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FUTURE OF MEDICARE

COMMISSION MEETING

Washington, DC

Wednesday, February 24, 1999

MEMBERS OF COMMISSION

SENATOR JOHN BREAUX, Statutory Chairman

REPRESENTATIVE BILL THOMAS, Administrative Chairman

STUART H. ALTMAN, Ph.D.
SENATOR J. ROBERT KERREY
REPRESENTATIVE MICHAEL BILIRAKIS
REPRESENTATIVE JIM McDERMOTT
COLLEEN CONWAY-WELCH, Ph.D.
SENATOR JOHN D. ROCKEFELLER, IV
REPRESENTATIVE JOHN D. DINGELL
DEBORAH STEELMAN
SENATOR WILLIAM H. FRIST
LAURA D=ANDREA TYSON, Ph.D.
ILLENE GORDON
BRUCE VLADECK, Ph.D.
SENATOR PHIL GRAMM
ANTHONY L. WATSON
SAMUEL H. HOWARD

BOBBY JINDAL, Executive Director

THE NATIONAL BIPARTISAN

COMMISSION ON THE

FUTURE OF MEDICARE

Transcript of

Wednesday, February 24, 1999

Commission Meeting

The Commission met at 3 p.m., Senate Dirksen Building, room 215, Senator Breaux presiding.

Present: Senator John Breaux, Representative Bill Thomas, Stuart Altman, Representative Michael Bilirakis, Colleen Conway-Welch, Representative John Dingell, Senator Bill Frist, Illene Gordon, Senator Phil Gramm, Sam Howard, Senator Bob Kerrey, Representative James McDermott,

Senator John Rockefeller, Debbie Steelman, Laura D’Andrea Tyson, Bruce Vladeck, Anthony Watson, and Bobby Jindal.

Senator BREAUX [presiding]. The Commission will please come to order. I am going to ask everybody to please find their seats. I think just about everybody on the Commission is here. I think that Senator Rockefeller is doing something on the Senate floor. Congressman Dingell, as I understand, is on his way over. Other than that I think we have the full complement of the Commission members.

Let me welcome everybody, as well as everyone in our audience. We apologize for the size of the Senate Finance Committee room. There are about 24 committee hearings going on around the Congress this afternoon, and space was at a real premium. We are being covered by C-SPAN, of course. Of that we are appreciative. It makes what we do today available to a lot more people. I hope that they will take advantage of that opportunity.

At our last meeting, I proposed a premium support model that was based on the Federal Employees Health Benefits Plan style system. One of the most frequently asked questions of the Commission members since that time has always been, what about the numbers? In particular, does this premium support model actually save money or not? I am pleased to say that we now have the answer to that question from three different sources. The answer is a resounding yes.

In the time that we have today, I would like to ask Bobby Jindal to go over the reports and the analyses that we have received over the past week from the Commission staff, from the Congressional Budget Office, and also from the Health Care Financing Administration, HCFA. I would hope to finish this meeting by 5 o’clock so that people would have an idea of what the schedule is going to be.

Before we get started, I would like first to reiterate something that I said at our previous Commission meetings. The reason that I have long supported the concept of a premium support approach is because I believe that it will give us the best opportunity to provide a better benefit package to seniors which will include prescription drugs. It will deliver health care in a way that enables Medicare benefits to better keep up with medical technology.

I think that we all agree that the Medicare benefits package could and should be better than it is. The 1965 model under which we are running Medicare today needs, in my opinion, to be updated and to be modernized for the 21st century and adapted to conform to modern notions of health care delivery.

I believe that the premium support approach is the best way to do that. Some people want to talk about new revenues as well. But what I tried to do first was to isolate the efficiencies that a premium support model could yield. Then I looked at ways to address any remaining financial shortfalls in the program. I think that there is agreement that we cannot add revenues without looking also at reforms.

The analysis that we will review today looked at one premium support option and suggests various levels of savings that would result depending on certain design details. The design details would affect the level of savings and also have an impact on beneficiaries. That needs to be carefully considered obviously as well. I am encouraged by the fact that there is and has been expressed bipartisan interest in the premium support concept, and that the analysis from both public and private sector sources say that a competitively based premium support produces savings for the Medicare Program.

After Bobby Jindal’s presentation, the Commission staff, of course, will be available to answer questions that any of the Commission members have about the presentation.

Let me also say that I am in the process of preparing a modified proposal addressing the prescription drug issue. This is obviously a very sensitive and a very difficult issue for everyone, both from a policy standpoint as well as from a political standpoint. But the goal should be to make a viable prescription drug benefit available to all beneficiaries. To that end I am working in concert with Commission members to try to construct a scenario that builds around what I think are our four fundamental principles.

First, public spending should not crowd out private spending. The point has been made many times that 65 percent of the Medicare beneficiaries currently have a drug benefit, whether through Medigap or whether through their former employer, through Medicaid or through an HMO. We should try to minimize any displacements of these existing dollars.

Second, we should avoid creating a buyer with monopoly powers. Third, we should minimize the need for new revenues, while recognizing that new revenues will be needed. Fourth, all Medicare beneficiaries should have access to an affordable drug benefit. To that end I am exploring the possibility of expanding drug coverage to Medicare beneficiaries in the following ways for members to consider.

First, I would like to see drug coverage provided to the current QMB’s, the Qualified Medicare Beneficiaries; and to the SLMB’s, the Specified Low-Income Medicare Beneficiaries through the Medicaid Program. This would be for the first time providing a prescription drug benefit for all beneficiaries up to 135 percent of poverty, which is about $11,000 for an individual. Currently only those beneficiaries who are duly eligible for both Medicare and Medicaid have access to any beneficiaries’ benefit.

This provision would help to focus on those beneficiaries who do not have a prescription drug benefit and who need it the most; those who are not poor enough to be duly eligible for Medicaid, but at the same time cannot afford prescription drugs. I have asked Commission staff to analyze this proposal to determine how much it would cost, assuming that Medicare picks up the additional costs, and how many beneficiaries would benefit from this expansion.

Second point, another way of increasing access to a drug benefit for fee-for-service beneficiaries is to require that all Medigap plans offer a prescription drug benefit. This would hopefully reduce the adverse selection against those Medigap plans that now offer prescription drugs. The reason principally why these plans are so expensive is that only beneficiaries who need the drug benefit, buy it.

Third, I would like to pursue the idea of giving the Medicare fee-for-service beneficiaries who don’t qualify for the low-income subsidies access to a privately run drug benefit option and requiring the premium support private plans to also offer an option that includes prescription drugs. There is still obviously a great deal of work that needs to be done on this last provision. There are many different ways that it can be constructed. There is not just one single opportunity to make this provision effective and workable. Let me underscore again that there is still a lot of work for us to complete in a very short period of time.

Nothing that I have said today certainly represents a final recommendation or a line in the sand drawn by me from anything that I am attempting to accomplish without Commissioners. I have been encouraged over the past several days and weeks by the willingness of the members of the Commission to discuss the best way to design a premium support model that can be workable.

With all of these analyses that are just coming out in the past week, for instance, I realize that it may take additional time to conclude the work of this Commission and to conclude our deliberations in a thoughtful and an understanding manner. If members are willing to work together in good faith, and it looks like we have the opportunity to reach a positive conclusion, I am open to possibly extending our deadline by a few weeks in order to allow us to review and digest these analyses and reports that we have received, and to try to reach a bipartisan consensus that can be turned over to the President and to the Congress.

I would now like to recognize my cochair, Congressman Thomas for any comments he might wish to make.

Mr. THOMAS. Thank you, Mr. Chairman.

It would be difficult for me to imagine the need to extend a deadline based upon the information that we have now received from both HCFA and CBO on the premium support model and based upon the chairman’s opening statement in terms of a number of options available to make sure that one of the primary benefit concern modifications, prescription drugs, would be available, not just under the new model as outlined, but also available for those who wish to remain in the old-fashioned or the fee-for-service Medicare Program.

I am mindful also of the number of requirements that this Commission was asked to address. First and foremost is saving Medicare. That has to do with costs, but it also has to do with the way that we determine how Medicare is saved. Solvency of the part A trust fund has historically been used as the criterion for saving Medicare. I think it is becoming more and more evident that the concept of solvency of the part A trust fund can be answered in a number of different ways, as it was in 1997 by the transfer of programs from part A to part B or by other arrangements.

Part A solvency does not really reflect the dynamics of even today’s, let alone tomorrow’s, Medicare. One of the things that I believe the Commission needs to resolve before it gives the final report is what is it that we mean by saving Medicare.

I do believe that the exposure to the general fund is a criteria that needs to be examined, since that seems to be the final resting point of almost all solutions that people suggest as being the ultimate way to save Medicare. It does involve providers, it does involve beneficiaries, and it does involve those individuals who pay the HI payroll tax, as well as the general fund.

I think our goal of creating a better Medicare can be evidenced by the support that has been given by a number of Commissioners to, for example, a premium support model setting aside the savings aspect in terms of, we believe, its ability to innovate technological innovation and delivery techniques faster so that our seniors can get the benefits of an evolving and improving general health care delivery system available to them through Medicare.

Also, Mr. Chairman, I have to say that if we can sit down with those who are interested in examining the opportunity to present an 11-vote proposal to Congress and, in fact, to put into effect, as soon as possible, the savings, the restructuring and the opportunity for prescription drugs as a more comprehensive part of a new and ongoing Medicare, there should be no need to talk about a deadline delay. There just needs to be an opportunity to get at least one more vote focused on how we can put the package together.

I, for one, am more than willing to sit down with any other member who wants to talk in detail about how some of the positions outlined by the chairman might, in fact, be carried out. So, I am excited to hear our Executive Director’s explanation of both HCFA’s and CBO’s documentation of the premium support model and the discussion based upon the chairman’s opening statement, focused on the question of prescription drugs.

Senator BREAUX. Thank you.

What I would like to do now is to call on Bobby Jindal to make the presentation. All Commission members have in front of you a document which is what Bobby is going to utilize to follow through with charts and analyses of all three of the ones that have presented analysis to us. I want to particularly thank the ones who have helped us get this information. I want to particularly thank Rick Foster and the HCFA actuaries for the work that they have done.

I know it has been very difficult, Rick. Thanks for getting it to us.

We will proceed from there. Then we will ask questions. Unless there is something that really is important, let’s allow Bobby to go through it, take some notes and prepare. Then we will do the questions. Let him do his presentation first.

Bobby?

Mr. JINDAL. Thank you, Senator.

In front of you, as the Senator said, you have an outline with some handouts. You should have in front of you a copy of all the graphs and tables to which I will be referring. I would like to organize this presentation really around the four topics on the first page.

First, I would like to give a very, very brief overview of information in the rest of the document. Second, I would like to go over some of the different reasons different analysts have concluded that premium support, and Senator Breaux’s proposal in particular, would result in savings. Third, I would like to go over some of the conclusions of some of those analyses; how much savings were estimated by those different analyses.

Finally fourth, I would like to go over some of the different design details within the premium support package and go over the impact of changing some of those design details that can impact the savings in material ways.

Mr. VLADECK. I’m sorry to have to interrupt. There is a semantic problem here that is not trivial. That is, if I understand the analysis that we have had sent to us, the overwhelming proportion of the savings attributed to Senator Breaux’s proposal by the actuaries--and as best I can tell, by the Commission staff, which are the only numbers we have, arise not from premium support, but from other aspects of the proposal.

Now, I am perfectly comfortable with the notion that Senator Breaux’s proposal, taken as a whole, might generate some very substantial savings. But I think it is important in describing the analyses not to attribute to premium support that which the analyses attribute to other proposals, including, quote, more traditional approaches to addressing the financial problems of Medicare.

Senator BREAUX. Let’s let him present it and then ask those questions. That’s why he is doing it.

Mr. VLADECK. But I think as you go, I would appreciate it if you could distinguish between what is premium support and what are the other aspects.

Senator BREAUX. He has not said anything that you disagree with so far, had he? [Laughter.]

OK, Bobby; go ahead.

Mr. JINDAL. I will make two points; only that savings are indicative of the entire package. Second, in different analyses you will see the breakdown of the premium support. The premium support, plainly labeled, is by far the largest component in both analyses.

Dr. Vladeck is right; there are other components. The question for the Commission certainly to consider, when we get to the details of the package, is what of those details would be done in the context of the premium support world, as opposed to which of those might or might not be acceptable outside of that world; for example, savings within the traditional program. We will talk a bit more about that.

Let me start then with the overview. We did request and receive an analysis from the Congressional Budgetary Office, from the office of the actuary and as well from Jeff Lemieux, of our staff. All of those analyses suggests that a properly designed premium support proposal would allow plans to compete on price and quality and would result in significant savings. That is the overview of what those three analyses all conclude: A properly designed proposal would result in significant savings.

I will not read all the backups which you have in front of you. But there are a couple of quotes from the CBO letter, dated February 18, saying, ‘‘This proposal would foster greater competition among plans and greater choice for beneficiaries.’’ Then it goes on to say, ‘‘A premium support system that resulted in effective price competition would most likely lower Medicare’s costs.’’

Mr. MCDERMOTT. Mr. Chairman, are you talking about the CBO analysis that was given to us that says that they count on making savings by reducing benefits or increasing premiums? Are those aspects part of the analysis that you say makes the savings?

Mr. JINDAL. The CBO analyses, if you look at it there is a 4-page cover letter and there was a detailed analysis behind that.

Mr. MCDERMOTT. Page 8 is where this line is.

Mr. JINDAL. In that analysis there were a couple of aspects of the Senator’s proposal that do not reflect what has been described as the Senator’s proposal. For example, the aspect you are referring to, the ability to reduce benefits, was not a part of the Senator’s proposal. There was also a second aspect, and there also are many others.

Mr. MCDERMOTT. Has there been a redoing of their analysis since they found out?

Senator KERREY. Mr. Chairman, can I interrupt.

With great respect to Congressman McDermott’s question, I had a question on the fourth word of the cover document. Should we be asking questions as we go through this, or do you want us to get through it and then hold our questions to the end?

Senator BREAUX. Obviously during the opening statement I would like for the members to wait. There are going to be a lot of questions on every one of these. There will be differences with CBO; there will be differences with HCFA actuaries; there will be differences with the staff.

But what I would like to do is let him go through the process; you make notes of your disagreements and your questions. We will have the time to address those. I think we can better do it that way.

Jim McDermott’s point is good. I have said publicly and I will say it at the Commission meeting that CBO in many instances misinterpreted what we asked them to score. That is totally incorrect and there is not disagreement on that; that is a valid point. But I think we should try to hold it until we have finished the presentation.

Senator ROCKEFELLER. Let’s save our questions.

Mr. JINDAL. I do not want to miss some of the details, but the overall tone remains that they did not provide specific scoring. They did mention that a competitive dynamic would result in savings. It depended on some of those details.

Second, turning to the office of the actuary; turning to the HCFA analysis, we will go into some more detail. Their analysis also showed that Senator Breaux’s plan in its entirety will result in savings of over 10 percent from present-law expenditures by 2005. Again, we will go through that in some more detailed analysis.

Third, looking at the Commission staff analysis: This analysis showed that the Senator’s entire proposal would slow Medicare spending. Growth and outlays would actually slow by a modest 1 percent per year, but over time that would compound to a very significant savings, again looking into how those totals do grow tremendously.

Finally fourth, from the Lewin Group in the September 1998, study they said: ‘‘Based upon the cites of studies in our report, the increase in managed-care involvement implied’’ and they used their own language for what premium support would be ‘‘would result in long-term reduction in the long-term annual growth rate of between ½ and 1½ percentage points.’’ Again, that is comparable to the staff analysis, saying that the proposal in its entirety would save approximately 1 percent.

So, the overview is simply this.

Senator GRAMM. I have a point of information. When you say 1 percent, you mean 1 percentage point; you don’t mean 1/100? You mean instead of growing by 8 percent a year, it grows by 7 percent a year. Obviously with the arithmetic that is a great big difference. I just want to be sure we have it right.

Mr. JINDAL. That is absolutely correct. I think you have been credited with the very famous statement, ‘‘It is the magic of compound interest.’’ It is the magic of compounding savings applied to Medicare.

If I turn away from the overview and then turn to the third page in your document, it is entitled, ‘‘Why Does Premium Support Result in Savings?’’

A very important point is that different analysts cite different ways that beneficiary choice and competition associated with premium support models result in savings. Different analysts cite and emphasize different reasons. For example, the Commission staff analysis emphasizes the reduction in growth rates. We just discussed emphasizing that with reduction in growth rates, you don’t get large savings in the first couple of years. But you do get large savings as they compound in subsequent years.

In contrast, the actuaries’ analysis emphasizes savings from switching from more expensive to less expensive plans. My only point at this point is just to point out that different analysts cite different reasons. They are not necessarily mutually exclusive, but different analysts emphasize different reasons for why premium support would result in savings. I list three here and give some background data.

I will not go through all the data, but I would like to go briefly through those three reasons. The first is that beneficiaries face more incentives to choose less expensive plans, since they will have a share in the savings. Beneficiaries would actually have an incentive to choose lower cost and more efficient plans. Medicare’s costs would, therefore, be reduced as beneficiaries switch from less efficient to more efficient plans.

So, the first reason one might credit premium support for savings are the switching savings as beneficiaries, either a single time or sequentially, switch to lower cost plans. I will on occasion refer to graphs, not only in your attachment in your handout, but we have also got the graphs behind us.

If you will look at figure 1, for example, which is right behind me, but is also in your handout, you will see the annual experience of the Federal Employees Health Benefits Program. If you look in the left column, you see what happens in pre-open season when plans submit their bids. What you see in the left column is the predicted increase in the growth and costs in that program.

In the second column you see the actual growth that results after beneficiaries have actually made their selections. Then through the third column, if you just take the difference between the second column and the first column, you take the difference between what actually happens versus what you would have predicted would have happened based on the previous year enrollment. You see the savings of that program that occurs because of the beneficiaries switching.

So, in a given year, beneficiaries switching plans is what results in the savings that you see in that third column.

The second point: So, in addition to the savings from switching, you also have the fact that plans would now have incentives to compete on price in order to attract beneficiaries. This competition could result in slowing of growth rates in Medicare spending. Again, this was the aspect of the reduction in growth rates emphasized by the Commission staff analysis.

If you look at figure 2, not only in the analysis, but also behind me you can see we have got a table and we have gone through some of these numbers before. So, I won’t go through these in any great detail. You can see comparative numbers of the different growth rates of the different public and private programs between the Medicare Program, between the FEHBP Program, between the CalPERS Program and private plans in general.

When you look at that table, you certainly see in recent years that private plans--especially if you look at CalPERS and FEHBP, they have grown at a slower rate than Medicare. Look at that figure and also look in the appendix. We have got various quotes from various health care experts from a variety of different sources that describe why what we have witnessed in the last 5 years with private plans, with CalPERS, and FEHBP for a longer period of time, might be expected to continue over the future.

I list here some of the reasons they cite, not all of them. Some of the reasons they cite, for example, are that plans may be able to negotiate. They may have stronger negotiating power because providers have excess capacity. You may see increased productivity through a series of innovations. So, it may not be that 5 years from now you are going to have the same innovations that plans have used in the last 5 years. But it may be that you would expect that you would see plans do a series of changes that result in savings.

You may have selective contracting and other types of changes that have changed the culture of the health care industry. They may have brought a permanent cost-consciousness to providers.

In the appendix in this handout, you see a much more exhaustive list as a sample list of quotes from different sources that describe why there are these slower growth rates that you see in figure 2. These savings might be able to continue in the future. It would demonstrate why harnessing that competition might be able to slow down Medicare’s growth rates and result in savings to the premium support system.

Finally, third: Again we are referring to the third figure. Premium support might allow beneficiaries to coordinate multiple sources of financing and coverage into one plan. Now, we have certainly on this Commission talked before about the inefficiencies of the current supplemental insurance market.

I won’t belabor the point. We do have figure 3 behind me. We have also got it in your handouts. We have got differences in costs between those people that are in Medicare fee-for-service versus those beneficiaries with Medigap coverage and those beneficiaries with employer-sponsored coverage. Suffice it to say, we have gone over this before, that first-dollar coverage can increase both utilization and spending. In the premium support system you would find more integrated coverage and more coordination.

There are other effects, other benefits in addition, to savings. This might also make it easier for employers to coordinate their care for employees. One of the things we have heard from a variety of experts that have come to testify to the Commission is the challenges that employers face in coordinating coverage and designing wraparound packages.

So, in addition to decreasing the incidence of first-dollar coverage, making other types of coverage more likely, you also make it easier to arrange and structure and coordinate wraparound coverage and to coordinate multiple sources of financing.

For these three different reasons, you would expect premium support to result in savings. First the beneficiaries would have more incentives to choose less expensive plans. Second, plans would be competing on price and, therefore, slowing down their growth rates. Third, premium support would allow beneficiaries to coordinate multiple sources of financing and care. Those are three different reasons that analysts cite to explain why premium support does, indeed, result in savings.

I will now turn you to page 4 and the third part of the presentation. We have gone over an overview; we have gone over the different reasons that different analysts emphasize in terms of the savings of premium support.

Now, I would like to talk a little bit about what those numbers do show, how much savings are represented in that analysis. While Jenny is changing the graphs--you do have these graphs in front of you. So, I will go ahead and start talking.

First let me start with the Commission staff analysis. The Commission staff analysis showed that the slowdown in Medicare’s growth rate--remember we talked about this starting off at 1 percentage point a year and a reduction in growth rates over time compounding to very significant savings.

If you look at figure 4 both behind me and in your handout, you see an analysis, a summary of what the Commission staff analysis showed the savings to be. What we have got across the top two lines are the two baselines discussed and adopted by the Commission. They simply are point-in-time estimates for 2010, 2020, and 2030. So, across the top two lines you see trustees intermediate, the baseline of what the current spending would be.

If we then have no slowdown--if you will remember, the growth rates did not have that slowdown. You can see what the current spending would be in 2010, 2020, and 2030. You see spending starts at approximately $536 billion in 2010 and grows to over $2 trillion in 2030. The range of savings is between $37 and $51 million in 2010 on trustees intermediate. It is $160 to $210 billion in 2020.

In 2020, if there is no slowdown, it is between $189 and $237 billion. Finally in 2030, on the bottom-right corner of that graph, the range on trustees intermediate for savings is over $470 billion to nearly $600 on trustees intermediate; no slowdown, it is a range of between $740 and almost $850 billion in 2030. You do see this point that even though the savings will start slowly, that the cumulative compounding of reduction in the growth rates does add up to significant savings over time.

These are expressed in dollars. The task force and the Commission have also looked at what this mean in terms of percentage of the Federal budget. What does this mean in relative terms? If you will turn to figure 5; that’s the next figure in your handout. It is the second figure almost directly behind me.

It is what Medicare would be as a percentage of the Federal budget, first under the current baselines and second under staff’s estimate of the original growth proposal if you look at the top two baselines. Under current law, Medicare is expected to grow from 16 percent of the Federal budget in 2010, up to between 28 and 38 percent of the Federal budget by 2030. That is under current law under the two different baselines.

If you look at the second two lines on that same chart, you see the staff estimate of what the original Breaux proposal would accomplish. You see there instead of going from 16 to 28 to 38, in 2010 Medicare would be 15 percent. In 2020 under trustees intermediate it would be between 18 and 19 percent; between 20 and 21 percent under no slowdown. Finally, at the bottom-right corner, 21 to 22 on trustees intermediate; 27 to 29 on no slowdown.

So, what you see is that you have a reduction from 28 percent in 2030 under trustees intermediate to somewhere between 21 and 22 percent under trustees intermediate; or a reduction from 38 percent under no slowdown to a reduction of 27 to 29 percent under no slowdown.

The range of estimates reflects the fact that under the staff analyses, Jeff made two different alternative assumptions. One assumption was that you did not have the same amount of savings in the government-run, fee-for-service program. The second estimate, where you are getting those larger numbers, Jeff does build in those savings in the government-run, fee-for-service program. We can talk a bit more about those design details when I get to the fourth section.

Finally, you have got two different indicators of what the staff estimated that the original Breaux proposal would do in terms of savings both in dollars and in percentage of the Federal budget. In the handout I also talk in terms of GNP.

The last indicator I want to do in terms of the staff analysis of the original Breaux proposal is:

What would happen to average Medicare premiums as a percentage of beneficiary income? This is reflected in figure 6, to my left; to your right. It is also in your handout. You see here that under-current law baselines you have average premiums in Medicare going from 6 percent of beneficiaries’ income in 2010 up to between 7 and 10 percent in 2030, based on which baseline you are looking at.

Under the staff estimate of the original Breaux proposal, you have got the premiums going from 5 percent in 2010--to somewhere between 5 and 7 percent in 2030. So, not only do you have a reduction in overall spending, you have also got a reduction in beneficiary spending. Both the beneficiaries and the government would share the savings of the slowdown in Medicare’s growth rates.

I would now like to turn to the second source of analysis. The first was the Commission staff analysis; the second was the actuaries’ analysis of Senator Breaux’s package. These charts again are in your handouts. The ones behind you are also included in your handouts.

The OACT analysis showed that Medicare savings in the entire proposal would be over $40 billion in 2006, which is 11 percent of what Medicare expenditures would otherwise have been. To put it a slightly different way, Senator Breaux’s plan would save between $337 and $372 billion through 2009. Expressed through 2030, that is a savings of 11.2 to nearly 12 percent from what Medicare expenditures would have been otherwise.

While you go through this graph, I want to make two notes about how these parameters were slightly different from the Commission staff’s parameters. One difference was that under the OACT analysis, certain provisions of the BBA were extended for 5 years. Whereas under the Commission analysis, you have two alternative analyses. One is where they were not fee-for-service savings and the other was where there were continued fee-for-service savings throughout the entire 30-year period.

A second difference is that under the OACT analysis, there is not an offset for low-income subsidies. That is because it was not specified in any detail in the original proposal. That would have, of course, reduced somewhat the savings estimated under that analysis because there was not that offset for the extended low-income subsidies.

If you look to figure 7, having noted those two differences, figure 7 shows the annual savings--I do want to note that actuaries provided two options of how to analyze Senator Breaux’s proposal. One was what was termed a limited-variation option in which there was limited variation in terms of the benefit. There was a core defined, standard types of benefits; plans were allowed to vary their specific offerings subject to board approval up to 10 percent. They could vary only by 10 percent from what was offered in Medicare fee-for-service.

All plans were required to offer at least a benefit package at least as generous as what Medicare fee-for-service was offering. That was the limited-variation option. They also scored a no-variation option. They showed what would happen if there was not a variation in the plans’ offerings. That results in slightly more savings.

In this chart in figure 7, I have showed the savings from limited-variation. If you look at no-variation, you would have slightly more savings. This shows you a chart, in graphic form showing what I talked about before. You see starting in 2000 and going up to 2009, the savings produced by the entire Breaux package--in 2006, you can see it is slightly over $40 billion.

Again, the no-variation would result in slightly larger savings. If you look at figure 8, the chart behind me and also in your packets, that also shows a cumulative savings through 2009. If you look at limited-variation, it produces savings of $347 billion through 2009. If you go through the strict no-benefit variation, you get savings of $372 billion through 2009.

We wanted to make this a little bit easier to look at the differences between the results between OACT and the staff analyses. As I did mention, they had different assumptions about the source of those savings. One way we are doing that is that on figure 9: What we have tried to do is translate their savings, both the Commission staff analysis and the HCFA analysis, into budgetary savings as a percentage of Medicare spending.

So, again these are budgetary savings as a percentage of what Medicare spending would have otherwise been. This chart tries to show in a comparable way how those conclusions differ. If you look in the first column under 2010, I am going to go down the first column and explain what those four numbers are.

You see in the Commission staff analysis, you have what is called a traditional estimate. The traditional estimate is one that did not assume continued savings in a government-run, fee-for-service plan. Under that scenario, you see budgetary savings of 6 percent of what Medicare would have been.

If you go to the non-traditional estimate, that does assume savings in the government-run, fee-for-service plan. These savings, for example, could be through an extension of provisions of the BBA or they could be through modernization. There are a variety of ways that could be characterized. But for the purposes of using an example, the non-traditional estimate assumed a ½-percent reduction in annual growth rates in the government-run fee-for-service plan. You see that the savings go from 6 percent to 8 percent.

Now, if you go further down that column, you see the actuaries’ analysis. I have already described the difference between limited-variation and no-variation. There actually is a difference. Due to rounding, they both wind up being around 12 percent. The no-variation would be a larger savings than the limited-variation.

When you compare the two, the first thing you will notice is that the Commission staff savings will be smaller in 2010 than the actuaries’ savings. Again that is because the Commission staff savings are based on this reduction in the percentage growth rate by 1 percentage point. Those savings compound over time, but they take time to compound.

So, up front you are going to see less savings in the Commission staff analysis. By 2020, you will see that Commission staff is up to 15 percent savings. The actuarial analysis is between 11 and 12 percent. So, you have fairly similar savings. Then in 2030 you see that those lines actually cross. There the Commission staff analysis has savings of between 20 and 23 percent and there the actuarial analysis is at 12 percent.

The big reason you see that difference again is the reasons that the different analysts cite for the savings in premium support plans. If you do believe that the competition will lower the growth rates, you will see ongoing savings that will take more time to occur. But over time, they will compound.

In contrast, if you emphasize the switching savings, you would expect some of those savings to accumulate faster. But you would not necessarily see that compounding effect in the outer years. So, by 2010 you see the actuarial analysis has larger savings than the Commission staff savings. By 2020 they are approximately equal. By 2030 the Commission staff analysis shows larger savings.

The third analysis--and this is not a precise cost analysis--but the third analysis was by the Lewin Group in September 1998. That report also studied different variations on premium support plans. They did everything from a defined benefit to a defined voucher variation. They estimated that there was the potential for a long-term reduction in the growth rate of spending of between ½ and 1½ percentage points.

All we have done in figure 10, which is behind me and again in your handouts, is show what that would mean--we have reproduced one of their graphs. This shows what that would mean in terms of part A spending.

Now, we have done all of our analyses in both part A and part B spending. This particular analysis happened to apply this reduction in spending growth rates to part A spending. This again just reiterates this point. The Lewin Group attributed between ½ and 1½ points in reduction in growth rates for a competitive-based system. This just shows again that this does compound into significant savings.

If you look at these three lines, all the HCFA assumptions line means is that is the baseline spending. That is just the HCFA current-law baseline. You have a ½-point percentage reduction, a 1-percent reduction and 1½-percent reduction. You can see they do compound to significant savings.

Those were the three different analyses of the savings of Senator Breaux’s premium support plan. We had the Commission staff analyses showing savings of between $475 and $850 billion. We had the OACT analysis that had more aggressive savings in the short run; by 2020 they tended to be approximately the same as the Commission’s; by 2030, less than the Commission’s, but still significant savings. You had the Lewin Group analysis which also showed a range of potential savings through reduction of the growth rate.

I would now like to turn to page 5, the fourth topic that I would like to cover and conclude on. We have certainly talked to many analysts in doing these different cost estimates. One concern that has arisen is that plans might continue to compete primarily on benefits as they do today, and not on price. If that actually happened, you might see a reduction in savings if some of those efficiencies were channeled into additional benefits.

This can be addressed through various design parameters. I started by saying that these various groups had said a properly designed premium support system would result in savings. The point of this last section is to mention at least three possible design variables. There were several others certainly that are not intrinsic to Senator Breaux’s package. But the listed variables could impact this balance of how much of the savings are spent on additional benefits versus savings.

The first possible change is to limit benefit variations. Certainly one thing you can do is, if you are concerned about the savings being diverted into extra benefits to the detriment of savings, you can actually put some kind of limit on benefit variation. For example, in the Federal Employees Plan, OPM actually limits the range of actuarial value to about 10 percent. The reason they have done this is primarily to limit adverse selection.

You could also imagine, however, the Medicare purchasing board could also be required to adopt the same kind of range. All plans have to offer core-benefit categories, but the generosity of their package subject to government subsidy would be allowed to vary by only 10 percent. Anything beyond that would have to be offered in supplemental riders. They would not be prohibited from offering that, but they would be required to offer that in supplemental riders. That is only one option.

A second design variable that you could alter is: Instead of telling the plans that they have to segregate benefits in terms of separate riders, you could say we are only going to include certain benefits when calculating our average premium. In other words, plans are allowed to offer other benefits. But for the purposes of calculating government premiums, we are only going to consider Medicare services.

Behind me there are listed, for example, out of the House Ways and Means Green Book, an example of how those services might be characterized. The point is again, if you did not want to limit the plan’s ability to offer additional benefits, you might say the government subsidy would only be based on those benefits.

This whole question of benefit variability and standardization vis-a-vis government subsidy--you can see the importance of that, for example, when you look at the OACT analysis and the different range of savings between the standard-benefits package and the limited-variation package. The third design detail that can be considered is that you could give beneficiaries more incentives to choose lower cost plans.

One of the criticisms about the FEHBP system is by not allowing beneficiaries to have zero-premium plans, that system actually is not resulting in the maximum savings that it might otherwise result in. If you look at figure 12, that is what’s referred to as the alternative-premium formula.

The Breaux proposal could actually be modified to allow beneficiaries to have zero-premium plans for lower cost plans. Instead of saying they would always pay a portion of premium, you could design a premium formula such that they could actually choose plans and not have to pay a premium. They could choose a cheaper, more efficient plan.

This is actually the formula that OACT analyzed. This was one of the alternative formulas that was included in the Commission staff analysis. These are just three examples. There are certainly many other design details. I would summarize with my opening statement that the three different analyses suggested a properly designed premium support system will result in savings. These are three possible variables you could change.

Certainly Senator Breaux in his opening remarks also mentioned others. I just want to conclude by saying these are not intrinsic to the premium support system. These are the kinds of levers you can pull if you are concerned about those different costs and savings issues.

That concludes the presentation. I will hand out some additional backup. You have certainly got the details in front of you in the three analyses.

Senator BREAUX. Thank you very much, Bobby, and all the staffers who helped put this together. I also want to thank CBO and Rick Foster from HCFA for the work they have done in presenting this information to us.

Obviously this is a presentation on costs. We can spend a lot of time on the design; of course, that is very important. But this presentation has been on the question of whether this proposal saves money. That is what the analysis that we have just received directs its attention to. So, I would like to have questions or comments or your thoughts on what you have just received, if you have some.

Senator Kerrey?

Senator KERREY. Mr. Chairman, is this accurate? As I look at the total savings using the actuaries numbers of $346 to $372 billion, premium support provides $75 to $100 billion of that. The BBA extenders, raising the eligibility age, modifying fee-for-service and Medigap performance; those are all additional savers.

So, is that accurate?

Mr. JINDAL. Two things. Certainly in the actuarial analysis, that is right. In the Commission’s analysis the premium support savings are a greater portion of the overall savings. Dr. Altman raised a good issue at our December meeting.

Senator KERREY. Don’t answer Dr. Altman’s question. Go ahead.

Mr. JINDAL. In terms of how you stack these, it will certainly heavily influence the savings you would get.

Senator KERREY. I just want to get this; that you are presuming in this proposal extending BBA, moving the eligibility age over 10 years, modernizing fee-for-service plans, cost-sharing changes over 10 years with both options, and Medigap reforms as well. You are presuming all those to get to the total amount of savings?

Mr. JINDAL. That’s right. Now, in the Commission analysis, we did choose two options, one without the fee-for-service savings. In the Commission analysis you can look at the savings that come from the premium support. They are a much larger percentage of the total savings than would be indicated in the actuarial analyses.

Senator KERREY. You have also got the income-related savers that are being transferred and used for subsidies for the lower income.

Mr. JINDAL. That’s right.

Senator KERREY. That is close to $100 billion over 10 years that is being redirected then for beneficiary subsidies?

Mr. JINDAL. Right; there is not that offset in the actuarial analysis. In the Commission analysis that has been offset.

Senator KERREY. And direct medical education under this proposal is about half, $50 billion over 10 years, which you transfer to appropriations?

Mr. JINDAL. That’s correct.

Senator BREAUX. Stuart?

Mr. ALTMAN. I have spent the better part of my professional life trying to do these cost estimates, and I really appreciate what has been done. But we do need to realize that we are in a bit of a Never-Never Land. I think they have done the best job they can. Although using my colleague’s 1 percentage point, 1 percent on 10 percent is 10 percent. But 1 percent on 4 percent is 25 percent.

To think there would be a savings as a result of 25 percent really gets to be high. But my concern is the following. We have not talked about how we are going to finance this program. While as I have said, I think we have done the best job, but I think you need to think about whether we can do it a little differently.

I don’t think it is worthwhile to spend a whole lot of time in deciding which number is right. My concern is, as we go forward if we are not right, who pays the difference? I don’t really know how we are funding this program. You know, if it is ultimately going to be the legislators, the members of this Commission that are going to have to vote for this, then it is going to be the legislative people 20 years from now who are going to have to vote for whatever it is.

Now, if we have committed--and I think I understand that we are going to fund 88 percent or whatever the number is by the Federal Government, if we are off by a substantial factor, it is going to fall on the general taxes and stuff like that. We are not going to talk at all about moving to some fixed contribution rate. I am pretty sure I am accurate here, but I think it is important for everyone to know that if we are off, where the responsibility lies.

Mr. THOMAS. This really is. The gentleman just stated the crux of the difference between some of the terms that have been used to describe the chairman’s plan as, for example, a voucher, which this is not; or a defined contribution, which this is not. It is a commitment to support a price that is negotiated on a weighted average. The percentage of that weighted average is the government’s responsibility. Both HCFA and CBO say if you do it right, it will generate savings over the current baseline.

Mr. ALTMAN. That’s right. I think it was important that we state it that way. So, if we can fight; whether we say a half or one, we have got to say that ultimately the overwhelming responsibility is going to be on the Congress and the Federal Government.

Senator BREAUX. It’s still an entitlement program.

Mr. ALTMAN. Now, let me get to the issue. Maybe I am sort of jumping ahead. We are now at 4 o’clock and we have supposedly 1 more hour. My head is swimming about the number of issues and questions I have. Maybe I am missing something, but we are talking about the Medicare Program for the next 30 or 50 years, and we are talking about having to have it finished in an hour.

If this is the last time we are going to meet, my calendar has March 1. I would like to support your proposal, as opposed to the Honorable Mr. Thomas. Seriously, I am really personally interested just as one person in this kind of a plan. I would hope that we would have the time to do this right. I have got four or five major areas that from my point of view have not been addressed. I can’t see how we can address them today.

Senator BREAUX. I want to hear everybody’s comment on that.

Mr. ALTMAN. I just want to lay that out. I really want this to work.

Senator BREAUX. I’ve got a lineup, and I appreciate Stuart’s comments. Basically what I said is if we need a little extra time to put this thing together properly and we can do it with the outlook that it will make a difference, I am willing to move forward.

If it not going to make a difference, we might as well end it on March 1. But if it is an opportunity to get something that we can approve, I would support that. I have Bruce and I have Phil Gramm and Tony and Jay.

Mr. THOMAS. Very briefly, if he has four or five items, he will lay them out. Believe it or not, we may be able to resolve them. But if he mentions he has four or five items and then moves to extend the deadline so that we can discuss them, then we will never, ever finish. I would, therefore, love to know what your four or five are.

Mr. ALTMAN. I have made them very clear. I think we need to be able to cover drugs for everybody. I think they ought to be affordable in a balanced way. I don’t think what is in the chairman’s outline is a drug benefit. That is my point of view. I do think we need to define a set of benefits, because I am afraid of shifting around.

I need to know how we are going to fund this. I am concerned about the regional reallocation of dollars and what it could do to high-spending, high-quality areas in different parts of the country. These are areas that are very important to me and I think to the health care system.

Yet, I like the premium support. I think it moves us in the right direction. I think it brings around these kinds of competitive forces that I would like to see. But these four areas just overwhelm me. I have a feeling I am not alone. So, my concern is I am missing something; why we are forcing this into today or tomorrow. Is there something about the calendar I am missing? We are talking about the Medicare Program for 50 years.

Mr. THOMAS. I thank the gentleman for the specific points.

Senator BREAUX. Dr. Vladeck?

Mr. VLADECK. This is really a question. The staff analysis, about which I still have some very serious concerns, does make estimates of the impact on beneficiaries, on their premiums on this proposal. That is not apparent. It was done more quickly and I understand some of the limitations of the actuaries scoring. But I have a very specific two-part question in this regard if I can.

As I understand the proposal that the actuaries scored, the premiums paid by beneficiaries, putting aside all the other savers in this proposal; just on the premium support, the premiums paid by beneficiaries who chose to remain in the fee-for-service plan would go up to a level substantially higher than current law under this premium support proposal.

Mr. DINGELL. Under one proposal it would go up 18 percent. Then under the other it would go up 30 percent.

Mr. VLADECK. With all due deference to your expertise, I wonder if we could address the issue to the actuary.

Senator BREAUX. Jay Rockefeller qualifies.

Senator ROCKEFELLER. Rick Foster is sitting right over here.

Mr. VLADECK. I’ll be glad to have Bobby.

Senator BREAUX. Bobby will go first and will give a comment to Dr. Vladeck’s question.

Mr. JINDAL. Let me start with the Commission analysis.

Mr. VLADECK. I don’t want to talk about the Commission analysis because we will get into a fight. I have asked you about the actuarial analysis. I am trying to move this along and be quiet about it.

Mr. DINGELL. Let’s have the actuary come up and give us the actuarial view.

Senator BREAUX. Bob, give the explanation. Then I can ask Rick to come up if he wants to come.

Mr. JINDAL. Right.

Now, we have provided the details provided to us by--I did talk to Rick who indicated under their assumption it is true that even though the weighted-average premium would decline and, therefore, the average premium paid would decline. The fee-for-service premium and other plans that are higher than the national average would also go up.

I think you referred to two numbers; the Representative referred to two numbers, 18 and 30 percent. In my conversation I understood that they would go up by between 18 and 30 percent depending on the standard or the limited variation. Then they would come back down because you would have savings in fee-for-service plans because of some of these things like the BBA extenders and the modernization.

Mr. VLADECK. But that is to say that if you had those other things and no premium support, the premiums paid by beneficiaries staying in fee-for-service would go down relative to current law; is that not correct?

Mr. JINDAL. I am sorry? One more time?

Mr. VLADECK. I think what you just said is that the impact on beneficiaries staying in fee-for-service options of premium support would in the aggregate proposal be substantially ameliorated by the savings from the other aspects of that proposal.

Mr. JINDAL. Two points; first of all this was something that we started off discussing at the very beginning. As about the savings, for instance, the BBA extenders and the fee-for-service modernizations. Certainly it is something for the Commission to discuss as to whether those policies would be outside the context of premium support or those will only be considered inside the context of premium support.

Mr. VLADECK. I am not asking a policy question. I am just asking a factual question, Bobby; that if you did everything in Senator Breaux’s proposal other than premium support, premiums for beneficiaries in fee-for-service plans would go down relative to current law. Whereas they would go up if you included premium support as analyzed by the actuary. That is just a factual question.

Mr. JINDAL. Accepting all of those caveats, I would say yes. Now, if you will allow me to talk about our analysis and why we disagree, I would give you a different answer.

Mr. VLADECK. I didn’t ask you that. If someone else wants to, that’s fine.

But I do have a separate question.

Mr. JINDAL. I’m sorry; I forgot. I said two things; there was a second point I had in terms of the actuarial analysis. When I talked to the actuary, he reflected that 18 to 30 percent off of today’s premiums, not what they would necessarily otherwise be.

Two big caveats on that. Even under current law; even if you assume the part B premium only was 25 percent of part B’s cost, it would not stay at 12 percent of the program’s cost. Whereas, in our premium support proposal we’ve assumed that it stays at 88/12, it would grow up to 14 percent over time.

So, if you look at that increase, that would increase the 12 percent up to approximately 14 percent; maybe a little bit higher, maybe a little bit lower. So, if you actually look at current law in Medicare spending versus what the premium support would do, even if you are forced to stay within that role and even if you take away those other offsets, all you are really talking about is a matter of timing. In some sense, the current law premiums are going to go up anyway as part B costs increase faster than part A.

The second caveat is that assumes that there is a way to fund part A after the trust fund goes insolvent, and that when it is funded, that is not going to result in benefit cuts or increases in costs to the beneficiaries.

So, those are huge caveats. If you accept all those, then yes, this would accelerate it, but those costs would have gone up over time.

Mr. VLADECK. I just heard the administrative chairman say there was a continuing commitment to fund it in a restructured manner. But two other points I want to make very, very quickly.

Senator BREAUX. Let me ask Rick Foster.

Rick, do you have anything different from what Bobby had? Is that accurate? Are there any differences? Do you have any different comment?

Mr. VLADECK. When Rick stands up, he really stands up.

Mr. FOSTER. What Bobby said is basically correct under the proposals that we estimated. The fee-for-service premiums; in other words, the premiums paid by people on fee-for-service plans would be significantly higher than under present law.

Now, the 18 and 30 percent that Representative Dingell mentioned, that is before you reflect the impact of other provisions that would reduce fee-for-service costs.

Mr. DINGELL. What are those other provisions?

Mr. FOSTER. The extensions in the Balanced Budget Act, the Medigap reforms.

Mr. DINGELL. So, what you are talking about here then is essentially reduction of benefits or increases in costs? One or the other, because the things that we are talking about in the Balanced Budget Act are, in fact, reduction of benefit levels to those covered retirees.

Mr. FOSTER. Their reductions in payments to providers.

Mr. DINGELL. Same difference. Cut benefits to provider----

Mr. THOMAS. Could you speak into a mike so that we could at least pick up half the conversation?

Mr. DINGELL. It is very simple. If you reduce those premiums, you are going to cut the benefits that you are going to be affording that class of persons. That is exactly what you are doing.

Mr. FOSTER. I characterize it differently. Back to what Dr. Vladeck asked, on the one hand the premium support formula is clearly designed to charge higher premiums for more expensive plans and lower premiums for the less expensive plans. Fee-for-service plans in this category will come out as a somewhat more expensive plans than average. They would carry a higher premium as a result.

The 18 to 30 percent can be reduced by about 7 or 8 or 9 percentage points to reflect the fee-for-service that would otherwise be part of the package. I can’t give you the exact figure today. We could do that. Under the one plan it would 18 minus about 8 or 10. Under the other it would be 30 minus about 8 or 9, which would be 20 or even more.

Senator BREAUX. I have got a whole lot of people----

Mr. VLADECK. I started out by saying I had two parts to this question. I just want to finish them.

Is it also correct that that higher premium paid by those in fee-for-service plans would be experienced under this model--and this is maybe even a design question--even by those who lived in communities such as rural communities in which there were no low-cost plans?

Mr. JINDAL. I think the design question is that the board could require private plans to offer in communities that might not otherwise have plans.

Mr. VLADECK. How would they do that?

Mr. JINDAL. The same way, in FEHBP. You can say, If you are going to serve a particular large city in this state, you have to also serve the surrounding rural parishes or counties. You are not allowed to come in and ‘‘cherry-pick’’ certain territories. In the FEHBP model you do have 10 choices in every county in the country.

Mr. VLADECK. That’s constantly alleged and we can talk further about that at some other time, but just not to take all the time.

The answer to your first question, as I look at the actuaries scoring of the total savings associated with Senator Breaux’s proposal, depending on which of the two variations you use, I calculate that approximately two-thirds of the savings represent increases to beneficiaries. I would be curious if you or Rick wanted to comment on the extent.

Mr. JINDAL. I certainly would. First of all I would be curious if you characterize every reduction, for example, in payment to providers.

Mr. VLADECK. I would exclude those. I would count those in reductions in payments to providers as the other 30 percent.

Mr. JINDAL. I will certainly look at your math, but I do want to make the point that if you look at the Commission staff analysis, if you do believe there is a reduction in the growth rate, the vast, vast majority of these savings come from premium support.

Now, clearly if you start with a different assumption that premium support will not slow down the growth rate, you are going to get most of your savings from those proposals which result in short-term savings. If you look, for example, at the Commission staff analysis, and look at the long-run, the 20 to 30 analysis: Over 90 percent of the savings at that point in time are due to the fact that you have got these competitive forces that reduce the growth rate. If you will look at the handout, we do have people that say that, yes, they believe that would happen.

Mr. VLADECK. The people in the handout who attributed most of those savings, as the Shields Report does, to the increased costs for beneficiaries and higher costs----

Senator BREAUX. I appreciate the questions. Let me get to Tony.

I’m sorry; Phil is next.

Senator GRAMM. I just want to make one point about the previous discussion. I think it is kind of meaningless to talk about what costs would be in the future if you don’t reform the program, because to pay for the program in the future you have to reform it.

In fact, as I recall, you were the head of HCFA when the 1997 proposals were negotiated, adopted by Congress, and signed by the President. The point is it is the extension of those reforms that is basically being disputed here. But just extending those won’t do anything.

You can’t talk about the future and what something would cost in a bankrupt program, as if the future could be paid for by current payments.

I want to address a couple of things, Mr. Chairman. There are two driving factors behind the time constraints. First is a knowledge that in this kind of activity if you don’t keep moving forward, things die. The second driving factor is that we want a proposal that will be built into this year’s budget. So, the one thing that we have to do is get this proposal out there so that the Finance Committee can start working on it as part of this year’s budget.

But in terms of Stuart’s concern that we do not have enough time to work the concerns through, to know what we are doing and to know how we are going to pay for it, I believe we have the time to do that.

I don’t know how much money premium support is going to save, and I don’t mind saying it. I think it probably will save money. I think it will change behavior. I think it will have a positive impact. But I am for it even if it does not save a dime, because realistically it is the only way that the average, non-poor American is going to get drug benefits by entering into a plan which is more efficient than the current system. In return for accepting those efficiencies, I believe that people who have ordinary incomes will end up getting a better health care system.

So, I hope it saves money. I personally believe that it will save money. I don’t know it will save money, but I do know it has the potential and that it will improve the system.

This is something Stuart and I agree on. That makes it important; that means that Stuart is on my right here. [Laughter.]

Additionally, we need to look through the part A trust fund. We need to take out all those slush funds, all the add-ons, all the subsidies and inefficiencies, and then figure out how we are going to deal with them in the normal budget process and not continue to fund them through the part A trust fund.

Some final points; I think in terms of paying for drugs, for the QMB’s and SLMB’s it is a dangerous thing to simply add it on without a payment mechanism.

With some cost-consciousness, we can pay for these add-ons by guaranteeing that the savings we get from raising the part B premium or implementing premium support actually go to meeting our cost problem. I think that is something that we can do.

In doing so, for very nominal copayments in Medicare fee-for-service we can pay for these new benefits for people who have incomes below 135 percent of poverty. A very small copayment will not only pay for this benefit, but it will begin to encourage people to be cost-conscious.

Finally, Mr. Chairman, I want to thank you for your leadership. I know you have gotten responses from our colleagues who say: Don’t cut anything; add a whole bunch of benefits and don’t deal with the solvency problem of Medicare. The problem is everybody wants something for nothing.

It seems to me you have a very difficult task. Your proposal is not the one I would write if I were writing it myself, but I think it is one that hopefully we can build on reach an agreement. But in the end, you can’t have everything.

Senator BREAUX. Thank you.

Tony Watson and then Senator Rockefeller after Tony.

Mr. WATSON. As I heard yesterday from one of my esteemed colleagues that sat on the panel, I have been sitting around like a log doing nothing. At least I have been thinking about the problem.

I don’t think that we are facing reality in addressing a very severe concern to the American people. When we talk about Medicare reform, it is just not cutting benefits and denying senior citizens the kind of high quality medical care they are going to need as the system improves and becomes technically much more proficient as we move the system from a invasive or surgical system to more of a medicine system.

For long-term control of chronic disease, we have to have drug benefits for fee-for-service plans. I think it has to be understood that at a minimum, that is a necessity. I don’t think that we factored in nor do we have any analysis of the President’s commitment to put part of the budget surplus into Medicare which allows us much greater flexibility; no analysis whatsoever. I find that very unacceptable.

Third, and obviously I will never support raising the age to 67, especially since Professor Altman has told me that black men don’t live past 65. [Laughter.]

There must be a buy-in at 62. I think that we can design and modify the delivery system for Medicare without just cutting costs.

Mr. THOMAS [presiding]. Tell the gentleman that----

Mr. WATSON. By the way, I was hurt to learn--I hope I was at least an oak log. You thought I was a pine log?

Mr. THOMAS. I was thinking more along the lines of ash. [Laughter.]

The chairman knows that the gentleman from New York, Mr. Watson, did bring up a point in terms of analysis. I just wanted to tell him that we can do it later or we can do it on paper; that the President’s proposal to use 15 percent of the surplus to postpone the insolvency date on the part A trust fund is, in fact, something that needs to be analyzed. Once you understand what it is, it is more of an accounting procedure than an ability to utilize.

I don’t want to go beyond that, but Dan Crippen’s analysis in the CBO document, the CBO Director, in the cover letter does, I think, do a good job of putting it in perspective. The Ways and Means Committee had Jack Blue in front of us yesterday. Based upon the questions that I and others asked him, we have a much better understanding. I would love to visit with the gentleman to show what happens with that money.

Senator BREAUX. Senator Rockefeller?

Senator ROCKEFELLER. First of all I would like to agree with Stuart Altman. John, we have sat side by side in Finance; we are very, very good friends. Mr. Chairman, you have done a terrific job on this thing. But I am genuinely frightened on behalf of the folks that I represent in my state and across the country.

Phil Gramm says that we have got to start acting on this this year. The vice chairman Thomas says, ‘‘Well, we can’t figure what the costs are going to be until we figure what the changes are going to be.’’

Some of us on the Democratic side were given information, I guess, two mornings ago at the 8 o’clock meeting which we had never seen before. I asked at that point about GME among other things. Now I learn for the first time that it is going to come out under an appropriations scenario which I would fall on my sword against and I cannot believe that Bill Frist would be for.

You put it under appropriations and you are not going to see it. It is not going to come from anywhere else; the appropriation will get rid of it over time. So, the question is about really who benefits most from this? Who pays most?

We don’t know the answer to these questions. I can hold up this chart that we got, I guess, just this morning in the letter from you about the HCFA actuary. You go down and you look at the savings and it is very hard to see them. But, you know, you have your premium support coming in with $46 billion over 10 years; then the savings from BBA, from cost-sharing changes, modernization.

Rick mentioned this removal of GME income-related, premium-eligibility Medigap. All of these things interrelate. Just from a discursive point of view, what are we doing all of this for, for premium support? It is a relatively small thing. Now, Phil Gramm says he doesn’t care if it doesn’t save a dime. Well, I do. I also care very much whether under your plan every single citizen is going to be eligible and be able to afford a prescription drug benefit.

It was my impression from our conversation the other morning at 8 o’clock in the morning that the answer was no, that it will not be there for everybody; that it will be for some and it won’t be for others. So, you know, we have this enormous program which other than Social Security is sort of the thing that most people in this country depend upon, 39 million people. We have got to fix it all in the next hour, day, 2 weeks and then take it up this year?

I really want to object to that. We have fundamental disagreement on a number of issues. We have your numbers; we have CBO’s numbers. CBO decides to become a policy analyst. The chairman admitted this with some displeasure that they decided to become makers of plans and programs. Well, that is not their business and I am not sure about their numbers.

I trust Rick Foster and the actuaries because they have to actually deal with this stuff. Rick says: Well, you know, maybe the Medicare beneficiaries or the actual benefit payment would be 30 percent and would go down to 21 percent or 18 percent, but that is big. The point is that they are paying a lot more.

Well, how much more? We just don’t know. We have to know that kind of thing. I brought up in a meeting the other morning at 8 o’clock that 71 percent of the counties in this country do not have any choice available at all for Medicare. I come from a state where there is one certified plan that is called ‘‘No Choice.’’

So, what does this do for the 71 percent of those counties representing 29 million or 11 million. I really don’t even remember how many, but all of my people. What does it do for them? How do we handle that?

Senator BREAUX. You raised some questions about numbers. Let me ask Bobby to respond.

Mr. JINDAL. Sure, let me just focus for a response to the numbers part. Two things; in terms of the impact on beneficiaries we did allude to the fact earlier that the Commission analysis showed actually a reduction in premiums. Now, the actuarial analysis showed a reduction in average premiums, but not for people who remained in an above-average cost plan, including fee-for-service plans.

Fundamentally the difference between those two sets of numbers--why does one show greater savings in premiums and why does this one show only the savings for the average premium. It has to do with what you think about the result of competition. If you do believe competition will result in an ongoing reduction in growth rates, it will benefit beneficiaries. In the premium support system they would share in those ongoing savings.

If you don’t think competition will result in ongoing savings, then no, you would not expect the premiums----

Senator ROCKEFELLER. Bobby, you can’t leave that in the air. Before 1965, the free-market system went to work on seniors and covered 50 percent of them. That is why we invented Medicare, or John did. I mean, you can’t say that to me. It depends on what you think the market system will operate.

I don’t have that margin with my people. You have heard me say that ad nauseam. Their total non-health care income is $8,500 here. I don’t have room to make a mistake in terms of my people. I do not have that room. So, just saying that the market might work depending on what you think of it, we can’t do that in something called Medicare and make decisions.

Senator BREAUX. I would just point out, Jay, that the situation right now is we have a program that does not cover about 47 percent of the cost of health care for seniors. In addition that program is going broke. So, it is not a question of not doing anything. It is a question of what we do.

Senator ROCKEFELLER. And I agree with that, but let’s make it right.

Senator BREAUX. Dr. Frist?

Senator FRIST. Thank you, Mr. Chairman. Again, thank you for all your work.

I am not sure what the time line should be. I think unless we work pretty aggressively with a deadline very soon, it is going to be the same thing. It is very complex; we are not going to have all the answers. We can struggle with the numbers again and again.

I am delighted to see and I am convinced, based on the three assessments, that premium support has a real potential to have true cost savings in part because we all know that is the direction of health care today. It is better organization, more efficient means of care delivery. We know that we don’t have the answers yet to the health plans or at least making that first best stab. So, that is No. 1.

No. 2; I think it is important to clear up--and I don’t think we need to spend a lot of time on it-- but a number of us have been very involved over the last 2 weeks looking at the budget. The budget, as we look forward to a huge surplus over the next 15 years in this country, the President’s proposal of spending 15 percent of that surplus or saving 15 percent of that surplus and putting it in the part A trust fund is an issue which really should not affect what we are doing today because, as has been pointed out again and again, it is an intergovernmental transfer of money, a lot of money, $0.9 trillion, $900 billion over a 15-year period.

The important thing for us to understand, especially those of us who are not involved in budgeting--the President understands this and Jack Lew understands it--the CBO yesterday and the OMB Director, all of whom presented to us in the last week have made it very clear that that money comes into the trust fund. It may, and that can be debated, have certain advantages in terms of paying down public debt. But the one thing that it does not do is affect the overall health of Medicare, the overall benefits or obligations, or the money that can be used, because that money cannot be spent, period.

It is $900 billion worth of IOU’s that eventually have to be paid back by a future generation. That money cannot be spent. In the testimony in our hearings, it was made very clear by the administration that we should not interpret in any way that that money should be used either for an additional benefit or to restore the financial health of Medicare. It is very important; I don’t think we need to talk a lot about that except that people need to understand those are IOU’s and have to be paid back.

No. 3; we have not talked about it, but it is sort of like Stuart’s comment. We have got this list of things that have to be talked about; including prescription drugs. As a physician, I always have to come back to this issue because as we move to the future of health care, prescription drugs have to be addressed. It is, if not the most, one of the most important parts of the armamentarium of medicine, of health care for our seniors in the future. So, it must be addressed up front.

The proposal we need to look at further is what you have put on the table, but we do start with facts that the Commission has uncovered. The facts are that 65 percent--and it can be argued whether that number is 55 or 65 percent--of seniors today have some sort of drug coverage. Also, we know we cannot afford it. The Commission staff has come out and said that it is going to cost $267 to $307 billion over 9 years. In the ninth year alone the benefits will be around $40 billion.

At the same time, I just said we are not going to have new money coming into the program based on the budget or the surplus. That is absolutely out. How are we going to pay for that? I go back to Phil Gramm’s comments. The way that we have the potential for paying for at least some part of that is through better organization, modernization, premium support. That is what this model accomplishes. What we know is that 65 percent of seniors have some sort of coverage.

An objective of mine is not by good intentions to drive them outside of that coverage. So, the second real priority for me is basically who is that other 35 percent? How can we begin to chip away at them, the group that I have first obligated to? It is not easy to take care of everybody, I am convinced, based on the work of this Commission. It is easy to say to throw it into the benefit package. But we just can’t afford to do that.

First we must take care of that low-income group. In that low-income group we start off with the dual-eligibles. They have pharmaceuticals taken care of. Next, we improve coverage for the QMB’s and SLMB’s, which I think is part of the Breaux proposal; if not, it has to be. As we bring more people into the QMB/SLMB element, again we can pick some sort of marker where the drug coverage will be available for that group that simply cannot afford drugs and they have got to have the drugs for health care for the future.

Therefore, since we cannot take care of everybody, we need first to take care of those people who are very low-income. I am hopeful that Breaux II does address that. The fee-for-service element--again we heard today--I heard really for the first time the fee-for-service package proposal which I guess is part of the Breaux II proposal and will have some sort of Medigap reform that would, I guess, require if you are going to play in the Medigap field, have a drug package which is more affordable.

I want to look more at that. I am very hopeful it can address some of the fee-for-service effort. But I think we are going to have to prioritize, because we cannot do everything for everybody because we don’t have unlimited funds. The savings that we talked about today do allow us, I think, to move forward in that direction of some prescription drug coverage which I am very excited about because it is not there today for many needy seniors.

Remember, we don’t have prescription drugs in Medicare today. So, let us not just throw it in the package and say that is going to solve the issue and not with the expectation that the surplus can pay for it. I feel very positive about the direction we are moving in, but I think we do have to address the prescription drug issue.

Senator ROCKEFELLER. Mr. Chairman, I never got my answer on my question about the 71 percent of the counties that have absolutely no choice available. I deserve an answer. I have got to know what that is. I am talking about my state.

Mr. THOMAS. Does anybody want to address it in the context? I know the FEHBP numbers. In West Virginia there are 24 plans.

Senator ROCKEFELLER. One of them certified.

Mr. THOMAS. Anybody want to react? I did not know I was the one responsible. But now that I know I’m charged, I will get an answer.

Mr. JINDAL. What do you mean by certified?

Senator ROCKEFELLER. Allowed to go ahead and do business properly.

Mr. JINDAL. There are 24 plans that operate.

Senator ROCKEFELLER. Let me use the word accredited, Bobby.

Mr. JINDAL. We’ll work with you to get that information.

Senator ROCKEFELLER. I hope so.

Mr. THOMAS. If you use the term accredited, otherwise they wouldn’t be able to practice insurance in West Virginia.

Senator ROCKEFELLER. West Virginia may be wonderful and may be terrible in accrediting things. But if I have one accredited plan and I know 71 percent of counties do not have plans, I think that is reason for me to ask the question and deserving of an answer.

Mr. THOMAS. Then we will give you an answer.

Ms. GORDON. I have got a very similar situation in my state, but we do have 10 plans, I understand, that are approved under the Federal Employees Health Benefits Package. I do know that they work because I, for one, am insured under that package. They do work in the State of Mississippi.

Mr. THOMAS. The Chair believes in order of those that are listed to be called on, John Dingell, Ms. Welsh, Ms. Steelman, Jim McDermott, and Senator Kerrey.

Mr. DINGELL. Thank you, Mr. Chairman.

I have been seeking with some diligence for a way in which I could be supportive of the proposal. I regret to inform you that I cannot, at least at this particular time. Let’s try to look to see where the real savings in this matter are and then some of the other facts that relate to this.

First of all the BBA extenders give us $21.3 billion over 10 years. Fee-for-service modernization will give us $57.1 billion over 10 years. Together that is $78.4 billion which will be saved over 10 years. If you had the removal of GME from Medicare, that saves another $46 billion. So, for over 10 years you save $124.5 billion.

Now, I note that the President has proposed for the use of 15 percent of the surplus or of the budget or $686 billion to help preserve down the road. Let’s go to see then where we come out if we move to the premium support model.

My good friend, Mr. Gramm, has indicated that he does not know and has indicated that he does not really think there is any savings here. I have listened to hear whether the staff or the actuaries that have looked at this find any savings in it. We hear, Well, maybe these things will be attended by efficiencies which will make it possible for there to be savings.

‘‘Maybe’s’’ are not something on which I have ever bet. I am Polish and I tend to be rather suspicious of ‘‘maybe’s.’’ Having said that, we now look at what happens to conventional Medicare and fee-for-service plans as we know them. First of all there would be increasing eligibility age that would amount to $25.2 billion over 10 years.

I would note that cost-sharing savings come to $19.5 billion over 10 years. I would note that other changes in Medigap come to $11.3 billion over 10 years. Going to the first two, the item on increasing the eligibility age and the cost-sharing savings, these are both hits on the pocketbook of current retirees or people who stay in the fee-for-service plans either because they choose to do so or because there is no alternative system available to them in the region in which they might happen to live.

Now, this leaves us then with some questions with regard to what the office of the actuary has said. Their analysis shows that under option 1, seniors will pay 18 percent more under current law rather than they do now under current law for fee-for-service systems. This is because we have subtracted the Balanced Budget extenders which are going to hit them anyway. So, we really have not done them any favor.

The same reasoning applies with regard to the other option where they would pay about 30 percent more than under current law. Because we take the extenders out, that leaves them with a 20-percent increase. Now, CBO in their February 18 memo--and I don’t know whether this is a good memo or not--CBO has been under some attack here. But I am going to just quote what they had to say and then we can have an appreciation of how I feel on this matter.

‘‘The traditional program would receive capitation payments like any other participating plan, and the Federal Government would refrain from bailing it out even if the program ran into potential difficulties.’’

What this translates to is a simple statement. Somebody is then going to have to pay more. It means that we have whacked the providers or in the alternative, it means that we have whacked the beneficiary recipients. If we whack the beneficiary recipients, we have to then make the system whole by charging them more or by reducing their benefits.

So, I have some real troubles with what it is. This reminds me of a wonderful editorial I saw in the Detroit News years ago in which they described a pattern of cuts which have been inflicted by Detroit Street Railways, which was the public transit system in that particular day. There were constant cuts in service, and constant increases in service charges occurred over time until finally the populace gathered together in a burst of outrage, overturned and burned the last DSR bus.

I suspect that that’s the likelihood here in the situation we confront with regard to Medicare.

Senator BREAUX. Let me have Bobby who will be talking about one of the comments. I don’t want to prolong it, but on the premium thing, which I don’t think is accurate at least from my perspective----

Mr. JINDAL. I will make two very, very brief comments. In terms of the premium increases of 10 to 20 percent, under the actuarial analysis it is not a comparison as I understood talking about necessarily under current law. You would, therefore, have again the 88/12 split not being maintained under current law. That is going to go up to 14 percent under current law. That is compared to the current--Rick, you can correct me if that’s wrong. But I think 18- to 30-percent reduction by the other savers to 8 to 20 percent was actually based on their current ratio, not on current law. Under current law, premiums would increase anyway.

Mr. DINGELL. I think that is on top of, isn’t it? Am I clear in that interpretation?

Mr. FOSTER. The comparison we have made is in the fifth year of the projection, once things have settled down a bit. Bobby makes the point that over time, because under present law part B costs are expected to grow more quickly than part A costs under present law. Part A costs pay 25 percent of the total roughly.

The premium under present law could represent the growing share of the total costs. We have not done the analysis past the fifth year, but we could do that for you.

Mr. DINGELL. I think that would be useful if you did.

Mr. VLADECK. But your comparisons, Rick, are to current law. They are not to the current situation.

Mr. FOSTER. To current law.

Mr. VLADECK. They are to current law; they are not to the current allocation of responsibility between premiums and other sources of revenues; is that correct?

Mr. FOSTER. That’s correct. The 18 percent minus fee-for-service savings, the 30 minus the fee-for-service savings. Those are all relative to premiums under present law in the fifth year of projections.

Mr. JINDAL. Just a quick point on the competition. Again, as we point out, the beginning of the analysis was different. In the actuarial analysis they do front-load the savings from the non-premium support. But remember the lines intersect.

If you look at the Commission analysis, reducing the ongoing savings from competition, those do compound so that in future years, those are well over 90 percent of total savings.

Mr. DINGELL. Let’s address this question. I keep hearing about how competition is going to produce savings. All I know is that competition under the programs that we have put in place up to this time with regard to putting people in HMO’s and allowing them the options has resulted in probably three things: One, a diminution of benefits. Two, an increase in costs to the Federal Government. Three, a reduction in payment to these HMO’s and they are now getting out of the business and leaving people stranded with no one to provide them the care.

So, I don’t see anything that you have told me today that tells me we are about to see any significant savings from competition. I am Polish and I may look a little dumb, but I am not one who is prepared to accept the idea that just because somebody says there is competition here, that it is going to make savings; that, in fact, it is going to occur.

I have been diligently questioning and I have communicated with our chairman whom I love dearly to request support for the view that this competition is, in fact, going to save money. I have not gotten a shred of information or evidence which tells me that this competition is going to produce any savings for anybody.

Senator BREAUX. John, this is what the whole briefing was on. You can disagree with it, but it is not fair, I think, to say that you have not gotten any information on the subject. We can disagree with what HCFA says. We can disagree with what the staff said. We can disagree with what the Lewin report says. We can disagree with what CBO says. But it is not fair to say we have not gotten any information on the subject.

Mr. DINGELL. We have had the staff tell us time after time that this competition is going to produce savings. I am listening for where those savings are going to be. I want to find them somewhere other than in the statement of the staff. That, to me is a conclusion.

I may be a cockeyed Polish lawyer, but I ain’t cockeyed enough to say that we have heard anything that tells me that we are going to have competition and to, in fact, support that with identification of what the competition is going to produce in the way of savings.

Senator BREAUX. Colleen Conway-Welsh?

Ms. CONWAY-WELCH. Thank you, Mr. Chairman.

I would like to make a couple of comments. Actually one of them is relative to competition, Mr. Dingell. As I learn more about the premium support issue, it seems to me that that is the only thing that is on the table that will really change behavior. I see the change in behavior as resulting in saving money. That implies that competition is part of that.

So, from my perspective I am more comfortable with the fact that changing behavior does have a lot of benefits associated with it, not the least of which is that you have more choice. That also will add to the competition.

I also wanted to make a point about the prescription drug coverage. I have said this before; I am a nurse. I have heard the horror stories; I have seen the horror stories. I want the seniors, and particularly the seniors with very limited incomes, if any income at all, to have pharmaceutical coverage.

But I don’t want to break what does work in the system today, and that is that 65 percent of seniors do have the wherewithal to be able to pay with private dollars. So, we need to be very careful as to how we go about that. Certainly there is nothing to be recommended by preserving the current system. We know that we need to have a better way of addressing that. But I want to be careful that we don’t kind of throw the private money out in our effort to find a solution.

I also wanted to make a point about the definition of solvency relative to the growth rate. I must confess that I don’t understand a lot of the legislative language that has gone into that. But it seems to me that that 15 percent is Social Security money and I don’t understand how that could be used for Medicare. Maybe it can, but I need some help to understand that, because my first impression was that it could not be moved over.

Fourth, I wanted to make a comment about the Balanced Budget Act of 1997 in terms of it being extended. I know that we must find that amount of money as we move toward a conclusion. But let me just register the significant pressure that some of us who are involved in the health care industry have experienced as we have been contacted by many, many people with the issue of, quote/unquote, saving Medicare as requiring a number of policy issues to occur.

I am uncomfortable that extending the Balanced Budget Act of 1997 is really a policy recommendation. That is kind of a fixer-upper, and there are a lot of folks out there who are going to be harmed to some extent by the Balanced Budget Act extensions.

I am speaking about Tennessee now. Prior to the Balanced Budget Act of 1997, Medicare in Tennessee was the lowest payer to hospitals and providers, except for Medicaid in there for the hospitals with the heaviest loads of Medicare and Medicaid patients. So, the safety-net hospitals and the academic health-science centers that care for these folks really have been under an even more significant hit.

National accounting firms and bond rating, particularly of the academic health-science centers, is tenuous. A number of them have been put on watch and they are able to because of their financial strife, their bond ratings are dropping. That is an issue in terms of being able to raise capital.

I am not talking about cuts in profit margins of these places. But I am talking about cash-flow changes that will prevent either routine capital replacement costs. These are the institutions that by-and-large serve our very poor seniors. So, we need to be careful as we go forward. I know that we need to identify those savings, but I would hope that we would be able to enlarge the scope of our review of that.

Finally, if we go with the premium support model, which again seems like the only model that is going to change behavior, we know that that model will not support some of the issues such as direct medical GME. But Senator Frist has really investigated that very carefully. He seems to feel that a mandated appropriation would begin to address that issue.

I don’t pretend to understand all of the intricacies of that either. But from what I have heard, that is a good possibility and something that should be investigated. I would like to think that I am not a particularly Pollyanna-type, but I would think we have achieved a significant amount of consensus. We also have some troubling differences that we need to resolve. But I don’t think anybody thinks the current system is doing much for anybody anymore.

So, I would hope that we could move toward a conclusion in a reasonable amount of time. I don’t want this activity to be useless. I want us to spend this time in making a contribution to saving Medicare.

Senator BREAUX. Debbie Steelman is next. Then we are going to have some votes.

Ms. STEELMAN. The objects of my affection have departed, but I will speak to them nonetheless.

I think that I have put on the record before that I very much appreciate and respect Senator Rockefeller’s passion. I would simply like to point out that if I didn’t think beneficiaries would be better off under this program, I would not be for it. The people from my home county, Benton County, MO, are just as low income as people in his state.

The proposal that you have talked about in terms of more money for low income, particularly in terms of drug coverage, SLMB’s and QMB’s, in West Virginia, he has 60 to 63,000 enrolled SLMB’s and QMB’s that do not currently have drug coverage. As I understand the modifications of your proposal, they would get drug coverage under this. He has at least 30,000 more SLMB’s and QMB’s, if we put in outreach money and participation money, who would get drug coverage.

I clearly support what Senator Frist has said, that we ought to be putting our money toward those people who cannot afford drugs. We should not be putting our money toward those who are currently using their own money to purchase drugs. We should not put any incentives to cause the taxpayer to have to pick up that money. I am very much for helping people who do not have pharmaceutical coverage, without hurting people who do have it.

Some of the ideas we have put on the table for accomplishing that are very legitimate and are, let me say, underrespected by Senator Rockefeller.

I also believe, Senator Breaux, what you have done in terms of your leadership on this is really an act of honor. I think you have paid homage to everything that John Dingell has ever done in terms of this proposal. He invented this program and you are going to reinvent it. You are going to make it there for the people in my generation.

I know that Mr. Dingell cares a great deal about current retirees and I do also. But current retirees will be barely affected by this proposal. This is a long-term process. This is turning around many battleships. We have to think about future beneficiaries, the ones whose premiums will go up anyway, the ones who will face provider cuts anyway, the ones who will face coverage denials anyway, the ones for whom this program is not at all risk-free.

This program is filled with risks in its current condition. By going through a premium support model we will reduce in his terminology the need to whack taxpayers or whack beneficiaries. We are trying to reduce a growth rate so that those tough choices are less tough. If we don’t go to premium support systems, then everything we have done in the last 20 years, two decades of more regulation and less satisfaction, then we will have two more decades of more regulation and less satisfaction.

I also agree with what Stuart Altman said in a speech last week that that is not a risk-free proposition for people. Medicare could get hurt and beneficiaries could get hurt if we do not act now.

Now, as to the existence of private plans in either West Virginia or in the locations that Mr. Dingell refers to, obviously private plans under the current system are very different than private plans under a new system. In the current system you have health plans under a price-administered system. When you have a price-administered system, benefits vary. If you want to secure benefits, you make sure prices can vary. That is the whole point of moving to market competition. That is the whole point of restructuring this program.

We want to make sure that the market works. So, the board has to have some authority in order to make sure that the taxpayer does not have to pay an extraordinary burden or the beneficiary pay an extraordinary burden. We want them to share that burden. So, it is fair and consistent over time going forward. So, plans will compete everywhere because they know that they can get a premium that makes it worth competing.

Obviously the current Medicare+Choice system has deficiencies. We are not modeling this program on that system. We are modeling this program with a 30-year track record of offering stable benefits at stable prices.

With all due respect to Mr. Dingell, many people other than Jeff Lemieux, whose work I respect, have said so. They say that the fee model saves money. Lewin says that; CBO says that; Rick Foster says it. We have plenty of evidence on which to base our design questions which I hope is the next step of this process.

Senator BREAUX. Thank you very much.

Senator Kerrey?

Senator KERREY. Thank you, Mr. Chairman.

First of all let me say that I think one of the things that you may have to consider--you and Representative Thomas may have to consider--is whether or not we can combine this effort to reform the system and modernize it with an effort to try to put more money into it. Because once you have put money into it, you have got new benefits and you have got to cut old benefits. It gets very, very difficult. It may be that at the end of the day, the best we can do, which would be an enormous achievement, is to just modernize the system and not get into the rest of it.

I see Bruce over there rubbing his eyes. So, maybe that won’t work either. [Laughter.]

The second thing I would like to say is that I have spent a lot of time with 200,000 beneficiaries in Nebraska, as well as providers in Nebraska. I find several things when I try to describe the premium support model which in general I support--I mean, I like what you have laid down. I would like to identify some changes that I’d like to get considered.

The beneficiaries and the providers in Nebraska say, ‘‘Well, at least I have a baseline proposition.’’ I don’t know what is going to happen. In spite of all the talk about people being unhappy with Medicare, once you cut right to it, they are relatively happy with it. They are not as displeased as we sometimes make them out to be. They are pretty grateful for what they have.

Yes, it is not as generous as they would like. They would also like prescription benefits. But they have it figured out. They buy Medigap policies; they have supplemental coverage. Their lives are pretty well taken care of. Yes, they do worry about different aspects. They come and talk to me about it all the time.

But it is this ‘‘devil I know’’ versus the ‘‘devil I don’t know’’ that I have to deal with. At some point that is exactly what I will do. I will take it out on the road and will try to explain and try to get some suggestions. This report, I hope, will go to the Congress. I hope that our committee has the chance to mark it up. That is when the real rubber meets the road.

There are a couple of changes that may be already in there; that I hope will end up being in there if they are not already. One of the problems we have right now with Medicare is that people do not understand who is paying for it. They keep saying--Stuart and I have talked about this--that it is the government paying. It is government money. Well, it is not government money. I am taxing somebody to pay for these benefits. At the very least, we need to make certain in the modernized program that we have a full accounting. So you know where the money is coming from. They have payroll taxes; they have income taxes; they have premiums that are paying for the program. The money is not coming from Washington, DC. It is coming from a tax--a tax on a growing number of people, by the way, who do not have health insurance.

Second, as a part of that, I think we need to let people know who is getting subsidized. You may not like that, but if you are getting a subsidy, by gosh, you ought to sort of stand in the public light getting that subsidy. Maybe that’s a difficult proposition for privacy reasons, but it’s all wrapped up in this idea that people, even my beneficiaries in Nebraska, don’t understand where the money is coming from; they don’t understand how the system is financed.

It is awfully difficult to have an intelligent conversation about what we ought to be doing with the system 20 years from now, if you have that general lack of understanding.

Next, I think we have to say if we are going to modernize this thing, that we ought to publish the data on outcomes so people know whether or not they are getting their money’s worth. We spend $210 billion on Medicare, tax dollars for Medicare, but if you ask me, ‘‘Are we getting our money’s worth?’’ I don’t know. I don’t have much data.

Not only do I need it to make good policy decisions, but I think the private sector needs it as well so they can adjust their practice guidelines, improve quality and so forth.

And in response to Senator Frist who was making his recommendations on GME, I think whether it is controlling actual dollars or making recommendations, the cost of health care is influenced by research and graduate medical education. So let’s consider giving the board some authority over that--allow it to make some recommendations about how research dollars ought to be spent, as well as on graduate medical education. It will have an impact on health care, on medical practice itself.

Health care is moving so fast, technology is moving so fast. One of the things I would never pretend to do is understand where it is going to be 10 years from now. But I want to make certain that this system that we design takes many of the rigidities out of it and allows this thing to go wherever it ought to go, in terms of higher quality care and reducing the cost of delivery for that care. The concerns that I have--and Bruce, this is to you, I expect under no circumstances are you going to vote for premium support, but maybe you would.

But I would hope for those of us who would like to support and like the general outline of it, I would hope that you will help us and make certain that the fee-for-service component is vigorous, it is competitive, that HCFA can have a competitive offering out there.

Because, like Jay Rockefeller, I have got at least half of my population who have no competitive alternative right now. They are going to go with fee-for-service. And it has got to be vigorous.

Stuart has raised some concerns about cherry-picking. We have got to make certain that we get those numbers right so we don’t have some adverse consequences, as you described, to the Federal Employees Health Benefits Program. That thing almost went into the tank a couple of times. So, we have got to be very, very careful how we design this thing, not only from the standpoint of the beneficiaries, but also from the standpoint of the way the system is going to operate.

I think if we follow the low-income person, that QMB-SLMB person, and make certain that their lives are better as a consequence of what we do, I think that we can take a lot of the worry out of whether or not we are getting this thing right.

Third, I say if we are going to move eligibility age, we have got to face the facts. We have got to have a buy-in of some kind. We have got to figure it out. I know it is tough, it can be costly. There are disputes about whether the President’s proposal has any merit, but 1.1 million of 1.3 million Americans took an old-age benefit in 1997. They call it a retirement benefit, but under law it is an old-age benefit.

They are taking it, not at 65, but at 62, 63 and 64. We have a growing number of Americans who are leaving the work force at an earlier age. Somehow we have got to address that. Now, maybe we cannot in this recommendation. But at least I think we have to forward to Congress the recommendation that they deal with it in order to make this thing work.

Fourth, on all the ‘‘pay-for’s’’ in there, I voted for that 1997 Balanced Budget Agreement, but I am concerned about extending those BBA extenders out and the impact on rural hospitals. I think it could be devastating. We have a much more difficult time making ends meet out in rural communities. I appreciate that that is money I have to find somewhere else, but I just want to alert you that it is a problem.

Last, I would say that I appreciate, Mr. Chairman, the effort to try to come up with a solution for the drug benefit. But be alert that if we impose the drug benefit on QMB-SLMB’s, it is an unfunded mandate.

Senator BREAUX. We are talking about us picking it all up.

Mr. THOMAS. I would tell the Senator that that is something we would not do.

Senator KERREY. You need not tell me. I am happy to report to you that I will strike that last objection. [Laughter.]

Mr. THOMAS. Now, the Senator on the right of me is not happy with that statement, but at least the left of me is happy.

Senator KERREY. Let me just say in general terms, I do think that a premium support system can be a modernization, can be enormously beneficial. And I hope--especially Stuart, you rattle off four areas of concerns. Earlier in private conversations I have heard more detailed concerns. I hope that both you and Bruce will help us design this thing. Even, as I said, though you may not vote for it in the end, you will help us design it so that that fee-for-service component is vigorously competitive coming out of here.

Senator BREAUX. I have got Dr. Tyson, Congressman McDermott, Sam Howard, and Illene and Mike.

Dr. Tyson?

Ms. TYSON. It is past 5 o’clock.

Senator BREAUX. I know. Take your time.

Ms. TYSON. There are many things to say. I should just try to get us to a decision point. I have heard from many people around the table today that they have expressed very serious, if not complete, reservation about drug coverage. They are opposed to any additional money and they are opposed to any additional time to evaluate and make adjustments on the details of premium support.

If those three things are true, then I, who am sympathetic to the notion of further exploring premium support, feel that it is unlikely that we can come to a conclusion. We need more time. But we don’t need time if, in fact, the position of the majority of people is that we could not have drug coverage.

Senator BREAUX. Let me say that you are in a very strong negotiating position. [Laughter.]

Ms. TYSON. It is after 5 o’clock and it seems to me we may as well be sensible here. I am sympathetic to premium support. I take Senator Gramm’s position on this. I don’t know how much money it will spend, but I do believe that we should experiment with ways that we believe will enhance efficiency and get us over time with better incentives.

I believe that most of the reason that costs in Medicare rise is because that health care costs rise because of changes in technology and changes in utilization of new procedures. So, I don’t think we are going to save tons of money, no matter how we design this. And because I don’t think we are going to save tons of money, we as a society have a political choice. Do we want to put more resources into this program through taxpayers, through providers or through beneficiaries?

We are not going to save the resources that we need through premium support. I think we should do it, if we get it right. But, frankly, we are kidding ourselves and future generations if we think that we are not going to be spending substantially more on this.

So, that is the first point. If we want to say there are going to be no additional dollars, then I think we are not being serious.

On the drug issue, let me say I have been characterized in the press as an economist because I like competition, and as a liberal because I favor drug prescription coverage. Now, let me say that my interest in drug coverage is not actually because I am a liberal, although I am not particularly afraid of that term--I guess I should be here, but I am not--I would argue for drug coverage on the grounds of both efficiency and on the grounds of equity.

Let me start with efficiency first. Then I don’t have to be liberal or conservative; I’m just a tough-minded economist. On the efficiency side, let’s face the realities. If Medicare were being designed now rather than in 1965, we would include drug coverage, because drug coverage today, and certainly 30 to 50 years in the future is going to be an increasingly important part of Medicare, because it is an increasingly important part of how people take care of themselves.

So, if we are pretending to give both consumers and providers efficient choices about how to take care of themselves, then we don’t want to keep out of the package of benefits what is becoming an increasingly efficient way to take care of yourself. That isn’t efficient. That is the first point.

The second point is that the current system we have for providing drug coverage, although it covers 65 percent of the people, is hardly what you would call efficient. First of all, one-third of these people get it through their employers. That is declining over time. Just to refresh everybody’s memory, employers get substantial tax incentives for doing this. So, this is being supported with public money. All employer-provided health benefits are being supported with public money.

Next, Medigap is notoriously inefficient. It has huge load factors. It has huge cherry-picking. It has huge administrative costs. The benefit is becoming more and more--the drug benefit, which is not very widely available and is becoming less available. The employer benefits are becoming less available too.

Again, we are trying to plan for 30 to 50 years from now. It does not interest me that there is a lot of current private money in drug coverage. All the trends are that the private money is going to disappear except maybe for that part which comes out of the pockets of the beneficiaries and that part which comes from the employers because there is a tax incentive. Therefore, it is publicly supported.

So, I think that the efficiency of the current system by which we do or do not provide drug benefits is highly questionable. I support drug benefits for efficiency purposes, as well as for equity purposes, because I am a liberal economist.

Senator BREAUX. Are you open as to how they are presented?

Ms. TYSON. If it is not an issue that can be discussed, then I think we have reached as far as we can go. If we are going to discuss drug benefits, we certainly need more time. These two things are absolutely the same issue.

Finally, let me say one other thing.

Mr. THOMAS. Dr. Tyson, on the point of time, because I am mindful of what Senator Rockefeller did in not answering the question. If, in fact, we need time to seriously negotiate to produce a product which reaches the statutory requirement of 11 votes, time is not a concern.

If it is to continue to debate in a general sense without specifics that we can respond to, then it makes no sense to continue.

Ms. TYSON. I am actually trying to address your question.

Mr. THOMAS. So, what I am telling you is that time is only a concern for me if we are not moving toward closure on those areas. It has been indicated there is some disagreement and there is a possibility of supporting the majority, the super-majority’s position. If that is where we are moving, then forget about the time argument. I want to look at the problem, the substance, and the solution.

Ms. TYSON. I just want to say one final thing, because I think--I realize in the discussion that preceded there was an important confusion which we could clear up with numbers. Numbers oftentimes don’t clarify anything, but they might here.

I think people are concerned about premium support, not because they think it won’t work. Let’s accept the notion; let’s take the Phil Gramm position. We don’t know. We think there is a good analytical argument that it will work, but maybe it won’t have a very big effect.

People are convinced that premium support will leave the fee-for-service beneficiaries, those beneficiaries, and they are the majority of beneficiaries, who choose fee-for-service plans over the next 30 years, worse off than they otherwise would have been.

I want to emphasize ‘‘worse off than they otherwise would have been,’’ because the correct set of numbers is what do we think would happen if we had no premium support at all. Let us project out 30 years after we reformed everything else, what would the premium for the fee-for-service person look like 30 years from now?

Then we put on top of that a premium support model and say, Well, what would the fee-for-service premium look like with the premium support model? It is my assumption, and it is an assumption at this point, but I think we could look at it with numbers. It might be the case that the fee-for-service beneficiary was slightly worse off than the premium support beneficiary because they chose the more expensive package. But the fee-for-service beneficiary would certainly be better off than they would be if we had not made any reform of Medicare.

So, it is really important to get that distinction out there. I think we could help move the process forward if we saw those kinds of numbers.

Senator BREAUX. Thank you.

Congressman McDermott?

Mr. MCDERMOTT. It seems to me that we go around and around about whether the premium support model saves money or not. But I think if you look simply at what the average increase in premiums has been between 1988 and 1999, the Federal Employees Health Benefits Plan has increased 7.5 percent and Medicare has increased 7.6 percent.

The assumption that you are going to save 1 percent every year for 30 years is simply unrealistic--I don’t know how anybody could seriously sit up here with a straight face and make that kind of assumption, given what the evidence is that we have from 1988 to 1999.

But I have one other larger point to make about this process. I have asked over and over again for specifics. I don’t know what was sent to CBO. I have never seen what specs were sent to them.

Senator BREAUX. Jim, you got the exact letter that I sent to CBO asking them to score. Everybody got the same letter I sent to them.

Mr. MCDERMOTT. Maybe that’s true, but they seem to have written their own specs then. So, we are going to throw CBO out right away. They are worthless. [Laughter.]

Senator BREAUX. As an institution or just their product?

Mr. MCDERMOTT. Their product in this particular case; no one should quote it; no one should talk about it, because they wrote their own deal. What I do have here are the specs that were used by the HCFA actuaries. The HCFA actuary specs that you see in the memo which is dated February 23, from Senator Breaux, reveals what this is really all about.

A long time ago in this debate, Dr. Vladeck brought up the fact that two-thirds of the so-called savings comes out of the hide of the beneficiaries. I want to put a finer point on it. If you look at the cost savings in the fee-for-service system, first you have raised the deductible to $350. Now, that applies to everybody, of course, but obviously you have to be sick to wind up having to pay it. If you are not sick, you never pay it.

Then the next thing is there is a 10-percent coinsurance on home health care. Now, everything we have done in health care over the last 25 years has been to get people out of the hospitals quicker and quicker and put them in home health care. People go out of the hospital; we have had to pass bills here about whether people can have breast surgery and be sent home the next day. We have forced people into their homes very quickly. That has led to a tremendous growth in home health care.

Now, we slap on a 10-percent copay for people who are sick. Then if you look further, there is a 20-percent copay on other services. Now, I tried to think what they were talking about in other services. Well, laboratory--oh, I see; if they go for blood work they are going to get a 20-percent copay for their labs after their surgery for cancer. Or they are going to get a 20-percent copay when they are in skilled nursing home facilities.

These are new costs on sick people. You are taking this out of the hide on anybody who stays in the fee-for-service system. But you are pointedly putting it on the sick people. Now, that is what the specs say and that is how you are going to drive people out of fee-for-service plans. That must be the thinking, because right now only 16 percent of senior citizens are in managed care.

Now, all these assumptions about the way this premium support business is going to save money and all the rest say that we are going to have 50 and maybe even 75 percent of the people that will be in managed care. How do you get them there?

Well, if they get sick, you drive them out by the costs that you impose on them. Anybody looking at this and thinking: What happens if I get sick? How would I pay 20 percent on all the laboratory fees? How would I pay 10 percent on the home health care? I mean, having watched my own father, 93 years old, we watched all the times he went into the hospital; how many times he came out. That home health care business when you are old is a real cost.

If you are living on Social Security and you suddenly got a copay, then you say: Well, now we are going into SLMB and QMB. There is no provision in here that automatically puts people into SLMB and QMB when their income is at a certain level. They still have to go looking for the place to join or whatever.

There ought to be an automatic requirement that at 65, if you do not have the income, you go right into SLMB and QMB to cover all of this stuff. But people will not do that, because they know that old people have got too much pride and they are not going to go looking for the welfare office to ask for the SLMB Program.

I personally think that the use of the stick in this is so much more than the carrot, because this analysis does not even analyze the cost of a drug benefit in the premium support system. I mean, I have a hard time with this. How are you going to get people to leave fee-for-service plans and go to premium support systems to have all these savings if you are not guaranteeing that they are going to have a drug benefit?

I know in Seattle that our managed-care people are having a terrible time staying solvent and offering a drug benefit. They are asking for a waiver so that they can charge a premium in the managed-care situation so that they can give a drug benefit. That is true in Minneapolis, that is true in Oregon and in Washington and it is going to be true further across the country.

I really think that you have to look carefully at what you’re doing or what is proposed here. I personally don’t think people are reading the details, because the devil is always in the details.

Senator BREAUX. Sam Howard?

Mr. HOWARD. Thank you.

I came up today thinking that I was going to vote, but it doesn’t look like we are going to get to vote. So, I have got to come up again.

Mr. THOMAS. Leave a proxy. [Laughter.]

Mr. HOWARD. Let me say that I am a strong advocate of the premium support system. I think it is the right way to go. It is the only system that I see that can provide the flexibility that we need in Medicare. Going forward tomorrow, it will produce savings; it will produce plans.

I remember in TennCare, when it was formed, there was only one plan in the state dealing with Medicaid. One. Now there are at least nine, because when you come out with a model or a financial model or a system that allows competition, people will tend to look upon them as opportunities and they will participate. I will tell you that most of them are not-for-profit plans that are participating.

Your proposal I read and I do support it. I do have some concerns about it. I am supporting it because I believe in premium support. I really do, but I do have reservations about raising the age from 65 to 67. I have said that before.

The BBA extender is giving me trouble too, because I think that being in the health care business, I think we do not know the impact of what they are having on the health care providers of this country. I would think that that should be revisited, the whole matter of BBA extenders or the structure of them when we go forward.

I do have trouble with this welfare part of this bill, this proposal. That is where we get into sharing of certain of the premiums against low income. Every legislation I know of, we always put a welfare part in it. It just seems to me it is inappropriate to do in this program.

I like it because it allows opportunity to have long-term care. You can add benefits to these plans and add benefits. So, I think we have the potential for long-term care if a plan wants to offer it or offer those types of provisions. I think it will certainly change the behavior. I think with the change in behavior we are going to get the savings we anticipate.

This is really something I have advocated since 1982. I have not changed and I will say this, if we do not pass it by 11 votes, I will say that we will have a premium support system in this country because the other one will die of its own weight.

Senator BREAUX. Illene Gordon?

Ms. GORDON. Thank you, Mr. Chairman.

Let me say this, I have said it before to this Commission that I certainly support premium support system. I work with this every day with beneficiaries, with providers, with intermediaries every day. I see what happens here.

Congressman McDermott, my state does not even have a choice, a Medicare choice. It is fee-for-service plans or nothing. But under the premium support system we would have a choice. Our seniors would have a choice and they could in this choice have a drug premium.

I know you are looking at me and saying what does she mean by we only have fee-for-service plans? We do not have a Medicare HMO in the State of Mississippi. So, this would give us a choice under premium support. I believe there are 10 approved plans in our state that our seniors could buy into.

I also am concerned about the extension of the BBA. We have had a lot of talk about that. I have had a lot of calls about it because being a rural state, that it would affect us. I believe it would affect even the home health services. Is that not correct? That would extend that into a system that is already hurting very much.

But I do support premium support system and I appreciate this opportunity of saying so. One other thing that I do want to reiterate that I have said to this Commission is the thing with HCFA. I am against giving HCFA any more power. We have done too much of that maybe already.

Thank you very much.

Senator BREAUX. Congressman Bilirakis?

Mr. BILIRAKIS. Thank you, Mr. Chairman.

I usually don’t like to just say something just for the sake of saying it. I realize that we have to finish up here, because we have to make a decision as to whether we keep going or do we basically stop.

I endorse virtually every word that Dr. Tyson has said. I don’t think that supporting some sort of a prescription drug benefit makes you a liberal. I think it makes you someone who knows there is a need out there. I just cannot believe that we can’t come up with something that will satisfy that particular requirement.

I might add that I have served as chairman of the Health and Environment Committee in Commerce in the Congress now for 6-plus years. I have seen a lot of talent over the years. I am not sure that I have ever seen a panel with more talent than what we have here, which makes me that much more frustrated and disappointed that we have not been able to come up with something after all these months.

That is certainly not a slur on you, Mr. Chairman. You and Mr. Thomas have worked hard. The disappointing thing to me is at least you have come up with a plan. I have not seen anything else being presented here.

Is the premium support model perfect? No, I think not. Is your entire plan? I mean, I am not happy about increasing the age. I have already told you I don’t like the BBA 1997 extender applied as part of the plan. We can talk about Medigap reform and things of that nature, but are we going to meet the goal that Congress and the President have imposed upon us if we are not willing to give in some areas? I think not.

So, I am frustrated and disappointed. I will be even more disappointed if we give up on this venture and decide we just can’t come to an agreement. I implore the people here; we have a job to do. It is easy to sit here and just throw stones, and that is basically what I have heard over a period of months, just throwing stones without any suggestions of better ways to go about something.

I am sick and tired of it all, quite frankly. I am wasting my time, and my time is very valuable, if we don’t really proceed on a more positive basis.

Thank you.

Senator BREAUX. We have a vote on in the Senate. Senator Kerrey and I are going to have to depart. But we are going to have Dr. Vladeck, Stuart Altman and Bill Thomas.

Mr. VLADECK. Mr. Chairman, I hope you can stay for just this one point. I have been trying to figure out what is bothering me about some of this discussion. I have finally figured out that a number of the folks who have defended the notion of premium support have said it is the only way we can ever modernize the benefit package. It is the only way we can afford a drug benefit in the program and have made similar comments to that effect.

Sam said under premium support we can have long-term care. As I understand the proposals that were scored, there were two variations that the actuaries scored and 1½ that our staff scored, one of which would permit no-benefit variation relative to the existing fee-for-service benefit package which means no drug benefit.

The other would permit up to 10-percent actuarial value relative to what is provide in the fee-for-service plans which on my calculations would not provide a drug benefit. I believe under a premium support system beneficiaries who are now getting drug benefits in managed-care plans that are being overpaid in some parts of the country would, in fact, lose those benefits the way the specifications in this plan have been defined.

Now, I don’t think we can have it both ways. I don’t think the premium support theory is going to come down out of the sky and give us a drug benefit. If we are going to have a drug benefit, we are going to have to pay for it. Somebody is going to have to pay for it. If the beneficiaries are not going to pay for it, then we are going to have to pay for it out of savings. The actuaries savings won’t pay for it either.

That gets to the last point I would like to make, which is that I have heard a number of times this citation that 65 percent of beneficiaries now have drug coverage. Let me just point out that what came out of that report was that 65 percent of beneficiaries have some drug coverage, no test of adequacy, much of it wildly inadequate and more than one-third of that 65 percent have publicly provided drug coverage through Medicaid or something else.

So, the amount of private dollars in the system is way exaggerated when one talks about 65 percent in this regard. So, people talk about details and other people express impatience for details and so on. I just want to put on the table--and if anyone can refute it, I am happy to refute it--that the premium support plan has specified for the purposes of the actuaries estimates and I believe CBO’s estimates does not include a drug benefit.

And the fee-for-service plans I don’t think would permit more than a $450 actuarial value of a drug benefit in a private plan.

Senator BREAUX. Dr. Altman, and then to conclude, Bill Thomas.

Mr. ALTMAN. Let me try to answer that. The actuary, I guess, needs to get into it. It seems to me that one ought to talk about the cost of the basic benefit plan before and then talk about savings relative to that basic. Then to the extent, whether it is a managed-care or a fee-for-service plan, you are talking about the savings relative to a common benefit. You are not talking about adding the benefit beyond the basic benefit.

But be that as it may, as long as I have the microphone, Congressman Thomas, I have--and I think Laura has--but I have said from day one what a decent drug benefit would look like. I think it is not that hard to say it. It needs to be available to everybody. It needs to be both in a fee-for-service plan and in the other plans. You can have sizeable coinsurance and deductibles and premiums income-related.

We have not talked about this. I think it is unfair quite frankly to say that we have not put forward--from day one I have said the drug benefit needs to be available potentially to everyone. If it is not, it causes tremendous adverse selection. If you don’t included it in the fee-for-service plans, you are going to find people wandering into managed care.

The managed care people don’t want it only in their plans. It is not a good way to do it. What frustrates me is that we have not been able to discuss it. Covering it under Medigap is not covering it. If my employer came to me, put his arm around me and said, ‘‘Stuart, you have been a tremendously hard-working person. I am going to add to your benefit package by including a privately funded plan that you can buy,’’ somehow that would not make me excited. [Laughter.]

Debbie, you and I agree on a lot of things. You look forward into the future better than most people that I know. We have got to stop this 65 percent. Every indicator, as we look forward into the future, suggests that employer-percentage availability of health care is going down. The Medigap policies are increasingly going to be expensive for drug coverage. We have got to push that aside.

I am not personally in favor of massive amounts of tax money substituting for private money. But the idea that we use that as an excuse not to cover drugs for everybody is going to lead to a distortion in that system.

So, if you are serious, I really beg of you to give us a little more time to try to come up--now, that is not the only problem in this, but, you know, this income-relatedness of $25,000. People need to look at that. Not everybody thinks $25,000 is wealthy. So, we need to look at that part.

So, if you ask me to vote today, I could not in good conscience vote yes. There is so much of this that I want to understand. You can say the Congress has time. I am just a professor and you have asked me to vote on this thing. Given what I know now, there are too many questions.

Finally, Sam, if we don’t put the extender, where do you think the savings are going to come from in the competition? The savings on the plans are going to come exactly the same way that the extenders come. It is going to be those managed-care plans squeezing down on payments to the providers, as well as redesigning the available care so that there is less care.

I think it is more efficient and I am on your side, but it is going to be less money in the delivery system. So, finally I would like to end where I began. I think we have made tremendous progress in the last couple of weeks. I think we have gotten information and are now addressing the issues that this Commission was set up to do.

We have not discussed how we are going to pay for it. This one Commissioner would much prefer to come down from Boston at least one, if not several more times.

Senator BREAUX. Let me just say that we have got to go. We have about 4 minutes before the vote occurs. I am going to let Bill Thomas make a comment in conclusion of this meeting. I think it is obvious from the discussion that there are still questions that have not been sufficiently answered in order for us to conclude the work of the chairman in a matter of hours.

Our deadline is Monday. I will be talking with members of the Commission between now and the weekend about what is the feasibility of trying to extend it for a relatively short period of time in order to answer the questions that have been posed today to see if a package can be put together which will make sense.

I think we owe it to this effort if we are close to an agreement. If there is some potential for agreement, we owe it to ourselves and the work we have put in for a year. We owe it to the people who appointed us to make the best possible effort that we can. We are going to make that effort.

So, I will be talking with all of you that have raised questions that I think can be addressed to determine a little additional time will be beneficial. I happen to believe that it will be, but I want to hear from you about that.

With that, I am running off to vote.

Congressman Thomas?

Mr. THOMAS. Frankly, I am pretty upbeat in terms of a conclusion around this. We need 11 votes; we knew that was going to be a very difficult number. It is 65 percent of the Commission. No one else has ever had to meet that standard. If I thought I could get Jim McDermott’s vote by putting in an automatic sign-up for low-income--I could not get his vote on the 1997 Medicare changes; they passed in the Ways and Means Committee 33 to 1. [Laughter.]

But if, in fact, by process of elimination here--[laughter]--if I thought that automatic sign-up would do it, I would put that baby in there.

We have, I believe, 10 votes. That is enough votes to do anything in the Senate, including cloture; nine votes is all you need to do to run the House.

So, we have moved a long way toward trying to meet our criteria. Interestingly enough we came up with a program, the premium support model which, notwithstanding the concerns about CBO--I think if you take a look at the basic principles that CBO was using pretty well affirmed by our staff, then low and behold the HCFA actuaries. The last time we got that kind of triangulation in terms of understanding the direction if done correctly, was quite a while ago.

So, I think that is positive as well. In fact, Democrats offering the market structure to save money and offering a better program, that is a great step forward. When you have Republicans talking about needing low-income support and talking about prescription drug programs, I think that is pretty good.

When you talk about the fact that we came here to talk about seeing if we could not breathe some life into the Medicare Program and what we really hear from actuaries and others, that if we do this correctly, people can choose a program that, in fact, gives them a clear, defined benefit entitlement program; and if they make the right choice, it can perhaps cost them nothing out of pocket; then that sounds like a pretty good program to me.

Stuart, with all due respect, quote, You want a drug plan that is available potentially for everyone. I really don’t know what that means. We have got to sit down and work on that. I am anxious to meet whatever the particulars are in your drug program that would be potentially available for everyone. That is a term we are really going to have to focus on. [Laughter.]

Since you have said it four times now, I should get it. Let’s spend a little time so that I can.

But if you look at where we started and where we are, Mr. Chairman, I think we have had significant closure on a problem that Alan Greenspan, when he was in front of Ways and Means Committee 3 weeks ago, said in 1981 or 1982 when they had the Social Security Commission which gave us the last reforms. They said they were offered the opportunity to examine the Medicare question and they declined. [Laughter.]

That shows how smart he is. They declined because they said it was more difficult. It was far more difficult than Social Security.

So, if you look at where we are and all we need is matter of hours or days to bring this to a conclusion, I really am quite pleased with how far we have moved. If Stuart will move over a seat, maybe we can close out one of the items we have left; and if Laura will move over a seat, I might be able to close that item out as well.

So, I frankly am very pleased with the progress we have made. We are up against a real deadline. Maybe we can now get some real agreement, because artificial deadlines produce no agreements. Real deadlines produce real agreements.

Thank you, Mr. Chairman.

Senator BREAUX. With that, this will conclude this meeting. I would ask members to bear with us. I will be in touch with what the next step is. I thank them for their participation.

[Whereupon, at 5:45 p.m., the proceedings were concluded.]

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