Medicare: Options for Reform (Testimony, 05/26/99, GAO/T-HEHS-99-130).

Pursuant to a congressional request, GAO discussed efforts to reform the
Medicare program, focusing on: (1) a conceptual framework for
considering the various possible combinations of reform options; and (2)
lessons about implementing reforms learned from recent Medicare
experience.

GAO noted that: (1) options to reform Medicare have two major
dimensions: (a) expansion of Medicare's benefit package; and (b) cost
containment through financing and other structural transformations; (2)
two commonly discussed benefit expansions are the inclusion of a
prescription drug benefit and coverage for extraordinary out-of-pocket
costs, known as stop-loss, or catastrophic coverage; (3) the financing
reforms are reflected in three models: (a) fee-for-service
modernization; (b) Medicare Choice modernization; and (c) a premium
support system fashioned after the Federal Employees Health Benefits
Program; (4) each of these models is designed, to different degrees, to
alter program incentives in place to make beneficiaries more cost
conscious and providers more efficient; (5) as the various reform
options come under scrutiny, the importance of design details should not
be overlooked; (6) GAO's work on efforts to implement reforms mandated
in the Balanced Budget Act of 1997 is instructive regarding reform
specifics; and (7) the principal lessons drawn from recent experience
include the following: (a) the particulars of payment mechanisms largely
determine the extent to which a reform option can eliminate excess
government spending while protecting beneficiary access to care; (b)
revisions to newly implemented policies should be based on a thorough
assessment of their effects so that, at one extreme, they are not unduly
affected by external pressures and premature conclusions or, at the
other extreme, they remain static when change is clearly warranted; and
(c) for choice-based models to function as intended, consumer
information that is sufficiently comparable to create competition based
on cost and quality is essential.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-HEHS-99-130
     TITLE:  Medicare: Options for Reform
      DATE:  05/26/99
   SUBJECT:  Health care programs
	     Managed health care
	     Health services administration
	     Health insurance
	     Health insurance cost control
	     Consumer education
	     Health care costs
IDENTIFIER:  Federal Employees Health Benefits Program
	     Medicare Choice Program
	     Medicare Hospital Insurance Trust Fund
	     Medicare Program
	     Medicare Fee-for-Service Program

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Cover
================================================================ COVER

Before the Committee on Finance, U.S.  Senate

For Release on Delivery
Expected at 10:00 a.m.
Wednesday, May 26, 1999

MEDICARE - OPTIONS FOR REFORM

Statement of William J.  Scanlon, Director
Health Financing and Public Health Issues
Health, Education, and Human Services Division

GAO/T-HEHS-99-130

GAO/HEHS-99-130T

(101847)

Abbreviations
=============================================================== ABBREV

MEDICARE:  OPTIONS FOR REFORM
============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

We are pleased to be here today as you discuss efforts to reform the
Medicare program.  In March 1999 testimony before this Committee, the
Comptroller General noted an emerging consensus that substantive
programmatic reforms are necessary to put the Medicare program on a
sustainable footing for the future.  Budget projections show that
health care is consuming ever larger shares of the federal dollar,
thus threatening to crowd out funding for other valued social and
economic activity.  In addition, deliberations by the National
Bipartisan Commission on the Future of Medicare as well as recent
testimony before this Committee reflect public concern about the
adequacy of Medicare's benefit package and the potential for erosion
in the face of future budgetary pressures. 

Over the past several months, this Committee has held a series of
hearings on Medicare reform issues to determine the nature and extent
of modernization needed and invited us to discuss the array of reform
options.  To that end, my remarks today will focus on a conceptual
framework for considering the various possible combinations of reform
options and lessons about implementing reforms learned from recent
Medicare experience. 

In brief, options to reform Medicare have two major dimensions:  (1)
expansion of Medicare's benefit package and (2) cost containment
through financing and other structural transformations.  Two commonly
discussed benefit expansions are the inclusion of a prescription drug
benefit and coverage for extraordinary out-of-pocket costs, known as
stop-loss, or catastrophic, coverage.  The financing reforms are
reflected in three models:  fee-for-service modernization,
Medicare+Choice modernization, and a premium support system fashioned
after the Federal Employees Health Benefits Program (FEHBP).  Each of
these models is designed, to different degrees, to alter program
incentives currently in place to make beneficiaries more cost
conscious and providers more efficient. 

As the various reform options come under scrutiny, the importance of
design details should not be overlooked.  Our work on efforts to
implement reforms mandated in the Balanced Budget Act of 1997 (BBA)
is instructive regarding reform specifics.  The principal lessons
drawn from recent experience include the following: 

  -- The particulars of payment mechanisms largely determine the
     extent to which a reform option can eliminate excess government
     spending while protecting beneficiary access to care. 

  -- Revisions to newly implemented policies should be based on a
     thorough assessment of their effects so that at, one extreme,
     they are not unduly affected by external pressures and premature
     conclusions or, at the other extreme, they remain static when
     change is clearly warranted. 

  -- For choice-based models to function as intended, consumer
     information that is sufficiently comparable to create
     competition based on cost and quality is essential. 

   BACKGROUND
---------------------------------------------------------- Chapter 0:1

The future of an unreformed Medicare program includes a likely
scenario in which an increasing population of seniors and technology
advancements consume ever-growing shares of the nation's health care
resources and federal budget.  A growing consensus, which includes
the trustees of the Medicare Hospital Insurance Trust Fund, notes
that BBA took strong steps toward addressing this problem, but
additional reforms are needed. 

      MEDICARE SPENDING PRESSURES
      IMPEL NEED FOR MAJOR REFORM
-------------------------------------------------------- Chapter 0:1.1

Medicare's rolls are expanding and are projected to increase rapidly
with the retirement of the baby boom generation.  For example,
today's elderly make up about 13 percent of the total population; by
2030, this group will comprise 20 percent as the baby boom generation
ages.  Individuals aged 85 and older make up the fastest growing
group of Medicare beneficiaries.  Thus, in addition to the increased
demand for health care services due to sheer numbers, the greater
prevalence of chronic health conditions associated with aging will
further boost utilization. 

Compounding the cost pressures of serving a larger and needier
Medicare population are the costs associated with the scientific
breakthroughs for treating medical conditions and functional
limitations.  Technological and treatment advances have resulted in
more services being provided to more beneficiaries.  These services
can restore health, reduce pain, increase functioning, and extend
lives.  At the same time, certain high-tech services may be of
limited clinical value or fail to meaningfully improve the quality or
length of life.  Nevertheless, technological advances fuel the
public's expectations that more health care is better. 

The actual costs of health care consumption are not always fully
transparent to consumers.  Third-party payers generally insulate
patients and providers from cost-of-care decisions.  In traditional
Medicare, for example, beneficiaries are required to contribute 20
percent of the payment for physician visits and other services and a
significant deductible for inpatient hospital care.  These
cost-sharing requirements are designed to give beneficiaries direct
financial incentives to curb inappropriate care or services of
marginal value.  Yet the impact of the cost-sharing provisions is
muted because about 87 percent of beneficiaries have some form of
supplemental health care coverage (such as Medigap insurance) that
pays these costs. 

While demographics and technology drive up health care utilization,
pressure is mounting to update Medicare's outdated benefit design. 
At present, Medicare leaves beneficiaries without coverage for
important services and at risk for large out-of-pocket costs due to
coverage limitations.  In 1965, when the program was first created,
outpatient prescription drugs were not nearly as important a
component of health care as they are now.  Used appropriately,
pharmaceuticals can cure diseases, improve quality of life, and
sometimes substitute for more expensive services.  Further, the
Medicare benefit does not provide truly catastrophic coverage for
those requiring lengthy hospitalizations.  Nor are there any limits
to the copayments required of beneficiaries needing extensive care
from physicians and other providers.  While Medicare coverage limits
do not affect many beneficiaries, the limits can prove devastating
for the few who exhaust the benefit without any supplemental
coverage.  Most private insurance options and Medicaid programs
provide prescription drug and catastrophic coverage.  Many
individuals seek to similarly modernize Medicare's benefits.  The
cost implications, however, could be enormous.  Their consideration
needs to take account of the future unsustainability of the current
program and its financing gap, which already greatly exceeds that of
Social Security. 

      BBA TOOK BOLD STEPS TOWARD
      MODERNIZING MEDICARE
-------------------------------------------------------- Chapter 0:1.2

Enacted in 1997, BBA set in motion significant changes toward
modernizing Medicare. 

The act's combination of constraints on provider fees, increases in
beneficiary payments, and structural reforms is expected to lower
program spending by $386 billion over the next 10 years.  Because
certain key provisions have only recently or have not yet been phased
in, the full effects on providers, beneficiaries, and taxpayers
wrought by BBA will not be known for some time. 

Of particular significance was BBA's creation of the Medicare+Choice
program, which furthered the use of a choice-based model of providing
Medicare benefits.  Medicare+Choice expanded Medicare's managed care
options to include, in addition to health maintenance organizations
(HMO), health plans such as preferred provider organizations,
provider-sponsored organizations, and private fee-for-service plans. 
As part of this expanded consumer choice program, BBA provisions
placed a dramatic new emphasis on the development and dissemination
of comparative plan information to consumers to foster quality-based
plan competition.  Other BBA provisions were designed to pay health
plans more appropriately than Medicare had done under the previous
HMO payment formula. 

BBA also made historic changes to traditional Medicare.  It is
gradually eliminating, for the most part, cost-based reimbursement
methods and replacing them with prospective payment systems (PPS). 
The intent is to foster the more efficient use of services and lower
growth rates in spending for these providers, replicating the
experience for acute care hospitals following the implementation of
Medicare's PPS for hospitals, which began in the mid-1980s.  BBA
mandated phasing in PPSs for skilled nursing facilities (SNF), home
health agencies (HHA), hospital outpatient services, and certain
hospitals not already reimbursed under such arrangements. 

   DIMENSIONS OF REFORM INCLUDE
   BENEFIT EXPANSIONS AND
   FINANCING CHANGES
---------------------------------------------------------- Chapter 0:2

Concerns continue to be voiced about the obvious gaps in protections
for Medicare beneficiaries, which contrast with what is available for
most individuals with private employer-based coverage.  At the same
time, competing concerns remain about the need to dramatically check
Medicare's cost growth, even without adding new benefits.  In
response, a range of proposals has been made, each seeking to update
Medicare's benefit package, restructure the program to constrain cost
escalation, or both (see table 1). 

                          Table 1
          
          Major Dimensions of Medicare Reform, by
                           Option

Updated benefit package       Financing and organizational
options                       change options
----------------------------  ----------------------------
--Coverage for outpatient     --Fee-for-service
prescription drugs            modernization
--Limit on beneficiary        --Medicare+Choice
liability                     modernization
                              --FEHBP-type premium support
----------------------------------------------------------

      BENEFIT EXPANSION REFORMS
-------------------------------------------------------- Chapter 0:2.1

Medicare's basic benefit package largely reflects the offerings of
the commercial insurance market in 1965 when the program began. 
Although commercial policies have evolved since then, Medicare's
packageï¿½for the most partï¿½has not.\1 For example, unlike many current
commercial policies, Medicare does not cover routine physical
examinations or outpatient prescription drugs or cap beneficiaries'
annual out-of-pocket spending.  Some beneficiaries can augment their
coverage by participating in the Medicaid program (if they are
eligible), obtaining a supplemental insurance policy privately or
through an employer, or enrolling in a Medicare+Choice plan. 
However, these options are not available or affordable for all
beneficiaries.  Furthermore, to the extent that Medicaid and
supplemental policies provide first-dollar coverage of services, the
beneficiary population's sensitivity to service costs is dulled,
contributing to some continued excess utilization.  Consequently,
many reform advocates believe that Medicare's basic benefit package
should be brought into line with current commercial norms. 

Two benefit reforms under discussion by policymakers are the
inclusion of prescription drugs and stop-loss coverage that caps
beneficiary out-of-pocket spending.  Each involves a myriad of
options, and assessing the merit of these reforms would depend on the
specifics that may be included.  For instance, a Medicare
prescription drug benefit could be designed to provide coverage for
all beneficiaries; coverage only for beneficiaries with extraordinary
drug expenses; coverage only for low-income beneficiaries; or
coverage for selected drugs, such as those deemed to be cost
beneficial.  Such coverage decisions would hinge on understanding how
a new pharmaceutical benefit would shift to Medicare portions of the
out-of-pocket costs borne by beneficiaries as well as those costs
paid by Medicaid, Medigap, or employer plans covering prescription
drugs for retirees.  How would these new program costs be shared
between taxpayers and beneficiaries through premiums, deductibles,
and copayments?  Would subsidies be provided to help low-income,
non-Medicaid eligible beneficiaries with these costs?  The
administration of the benefit raises other questions, such as, Who
would set and enforce drug coverage standards among the private
health plans participating in Medicare?  and, for traditional
Medicare, How would reimbursable prices be set?  Price-setting
options include using a formula based on market prices, negotiating
directly with manufacturers, or contracting with a pharmaceutical
benefit management company.  A catastrophic, or stop-loss, coverage
benefit would similarly entail its own set of design permutations,
variables, and related consequences. 

--------------------
\1 Some Medicare benefits have changed.  For example, BBA added or
expanded coverage for screening mammograms, prostate cancer screening
tests, bone mass measurements, and several screening or preventive
services. 

      FINANCING AND OTHER
      STRUCTURAL REFORMS
-------------------------------------------------------- Chapter 0:2.2

Many Medicare reforms are designed to slow spending growth to keep
the program viable for the nation's growing aged population. 
Although the various proposals differ from one another in concept,
they all include mechanisms to make beneficiaries more cost conscious
and incorporate provider incentives to improve the efficiency of
health care delivery.  The various financing and structural reforms
are organized around three general models:  fee-for-service
modernization, Medicare+Choice modernization, and a premium support
system fashioned after FEHBP (see table 2). 

                          Table 2
          
           Medicare Reform: Options for Financing
                   and Structural Change

                            Medicare+Choic  FEHBP-type
          Fee-for-service   e               premium
          modernization     modernization   support
--------  ----------------  --------------  --------------
Pending   --Prospective     --Health-
          payment systems   based risk
          (HHAs, hospital   adjustment of
          outpatient        rates
          departments, and  --Annual
          others)           enrollment and
                            lock-in
                            --Competitive
                            pricing
                            demonstration

Potentia  --Selective       --Plan savings  --Premium
l         purchasing        shared with     based on
          --Negotiated      program         offered or
          pricing                           negotiated
          --Case                            price
          management for                    --Beneficiary
          complex and                       contribution
          chronic                           based on plan
          conditions                        cost
          --Utilization                     --Traditional
          management                        Medicare
          --Medigap and                     included but
          beneficiary                       with enhanced
          cost-sharing                      flexibility
          reforms                           and self-
                                            financed
----------------------------------------------------------

         FEE-FOR-SERVICE
         MODERNIZATION
------------------------------------------------------ Chapter 0:2.2.1

BBA improved the efficiency of Medicare's traditional fee-for-service
program by substituting a variety of PPSs and other fee changes for
the cost-based reimbursement methods and outdated fees that existed. 
Nevertheless, Medicare is still not an efficient purchaser. 
Adjusting its systems of administered prices and fees up or down to
ensure beneficiary access or to capture potential savings as the
market changes poses an overwhelming, if not impossible, challenge. 
Medicare largely remains a passive bill payer, exercising no
meaningful control over the volume of services used.  Proposals to
modernize fee-for-service Medicare aim at providing flexibility to
take advantage of market prices and introducing some management of
service utilization. 

Preferred provider arrangements, whereby insurers select certain
providers because of their willingness to accept lower fees and their
efficient style of practice, have become commonplace in the
commercial insurance market.  By accepting negotiated or
competitively bid fees that fall below the usual levels, selected
providers and the beneficiaries using their services would be
afforded certain advantages.  The selected providers with lower fees
may experience increased demand, while beneficiaries using their
services could be subject to lower cost sharing.  Comparable
arrangements have been proposed for fee-for-service Medicare. 
Testing of this concept has been under way in the Health Care
Financing Administration's (HCFA) Centers of Excellence
demonstrations, where hospitals and physicians agree to provide
certain procedures for negotiated all-inclusive fees.  BBA also
allowed for testing of competitive bidding for medical equipment and
supplies with high bidders being excluded from serving Medicare
beneficiaries. 

About 87 percent of beneficiaries in traditional Medicare face little
cost sharing in the form of deductibles or copayments for services by
virtue of their eligibility for Medicaid or their enrollment in a
supplementary insurance plan.  While increases in cost sharing have
been common in private insurance to make beneficiaries sensitive to
the value and cost of services, it has been a cost-containment tool
largely unavailable to Medicare.  Protecting low-income beneficiaries
from financial barriers to care remains a critical concern.  However,
changes in allowable supplementary coverage could restructure cost
sharing to heighten beneficiary sensitivity to the cost of services
while removing catastrophic costs for those who have extreme medical
needs. 

Private indemnity insurers have moved to incorporate certain
utilization management techniques into their policies, such as prior
authorization of some expensive services and case management for
persons with serious chronic conditions.  Though such techniques are
increasingly common among private insurers, their impact and
effectiveness on the unique population Medicare covers is unknown. 

         MEDICARE+CHOICE
         MODERNIZATION
------------------------------------------------------ Chapter 0:2.2.2

Medicare+Choice signaled a new phase in efforts to transform
Medicare.  Built on the program that allowed beneficiaries to enroll
in participating managed care plans, Medicare+Choice expands options
available to beneficiaries and substantially changes plan payment
methods.  By raising payments in certain areas and allowing
additional types of entities to contract with Medicare,
Medicare+Choice is intended to boost plan participation and
beneficiary enrollment.  Payment changes are designed to adjust the
per capita rates to more accurately reflect expected resource use of
enrollees and slow the growth of spending over time. 

Among other payment changes, BBA required HCFA to implement by
January 1, 2000, a methodology to adjust plan payments to reflect the
health status of plan members.  Favorable selectionï¿½that is, the
tendency for healthier beneficiaries to enroll in managed care
plansï¿½has resulted in payments that are higher than warranted.  The
new risk adjustment method developed for Medicare will more closely
align payments to the expected health care costs of plans' enrollees. 
This will help produce the savings originally envisioned when managed
care enrollment options were offered to Medicare beneficiaries and
will foster competition among plans on the basis of benefits and
quality rather than enrollment strategies. 

The design of the Medicare+Choice program does not, however, allow
taxpayers to benefit from the competition that currently occurs among
health plans.  If a plan can provide the Medicare package of benefits
for less than the Medicare payment, it must cover additional
benefits, reduce fees, or both.\2 Plans that offer enriched benefit
packagesï¿½such as, including coverage for outpatient prescription
drugs or routine physical examinationsï¿½may attract beneficiaries and
gain market share.  Medicare, however, pays the predetermined price
even in fiercely competitive markets. 

The Medicare+Choice program could be modified, through new
legislation, to require that taxpayers and beneficiaries both benefit
from health plan competition.  The Congress could require that when
payments exceed a plan's cost of services (including normal profit),
part of the savings be returned to the program and the rest be used
to fund additional benefits.  Another alternative would be to set
plan payments through competitive bidding.  In fact, BBA mandates a
competitive pricing demonstration.  However, setting the parameters
of a competitive pricing system is a formidable task.  Furthermore,
this payment setting approach may be best suited to urban areas with
high concentrations of managed care members. 

--------------------
\2 Alternatively, plans can contribute to a stabilization fund that
would allow them to provide additional benefits or lower fees in
future years.  Before BBA, health plans also had the option of
accepting a lower capitation payment.  In practice, plans preferred
to add benefits to attract beneficiaries. 

         FEHBP-TYPE PREMIUM
         SUPPORT
------------------------------------------------------ Chapter 0:2.2.3

Although modernizing traditional Medicare and Medicare+Choice could
improve control of program spending, several incentives would remain
unaltered.  For example, beneficiaries would remain partially
insulated from the cost consequences of their choices.  They would
not benefit directly from selecting plans capable of delivering
Medicare-covered benefits less expensively since the premiums they
pay may well remain constant.  Program payments to plans would
continue to be established administratively.  The Bipartisan
Commission and others have accordingly discussed the adoption of an
FEHBP-type of premium support for Medicare.  Such a reform would
raise the sensitivity of both beneficiaries and providers to the
costs of services. 

The two defining elements of an FEHBP-type of premium support are (1)
the establishment of premium levels for plans through negotiations
between the program and plans and (2) the linking of beneficiaries'
contributions to the premiums of the plans they join.  This system
makes transparent to beneficiaries which plans operate less
expensively and can therefore charge lower premiums.  In principle,
it encourages competition because plans that can deliver services
more efficiently can lower premiums and attract more enrollees.  In
practice, some caveats remain.  Differences in premiums can reflect
more than variation in efficiency.  Plans may achieve savings through
narrower provider networks that, while capable of providing
Medicare-covered benefits, could cause beneficiaries to experience
inconveniences and delays in accessing services.  Providing
beneficiaries adequate comparative information on plans' expected
performance becomes even more critical. 

Since most beneficiaries participateï¿½and are expected to continue to
participateï¿½in traditional fee-for-service Medicare, its
incorporation into the FEHBP-type system is seen as important.  Under
current arrangements, the only premium for participating in the
traditional program is the fixed monthly amount that beneficiaries
voluntarily pay to receive coverage for part B (physician,
outpatient, and other services and supplies) or to be eligible to
enroll in a Medicare+Choice plan.  Because the premium amount
represents a fraction of the program's cost and is deducted from
beneficiaries' monthly Social Security payments, participants are
less aware of the cost of the traditional Medicare program.  The
Bipartisan Commission discussed incorporating traditional Medicare as
another plan under an FEHBP-type premium support system.  Traditional
Medicare would propose and negotiate premiums like any other plan and
be expected to be self-financing and self-sustaining.  Recognizing
the challenge the latter requirement creates, the commission would
also provide traditional Medicare more flexibility to manage costs
using tools similar to proposals for fee-for-service modernization. 

Incorporating traditional Medicare as another plan puts all plans on
equal footing and maximizes beneficiary awareness of costs.  However,
the sheer size of the traditional program creates questions.  How
much flexibility can be granted to traditional Medicare given its
market power?  What will it mean for a public plan to be
self-sustaining and self-financing?  Can it generate and retain
reserves as a protection against future losses?  How will losses be
managed?  Today's hearing is precipitated in part by the fact that
the self-sustaining Hospital Insurance Trust Fund is projected to
become insolvent.  That prospect is intolerable.  Similarly,
insolvency of traditional Medicare, which may continue to enroll the
majority of beneficiaries and may be the only plan serving many areas
of the country, is not acceptable.  The dilemma of how to guarantee
traditional Medicare's solvency in the context of an FEHBP-type
premium support system needs to be addressed. 

An FEHBP-type premium support system increases the importance of
effective program management and design.  In particular, the ability
to risk adjust premiums to reflect the variation in health status of
beneficiaries joining different plans becomes paramount. 
Participating plans that attract a disproportionate number of more
seriously ill and costly beneficiaries would be at a competitive
disadvantage if their premium revenues are not adjusted adequately. 
In turn, enrollees in those plans may find services compromised by
the plans' financial situation.  Inadequate risk adjustment may be a
particular problem for the traditional Medicare plan, which may
function as a refuge for many chronically ill persons who find
selecting among plans challenging and opt for something familiar. 

   RECENT MEDICARE REFORM
   EXPERIENCE ILLUSTRATES THE NEED
   FOR CAREFUL ATTENTION TO REFORM
   SPECIFICS
---------------------------------------------------------- Chapter 0:3

Our analyses of efforts to design and implement BBA reforms suggest
several lessons as reform options come under closer scrutiny. 
Highlights from our recent studies on new payment methodologies,
provider behavior in evolving markets, and Medicare+Choice
information initiatives are instructive. 

      ENGINEERING PAYMENT
      MECHANISMS TO ACHIEVE
      DESIRED OUTCOMES
-------------------------------------------------------- Chapter 0:3.1

The particulars of payment method reforms can affect whether reforms
promote or deter unnecessary spending, ensure or impede access to
appropriate health care, and facilitate or frustrate implementation
efforts.  Experience implementing BBA provisions mandating
prospective payment systems and new payment rules for capitated
managed care plans illustrates that design details matter. 

Our review of the recently implemented PPS for SNF care is a case in
point.\3 Under PPS, SNFs receive a payment for each day of care
provided to a Medicare beneficiary.  Since not all patients require
the same amount of care, this amountï¿½called a per diem rateï¿½is
ï¿½case-mixï¿½ adjusted to take into account the nature of each patient's
condition and expected care needs.  In general, a PPS gives SNFs an
incentive to provide daily services efficiently and judiciously
because SNFs with costs higher than the adjusted per diem rate are at
risk for the difference between their costs and the payments.  The
case-mix adjuster incorporated into the new PPS, however, allows a
SNF to increase its payments by manipulating the services provided
and thus bypass the need to become more efficient.  Furthermore,
whether a SNF patient is deemed eligible for Medicare coverage and
how much will be paid are based on a facility's assessment of its
patients.  HCFA's ability to monitor these assessments, however, is
limited.  If SNFs manipulate service use to raise payments or make
inappropriate patient assessments, expected savings from PPS could be
threatened.  Monitoring these assessments and determinations will be
key to realizing the expected savings from PPS. 

The Medicare+Choice payment rules established by BBAï¿½in essence,
reforming Medicare's previous HMO payment rulesï¿½similarly illustrates
the need for effective design and adequate oversight.  Currently,
health plans that participate in Medicare+Choice receive a
predetermined amount, known as a capitation payment, for each
beneficiary they enroll.  Because health plans are not paid for each
service they provide, they have no incentive to oversupply services. 
In fact, the incentive is reversed; health plans mayï¿½at least in the
short runï¿½earn greater profits if they inappropriately withhold
services or avoid enrolling beneficiaries who have above-average
health care needs. 

To reduce the undesired incentives of capitation, BBA mandated the
implementation of a new Medicare risk adjustment methodology based on
individuals' health status.  The new risk adjuster is intended to
reduce overall excess payments and improve the fairness of payments
to individual health plans.\4

Although this new methodology has its own shortcomings, it represents
an important improvement, particularly given health plans' limited
ability to supply comprehensive health data on their members.  HCFA
anticipates that health plans soon will be able to supply more
comprehensive data so that the agency can implement a more refined
risk adjustment methodology in 2004. 

Adequately adjusting paymentsï¿½either prospective rates in
fee-for-service Medicare or capitation amounts under managed
careï¿½becomes more important as Medicare improves its cost-containment
efforts.  Previously, there was little need to account for variations
in patient needs when payment methods reimbursed the total cost of
providing Medicare services or when rates were overly generous. 
Absent these wide margins for error and an increased emphasis on
efficiency, case-mix adjustment and risk adjustment become
increasingly important.  When adjustment methods are inadequate,
providers may be motivated to increase revenues by skimping on
essential services, selecting healthier beneficiaries to serve, or
both.  Such behavior would thwart the twin goals of controlling
spending while providing beneficiaries access to benefits. 

--------------------
\3 BBA phased in PPS for SNF care beginning on July 1, 1998. 

\4 Medicare Managed Care:  Better Risk Adjustment Expected to Reduce
Excess Payments Overall While Making Them Fairer to Individual Plans
(GAO/T-HEHS-99-72, Feb.  25, 1999). 

      UNDERSTANDING PROVIDER
      BEHAVIOR IN EVOLVING MARKETS
-------------------------------------------------------- Chapter 0:3.2

Medicare experience also illustrates that an incomplete assessment of
a new policy's effects can lead to potentially premature calls for
action.  Recently, the introduction of certain BBA reforms caused the
affected provider communities to assert that immediate remedies were
needed.  Last fall, nearly 100 managed care plans decided to
terminate their Medicare contracts or reduce the geographic areas
they servedï¿½actions they attributed to payment changes mandated by
BBA.\5 As a result, approximately 407,000 beneficiaries (7 percent of
the managed care population) had to choose a new managed care plan or
switch to fee-for-service. 

Determining the extent to which BBA inappropriately precipitated the
withdrawals is difficult, however.  Managed care plans' participation
decisions appear to be associated with a variety of factors.  Indeed,
our recent review suggested that a portion of the plan withdrawals
occurred because plans decided they could not effectively compete in
certain areas.  Moreover, 40 managed care plans have recently applied
(and some of these applications have already been approved) to serve
Medicare beneficiaries.  Medicare is not unique in experiencing
changes in plan participation.  In each of the past several years,
FEHBP has seen new health plans participate while others have dropped
out.  This year, approximately 90,000 FEHBP beneficiaries had to
switch plans because their original plan withdrew from the program. 

As another example, between October 1, 1997, and January 1, 1999,
over 1,400 HHAs closed.  Providers have attributed these changes to
BBA payment and other reforms.  After several years of large
increases in home health expenditures, BBA mandated stricter limits
on HHA payments, making it difficult for some agencies with expensive
treatment patterns or those located in areas with many other HHAs to
maintain current practices.  Our recent analysis of HHA closures
indicated that almost half of the closures occurred in just four
statesï¿½three of which had previously experienced agency growth well
above the national average.  This pattern suggests that the closures
could be a result of market corrections for recent overexpansion as
much as a response to Medicare's efforts to control its spending on
this benefit.  Further, we found little evidence of beneficiary
access problems due to closures, thus raising questions about
industry calls for relaxing payment limits to help HHAs remain open. 

It is clear, however, that payment and other reformsï¿½even when
correcting a poor policy of the pastï¿½have the potential to be
disruptive for both beneficiaries and providers.  Avoiding sudden,
dramatic changes may be the key to minimizing disruptions and
ensuring any reform's success.  HCFA has wisely taken this approach,
for example, in its decision to phase in the new managed care risk
adjustment methodology over a period of several years.  Nonetheless,
it is not possible, or even desirable, to eliminate completely the
natural disruptions that result from voluntary plan and provider
participation decisions.  The impact of these disruptions on
beneficiaries needs to be ameliorated.  Reforms that are accompanied
by such safeguards are likely to receive greater public support. 

--------------------
\5 Medicare Managed Care Plans:  Many Factors Contribute to Recent
Withdrawals:  Plan Interest Continues (GAO/HEHS-99-91, Apr.  27,
1999). 

      SHAPING CONSUMER INVOLVEMENT
      IN CHOICE-BASED MODELS
-------------------------------------------------------- Chapter 0:3.3

Enabling beneficiaries to make better, more efficient health care
choices underlies the majority of the reform options.  Such improved
decisionmaking hinges on beneficiaries having the necessary
information to accurately assess their choices.  BBA took significant
steps to foster the success of the new choice-based managed care
option by mandating improvements in Medicare's consumer information. 
The mandated initiatives were designed to help beneficiaries decide
whether to choose traditional Medicare or an available
Medicare+Choice plan.  Prior to BBA's enactment, comparative
information about health plan options was not systematically
available to Medicare beneficiaries, as we reported in 1996.\6 Now,
post-BBA, Medicare has a toll-free information telephone number, a
web site, and plans to include some limited comparative information
in its mass mailing of handbooks. 

Despite these gains, substantial improvements are needed to enable
Medicare seniors to become discriminating consumers.  Recent analysis
indicates that many beneficiaries poorly understand traditional
Medicare and comprehend less about their managed care options.  At
present, Medicare beneficiaries must continue to rely largely on
plan-supplied information, which currently lacks adequate
standardization and reliability.  In our recent study of plans'
marketing and contract approval materials, we found information that
was inaccurate, incomplete, or otherwise misleading, reflecting weak
federal oversight of industry marketing efforts.\7 Information on the
relative performance of health plans is also lacking, but the field
of performance measurement is in its infancy, as experts struggle to
reach consensus on which health outcome measures would be meaningful
to consumers in general and Medicare beneficiaries in particular. 

--------------------
\6 Medicare:  HCFA Should Release Data to Aid Consumers, Prompt
Better HMO Performance (GAO/HEHS-97-23, Oct.  22, 1996). 

\7 Medicare+Choice:  New Standards Could Improve Accuracy and
Usefulness of Plan Literature (GAO/HEHS-99-92, Apr.  12, 1999). 

   CONSIDERATIONS IN WEIGHING
   FUTURE OPTIONS
---------------------------------------------------------- Chapter 0:4

In his March 10 testimony to this Committee, the Comptroller General
enunciated several criteria for assessing the merits of reform
proposals that bear summarizing here:  (1) affordability:  reforms
should address the current program's incentives inhibiting effective
cost containment; (2) equity:  reforms should not impose a
disproportionate burden on particular groups of beneficiaries or
providers; (3) adequacy:  reforms should account for the need to
foster cost-effective and clinically meaningful innovations,
furthering Medicare's tradition of technology development; (4)
feasibility:  reforms must provide for such administrative essentials
as implementation and monitoring; and (5) acceptance:  to make
program costs more transparent to the public, reforms must provide
for sufficiently educating the beneficiary and provider communities
to the realities of trade-offs required when significant policy
changes occur.  Most importantly, reforms need to address the
sustainability of the program and ensure it does not consume an
unreasonable share of our productive resources and does not encroach
on other public programs or private sector activities.  An
incremental approach to changes of the magnitude likely required
would enhance both their feasibility and acceptance. 

The lessons learned in implementing BBA reforms touch on aspects of
these five criteria.  For example, payment mechanisms designed to
achieve frugal program spending must avoid fostering perverse
incentives for providers to skimp on services as a way to maximize
revenue.  In addition, interest group pressure to swiftly undo newly
implemented reforms should not overwhelm policy decisions, as
misdiagnosed problems can lead to misguided solutions.  Finally,
consumer information can create stronger, quality-based competition
when the information made available is sufficiently standardized and
complete to make cost, benefit, and performance comparisons easy. 

To apply these lessons in a fashion so that reforms meet the five
criteria for success, implementation of reforms must be done with
effectiveness, flexibility, and steadfastness.  Effectiveness must
include the collection of necessary data to assess impactï¿½separating
the transitory from the permanent and the trivial from the important. 
Flexibility is critical to make changes and refinements when
conditions warrant and when actual outcomes differ substantially from
the expected ones.  Steadfastness is needed when particular interests
pit the primacy of their needs against the more global interest of
preserving Medicare. 

Mr.  Chairman, this concludes my prepared statement.  I will be happy
to answer any questions you or other Members of the Committee might
have. 

*** End of document. ***