we reached our 
conclusion where we looked at those elements and said that they 
do not appear to meet the criteria of the statute, is there are 
several factors we had to take into account. First, we do 
recognize that the Section 402 authority does give the 
Secretary broad authority to make changes in payments for the 
efficiency and economy of services. So we recognized it was 
broad.
    We looked at the legislative history and case law. And 
those sources were very limited. There was very little there 
that we could use where we could apply then the law to facts as 
presented in this demonstration. So we had that limitation as 
well.
    And finally, we of course recognize that the Secretary does 
have discretion and that we did need to give some deference to 
that discretion.
    Mr. Lankford. So basically you are saying that the 
Secretary has broad authority, no one has done this ever 
before, to this size, to this scale, this type. So it is hard 
to say it is illegal because it has never been done.
    Ms. Emmanuelli-Perez. Well, it is hard for us to say it is 
illegal, because the usual sources that we would have to apply 
the law would be legislative history and case law. And that is 
virtually non-existent in this case. There is very little on 
those points.
    Therefore, what we were able to look at was, really compare 
the facts that CMS presented, the rationale they presented for 
their demonstration, and then compared that to the plain 
language of the statute, which does require the creation of 
additional incentives as well as for the agency to be able to 
determine whether those changes did increase the efficiency and 
economy of services.
    Mr. Lankford. So HHS is spending $8.3 billion with no prior 
pathway to this in the past, and not sure they are going to be 
able to accomplish it in the future, and drop a lot of dollars 
into this particular year in the Medicare Advantage. And we 
don't know why, we are just left to guess at that point.
    Ms. Emmanuelli-Perez. Well, for our purposes, and looking 
at the work that we did as a legal matter, as well as Mr. 
Cosgrove, in looking at the demonstration, we cannot find how 
this demonstration is going to either test what it says it is 
testing, and from the legal standpoint, we cannot find that it 
meets the criteria as based on the plain language of that 
statute.
    Mr. Lankford. Thank you. With that, I yield back.
    Chairman Issa. I thank the gentleman. I guess that is the 
question of a compelling legal authority, we once popularly 
heard from Vice President Gore.
    We now recognize the gentleman from Illinois, Mr. Davis, 
for five minutes.
    Mr. Davis. Thank you very much, Mr. Chairman. I want to 
thank you for calling this hearing. Because understanding 
health care costs is a very difficult and complex item. I think 
it requires and needs as much discussion as we can possibly 
have.
    Mr. Blum, let me ask you, the quality bonus program has 
drawn attention for both its size and for its cost. The CMS 
Office of the Actuary has estimated that the quality bonus 
program would have a ten-year cost of $8 billion above and 
beyond the cost of the bonus program included in the Affordable 
Care Act. Can you help us understand how this $8 billion will 
be distributed, and does the entire amount represent bonus 
payments to the qualifying plans?
    Mr. Blum. I think, Congressman, it is important to have 
some overall context. Over the next 10 years, our actuaries 
project that we will spend more than $1.3 trillion on private 
plans participating in the program. So I think from my 
perspective, this demonstration represents a very small 
portion, a very small proportion than what the program will 
spend on health plans going forward.
    These are bonus payments designed to provide progressive 
payment incentives for plans to move up the payment scale. I 
think there is a longstanding principle, when we structure 
these payments, structure within the Medicare program, that we 
want to both reward the attainment, those plans that get to the 
five star level, for example, but also the improvement.
    I think one of the things that I think the General 
Accountability Office did not look at is how have plans changed 
their operations, how have plans changed how they structure 
their programs since CMS put forward this demonstration 
program. I am convinced that we have seen fundamental changes 
in behavior. I am convinced that we have plans that have 
recognized that their service to beneficiaries is not just to 
pay claims but to improve the overall quality and value of 
services being provided to those beneficiaries.
    So I think at the end of the day, when the demonstration is 
complete, we will see dramatic improvement without compromising 
what we mean to be a five star plan in quality and overall 
performance. I do believe also that because payments to plans 
are based upon their bids. We are demonstrating that with a 
focus on quality, with a focus on improvement, will we get more 
efficiency and economy in the program. I think that our 
demonstration will meet those tests.
    Mr. Davis. So $3 billion of the cost attributed to the 
program is due to higher enrolment in the demonstration period 
and the years that will follow, is that accurate?
    Mr. Blum. Well, these are 10-year estimates. So when our 
actuaries look at the cost, they look at it over a 10-year 
window. I think when you break down the $8 billion, part of 
that is the fact that plans are improving. I think our 
actuaries believe that we have created strong incentives for 
improvement and to pay our more bonus payments because we have 
more four and five star plans. I think despite predictions that 
the Affordable Care Act was going to decimate the MA program, 
the opposite has occurred. I think both the actuaries and the 
Congressional Budget Office have substantially changed their 
projections for the future of this program. I am very confident 
that it is going to be a strong program today, tomorrow and 
well into the future.
    Mr. Davis. Does this estimate suggest that the bonus 
program could result in improvements to benefits and services 
that would attract more seniors to the Medicare Advantage 
program?
    Mr. Blum. I think that is a key point, Congressman. These 
bonus payments don't go to health plans, they go to 
beneficiaries. So as plans improve, they are able to provide 
more services, they are able to invest those monies and provide 
better quality care. I think also not only trying to change 
health plans' perspectives and operations, we are also changing 
how beneficiaries think about the program. We want 
beneficiaries to seek out the best possible plans. We are 
confident that plans that achieve four star, five star status, 
they represent best in class.
    My mother that lives in Illinois, in the Chicago area, does 
not have access to a five star plan. From my perspective, as 
the senior policy official, every Medicare beneficiary in every 
part of the Country should have the opportunity to enroll as 
quickly as possible in a five-star plan. I want my mother to be 
in that five star plan. That should be our ultimate goal.
    Mr. Davis. Thank you very much. Thank you, Mr. Chairman.
    Chairman Issa. Thank you.
    Mr. Cosgrove, would you also try to answer on that 
question?
    Mr. Cosgrove. Well, I guess what I would like to add is, I 
would hope that if we paid plans $8.35 billion more that they 
would enrich their benefit packages, and if they did so, that 
it would increase enrollment. That is not my understanding, 
though, of what the purpose of the demonstration was for.
    Chairman Issa. Thank you.
    With that, we recognize the distinguished gentleman from 
Tennessee, Dr. DesJarlais.
    Mr. DesJarlais. Thank you, Mr. Chairman, and thank you all 
for being here today.
    Let's just step back for a minute and look at why we are 
here today. We have an awful lot of seniors out there that are 
very concerned about their Medicare, and they want to make sure 
that we preserve and protect it. So we are here today to make 
sure that is what we are doing, that we are spending our tax 
dollars well.
    Mr. Cosgrove, if Medicare were your company and this $8 
billion were yours and your child's future depended on it, 
would you invest this $8 billion on this demonstration?
    Mr. Cosgrove. If my child's life were at stake, I would 
invest anything that I had.
    Mr. DesJarlais. I am just saying, if your children's future 
depended on your financial welfare, if this were your $8 
billion, would you invest it in this particular demonstration?
    Mr. Cosgrove. I would not have undertaken this 
demonstration. I would have done the way traditional 
demonstrations are done, you roll them out slowly, you test to 
see if it works, you make modifications, you expand the 
demonstration.
    Mr. DesJarlais. Ms. Perez, would you spend $8 billion on 
this demonstration if it were your money, not the taxpayers'?
    Ms. Emmanuelli-Perez. Based on the legal criteria we looked 
at, I would not spend those funds, because we don't feel that 
it meets the criteria of Section 402.
    Mr. DesJarlais. Mr. Blum, you would make that investment if 
it were your money, yes or no?
    Mr. Blum. I think our challenge is to reduce overall 
Medicare costs.
    Mr. DesJarlais. Would you spend it if it was your money, 
not the taxpayers', coming out of your pocket, would you spend 
it on this demonstration?
    Mr. Blum. I think the point is that all of us pay----
    Mr. DesJarlais. It was just a yes or no. If you can't 
answer it, that is fine.
    Let's look at what would happen if this demonstration 
didn't occur. If this demonstration project were not 
implemented, what would happen, Mr. Cosgrove? What would happen 
to our seniors' Medicare Advantage plans?
    Mr. Cosgrove. If this demonstration didn't occur, then the 
bonus incentive system under the ACA would have been put in 
place, which would have meant that plans that got four, four 
and a half, five stars, would have received bonuses.
    Mr. DesJarlais. Okay. What would happen to their costs, to 
the costs of their plans if this demonstration didn't occur 
when it is set to occur? Is their cost going to go up or down?
    Mr. Cosgrove. Because of the demonstration?
    Mr. DesJarlais. Right. Does the demonstration delay a cost 
increase in their plans, in their Medicare Advantage plans?
    Mr. Cosgrove. Well, the demonstration, I am not sure it 
affects their costs. But it does affect the revenue stream that 
comes to them. If this demonstration didn't exist, then more of 
the ACA's payment reductions would have gone into place.
    Mr. DesJarlais. Okay, so the payment reductions would have 
gone into place, it would occur in October, is that correct? In 
October of this year, the payment reductions, the Medicare 
Advantage plans would cost more in October if this 
demonstration were not implemented, is that correct?
    Mr. Cosgrove. It would have started January 1st of 2012, 
this year.
    Mr. DesJarlais. So at any rate, their costs, the seniors' 
cost for their health care plans are going to go up if this 
demonstration is not implemented?
    Mr. Cosgrove. It is likely, yes.
    Mr. DesJarlais. Okay.
    Mr. Blum, what percentage did you say of our seniors 
participate in Medicare Advantage?
    Mr. Blum. Today about 27 to 28 percent.
    Mr. DesJarlais. Okay, so 27, 28 percent. How many million 
voters is that?
    Mr. Blum. That translates to about 13 million 
beneficiaries.
    Mr. DesJarlais. Thirteen million beneficiaries, I am sorry, 
I said voters, excuse me.
    So now, this study, this study that is going in, it was 
initially designed as a demonstration, was to be for four and 
five star plans. But for some reason now, you are going to do 
three star plans. Can we put up that slide that shows the 
number, the percentage? Okay. You can look at that slide. What 
percentage there is three star plans, or mediocre plans?
    Mr. Blum. I can't do the math fast.
    Mr. DesJarlais. It looks like at least two-thirds, right? 
Would you agree with that? About two-thirds. So all of a 
sudden, this $8 billion is not going to go to four and five 
star plans any more, like it was supposed to. But prior to this 
election, we are going to go ahead and include a much larger 
group of seniors in this study. We are going to reward mediocre 
plans with this $8 billion, is that what you are telling us?
    Mr. Blum. I think my argument before the Committee is that 
we are creating a much stronger payment structure, an incentive 
structure, for plans to rise up the quality scale.
    Mr. DesJarlais. You think. That is what you are hoping, 
that is what you are gambling the taxpayers' money on. You are 
taking an $8 billion gamble with taxpayers' money in hopes that 
it will do this.
    Mr. Blum. Well, I think this was a demonstration. So we 
were coming into this demonstration hoping to learn more about 
ways to improve the Medicare program. That is consistent with 
the authority. I think the key point here is that we are paying 
today substantially less to our health plans across the board--
--
    Mr. DesJarlais. Do doctors get more payment out of this? 
Will physicians? Because right now seniors are telling me they 
are having a hard time finding doctors. When I was practicing 
just two short years ago, I know that for a fact, that it was 
hard to find a doctor if you were on Medicare. Does this in any 
way incentivize physicians? Will they get higher pay? Or does 
this go to these plans? Do the plans get the money?
    Mr. Blum. What this incentivizes is plans to build much 
stronger relationships with their physicians, to build much 
stronger linkages, to encourage physicians to improve the 
overall quality of care. Plans negotiate their own payment 
rates separately from Medicare for physician payments. So I 
can't speak to the actual rates.
    Mr. DesJarlais. Well, there is a problem with access to 
care right now. The SGR formula is broken. That is still an 
issue we have to deal with. Physicians right now have not 
received any kind of pay increase for over a decade. Is there 
anything in this that is going to improve physician incentive 
on care? Because right now, I can tell you, if a Medicare 
patient comes in, and they are going to have an hour-long 
physical exam, and I was there when the Medicare Advantage came 
in, there were a lot of new criteria that we were supposed do, 
EKGs and more screening tests, and it takes a lot longer time. 
As a physician, I might get $50 to $60, whether that takes a 
half hour, or hour, or hour and a half. You are asking for more 
and more from physicians. Is there going to be any more 
incentive? Because I can tell you, the overhead, when I started 
20 years ago, was 50 percent. Now it is about 75 percent in a 
solo practice. So what are you going to do to improve access to 
care? You are wanting quality of care, but you are not wanting 
to pay for it. You are wanting to give it to plans, but not 
providers, is that correct?
    Chairman Issa. The gentleman's time is expired, but the 
gentleman may answer.
    Mr. Blum. I think I agree that the SGR is a challenge that 
we all have to face together. That is true for the private plan 
side of Medicare but also the traditional fee for service side 
of Medicare. What I hear from health plans who are now 
participating within the Medicare program is they are changing 
their payment structure with physicians to reward that extra 
time that is being spent with beneficiaries to provide 
wellness, to provide preventive care.
    I think what is most exciting about the reaction to this 
demonstration is that it helps to build much stronger 
relationship links with health plans and the physicians they 
contract. Physicians don't have to contract with the MA plans. 
That is a private negotiation that CMS never interferes with. 
At the same time, what I believe this payment demonstration has 
created is a focus on how well beneficiaries receive services 
from their physicians, how much time do they have, do they 
focus on managing chronic conditions much better? I think from 
a physician perspective, and I am not a physician, so I can't 
speak from first-hand knowledge, but I believe that this 
structure, and a long-term strategy for both the fee for 
service program and the MA program, is to build much stronger 
relationships with patients and their doctors. Because that is 
how it will demonstrate better quality care.
    Mr. DesJarlais. Mr. Chairman, can I have a few seconds to 
respond?
    Chairman Issa. I ask unanimous consent the gentleman have 
an additional 30 seconds.
    Mr. DesJarlais. I thought just a few minutes ago you were 
essentially bragging on how you were going to bring the payment 
cost down, you are going to lower that. So how are you going to 
incentivize physicians, if you are bringing that down from 114 
to 100 percent?
    Mr. Blum. I believe that our best ways to reduce Medicare 
cost is better chronic care management, better care 
coordination to reduce re-hospitalizations.
    Mr. DesJarlais. And you are going to learn this from a 
study that Mr. Cosgrove and Ms. Perez say will not demonstrate 
anything. I yield back.
    Chairman Issa. I thank the gentleman.
    We now recognize the distinguished gentleman from Missouri 
for five minutes, Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman.
    To Mr. Blum, on the legal question, we reached out to an 
outside attorney, a professor of administrative law at American 
University, Jeffrey Lubbers. Professor Lubbers described the 
Secretary's authority as very broad. And he said he believed 
this demonstration program fits comfortably within that 
authority. Mr. Blum, do you agree with Professor Lubbers?
    Mr. Blum. When designing and constructing the 
demonstration, we worked very closely with our general counsel 
colleagues. We believe that we are operating consistent with 
the 402(b) authority. I haven't read the analysis, but my 
answer is yes.
    Mr. Clay. And then Professor Lubbers also explained that he 
considered this disagreement between CMS and GAO to be a 
methodological disagreement, not a legal one. Mr. Blum, do you 
agree with Professor Lubbers in that analysis?
    Mr. Blum. We have responded to the General Accountability 
Office's concerns. We believe that we have a program that can 
be demonstrated and that we have a plan for evaluation to 
compare the demonstration plans with other plans not part of 
the demonstration. So we are confident that when this 
demonstration is complete we will have very valuable 
information to determine how we can both accomplish the dual 
goal of reducing overall Medicare costs while substantially 
improving the overall quality and performance.
    I am confident that our demonstration, when complete, will 
provide this thorough evaluation that we are concerned about.
    Mr. Clay. Yes. Thank you for that.
    Mr. Blum, I think we can all agree that we need to continue 
to improve Medicare to ensure that these plans are providing 
quality, value service to seniors and to encourage the use of 
preventive services.
    Mr. Blum, can you tell us about the status of your efforts 
under the Affordable Care Act to encourage the use of 
preventive care services in the Medicare program?
    Mr. Blum. I think overall, both in the traditional fee for 
service program and the Medicare Advantage program, one of our 
key strategies to make the program work better for 
beneficiaries but also to reduce long-term costs is a greater 
emphasis and a greater focus on prevention and wellness. The 
Affordable Care Act has waived cost-sharing for certain 
preventive benefits, provided beneficiaries the opportunity for 
the first time for free wellness visits with their physician of 
choice. That is the same is true in the fee for service side, 
as in the private side of Medicare, the private plan side.
    So beneficiaries have reacted very strongly to these new 
benefits. We have been monitoring on a month to month basis the 
take-up rates and doing everything we can to make sure 
beneficiaries know that while we are reducing the overall cost 
of the program to keep it affordable for current beneficiaries 
and also future generations, there are more benefits being 
added overall to the program so beneficiaries are getting more 
services than they got before the Affordable Care Act was 
passed. And premiums have stayed very affordable as well.
    Mr. Clay. And I guess that goes into my next question, 
which is, about your efforts to incentivize improvements in the 
quality of care amongst both providers and insurance plans, can 
you talk a little about that?
    Mr. Blum. I think these new strategies are just going into 
place, but across our payment systems, be it in the inpatient 
hospital or in the physician payment side or in our health plan 
payment systems, we are creating structures that changes 
fundamentally our payment systems from being one that pays on a 
service or pays on kind of monthly capitated to a payment 
structure that pays based upon the overall value and quality 
that providers provide to their beneficiaries. We assess 
quality in a whole range of measures, from the processes of 
care measures to the outcome measures to the overall patient 
satisfaction. So we have sophisticated ways, and I think ways 
like never before to assess and to measure quality. But I think 
from the Medicare program's perspective, we are very proud in 
the fact that we have fundamentally changed how we pay 
providers to reward the best possible care, highest possible 
performance. I think without the strategy that the program will 
not live up to its promise to its beneficiaries.
    Mr. Clay. Thank you for that response.
    Mr. Blum, can you explain the concept of risk selection?
    Mr. Blum. I think whenever you pay a capitated entity a 
fixed amount, they have incentives to market to and to 
encourage beneficiaries that will lose, that will spend the 
least amount of services in order to maximize profit. I think 
the long history of the private plan side of Medicare, that was 
the fundamental strategy, was to get paid a capitated rate and 
to find the healthiest beneficiaries that would have the least 
amount of services.
    What I think the quality bonus payment structure does is 
changes that fundamental business model from a model that used 
to reward plans to avoid services to a model where plans are 
rewarded for providing services. I talked about what the goals 
of a five star plan are. But what a five star plan to me really 
is is a plan that provides more services, more help during 
beneficiaries' time of need, that works to keep beneficiaries 
out of the hospital, focuses on prevention, focuses on 
wellness.
    I think this demonstration at the end of the day will 
demonstrate that we can fundamentally change the business model 
to the program to be one where we pay plans on average the 
traditional fee for service program, we see dramatic 
improvements in quality and performance and beneficiaries are 
more satisfied with the program.
    Mr. Clay. Mr. Chairman, I know my time is up, but let me 
thank the witness for his detailed responses on explaining the 
benefits of the ACA to all of us.
    Chairman Issa. I appreciate the gentleman clarifying that. 
I think if this hearing was only on the ACA and not on wasting 
$8.3 billion, I would have appreciated his answer too.
    Mr. Clay. Well, but it is also an educational process here 
to let the American people know what the benefits are.
    Chairman Issa. No question at all. Clearly that story has 
not been told, Mr. Clay.
    Mr. Clay. But it is in the process of being told.
    Chairman Issa. It clearly is. So is the process of $8.3 
billion about to be wasted.
    With that, we recognize the distinguished gentleman and 
former car dealer from Pennsylvania, Mr. Kelly. And by the way, 
you are a former car dealer. I don't want to hear that you are 
currently one, because you are a great Congressman.
    Mr. Kelly. Still own the dealership, don't run it.
    Thank you, Chairman. And I am, I agree with Mr. Clay, there 
is an evolving truth as we see in this Administration, as we 
continue to look at programs that are put into effect and we 
start to wonder, why did we really do this.
    Let me ask you, Mr. Blum, if I could. Medicare waiver-only 
demonstrations must be budget neutral. And the applicants must 
supply information and assumptions supporting budget neutrality 
that CMS will use in preparing a waiver package for submission 
to the President's Office of Management and Budget. So OMB must 
approve the Medicare waivers before implementing the 
demonstration.
    Who at OMB approved this obviously not budget neutral 
program?
    Mr. Blum. I think a couple of points, Mr. Congressman.
    Mr. Kelly. I just need to know who at OMB.
    Mr. Blum. This program was implemented in the normal course 
of----
    Mr. Kelly. So who at OMB? My question is, who at OMB? Do 
you know that? If you don't know, it is okay.
    Mr. Blum. Just follow the normal course----
    Mr. Kelly. I am going to take, if you can't tell me who it 
is, that you don't know the answer.
    So generally the Office of Management and Budget sends an 
approval packet for demonstration programs implemented by the 
Center for Medicare and Medicaid Services. Can we get a copy of 
the approval packet for the Medicare Advantage bonus 
demonstration by the end of the week? Is that possible?
    Mr. Blum. We are happy to work with you on that.
    Mr. Kelly. Thank you. So that is a yes?
    Mr. Blum. We are happy to work with you, Congressman.
    Mr. Kelly. That is a yes?
    Mr. Blum. We are happy to work with you.
    [Laughter.]
    Mr. Kelly. I love the way you guys don't answer.
    Mr. Cosgrove, because the idea behind this is, there was 
$8.3 billion spent on a program that has no control group, 
right? So if we are trying to prove something that is going to 
work, but then we don't really go after to find out if it is 
going to work, we just spend $8.3 billion, what did the bonus 
distributions do to these programs, or these plans that were 
working so well? Because I am looking at, it offset the effect 
of Medicare Advantage cuts by 71 percent in 2012. There must be 
some significance in why it is heavily loaded front.
    Mr. Cosgrove. Let me talk about the timing of that and what 
it can show. This is certainly one of our concerns.
    The bonus payments that are paid to plans this year were 
based on data that were collected from the period starting in 
January 2009 through June of 2010. So those data, which will 
determine payments this year, were collected before the 
demonstration was even announced by CMS in November of 2010 and 
well before the final version of the demonstration was 
announced in April of 2011.
    So it is hard for us to understand how this can act as an 
incentive payment for plans.
    Mr. Kelly. In my world, we call that bass ackwards.
    I am just trying to find out. Because we spend a lot of 
taxpayer money. We know it is not budget neutral. So what was 
the purpose of running this demonstration program? What is the 
relevance of it?
    Mr. Cosgrove. We asked CMS what the purpose of it was. We 
were told that in part, it was to test a scaled bonus incentive 
system where the plans that moved up the quality rating 
continuum would get larger bonuses and that they also wanted to 
make sure that they expanded the bonuses down to average 
quality plans to get the lowest quality plans they thought was 
more incentive to increase.
    It is not clear to us that that was implemented 
consistently, since in 2014, the only year that really makes a 
difference, four, four and a half and five star plans receive 
the same bonus percentage. And under the ACA, the lower quality 
plans would have had a greater incentive to increase to become 
four star plans.
    Mr. Kelly. I was just reading through some of the 
testimony. If Medicare Advantage plans don't change benefit 
packages, the Medicare Advantage cuts are going to result in 
higher premiums by about $1,800 per beneficiary, voters, by 
2017. So if I can game that, if I can make it look good today, 
if I can soften, if I can sugar-coat it today, but once that 
sugar-coating wears off, I am going to find out that I am 
probably not going to be able to do a Medicare Advantage in the 
future, because the cost is just rising in such a fast rate, it 
is going to put it off the market.
    Mr. Cosgrove. According to CMS regulations, these bonus 
payments that plans receive are to go to both enhance the 
benefit package that beneficiaries get or reduce cost-sharing 
or reduce their premiums.
    Mr. Kelly. Okay.
    Chairman Issa. Would the gentleman yield? Mr. Blum, you 
didn't answer the gentleman's question on who approved waiving 
the budget neutral. When you come here representing the 
Administration, and it is a question I am sure you already knew 
could be asked, would you please answer it?
    Mr. Blum. We operated the payment notice to announce the 
demonstration through the normal courses, through a full 
comment period. I signed the payment notice, that authority is 
delegated to me. But there is a major review and clearance 
process through the office and budget clearance process.
    Chairman Issa. I understand. The question had been, who at 
OMB approved the obvious non-budget neutral aspect of this 
program. Who at OMB.
    Mr. Blum. I work at CMS, and I can't speak to that.
    Chairman Issa. Do you know who at OMB approved it?
    Mr. Blum. No, I do not, sir.
    Chairman Issa. Do you know who in your organization above 
you approved it?
    Mr. Blum. The, I made a recommendation to the administrator 
at the time. And the administrator at the time was the 
approving official for CMS.
    Chairman Issa. And who was that?
    Mr. Blum. Dr. Don Berwick.
    Chairman Issa. Thank you.
    We now go to the gentlelady from California, Ms. Speier.
    Ms. Speier. Mr. Chairman, thank you.
    Mr. Blum, tell us about your experience, your resume, your 
background before coming to CMS.
    Mr. Blum. I spent three and a half years working for the 
Office of Management and Budget, spent three and a half years 
working for the professional staff of the Senate Finance 
Committee, working about four and a half years in the private 
sector and have been at CMS for about three and a half years.
    Ms. Speier. And certainly you know, as do the members of 
the House of Representatives, that the cost of Medicare is out 
of control and that we have to look at new ways of providing 
quality service and reducing the cost. One of the examples used 
by Togawandy was looking at McCallum, Texas, and El Paso, 
Texas, where we were spending twice as much money in McCallum, 
Texas for Medicare recipients, something like $14,000 a year 
and $7,000 a year in El Paso per Medicare recipient. And the 
quality of care, the demographics of the Medicare recipient 
were about the same. But yet it was about twice as expensive in 
McCallum. We found out it was because doctors were churning, 
that they were spending more money on services. And it so 
happened that the services were services they owned, home 
health care, MRIs, and that churning was having an effect. So 
isn't this particular pilot project an effort to see if we can 
get better quality of care by not necessarily using more 
services, and then incentivize the physicians who do provide 
that quality at lesser cost?
    Mr. Blum. I think our ultimate challenge with the Medicare 
program is to reduce overall cost, to ensure the program is 
stable and strong for current beneficiaries and future 
beneficiaries, while ensuring that beneficiaries have strong 
access to care and to ensure that the overall quality is 
improving. I think prior to the Affordable Care Act, the 
program had many vulnerabilities. Some of those vulnerabilities 
were that providers were paid for providing on a service by 
service basis. And oftentimes there was little value for those 
extra services. I think what we are doing right now in our 
overall strategy that was set forth by the Affordable Care Act 
is to change the fundamental business model for how providers 
interact with the health care program to focus on prevention, 
focus on getting waste out of the system, focus on better 
coordinating care to ensure beneficiaries get better care and 
to reduce unnecessary hospitalizations, for example. This is 
the same goals, the same model that we are promoting and trying 
to encourage and trying to test how to do so as rapidly as 
possible. The program will add 10,000 new beneficiaries each 
business day. So we have a tremendous challenge, all of us 
together, to reduce the cost dramatically but at the same time 
figure out ways to incent better quality of care. Because I 
believe over the long term, that will be our only strategy to 
reduce the fiscal challenge that we face in the Medicare 
program.
    Ms. Speier. The GAO has suggested that you don't have a 
control group or a comparison. How do you plan on making that 
kind of an evaluation if you don't have a control group? What 
are you going to use instead?
    Mr. Blum. I think we do have a control group. And we have 
identified in our response that we can assess those plans that 
are eligible for the bonus payments. I think the key point is 
that those plans have to submit the same quality information as 
the MA plans do to be eligible for the bonus payments. So 
really, I think the key measure is how has quality improved, 
how have patients experienced our care. And our demonstration 
is designed to test, as rapidly as possible, ways to 
dramatically improve the Medicare program. And I agree that the 
history of the demonstration program was to start small then 
expand and expand? And I don't personally believe that strategy 
has served the Medicare program or beneficiaries very well. 
Today we face a fiscal challenge, we face a quality of care 
challenge. And the old way of operating the Medicare program, 
in my view, won't be sustainable to both address the long-term 
fiscal challenge the program faces and the quality care chasm 
that has been in the program for too long. So while I respect 
the viewpoint that this demonstration is different from the 
past, in my own personal view, the past didn't serve taxpayers 
or beneficiaries very well.
    Ms. Speier. I yield back. Thank you.
    Chairman Issa. I thank the gentlelady. We now go to the 
gentleman from Arizona, Mr. Gosar, for five minutes.
    Mr. Gosar. Thank you, Chairman. Mr. Cosgrove, is the $8.3 
billion being spent on this program coming from the general tax 
revenue or from the Medicare trust fund?
    Mr. Cosgrove. It is coming from the Medicare trust funds.
    Mr. Gosar. So will any seniors face higher premiums for 
Medicare Part B because of the demonstration project?
    Mr. Cosgrove. Yes. All seniors, those in the traditional 
fee for service program as well as those who are in the 
Medicare Advantage plans, will face slightly higher premiums 
because of this.
    Mr. Gosar. Well. Ms. Perez, my colleague here asked a 
question in regard to the jurisdiction of the Secretary. Isn't 
it true that the Secretary has to use prudent use of scientific 
method and mathematical statistical evaluations of proper 
studies when they do that role?
    Ms. Emmanuelli-Perez. Yes. Under Section 402 there is a 
requirement that the Secretary consult with experts with 
respect to those demonstrations.
    Mr. Gosar. So use a prudent method. So it was very 
misleading. Mr. Blum, are you a mathematician?
    Mr. Blum. No, sir.
    Mr. Gosar. A statistician?
    Mr. Blum. No, sir.
    Mr. Gosar. And do you see any variance, you said, it hasn't 
worked very good. Do you believe that by the scientific method 
and by mathematics that we have achieved living longer today?
    Mr. Blum. My understanding is there is longer life span.
    Mr. Gosar. There is a longer life span. And it has to do 
with scientific method. It is about proven scientific process. 
It is a control group that works. That is what that man right 
there is talking to you about. We just don't throw that out, 
because it is proven over and over again. I am a science guy. 
You just don't manipulate data. That is the problem. So Mr. 
Cosgrove, you use mathematics and sound scientific method to do 
your methodology, do you not?
    Mr. Cosgrove. Yes, we do.
    Mr. Gosar. So in your professional opinion, this does not 
satisfy that scientific method, does it?
    Mr. Cosgrove. It does not, which is why we recommended 
canceling the demonstration.
    Mr. Gosar. I know my colleague over here was talking about 
if this program wasn't going into effect we would see some 
substantial cuts, would we not?
    Mr. Cosgrove. Yes, we would. The ACA would have phased in 
over time, reduced payments to Medicare Advantage plans, and 
the demonstration, in this year, offsets 70 percent of those 
over the life of the demonstration. It offsets about a third.
    Mr. Gosar. So truth and consequences comes in what time 
this year? Open enrollment starts in October, is that true?
    Mr. Cosgrove. That is correct.
    Mr. Gosar. So we would see this vast number getting this 
unexpected news about that time, would we not?
    Mr. Cosgrove. Yes.
    Mr. Gosar. So it goes to my colleagues talking about that 
this does have political consequences, very interestingly done.
    Mr. Blum, you said that CMS really doesn't have anything to 
do with compensation methods. Let me ask you a quick question. 
Isn't it true that all Medicare, Medicaid and all insurance 
rates are based off of Medicaid reimbursement rates set by CMS?
    Mr. Blum. For the traditional fee for service program, that 
is true.
    Mr. Gosar. For all of them. It is all of them. They are all 
based off of them. Actuarials are all based off of CMS' 
reimbursement rate.
    Mr. Blum. For our private plan payments, they are based 
upon plan bids. Plans submit bids.
    Mr. Gosar. Plan bids can be only accepted by what CMS 
actually does. So it is up to them independently, but it is set 
off CMS rates.
    Mr. Blum. Our actuaries review the bids.
    Mr. Gosar. Please go back and review insurance regulations. 
Who is to benefit from this, the plans or the physicians?
    Mr. Blum. Benefit? I am sorry?
    Mr. Gosar. With these types of benefits that you are giving 
the subsidies to, who benefits? Is it the physicians or is it 
the plans?
    Mr. Blum. Plans----
    Mr. Gosar. Plans. Very simple answer. Plans, right?
    Mr. Blum. Plans contracts separately with physicians that 
CMS does not oversee. So I can't speak to how plans change 
their compensation to physicians or hospitals based upon 
changes.
    Mr. Gosar. But they are also established by a rate that you 
establish, is that not true? Yes, it is.
    Mr. Blum. Sometimes plans follow our rate structure, but 
they are not required to do so.
    Mr. Gosar. They cannot be higher than that plan.
    Mr. Blum. They can be higher, they can be lower. Plans 
negotiate contracts separately with hospitals, physicians----
    Mr. Gosar. Let me ask another question, Mr. Blum. Is the 
private insurance marketplace being cost-shifted and is it 
going up?
    Mr. Blum. I can speak to the----
    Mr. Gosar. Is it going up? It is very easy. Come on, sir. 
You are not that naive. You know, and I don't carry government 
insurance, so I am very aware, has it gone up? Double digits 
every year?
    Mr. Blum. I track Medicare spending, so I can't speak to 
private sector. But I can say for Medicare----
    Mr. Gosar. You have to understand that. Because what you do 
is manipulating data. And if you don't see the bigger picture 
here, you are manipulating a small segment here to your 
benefit. And that is not to the benefit of the seniors or to 
the process, is that right?
    Mr. Blum. I believe that we are changing how we pay 
providers, and that is having tangible----
    Mr. Gosar. You are also changing the scientific method and 
methodology of how you conduct process that has proven over and 
over again to benefit not only statistical data, but also the 
scientific method, sir. Shame on you.
    Chairman Issa. The gentleman yields back. We now recognize 
the gentlelady from the District of Columbia, Ms. Norton, for 
five minutes.
    Ms. Norton. Thank you, Mr. Chairman. I wanted to be here in 
time to ask some questions. I have just come out of another 
hearing.
    I am interested in the star rating system and its 
application. We know that, let's take Medicare Advantage, of 
course, that this program serves 12 million of our seniors. I 
think it would be important to understand how the star rating 
system has, how it is used to help determine the quality of the 
plans that are offered. How is it derived?
    Mr. Blum. CMS collects a variety of measures from health 
plans that participate in the Medicare program. Those measures 
go through consensus based organizations to ensure that they 
represent fair and accurate ways to assess health plan quality.
    We collect a mix of measures, of process measures, for 
example, how well is the plan providing customer service to 
their members. We collect outcome measures, our plan is doing a 
relative better job to manage, for example, blood levels for 
diabetes patients.
    We also collect data on how satisfied beneficiaries are 
with their health plan. Then all these measures together get 
compiled to a star rating, with one star being the lowest 
quality and five star being the highest quality plans. Most of 
the plans today operate within the three and the three and a 
half range. To us, that is not acceptable for the long term. 
Our goal and our mission is to ensure that every beneficiary 
that wants to enroll in a private health plan has the 
opportunity to be in a four star, five star plan.
    Based upon our measures that represents----
    Ms. Norton. Has the star rating affected enrollment in 
these plans?
    Mr. Blum. I believe that we are seeing positive movement 
from beneficiaries to plans that have higher star ratings. In 
addition to establishment payment incentives, we are trying to 
educate, best we can, to the beneficiary community what it 
means to be in a four star, five star plan. So I believe that 
our demonstration will change the business model.
    But I think as important, possibly more important, that it 
will change how beneficiaries think about the program and 
choose which health plan to enroll in. Four star, five star 
plans, particularly five star plans, represent best in class 
and represent to us what every MEDICARE beneficiary should have 
the ability to sign up for.
    Ms. Norton. Let's look again at Medicare Advantage. I am 
looking now at a report from the Association of Health 
Insurance Plans. It says that there has been an 8 percent 
increase in the Medicare Advantage plan star rating. It also 
says that CMS has seen a 29 percent, that 29 percent of 
Medicare Advantage enrollees are indeed enrolled in the plans 
with four or more stars. That is up from, I believe it was 19 
percent. So 19 percent to 29 percent.
    How do you account for these fairly significant increases?
    Mr. Blum. I think my perception and perspective from 
studying the data is that we have sent a clear signal and a 
clear message that for plans that want to participate in the 
program for the long term, will have to dramatically increase 
their quality that they provide to their members and also their 
overall performance in the program. And this is a clear signal 
that that signal is sent both through payment incentives but 
also through our work in compliance to oversee the plans and 
our work to market or to educate beneficiaries on their plan 
options.
    Ms. Norton. Mr. Blum, the GAO criticism was that the bonus 
demonstration program extends bonuses to three star plans. And 
those of course are the plans that are only average under the 
rating system. Isn't that where the improvement is needed?
    Mr. Blum. I think that our payment policy should be, and 
this is a consistent principle throughout the Medicare program, 
is that we reward plans that both achieve the desired goal, but 
we also reward plans for steps in improvement. I think for us 
to dramatically change the program, we have to reward and 
incentivize not just the attainment but also to the improvement 
and send a clear signal throughout the plan community that they 
will do better, their beneficiaries will do better, if they 
rise up the quality scale.
    I think a lot of folks have argued to CMS, well, why don't 
you just lower your standards. And this year, last year, we 
have worked to improve the star rating to make it even a 
stronger standard what it means to be a four star, five star 
plan.
    So we are setting our goals high, setting our values to be 
that every Medicare beneficiary should have access to best in 
class care, and creating the payment structure and figuring out 
the best way to do it as quickly as possible to ensure that 
every beneficiary in all parts of the Country have access to 
best in class care.
    Chairman Issa. I thank the gentleman.
    Ms. Norton. Thank you, Mr. Chairman.
    Chairman Issa. We now recognize the gentleman from Idaho, 
Mr. Labrador.
    Mr. Labrador. Mr. Chairman, I yield back my time.
    Chairman Issa. Would you yield me the time?
    Mr. Labrador. Yes.
    Chairman Issa. I thank the gentleman for yielding.
    Mr. Blum, during CMS's comment period, well before the GAO 
study, you had 29 comments. If I understand correctly, 28 of 
them were from recipients, people who would get the money, 
isn't that true?
    Mr. Blum. The typical practice that our comment period, the 
majority of comments come from the plan community.
    Chairman Issa. Okay, so the people who would get the money, 
28 out of 29, they kind of like getting the money, especially 
if you give it for Cs.
    The one group that was not, in fact, a partisan in this was 
MedPAC. Isn't it true they reached a similar conclusion the 
GAO, opposing this plan, particularly as to scale?
    Mr. Blum. I think it is fair to say that consistent with 
other demonstrations that have been done, kind of a national 
basis, they raised concerns about can CMS----
    Chairman Issa. Right. And isn't it true that you didn't 
take any of their recommendations?
    Mr. Blum. I think we worked hard to develop that----
    Chairman Issa. Please, Mr. Blum. I don't want to hear about 
worked hard. Did you take their recommendations? You are under 
oath?
    Mr. Blum. CMS decided to finalize the demonstration.
    Chairman Issa. Okay. You didn't take their recommendations, 
is the answer.
    Mr. Cosgrove, are you an only child?
    Mr. Cosgrove. No, I am the youngest of three.
    Chairman Issa. Okay. I am one of six. And my family 
couldn't afford to give me grades, money for As and Bs and Cs. 
But I have an only child son. So we set up a program and we 
paid him extra bonuses when he got As, a little bit less when 
he got Bs.
    He asked me for money for Cs and something for Ds. And we 
gave him something for Ds, we took away the money he would have 
gotten for Bs.
    Isn't it true that this plan essentially rewards 90 percent 
of all participants, effectively neutralizing the real benefit 
in years one and two and three of moving up and getting better?
    Mr. Cosgrove. It certainly does reward plans that enroll 
about 90 percent of beneficiaries. In that sense, it also 
lessens the incentives for plans to move up, that is correct.
    Chairman Issa. So years one and two, moving up doesn't 
accomplish anything, because those years are already in our 
tail lights. Year three, threes, fours, four and a half, fives, 
all get paid the same, so no incentive for moving up, correct?
    Mr. Cosgrove. Yes.
    Chairman Issa. So the aspirations and the hope of Mr. Blum 
are not in this study.
    Based on science, based on experience of past demonstration 
projects, is there any reason that this plan couldn't be done 
on a much smaller scale, and thus be as effective for less 
money?
    Mr. Cosgrove. No. That is what we think a well designed 
demonstration would be, would be to start off small without 
spending over $8 billion.
    Chairman Issa. So any amount greater than the amount 
necessary to reach the conclusion that the demonstration 
project hopes to reach any amount greater than that is by 
definition waste, because it is unnecessary?
    Mr. Cosgrove. We recommended that the provisions of the ACA 
be put into place, and that those incentives and the effect of 
those incentives be studied. That would have cost $8.3 billion 
less than what we are spending now.
    Chairman Issa. Mr. Blum, earlier you were asked about an 
approval packet on the demonstration programs from OMB, and 
whether you would deliver that package to this Committee. Would 
you deliver the approval packet for demonstration programs to 
this Committee?
    Mr. Blum. We will be happy to work with you.
    Chairman Issa. No. Will you deliver it?
    Mr. Blum. I will be happy to check into the answer. I 
personally can't commit to that, but I will be happy to check 
into it for you.
    Chairman Issa. You will check into it. Are you aware that 
that packet has already been requested by Senator Hatch?
    Mr. Blum. I am not aware personally, but I can definitely 
check into it.
    Chairman Issa. Okay. Understand that that packet will be 
the subject of this Committee's formal request, if it not 
granted by the end of the week through this request. So please 
take that back with you.
    Mr. Blum. Will do.
    Chairman Issa. Now, at the beginning of this hearing, I 
made some fairly strong statements, statements about $8.3 
billion basically buying favors in an election. None of you are 
here to comment on that, that is a conclusion I reached.
    But Mr. Cosgrove, I want to ask you, because you have been 
at GAO for a long time, were you in a similar role when 
Republicans promised to ratchet down the cost of Medicare in 
the past and scored it some years ago through savings? Did you 
look at those?
    Mr. Cosgrove. I have been working on Medicare issues, 
Medicare payment issues, for more than 15 years.
    Chairman Issa. So isn't there a tendency under Republicans 
and Democrats, not this $8.3 billion that clearly is designed 
to ward off an event that would occur this year otherwise, but 
in Affordable Care, something Mr. Clay talked about it, it 
promised to get reductions through spending less. And it in 
fact set forward to pay less, so it is scored to pay less.
    Isn't it true that the history in your experience of all 
these plans to pay less ultimately end up being shored up by 
Congress later because the savings, for the most part, doesn't 
occur over the long run? Isn't that the general history of 
health care under Medicare that says, we will pay less, 
including what Dr. Gosar talked about, how we have been paying 
doctors less and seeing the effect?
    Mr. Cosgrove. Congress, over time, from both sides, from 
both kinds of Administrations, recognized that Medicare 
spending is unsustainable and has taken steps to try to reign 
it in. There is always pushback from providers.
    Chairman Issa. Right. So the history has been, like the 
Affordable Health Care Act, they score in the out year savings, 
claim they are going to pay less, tell people, like in this 
case, Medicare Advantage, that they are going to take you from 
14 percent premium down to 7 percent and eventually to flat-
lining you with a fee for service. But historically, there is a 
tendency to then backfill it for political reasons.
    Mr. Cosgrove. Historically when cuts have been enacted, 
then some subsequent legislation has often restored at least 
some of the payments, that is true.
    Chairman Issa. So when we look at what is being called a 
demonstration project, and Ms. Perez made it clear that it 
doesn't fit 402 requirements under the legal authority for 
that, is this effectively backfilling by an executive fiat the 
monies that otherwise would be taken under the Affordable Care 
Act?
    Mr. Cosgrove. It is replacing, in this year, in 2012, it is 
replacing 70 percent of the payments that otherwise would have 
been reduced, would have been recovered from plans.
    Chairman Issa. Last number, if you know it. If you take 
away the retroactivity of this year, how much of that $8.3 
billion would not be spent? In other words, if you say, we are 
not going to touch this year because this year, these plans 
can't do anything about it, how much of this $8.3 billion would 
be saved?
    Mr. Cosgrove. That is a number that we haven't estimated.
    Chairman Issa. But it is more than a third, because the 
bonuses are front-end loaded to this year, right?
    Mr. Cosgrove. The bonuses are front-end loaded. There is 
some tail effect in the out years, and so having to do with 
enrollment. But yes.
    Chairman Issa. So it is safe to say it is more than a 
third, probably more than $3 billion that will be given away 
this year for no performance change possible since it is 
retrospective analysis?
    Mr. Cosgrove. That is correct.
    Chairman Issa. Thank you.
    Mr. Cummings, do you have any final questions? The 
gentleman is recognized.
    Mr. Cummings. Mr. Blum, I have sat here and listened very 
carefully. I want you to address this whole issue of the, I 
know you have talked a lot about your objectives and things you 
have seen. You believe that we are providing more services as 
opposed to avoiding services. You said that, right? Is that 
right? Is that what you are seeing or is it?
    Mr. Blum. We are seeing a fundamental change in how health 
care services are provided to be one where we are paying for 
value rather than volume, and to create much more stronger 
structures to better coordinate care, better manage care, to 
best serve beneficiaries for the long term.
    Mr. Cummings. The folks from the GAO, I think, are saying, 
I don't think they are denying that what you just said is true. 
Denying or admitting it. But the question seems to be, what in 
this process says that what you are doing is resulting, is the 
causal effect of the results you just talked about? To me, that 
is the key. I have listened to all this, and that seems to be 
the key here.
    Help me with that.
    Mr. Blum. I agree. That is our fundamental challenge to how 
we manage this program for the long term. I think for too long 
the program has simply paid for services without any measures 
of quality, without any measures----
    Mr. Cummings. Answer my question. Give me the causal 
connection between this program, what you are doing, and the 
results you are seeing. Do you follow what I am saying? Because 
to me, that is the key. I think that is what these folks are 
concerned about, too. It is not that, nobody is saying it is 
not happening. The question is, what is the causal connection. 
The question then becomes, would it have happened anyway? Do 
you follow what I am saying?
    Mr. Blum. Sure. Well, I think the causal connection is that 
when you reward and incent improvements that you change how 
businesses and how plans invest in their beneficiaries, and 
structures their health plans. Rather than providing fewer 
services when beneficiaries are in their time of need, the 
causal relationship is providing more services, better services 
during their time of need that I believe will lead to higher 
quality ratings but also will lead to lower bids, because plans 
now can better manage services, beneficiaries will be 
healthier, beneficiaries will require fewer services over the 
long term.
    So it is a self-reinforcing proposition.
    Mr. Cummings. But to go back to what Mr. Cosgrove said, if 
you are giving awards before you get the, before you even the 
effect is supposed to be felt, how does that measure? Do you 
follow me? You have to get to that, because that is what they 
are talking about.
    Mr. Blum. I think we have to look at a whole host of 
different measures and outcomes. Clearly, we want to see 
changes in the performance measures as being collected by CMS. 
I think at the end of the demonstration, what we really want to 
see is has there been a fundamental change in those quality 
measures. I think a key point is that the demonstration was 
announced in 2010. That already has changed behavior.
    Mr. Cummings. Right there, I think you are helping me now. 
How so? What you just said, I want to understand that. You 
announced it, you are saying it had an effect. How do you 
conclude that?
    Mr. Blum. I think it sent a very strong message from the 
agency to every health plan that, your mission and your 
challenge and your opportunity is to serve your beneficiaries 
better. That is not just maximizing profit by serving your 
beneficiaries less, but it is better service, better quality, 
better outcomes, will create the business model to sustain this 
program over the long term.
    We believe this will also yield savings to taxpayers over 
the long term. We are on track to bring the overall payments 
down to 100 percent of fee for service over the next 10 years. 
But I believe that we are going to see the program continue to 
grow and more important, that quality of care will be improved.
    Mr. Cummings. Would it have been better to say, we are 
going to do that, as opposed to we are doing it? I think that 
goes back to what they are saying. It is one thing to say, we 
are going to make a payment, when you do these things. It is 
another thing to say, we are going to pay you all along. Go 
ahead. I really need the answer to that.
    Mr. Blum. Really, the payment structure is, once the plan 
can demonstrate that it has improved, it has increased, and 
this is designed to provide a higher payment as planned to move 
up that quality scale. We believe this is going to produce 
faster results and better care in a much quicker time frame 
than the Affordable Care Act's policies than what this 
demonstration.
    I just want to respond to the Chairman that we are happy to 
provide the OMB package today. I want to clarify my answer to 
you.
    Chairman Issa. Thank you.
    Mr. Blum. We are happy to provide that to you.
    Mr. Cummings. Thank you very much. You have been very 
helpful.
    That last piece, what you just explained, helps me 
tremendously. Thanks.
    Chairman Issa. Thank you.
    We now go to the gentleman from South Carolina for five 
minutes.
    Mr. Gowdy. Mr. Chairman, thank you. I want to apologize to 
the Chairman and the witnesses for being detained in Judiciary 
longer than I had hoped or expected to be. And with that, and 
in light of the Chairman's most recent line of questioning, I 
would be thrilled to yield my time to the Chairman.
    Chairman Issa. I thank the gentleman for yielding.
    Mr. Blum, I appreciate the packet being delivered. The 
Ranking Member asked you if, in light of the fact that all of 
this money for the first two years will be retrospective, 
whether you thought it had any effect. You said that in fact, 
you thought it already had an effect.
    Do you have any scientific data, or any data that you can 
deliver to us to show that effect?
    Mr. Blum. Not scientific, quantifiable effect. But I can 
give you my impressions.
    Chairman Issa. But you are not a scientist, you are not a 
physician.
    Mr. Cosgrove, have you, do you have any numbers to indicate 
that they have, A, already had an effect that is positive, or 
B, that the majority of this $8.3 billion being spent for what 
has already occurred and can't be changed is going to have an 
effect, in contrast to putting the money into a later period in 
which it could have an effect?
    Mr. Cosgrove. There is no way for me to determine that. We 
don't know what would have occurred had CMS allowed the ACA 
provisions to go into place in the first place.
    Chairman Issa. Right. But you are a microeconomist. And 
whether you are taking macro or micro, there is always this 
supply and demand really works because people move toward the 
reward and away from the punishment, if you will.
    In this case, the majority of these dollars are being 
provided for something in which no action changes. Let's just 
focus quickly on year three. In year three, the year in which 
there is an opportunity to change, isn't it true that as 
designed, CMS is in fact providing no incentive to be different 
than you are today? In other words, if you are a three today 
and you are a three in year three, you are going to end up with 
exactly the same amount of money, aren't you?
    Mr. Cosgrove. CMS does extend the bonus payments down to 
three star plans. Under ACA, only four star plans and above 
would receive a bonus.
    Chairman Issa. So under what Congress passed, which would 
cost less, three star programs would be working to become four 
star, not just because they are going to track clients and 
because they are going to be probably better, which the rating 
would imply, but because they would then be eligible for a 
bonus, is that right?
    Mr. Cosgrove. Yes, that is the incentive.
    Chairman Issa. But under the President's plan, or Secretary 
Sebelius' plan, that won't be the case. The fact is, you will 
be paid to be mediocre, you will be paid for Cs.
    Mr. Cosgrove. You will be paid for being an average plan, 
yes.
    Chairman Issa. So Mr. Blum, you repeatedly used the words 
four and five star. If Mr. Cosgrove is correct, isn't it true 
you are paying for Cs? You are paying for not improving under 
this $8.3 billion utilization?
    Mr. Blum. I would characterize the payment philosophy as to 
they are paying for improvement.
    Chairman Issa. Wait a second. Charcterize? What in your 
plan gives me, look, I am an old businessman. Tell me where I 
get one dollar more for improving if I am today a four, if I am 
today a three. Just assume I am a B student or a C student. 
What is the differential if I go from being a three to a three 
and a half in your plan?
    Mr. Blum. I forget the specific parameters. There are 
higher payments as plans move up the scale. And again, our test 
is by creating that ladder, by creating that pathway, do we get 
faster performance, faster improvements than had we not created 
that scale.
    Chairman Issa. Okay. Since you came here to testify on this 
$8.3 billion, I am assuming that if people improve, and you pay 
them more, it will go beyond the $8.3 billion? The bonus 
structure is such that the $8.35 billion can't be a static 
number, that there is actual improvement, you are going to pay 
more.
    Mr. Cosgrove, you have looked at this. If the threes today, 
which are going to be paid based on being threes today for that 
first year, and the second year, but in the third year, if they 
become three and a halfs or four, doesn't that mean that the 
$8.3 billion is higher?
    Mr. Cosgrove. If plans improve more than the actuaries 
expected, yes, absolutely. The payments would be higher.
    Chairman Issa. Okay. In your reviewing this, how much of 
this $8.3 billion was scored for actual improvement versus, if 
you will, the static amount paid out based on their current 
performance over the next three years?
    Mr. Cosgrove. I don't think I have it broken down year by 
year. But the first two years, where the bulk of the payments 
are made, are not for improvement, but they are for past 
performance.
    Chairman Issa. So the majority of it will be paid for no 
performance of the remaining, that tail end, let's call it, 20 
percent or less.
    Mr. Cosgrove. Right.
    Chairman Issa. The majority of it would be paid for just 
being a three or above. So it would be a fraction of that 20 
percent, no more than 5 or 10 percent that could possibly be 
available for the improvement portion?
    Mr. Cosgrove. I don't know what the percentages are, but 
that is in the right direction.
    Chairman Issa. Okay. So again, we are paying for the 
static, we are paying for what you have already done. I still 
reach the same conclusion that in fact this is politics. Or it 
is wanting to cover up the sins of the Affordable Care Act.
    I thank the gentleman for yielding, I will now recognize 
myself for my final second round. I don't want to go beyond 
that.
    Mr. Blum, you have talked a lot about improvement, 
improvement. And you have talked about the 10 years. The 10 
years you are talking about of getting to 100 percent.
    Let me ask you a question. I know you are not a scientist, 
I know you are not a statistician, I know you are not a doctor. 
But having been a business man, what is it that would take an 
insurance company and their working with doctors who presumably 
in many cases are working with conventional Medicare payments 
and so on, what takes 10 years? Why in the world wouldn't you 
have a target of getting to it in three years, if you know?
    Mr. Blum. I believe that we should have a goal to pay as 
low as possible price to our health plans as possible.
    Chairman Issa. No, no, that is not the question. Right now 
you are looking for performance change where Medicare Advantage 
under ACA is going to get to getting no premium. That is what 
many of us who voted against the Affordable Care Act really 
latched onto, the whole idea that you are not going to pay any 
more for these private ones. And that was in ACA. In other 
words, you scored, you were going to get down to flat payments.
    So one of my questions is, you keep talking about 10 years. 
But the first three years you are effectively un-ringing the 
bell, you are undoing the cuts that were in the Affordable Care 
Act through this demonstration project. Isn't that essentially 
for 90 percent, maybe Mr. Cosgrove can be analytical in this, 
this funding, this demonstration project essentially undoes for 
this coming year most of the cuts that would have occurred 
under the Affordable Care Act. Isn't that true? Seventy percent 
of them.
    Mr. Cosgrove. That is absolutely correct, yes.
    Chairman Issa. Okay. So the very first year we have a 
chance to get savings, something that people did know about 
since 2010, we are undoing it and all 28 companies who 
commented favorably were recipients of essentially a bailout 
against ACA, probably because it wasn't realistic.
    Now, Mr. Blum, the Affordable Care Act, passed by your 
party and your party alone, mandated certain things, although 
it gave authority for certain things to be done, and you 
believe you are asserting the authority. If you wanted to throw 
out something that President Obama, your boss, and Secretary 
Sebelius, put into the Affordable Care Act, if you wanted to 
change it, why didn't you come back to Congress? In other 
words, if you wanted to go off of the plan you actually wanted, 
this new one, why wouldn't you come to Congress for it?
    Mr. Blum. I think there is a long history within the 
Medicare program to test and to pilot through demonstrations--
--
    Chairman Issa. No, no, look. We are long past the facade 
that this is a demonstration program. You are flat changing 
what ACA said and you are changing it by billions and billions 
of dollars in an election year. Why didn't you consider coming 
back to Congress, or did you consider coming back to Congress 
and basically asking for the authority to change ACA to this 
$8.3 billion election year bailout?
    Mr. Blum. Our goals, again, was to figure out ways to 
demonstrate to ourselves, to the Congress, how to create this 
rapid improvement. I think part of the reason the Congress 
gave----
    Chairman Issa. Oh, please, stop. You have just heard the 
non-partisan part of this group say you are not paying for 
improvement, that the vast majority of this $8.3 billion is for 
non-improvement. As a matter of fact, it is for periods of time 
in which no improvement is possible.
    One of the amazing things, and I will close, one of the 
amazing things is you can come with your prepared statement and 
you can say that which is not true. Now, an honest way to come 
to the Congress is, look, we screwed up. We would destroy 
Medicare Advantage if we didn't bail it out. So we came up with 
a scheme to bail it out. That is what you did. You came up with 
an $8.3 billion scheme, and particularly about $4 billion of it 
for this year, to keep Medicare Advantage from imploding. You 
probably had many of these companies come to you and say what 
the catastrophic effects of legislation passed in haste on a 
partisan basis would do.
    So instead of honestly saying, look, we need to backfill it 
the way Republicans and Democrats have backfilled estimates 
that didn't turn out to be right, what this imperial 
Administration is doing is simply saying, we will ignore what 
the 402 provision is, we will simply say it means what we think 
it means and you can't stop us. We will take money, steal it 
effectively from future payments, steal it from seniors both in 
and out of Medicare Advantage, so that you can have a good year 
this year.
    That is what you have done. I am really distraught that 
Congress probably doesn't have the authority or the ability to 
stop you from raiding the Medicare trust fund.
    But seniors need to understand: the $8.3 billion you are 
taking, because ACA was screwed up, because Obamacare was 
screwed up when it came to what it was going to do to Medicare 
Advantage, the $8.3 billion you are taking is going to be paid 
by seniors both in and out of Medicare Advantage. The 75 
percent of seniors that aren't in Medicare Advantage are going 
to have to pay for it in the years to come.
    You are going to do that, and at least you could be honest 
and tell the truth here. I don't want to shoot the messenger, 
but quite frankly, you came with a message that the non-
partisan witnesses here say simply isn't true, not even in 
Washington.
    With that, I would like to thank you for your testimony. We 
stand adjourned.
    [Whereupon, at 11:50 a.m., the committee was adjourned.]





                                 
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