GO TO: Medicare HOME | Transcripts of Commission Meetings

THE NATIONAL BIPARTISAN COMMISSION ON THE

FUTURE OF MEDICARE

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
REPRESENTATIVE JOHN D. DINGELL
SENATOR JOHN D. ROCKEFELLER, IV
SENATOR WILLIAM H. FRIST
DEBORAH STEELMAN
REPRESENTATIVE GREG GANSKE
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 Commission met at 9:10 a.m., Library of Congress, Adams Building, room LA-220, Senator Breaux presiding.

Present: Senator John Breaux, Representative Bill Thomas, Stuart Altman, Representative Bilirakis, Representative John Dingell, Senator Bill Frist, Representative Greg Ganske, Senator Phil Gramm, Illene Gordon, Sam Howard, Senator Bob Kerrey, Representative James McDermott, Senator John Rockefeller, Debbie Steelman, Laura Tyson, Bruce Vladeck, Anthony Watson, and Bobby Jindal.

Senator BREAUX [presiding]. The Commission will please come to order.

We welcome all of our members and all of our guests this morning, the second day of hearings of the National Medicare Commission. Today=s agenda includes a discussion of Management and Administration issues with regard to the Medicare Program.

In addition to our own Commission member, Dr. Bruce Vladeck, who served in his previous life as the administrator of HCFA, we have in the audience today and available for any questions that we might have as we talk about Management and Administration, Nancy Anne Min DeParle who took over as administrator of HCFA in November 1997, replacing Bruce Vladeck.

She had previously worked at the Office of Management and Budget and also at the Department of Human Services in the State of Tennessee, where our commissioners, Sam Howard and Senator Bill Frist also come from. She will be available to answer any questions that we might have dealing with Management and Administration today.

That=s the first panel. The second area and topic of discussion for today will be the issue of financing Medicare, which obviously is a very important subject matter on the financing of the entire program.

The third meeting this afternoon will be the first meeting of the Reform Task Force concentrating on how do we reform the current Medicare system. Those members of the Commission who are on the Reformed Task Force will be meeting at 2 p.m., this afternoon in H-137 of the Capitol. Those members are Congressman Mike Bilirakis, Congressman John Dingell, Congressman Greg Ganske, Ms. Illene Gordon, and Senator Jay Rockefeller. That meeting is at 2 p.m., to 3:30 p.m., in H-137 of the Capitol.

I would like to particularly welcome all of our guests this morning who are here for this public session, as well as to point out that all of our proceedings are being televised. We are appreciative of C-SPAN for covering these hearings which are going out to literally millions of Americans who may be interested in what work the Commission is doing and will be watching the proceedings through the medium of C-SPAN telecasts.

I would welcome in particular the National Council of Senior Citizens who have a number of members who are here today. They have requested that the Commission do as much as we possibly can in terms of public hearings. Of course, I think all of us as a Commission are in agreement that we should make our proceedings as available to the public as we possibly can.

It is important to note that we are funded as a Commission under the legislation enacted by Congress and are funded out of Medicare. So, we have a particular obligation to be very careful especially as to how we spend our funds because of the nature of where our funds come from for this Commission.

I would point out that all of our hearings are public hearings. All 17 members of our Commission represent all regions of the Nation. We have established, I think, one of the first of any committee to have an official Website available to all Americans merely accessing our Website that we have which is >>Medicare.Commission.gov== and all of the proceedings of all of our meetings are on that Website.

Included on the Website are the testimony of all of the witnesses, backgrounds on witnesses that appear before this Commission, as well as the transcript of the entire proceedings including the questions and answers. We will also post notices for all the meetings that we will have in the future.

In addition to that I think it is very important to let you know that we had discussions last night about how we could further expand the availability of public input. I think all members clearly agree that that was extremely important.

I would just like to point out some of the things that we are discussing and have under active discussion right now in order to make the public access even more available. Some of the things we talked about obviously is full Commission hearings around the country. [Applause.]

We appreciate the applause. Of course, sometimes the applause may turn into something that is not applause. So, I will make the same ruling. Whether it is positive or negative, we want our guests to be our guests, but we also want to make sure that proceedings are able to occur without disruption.

Having said that, we are talking about full Commission meetings around the country. How many? Some have suggested 20; some have suggested 2. Somewhere in between is probably a reasonable number.

In addition, we are talking about doing teleconferencing, video Commission meetings whereby the Commission members could still be in Washington and still save money by not having to travel. By this approach we could have people testifying in various parts of the country which would be connected to us and with them interchanging, interactive through the means of telecommunication. I think that would save everyone a lot of money, but still accomplish the same purpose.

In addition to that we are talking about a proposal for regional hearings, with Commission hearings possibly hosted by third parties. There are a number of groups and organizations in the country that do an excellent job of hosting meetings on high-priority policy discussions, whether it is taxation, Social Security, or Medicare. We are now in the process of seeking to involve them in helping us with a series of regional hearings.

In addition to that we discussed a 2-hour, weekly, August through September, C-SPAN program whereby we can maybe involve C-SPAN in helping to have some of these weekly, 2-hour sessions whereby people who are interested will be able to see exactly what this Commission is doing through the medium of C-SPAN.

These sessions will also be featuring three Commissioners as well as viewer call-ins. We can have the public call in so that it is not just us talking to you, but you talking to the Commission.

Finally we talked last night about the possibility of local hearings where we would not have to have the entire Commission go. We could have two members of the Commission, for instance, doing hearings in their respective regional areas. One would be a Democratic appointee and one would be a Republican appointee which would be sort of a road show in the region that they come from. This would allow us to get additional input from the public.

So, those are all of the things that are being actively considered. I will tell you that this Commission, this chairman, my cochair, and all of the members are very, very willing and very desirous of the fact of getting as much public impact as we can.

A final note on this and if anybody has any other comments, they are welcome to make them. The final note is that this Commission does not write laws. This Commission is only charged by Congress to make a recommendation to the Congress and a recommendation to the administration. When that recommendation is received, the public hearing process begins yet again.

The Congress will then have to have public hearings on whatever we recommend and everything they do will be done in public. So, there will be ample opportunity for the maximum degree of public input; I assure you of that.

Let me ask if anyone else has any comments along those lines. Anyone? [No response.]

If not, we would like to begin our first discussion session this morning which will deal with Management and Administration. I would start by suggesting that we just throw out some ideas.

Again, we will go back to our block that we did yesterday. We are talking under Management and Administration and about management tools. Do we need to change the way the program is set up so that it could be better managed?

I would hope that we would talk about fraud and abuse as part of Management and Administration; how we can reduce and work toward eliminating fraud and abuse. Can the market system, for instance, handle fraud and abuse if we go to an entirely different delivery system?

We are talking about quality today. We are talking about Management and Administration. We are talking about the best way to promote the best package of benefits for seniors. We are also talking about resources and do we have adequate resources to administer Medicare; do we need more? Do we need to handle the administration differently than it is currently handled?

I would throw out just an idea or two and maybe hopefully we will get some discussion on this. I would point out that HCFA tried to do competitive demonstrations in Baltimore and Denver over the past couple of years. In both cases people and Members of Congress said we don=t want to do it here.

Actually Congress came in and overturned the opportunity for HCFA to test other types of competitive plans by acts of Congress. That is one thing I think would be the subject matter of this session. Another one would be should HCFA be given more tools to function like a health care purchaser in the private sector to enhance competition in terms of administration of the program. Is that a good idea?

Another possibility is given the differences in the health care delivery systems, my State of Louisiana is vastly different from California which is probably vastly different from New York and Mississippi and areas that we all represent. Does one size fit all? I mean, does centrally managed operation out of Washington, DC, fit all parts of the country? Can we perhaps regionalize it? Is that a good idea?

So, I would open up the discussion on Management and Administration and we will hear from our Commission members as they desire.

Congressman John Dingell?

Mr. DINGELL. Mr. Chairman, I note that Ms. DeParle is in the room. Should we have her available to come forward to answer questions?

Senator BREAUX. She is available as I pointed out earlier. She is right there in the front of us and will be available to anyone who wants to ask her a question.

Come on up, Nancy. That=s fine; we would love to have you. You are not really a witness, but if you have questions, we will be happy to respond to her.

Any other comments starting off for discussion on Management and Administration?

Dr. Vladeck?

Mr. VLADECK. Mr. Chairman, if I could make one observation about your last point which I think is very telling. The health care system in this country is increasingly heterogeneous and the needs and the characteristics of the health care system are very different.

At the same time increasingly Medicare is dealing with national companies and national providers supplying services to it. From an administrative point of view and from a point of view of flexibility and responsiveness to the markets, it might make a lot of sense to run the program in a substantially more decentralized fashion.

There is enormous resistance to doing so from those national companies. Just to give you one very quick illustration, there actually continue to be substantial variations in patterns of medical practice from one part of the country to another. HCFA=s policy has been to acknowledge that and recognize that by establishing much of the criteria for the review of claims and for medical necessity on a carrier by carrier regional basis rather than setting national norms for that.

The major suppliers of clinical laboratory services to Medicare are national companies. When a national company finds that its claims are being reviewed according to one set of criteria in North Carolina and another set of criteria in Virginia, it raises all sorts of questions including legal questions about equal protection under those circumstances.

So, we have to make a decision on the extent to which we want to either explicitly recognize that the program is going to operate differently in different parts of the country or in which we don=t, to which extent there are certain kinds of rigidities and inflexibility.

Senator BREAUX. Is it a problem that you have a national standard, Bruce, that is good for reimbursements for doctors that is the same in New York City as it is maybe in South Mississippi?

Mr. VLADECK. Well, we are very good, I think, or Medicare is very good. The Congress is very sophisticated at adjusting payment levels for the cost of doing business and other characteristics of different communities.

The problem is when you get to the heart of the issues of the kinds of capitated plans that you want to permit to participate in the program, the kinds of arrangements between hospitals and physicians. And particularly when you get to criteria for review of medical necessity or review of appropriateness of claims, there is a true no-win situation if you establish national criteria, you are accused of trying to force all of medicine into a cookbook through regulatory fiat.

If you make those judgments entirely at the local level, you are accused of denying the national providers of service equal protection. At some point we need to decide how we are going to address the great heterogeneity out there in terms of administering a uniform Federal law.

Senator BREAUX. Congressman Jim McDermott?

Mr. MCDERMOTT. Thank you, Mr. Chairman.

I think that this issue is one of the places where the use of some kind of national hearings in other places would be useful. They say that all politics is local. But Washington and Minnesota are punished for having had efficient health care systems in the past. I mean, HMO=s started in those areas very early on and have kept costs down so that our average per-patient cost is much lower than the rest of the country.

So, when you try to implement HMO=s in Medicare and say you are going to do 95 percent of the average per-patient costs, we start out at a tremendous disadvantage as compared to high-cost areas like New York and Los Angeles and other places.

Another place that you have tremendous variation is in the home health care area, where the average home health agency in the State of Washington has something like 18 to 20 visits whereas in unnamed parts of the country, it runs--[laughter].

I=ll say no more; I=ll rest my case. It is about 150 visits. So, when HCFA says let=s reduce by 10 percent, 10 percent of 150 visits is 15 and that is significant. But 10 percent of 17 visits is a big cut into what service is going on in the area. I think that at some point this Commission is going to have to deal with the disparities across the country in the cost of health care.

Senator BREAUX. Can I ask Nancy a question on that.

Nancy, when we try to reduce costs of programs, it is generally our across-the-board percentages, or can you take a look at areas that are higher costs versus lower costs and not give them the same percentage of cuts?

Ms. DEPARLE. Well, Mr. Chairman, you can do it either way.

Senator BREAUX. Do you have the authority to do it either way?

Ms. DEPARLE. Well, Congress gives us the authority. In this particular case, the case that Representative McDermott mentioned, in that interim payment system, it was done pretty much across the board. I think his illustration is correct. You know, where you stand depends on where you sit on each one of these things.

For each payment methodology, it is usually pretty much specified and you could do it either way. I guess I would say on that particular one, lots of folks spent a couple of years looking at it trying to come up with a way that everyone would think was fair. This is hard; it=s very difficult to do.

Senator BREAUX. Let me throw out this question. I have had people back home--and I bet you there are people in the audience have heard this as well--they said, Look, if Congress just got rid of the fraud and abuse in the system, you would probably save more money than you need to keep the system solvent for the next 30 years.

Is there any way to estimate the exact amount of fraud and abuse that could be eliminated? How much saving is out there potentially? We always talk in Congress about getting rid of fraud and abuse.

And Bruce, I=ll ask about that from your experience as administrator as well.

But, Nancy, what are the numbers out there. If we eliminated all fraud and abuse, would we save the system in and of itself?

Ms. DEPARLE. No, I don=t believe we would. But we certainly have been trying to do a better job of identifying, preventing and stopping fraud and abuse. I think we are doing a better job.

No one has a handle on exactly the amount of spending that is attributable to true fraud and abuse. The Inspector General, as you know, as a result of the Chief Financial Officer=s Act does an audit every year. We have had two of those and they do an estimate of claims that are paid inappropriately.

But that is not the same thing as fraud and abuse. I would also tell one man=s fraud and abuse is another man=s necessary payment. One thing that we found that as we have tried to do some things to make it tougher to get into the Medicare system to clamp down on some of these inappropriate payments.

We=ve heard lots of screams, because to some people the things that were going on were not fraud and abuse. So, it=s true again that where you stand depends on where you sit, to some extent.

Senator BREAUX. I don=t want to monopolize this, but while people are getting their questions, one final point. We introduced legislation, a number of us, to allow the Medicare Program to benefit from State Medicaid inspectors that travel within the state looking for Medicaid fraud that now are currently prohibited from doing anything about Medicare fraud.

For instance, if they are going through a nursing home, they could report Medicaid fraud, but they are prohibited from participating in trying to help Medicare find the same fraud in the same place. Legislation would allow state Medicaid inspectors to also participate in the reporting and doing something about Medicare fraud.

Is that a good idea?

Ms. DEPARLE. We have been looking at that legislation, Senator, and I do think it is important that the Medicaid Programs work together with the Medicare Program. What we are finding is that in the areas of the country where we are doing that such as, for example, Mr. Bilirakis is from in Florida, it is often the case that the same folks that are ripping off one program, are ripping off the other.

We can really achieve some changes there when we work together. So, in general we support working together with those two programs.

Senator BREAUX. Congressman Thomas?

Mr. THOMAS. I think the case that was cited by Representative McDermott is a good way to get into a broader discussion of management through HCFA. When you talk about home health care, what we tried to do was to stem the fastest growing area, because it was one of the largest, last remaining, cost-plus or add-on cost area.

We tried to shift to what we call a prospective-payment or fixed-fee concept. The problem was that we simply did not have the tools and the data available to do it. The current program is, as its name implies, an interim-payment structure. It is partly artificial.

The option was to try to do some kind of a national, local-payment blend, which was decided in working with the industry, or to try to curb overuse as was indicated in certain States, by adding a copayment. Individuals would have to pay to receive the services and that would serve as a kind of control on how much home health care was utilized.

The industry urged that we not apply a copayment. We did not; we applied an interim payment. Today the industry is on Capitol Hill urging us to do away with the interim payment. The problem is that we don=t have the kind of data necessary to implement the best kinds of controls.

Nancy, I would like for you to respond to this and, Bruce, you may want to respond perhaps from a defensive point of view. Bruce was the administrator when the managed care aspect of HCFA was brought into the larger structure, the integration, or reorganization, if you will.

There is a basic concern that I think a number of us have about whether or not HCFA is going to, quote/unquote, succeed. Traditionally the structure had been to apply the rules and pay the bills, albeit it from intermediate carriers which gets sometimes into the problems you were discussing. But this had not been as aggressive an outreach, consumer-oriented, information-providing structure.

There has to be a significant change inside the Health Care Financing Administration moving as people choose the Medicare+Choice options. This is probably more importantly so as HCFA provides the information and the knowledge to be able to move to those programs. So, HCFA has to be ahead of the beneficiaries in providing this consumer-oriented structure.

How are we doing in converting HCFA from the older structure to the newer outreach structure? Do you believe you have adequate tools to do that or do you think that eventually those two functions probably are going to have to be divided in which you have a bill-collecting section and you have a consumer information outreach operation?

Ms. DEPARLE. Well, you and I have talked about this some. I guess I would say the reorganization was a step in the right direction as far as trying to move in the general direction that you have identified and in particular the beneficiary education aspects of what we need to be doing.

As you say, we have not had either the direction or the tools to do those in the past. With the Balanced Budget Act of 1997, we now have the direction to do a beneficiary education campaign.

Mr. THOMAS. And some of the tools.

Ms. DEPARLE. Yes, and some of the tools. I appreciate the help of many of the people on this Commission in helping us get these tools.

Without the reorganization it is my understanding that the responsibility for the beneficiary education campaign would have been in seven or eight different parts of our agency. We would have just been pulling that together quite frankly.

As you know, as a result of the reorganization we have now something we have never had before which is the Center for Beneficiary Services. It is led by a woman, whom you have met and who worked in the private sector before. She has worked with senior groups around the country. She had done this kind of consumer education in the private sector.

I believe that that new venue to operate out of will help us to be able to do a better job than we would have been able to. So, in that sense I think it has succeeded.

Mr. THOMAS. But having said that, how is our timetable even in the terms of the early up-and-running options? We=re slipping aren=t we?

Ms. DEPARLE. Well, we have done a pretty good job on meeting most of the deadlines. As you know better than almost anyone here, there were about 300 different Medicare provisions in the Balanced Budget Act of 1997. On some of them we have slipped slightly.

I notified you last week that the Medicare+Choice reg that was supposed to be out yesterday is going to be a little bit late. We are slipping a little bit, but I believe we have tried our best to hold as tight as we could to those deadlines.

Mr. THOMAS. I believe you have as well. But this frankly is something that all of us have to watch carefully to see if we are successful in re-structuring in a timeframe that we need. That to me will be the greater indicator of whether or not this kind of program change will be successful.

Without the support and the infrastructure and the information-gathering capability and then dissemination, seniors simply will not have the information necessary to make choices. It is kind of hard to operate a Medicare+Choice if you don=t have the choice in front of you.

Senator BREAUX. As an example of just micromanagement, that one bill you just pointed out had 300 new regulations that your office has to comply with; just one bill.

Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman.

I would like to point out to the chairman that the chairman and I are working now, in fact, on a bill which would help with what Congressman McDermott was talking about, fair payment with in-home health care. And I would hope to get that moving.

I want to kind of short-circuit an instinct which may or may not be around the table and around the country. I think sometimes you go to town meetings, which I do a lot of, and you hear if people know what HCFA is in the first place. That is not uncustomary.

They don=t like that. They don=t like it, and they tend to blame HCFA. What I would like to point out is a couple of things and then ask a question of Nancy if I might. That is that HCFA basically spends about 2 percent of its money on administration which is about 10 percent or 8 percent less than most private groups would do, such as insurance companies.

I mean, it is a highly efficient, like Medicare itself, it is a highly efficient organization. It has to be understood as such.

Second, on the question of waste, fraud, and abuse, I would again caution our Commission that this is an enormous issue out there with the senior population. They really do believe if you get rid of waste, fraud and abuse, that you can, as Chairman Breaux indicated, create solvency for Medicare in the years to come.

My understanding, Nancy, was that there was about $20 billion worth of waste, fraud, and abuse this year, but CBO would score about $1 billion. A billion is a lot of money, but a billion is not the kind of money we are talking about in terms of preservation of Medicare. We are talking about a lot; a lot more than that.

But that does not make it less important for HCFA to attack. On the other hand, HCFA can attack all of it because so much of it is in the private sector. I, myself, have seen the software that is distributed to physicians, hospitals and others which tell you how to beat Medicare. You know, if you want to rip off Medicare, here is the software and this is how to do it. So, the private sector makes money off of encouraging waste, fraud, and abuse from practitioners and the health care community itself.

The question I had was, No. 1, how do you or what do you do on waste, fraud and abuse to improve performance? Second, given the fact that you have a lot of employees on the other hand, there are two problems. One is the employees are considered to be of insufficient number now to do what needs to be done particularly with regard to the 300 rules and regulations. They are just swamped.

Any time a new administrator, and you are an excellent one as was your predecessor, comes into HCFA, you get to bring a few people with you, but not much more. So, there is the whole question of the people who run HCFA and then the people who have been at HCFA throughout the years.

Usually in the Washington bureaucracy, those are people who tend to be intransigent and don=t move things because they say, >>This is the way we have always done things and this is the way we are going to do things because Nancy Ann will be here for a few years and then she will be gone.==

Could you comment on some of those?

Ms. DEPARLE. Yes, I will try to, Senator.

First, I want to thank you for mentioning our work force at the Health Care Financing Administration, because we do have a very dedicated cadre of people, some of whom have much better opportunities in the private sector frankly. But they have stayed there out of loyalty to the agency and to the program. It is a small agency.

You commented on our efficiency. Speaking for both myself and, I think, for Bruce Vladeck, our former administrator, I don=t know whether to be proud of that or not. We are running at 2 percent of cost, compared to about 12 percent from most private sector insurers.

I think that means that we are lucky and fortunate to do as good a job as we do. I don=t think that we do everything that the members of this Commission or the people who are the beneficiaries would like for us to be able to do. Frankly the 2 percent is only if you count in the amount of money that Social Security also spends to administer the program with their appeals and everything else.

If you just count our discretionary budget and not even the program-integrity money, it=s around 1 percent. We may be too efficient for our own good as far as that is concerned, especially where it relates to program integrity, fraud, waste and abuse. There I think every single person on this Commission that I know agrees that we need to do a better job.

In the last 5 years we have really been stepping up our efforts there. We have had a lot of success. We have returned around $8 billion, I think, last year to the Medicare Trust Fund.

But you asked me what we can do to improve our efforts there. Those things will cost money. We are only auditing or reviewing less than 10 percent that we get and the number of claims is increasing every year. We have to do more of that, if you want us to build public trust in the program. Each time that I go out and meet with seniors, they tell me that they want us to do a better job here and they want to help us do a better job.

We are going to have to engage the provider community. We have done that with the help of you in Congress and in the private sector who are supporting our efforts. We have got to tighten some of the rules for becoming a Medicare provider and we are doing that as well. We need to be sure that the folks that come into the program are solid businessmen and women, the kind that we want to contribute to this program and its beneficiaries.

So, there are things that we can do as I think your question suggests. They will cost money and resources. One of the reasons I am here is because we at the Health Care Financing Administration welcome this Commission=s suggestions, input, and direction into how we do our business and how we can do a better job. As well, we appreciate your help with resources.

Senator BREAUX. I am going to make a comment to try to ask all of our Commission members to be as concise and precise in their questions and comments as they possibly can. It will be hard for us to keep on schedule otherwise.

Next, Ms. Steelman and then followed by Senator Gramm.

Ms. Steelman?

Ms. STEELMAN. I would like to join in something that Dr. Ganske raised yesterday and Bruce said this morning. It is the question of national versus local management and national versus local decisionmaking. I think this is one of the most important questions facing this Commission.

I have got a question that I think is best put to Bruce or Nancy or perhaps Stuart or others who have opinions on this. I guess I will also go back to something Jim said yesterday, that there is something that we can learn from some other country.

Canada covers about 10 million fewer lives than Medicare in its national health care system. As I understand it, it has a far greater reliance on the provinces both to manage it and to design it. What is the thinking at Health Care Financing Administration or in other places on this question? What other resources is the Commission going to hear from that could educate us on this.

I know that there is a report by the NASI that suggests the need for not only greater local decisionmaking, but greater flexibility at HCFA to allow HCFA to use the kinds of tools that managed care uses in an integrated setting. But HCFA would seem to--the report seems to suggest that HCFA would be able to use them in a non-integrated fashion, in a more competitive bidding for units or that kind of approach.

So, I am interested in both Nancy=s and Bruce=s opinions in terms of the national versus local and just the number of lives covered and some of the regional issues that we have been talking about, as well as the use of managed care tools in the HCFA setting, itself, and not in the choice market.

Senator BREAUX. Nancy, do you want to comment first or perhaps Bruce? Give us the past; give us the present.

Mr. VLADECK. In terms of the past I would note that the President=s budget for 1997 contained a whole set of authorities for Health Care Financing Administration to undertake many of the activities that are, in fact, proposed in the National Academy=s report in terms of competitive bidding for certain items, in terms of selective contracting for certain items, and other prudent purchasing behaviors.

Most of those did not survive into the final form of the Balanced Budget Act of 1997, except in demonstration forms. If you are going to do that sort of thing; if you are going to move away from centrally administered price systems with all the prices in the Medicare Program set by formula and by Congress to a more market-oriented or market-responsive way of purchasing and purchasing prudently, you have to do it on a decentralized basis administratively.

There is no way to do all of that from Washington or Baltimore, even if you had enough people and enough resources to do it. I think from my own experiences, it is easier to make the administrative changes to permit you to do it than it is to get the legal authority to do it.

Senator BREAUX. Nancy, can you make a comment on that.

Ms. DEPARLE. Well, we just launched last week the first competitive bidding demonstration for durable medical equipment down in Florida. I guess it was Friday we met with folks in the Florida area and we have letters going out to beneficiaries.

Senator Gramm and others in this group are very interested in that and frankly they helped us preserve in the Balanced Budget Act of 1997 the authority to at least do these demonstrations. So, I would be very interested in reporting to the Commission and to the Congress about how this demonstration turns out.

There is no question that tools like this are very critical to our being able to innovate and to take advantage of some of the things in the private sector. And we do want to do that. We are very--we=re not only open to it, but as Bruce said we tried it.

Also as you said, Senator, we tried it a couple of years ago. We have gotten beaten back a little bit. But we are interested in doing it.

Debbie, I was very interested in what the National Academy report had to say about that, because we do want to be able to take advantage of some of those private-sector tools.

Ms. STEELMAN. The Denver and other demos were integrated demos. Really what I am getting at is the advisability of Health Care Financing Administration using prudent-purchasing type tools in a non-integrated way and what differences there are in doing that.

Ms. DEPARLE. Well, as I said, we are doing it in one sector. We are trying a demo in one sector. We are going to be looking at other areas of the country to do other products. We should be able to tell you something about how that works soon.

Senator BREAUX. Bruce, you have anything further on that?

Mr. VLADECK. Not anything particularly on this point, but I will try to follow your direction about being succinct. Let me make three points very quickly that Nancy Ann can=t.

The first is a bit of history. When HCFA was created in 1977, there was a conscious decision made not to give it its own field structure. Medicare customer relations and customer service had been handled through the Social Security field structure since Medicare was created. That worked very well; people were very comfortable with that. So, it just seemed silly to have to reinvent the wheel.

At the time that was probably a reasonable decision. That decision preceded the enormous RIF=s that took place in the Social Security Administration in the early 1980=s. There was a very substantial reduction in the Social Security Administration=s field staff and the morale of that field staff.

That certainly preceded the splitting off of Social Security from the Department of Health and Human Services. So, Social Security=s capacity to do that customer service function for Medicare has deteriorated very badly since HCFA was created. There has been no mechanism through which to recreate it.

For many years HCFA relied on contractors to do it. They did a job of variable quality. Their budgets, as you know, have been terribly squeezed over the last decade. In order to make sure that the claims got paid, they cut back very substantially.

So, Nancy Ann is running the world=s largest health insurance with no field staff in customer relations. That is a very significant administrative decision obviously.

If you look at private-sector open-enrollment programs, particularly those for retirees who are having multiple choice of plans for the first time introduced into their benefit programs, you will find that a typical cost for a first-rate consumer education, consumer counseling program in a multiple-choice environment is $10 to $20 per capita.

As you know, despite the efforts of some of the members of the Commission, HCFA is trying to do the Medicare+Choice consumer education for $2 per capita. It is trying to do that under the rules of Federal Procurement Practices and so forth. I fear that if we get what we pay for in that regard, there will be criticism of the administrative competence rather than recognition of that sort of basic reality.

I went through the experience of trying to undertake the radical step in customer relations and customer education, seeing to it that every Medicare beneficiary received a copy of the Medicare Handbook every year. I received very angry letters from the chairmen of all the committees of jurisdiction accusing me of a political plot. There was a formal complaint made against me to the Federal Elections Commission.

So, I am not sure how likely it is that we are going to make those resources available from year to year.

Senator BREAUX. On that point Congressman Thomas has a response.

Mr. THOMAS. I am sorry, Bruce, that you have to reach that level at this discussion, because frankly the booklet that you put out had on the first page an enormous picture of Secretary Shalala. The second page was an enormous picture of you with a very nice letter.

I looked through the entire booklet and found that not one line in that booklet advertised the choice structures then available, for example, in Medigap.

What we have tried to do, and I do want to compliment Ms. DeParle, because we have been working together on the new booklet which does inform members as far as choice.

When you had your risk-contract programs, you did not go so far as to include in the bills one piece of educational material which would assist people in making the choices. One of the reasons you are now in the difficulty you are is because there was an enormous degree of resistance and finally you were overwhelmed by the private sector. Now we are playing catch-up.

Anytime you play catch-up, it is more difficult. Historically HCFA has led in a number of areas such as prospective payment structure in the fee for service and other areas. But you are woefully behind in organization and structure, and you have got to look to the private sector and pick up various approaches that can be utilized.

We are very concerned about whether or not this old-fashioned bureaucracy can change in time to do the job. We are hopeful that you will. The argument for more resources is always there. You will always argue for more resources. We will do the best we can to provide them.

But at some point a judgment is going to have to be made. You are either going to be able to do the job of a consumer-oriented educational structure to allow people to have a clear understanding of choices or we will find someone else to do the job.

I don=t think it is worthy of this Commission to spend that much more time arguing about what occurred in the past or I will respond in kind to each comment that you make, and I choose not to do that.

Mr. VLADECK. Well, I think your point is very well taken, Mr. Thomas. I will not talk about the past in that regard.

Let me make just one more point if I can. That is I think in terms of the structure, the other issue that needs to be addressed by this Commission is the fact that is never acknowledged by a sitting HCFA administrator that HCFA cannot even respond to a Member of Congress or to a letter to a constituent without the approval of at least three or four assistant secretaries in the Department of Health and Human Services.

The extent to which the current structure of the department, particularly with Social Security no longer in it, conduces to or frustrates the ability to modernize the agency in the way that members have talked about, and that is something that I think needs to be considered by the Commission in the course of its deliberations.

Senator BREAUX. Dr. Altman, followed by Mr. Ganske.

Mr. ALTMAN. Let me be very supportive first of the amount of education that needs to be done and very supportive of what was done in the BBA. Let me articulate something that may sound obvious, but I want to say it. That is, given the fact that HCFA will never have the resources per dollar that the private sector has, it is going to have to prioritize.

For my money where it is going to have to spend its money is, yes on education. But education will become a private sector activity. You can bet your sweet life that with the amount of choice available and the amount of money available, there are going to be hundreds, if not thousands, of publications. The Medicare+Choice will swamp the newsstands and take away from mutual funds all of the magazines that are now out there. [Laughter.]

Some of us are going to go on cruise ships in our retirement years to explain all the complexities that Congress puts out. And I ask my colleagues to join me on this. [Laughter.]

But what no one else can do is manage this program. You can=t manage the program from the private sector. You can have people help you.

So, given the choices that she has to deal with and the fact that we will consciously restrict the amount of money, I would put my money on management and bill-paying. We somehow seem to be overpaying.

Put out the information. Make sure that others can build on that information, but not have a large number of people who are in the advertizing business on the HCFA staff.

Senator BREAUX. I had skipped over Senator Gramm inadvertently. So, it will be Senator Gramm, followed by Congressman Ganske.

Senator GRAMM. Mr. Chairman, I have handed out a chart here which originally was from the Oversight and Investigation Subcommittee of the Commerce Committee. They did a couple of hearings on it.

As chairman of the Health Subcommittee on Finance, I tried to look at it. Not all these numbers are totally comparable, but on oxygen concentrators we did get a GAO study that remarkably found that by the VA specifying the service contract, they were actually getting better service on average than Medicare.

But here is the point--and, Nancy, I brought this up not to in any way be critical of you, because you had not been there long enough to have allowed this to happen. I am sure that this occurred under Democrat and Republican administrations as well.

But the bottom line is nobody holds out the Veterans= Administration as being a super management agency. It has all the liabilities of being a government agency that any other government agency has. It has the bureaucracy that any every other government agency has.

But yet, in 1996 when we in Medicare were paying $4.846 billion for durable medical equipment, the VA on average paid $50 for a walker, and Medicare paid $80. For a quad-cane, another of these standardized items, the VA paid $15 and Medicare paid $44. For light wheelchairs the VA paid $417 and Medicare paid $1,026.

Then for the famous one, of course, since we are talking about a $1 billion potential savings, the oxygen concentrator--I actually visited VA sites that purchase, distribute, and maintain these oxygen concentrators. The difference there, of course, is astronomical. As I said, at first we were thinking that part of what the Commerce Committee found in the House was that it was a difference in servicing and you are buying a different product as many of the equipment salesmen say.

But in reality GAO did a study. They found that because VA had finished its manual in terms of what you were supposed to do in maintenance, they were actually getting maintenance. We got the same thing here for hospital beds.

I am not trying to fuss about this. What I am asking is what could we do that could make it possible for Medicare to at least equal VA in these areas. What could we do to help us get out of this situation?

I want to go back to my final point on this and to what Jay said. As long as we have got the misspending of money, I don=t call this fraud basically. If I walked into a car dealership and I said that I love that red truck; I=ll take it. I am going to pay a different price than John is going to pay if he calls up four dealerships, gets a Consumer Report, gets his friendly banker to give him the Blue Book value, and then John negotiates.

But the problem with this is that not only that there may be $1 billion lost here, but everybody who doesn=t want to make the hard choices necessary to save Medicare says, >>Well, look, if you would just fix this kind of business, you wouldn=t have to make these changes.==

So, what can we do to help you fix this kind of problem?

Ms. DEPARLE. You have already done one thing which is that last year you gave us the authority to do some demonstrations in this area. As I said, we just launched one in Florida. I may be talking to you about coming to Texas.

Senator GRAMM. Great; we would be glad to have you.

Ms. DEPARLE. We asked, and I think we have asked again this year for broader authority in this area. I would appreciate the Commission looking at that as well.

There is no question that Medicare can get a more competitive price. It=s embarrassing frankly. You can walk into the drug store and see a price that is much better than I know that Medicare pays. I guess I would say too that I don=t want to leave people with the impression that we have not done anything about some of these items. On oxygen, as you know, the administration worked together with Congress last year and we made a change.

But I think the more important point and the one that your question suggests is, should it take an act of Congress for us to be able to get a more competitive price? And I do not think it should.

As Debbie Steelman=s questions suggested, that is a cumbersome way to have to proceed. So, I think we need to work together with the Commission to try to get some more flexibility to use the market in the way that we are going to do in this demonstration. I think we are going to be able to show you that that is the right way to go.

Senator GRAMM. Well, I would just like to say, Ms. Chairman, it seems to me that our recommendation in an area would be that Congress would have a hard time not doing it. It is just like these demonstration projects. I thought about taking them out of the process, but we were just overwhelmed by individual members that thought that this was somehow important to them.

But if we give blanket authority for demonstration projects in whatever we recommend to Congress, it will then be that people who want to block them will have to act affirmatively rather than preventing us from acting.

Senator BREAUX. You would think that we would just do it rather than having to demonstrate that it is reasonable.

Senator, Congressman Dingle would like to add something.

Mr. DINGELL. I want to commend my friend, Senator Gramm, for this question, because I think it is a very good one.

A thought occurs to me that we have a structural statutory problem here. Medicare buys retail; VA buys wholesale. How do we address that problem? That makes you look very bad at HCFA. But there is a legitimate reason and I suspect the fault is that of Congress.

How do we address that?

Ms. DEPARLE. Well, I think it would take a legislative change. I think allowing us to do competitive bidding gets at that issue. If you put out there that we are going to be purchasing X-amount of this particular product and we want the best price, that moves in that direction. But we would need some legislative authority.

Senator GRAMM. Well, if you will tell us what it is, we will try to do it.

Senator BREAUX. That=s a very good discussion.

I would note that the time has arrived that we need to continue on with the people we have on this list. Next is Congressman Ganske.

Also, here are those who have sought recognition. Mr. Howard, Dr. Frist, Congressman Dingell, Mike Bilirakis, Rockefeller and Kerrey. We will take those next. Please be precise and concise.

Dr. Ganske?

Mr. GANSKE. I would like to follow up on a point that Bruce made, and that was that, you know, a conscious decision was made to do the administration on the local level through local carriers a number of years ago. I think the reason for that was that your local medical directors had a good feeling for the community. They would know, you know, if somebody phoned in with a problem, they would know how honest a person they were dealing with. I think it is the idea that local control frequently can be a little more flexible, but a little more reasonable. I want to point out a problem that I think is arising out of legislation that we passed last year regarding Medicare+Choice. Recently Iowa Blue Cross-Blue Shield announced that they are going to terminate their contract with HCFA and no longer serve as the Part B carrier. This has happened in several other States including Illinois.

The reason that they give for that is that they want to be part of the Medicare+Choice Program. If they are the carrier in administering the program, then that gives them access to information that might give them a competitive advantage against Tony=s program or Sam=s program. So, there is a potential conflict of interest if the Blues then want to get into Medicare+Choice.

What I am concerned about is, if the Blues are no longer the administrators and then we get to a national type of administrator, do we lose our local flexibility and our local knowledge in order to prevent some of the abuses?

I don=t know, Nancy; do you have any comments on that?

Ms. DEPARLE. Well, you are pinpointing a problem that we are experiencing. Some of our contractors are deciding to leave the program. Some of them feel that the reimbursement rates that we are paying are not high enough and that is why they are leaving. Others, as you say, are doing it because they, themselves, want to become health plans. They realize, and we have told them, that there would be conflict problems.

I think what has been discussed this morning is this difficulty of striking the proper balance between local decisionmaking and efficiently running a national program. Your question goes to that as well.

What I would like is more ability to, again, contract competitively with those who might offer themselves in the marketplace. Right now under the Medicare law, we are restricted to only dealing with insurance companies basically. For different parts of our business for just the paying of claims, there might be some other entities such as the financial service entities that could do that job.

You would want them to have a carrier medical director, so that the person that your colleagues and you, when you were in practice, were dealing with as someone who understood the local medical issues in the community.

But I don=t think it has to be--I think you can work with a hybrid. I think we have been doing that. We can improve, but I think we can continue to do that so that it does not have to be one or the other. But I would like to encourage the Commission to look at the authority that we operate under and whether or not we ought to have a broader set of competitors for this business.

Senator BREAUX. Mr. Howard?

Mr. HOWARD. Mr. Chairman, at the first meeting of this Commission, I asked the staff to prepare a comparison of the Medicare Program and the Federal Employee Health Benefits Program. I am looking at that comparison.

If I am sitting here as a CEO and the Medicare Program insures 37.6 million people, I see staffing of 25,080 people in HCFA and the contractor. I see 651 people in the Inspector General=s office. I see 19 people on the congressional and House staffs. I see 117 people involved in the various commissions.

When I turn over to the Federal Employee Health Benefits Program which has 4 million, I=ve got 110 people, 110 people handling 4 million. I have an Inspector General=s staff of 45; a congressional staff of 9. I ask myself as a CEO which one of these programs would I rather have and which one is better to administer.

I mean, if somebody can help me understand these numbers and interpret them for me, I would appreciate it. But the difference between 110 people and 25,080 is a lot.

Senator BREAUX. Actually with FEHBP there are also about 9 million when you include dependents.

Mr. HOWARD. Dependents, that=s right.

Mr. VLADECK. FEHBP pays providers at rates set by HCFA. It uses facilities that are licensed and certified by HCFA.

Mr. HOWARD. FEHBP?

Mr. VLADECK. Yes, sir. That is State licensure of hospitals and other health care providers and HMO=s is run through the HCFA budget. It also, as that anyone who is working for the Federal Government can tell you, there are an awful lot of personnel folks in all the different agencies of the Federal Government who spend a substantial amount of their time on the administration of FEHBP which are not included in those numbers.

Mr. WATSON. OK. So, I have got to get the personnel departments of every bureau?

Let me ask you one other question. Isn=t it one major difference that the Federal Employee Health Benefits Program pays plans= premiums? HCFA pays providers direct?

Mr. VLADECK. That=s correct. You have to account for the employees who cross on the standard option which is still elected by 73 percent of Federal employees who administer that program to get a true apples-to-apples comparison.

Mr. HOWARD. My point is that the Federal Employee Health Benefits pays plans= premiums and HCFA pays providers direct. Dr. Tyson said yesterday that fraud and abuse is a function of E-times-Q. So, the more that you pay providers direct and the more that you tinker with the pricing system, the more things become fraud and abuse that were normal practice.

Is that safe to say too?

Mr. VLADECK. Absolutely.

Mr. HOWARD. OK.

Senator BREAUX. Senator/Dr. Bill Frist.

Senator FRIST. I would like to continue this discussion because I think that we all recognize that we are going to reach out for change and appropriate change. I do want to look at structures that we have some experience with before we engage on this major change.

As we just pointed out, two obvious programs that we need to compare is Medicare and the FEHBP. They are very different programs, Medicare being an entitlement program, a great majority being fee for service, although we are moving toward plans and choice of plans; with FEHBP being employer-sponsored with a constituency there that Medicare does not have, that is the employer in comparing those plans.

Mr. THOMAS. Dr. Frist, could I just say that FEHBP is the Federal Employees Health Benefits Program, if someone is watching and does not know what it is.

Senator FRIST. That=s right; with agencies of the Federal Government being the sponsoring employers; participation voluntary, whereas in Medicare we have this whole concept of universality. So, there are a lot of differences.

I am not as concerned in terms of administration of it, because I think that question was in part addressed. But the Office of Personnel Management which oversees the FEHBP and HCFA do differ significantly in the way they interact with the contracting health plans.

Because OPM controls ultimately most aspects of the design of the programs, the management, and the negotiations of FEHBP, it seems to be able to respond much more rapidly, much more flexibly, and just really more responsive to what is going on in the insurance marketplace broadly.

Whereas, with Medicare as you had said and as Senator Gramm has said and others, any major change in Medicare has to be made by the U.S. Congress. As you said, it takes an act of Congress. Some people laughed, but in truth it takes an act of Congress to engage in any major or even semi-major change.

OPM, on the other hand, the Office of Personnel Management is able to implement that change based on their observations and evaluations of the marketplace. It=s much more responsive.

I guess my question to you is what deficiencies would we expect or have been observed in the OPM to be more responsive to the marketplace management style versus an act of Congress? What can we learn from that past history of OPM that has this long history of interacting directly with those plans?

Ms. DEPARLE. I would say that I probably studied more closely the administration issues than I have the deficiencies. Just a quick reaction would be that I, as a Federal employee, if I had a problem with my health plan, I would not call OPM. I would probably be calling the health plan directly or I would be calling my agency which has a number of employees who work on administering it.

I think you might find that the plans, themselves, would be more involved in marketing to beneficiaries as they are with the Federal Employees Health Plan. You might think that=s fine; you might not think that=s fine. There is probably less regulation of those plans by OPM.

Again, the question would be whether there are differences among the two populations that are being served here. You know, me as a Federal employee versus our grandparents who were in their eighties or nineties and whether there are differences there where you would want to make some other arrangements. You might expect some more vigorous oversight on our part.

Senator FRIST. Yes, the plans have different populations, different objectives, very different. I guess that we would be concentrating on management and responsiveness now. For the last 12 hours all we have heard is how rigid Medicare is; you can=t respond; your hands are tied; you have to report to under secretaries.

The OPM does not have that. There seems to be a reasonably effective program. They seem to get out from under this tremendous rigidity that you don=t seem to have; that Medicare does not seem to have and that I think we must have as we look to changing plans, changing quality, changing ways to educate people broadly.

I don=t want to engage in that though if we know something based on past experience with the Office of Personnel Management and FEHBP which throws up a red flag. But I have not heard that yet.

Ms. DEPARLE. Yes, I would just say that you are exactly right. We have to be engaged with the Congress together. We have to be engaged in all sorts of little individual decisions in running the Medicare Program that I think OPM, because of the way that is set up, does not have to be involved in.

Again, I would want to look at it more closely before I told you there are no problems with that. There are certainly things that I think you expect me to know right now about the price of some individual item that, if you asked someone at OPM, they would not know. Perhaps things are working fine; perhaps they are not.

Senator FRIST. Should we have to pass a Federal law to change this, under OPM and FEHBP you would not. But here we are deciding about walkers quad-canes, and bedside commodes in the U.S. Senate. There is something that does not quite fit. I really want to give you more administrative flexibility and in some way take the politics out of it and take the November elections out of it. I think that is coming to be one of my goals.

Senator BREAUX. We are over the time limit and we have got to move on. We can extend this a little bit and shorten the luncheon time period.

I have Congressman Dingell, Mike Bilirakis, Kerrey, McDermott, and Watson and that=s it.

Congressman Dingell?

Mr. DINGELL. Thank you, Mr. Chairman.

I note that HCFA=s operating costs are under 2 percent of benefits paid. I gather that the private sector is very fine and efficient. Private providers have about a 12 percent, as with Blue Cross-Blue Shield.

I note that you have a proposal for contractor reform that would allow HCFA to operate more like the private sector in its dealings with the contractors. Could you tell us how to propose HCFA=s ability to deal with contractors in the most effective and efficient manner.

Ms. DEPARLE. Yes, sir. This deals a little bit with the question I responded to with Dr. Ganske, and that is right now under the law we are limited in the contractors that can do our business for us; payment of claims and those sorts of things. We would like to be able to deal with a broader array of entities out there that could do this work.

There are a lot of reasons to do that, both from an efficiency standpoint and from Medicare making sure that it gets what it pays for. But as Dr. Ganske pointed out, there are also situations where these contractors who are right now paying our claims have now decided they want to become Medicare+Choice plans. That may be good, but it presents some issues with whether or not they can really do both jobs.

So, we have asked the Congress for the last few years for the authority to deal with the broader array of contractors to frankly set some goals for them and to hopefully get a more competitive price and a more competitive product.

Mr. DINGELL. The Balanced Budget Act of 1997 gave you new authority to do competitive bidding demonstration. That was something that was addressed by Senator Gramm. I would note that this could put you in the same ballpark as private sector with regard to Medicare=s market power.

How do you expect that that will help you to better manage Medicare?

Ms. DEPARLE. Well, I think it would help us to get out of the cycle that we are in right now that I just discussed with Senator Frist where on each individual item, we and the Congress are setting a price. We are not getting the best price for Medicare, as Senator Gramm=s chart shows.

So, I hope with these demonstrations we will be able to show you that that is the right direction to go in.

Mr. DINGELL. Does that include buying it wholesale, as opposed to buying it retail which is a major cost component?

Ms. DEPARLE. Well, it will include asking the equipment suppliers, for example, to offer us the best price.

Mr. DINGELL. Can you do that now?

Ms. DEPARLE. No, sir, we can=t. We can under the Balanced Budget Act of 1997. We could not before that.

Mr. DINGELL. Now, I would note that one of the pending proposals for budget offered by my good friend, Mr. Kasich, is going to keep HCFA=s budget stable, no increase for a period of 5 years. That, I would note, against the fact that you are already operating at 2 percent which is far lower than the private sector does.

I am curious. What will be the practical effect of that over time in terms of your ability to carry out the functions that have been stressed by the Congress and by this body, for example, in dealing competitively with contractor reform and addressing the problems of waste, fraud, and abuse; also in seeing to it that you move toward newer and better and more efficient ways of conducting the business of the agency?

Ms. DEPARLE. Well, it would really hurt us. I am very concerned about that budget proposal. We are doing the best we can to conduct the activities that you have given us so far. As we have heard this morning, you want us to do some more things.

We are trying to do the Health Insurance Portability and Accountability Act. We are trying to do a number of other activities that we have been given to do. I think we would have to do what Dr. Altman said, that we would have to prioritize.

I dare say that we would be down to focusing on what would not encompass all the activities that the members of this Commission would want us to do.

Mr. DINGELL. Now, this is against the background of the Congress having imposed traditional statutory responsibilities upon you under the Balanced Budget Act of 1997. You are probably anticipating the same thing under the next budget act; is that right?

Ms. DEPARLE. Well, yes, sir. Let me just say that we think there are some terrific things in the Balanced Budget Act and we are excited about working with the Congress. I have to be forthright with this group in saying that we cannot do them without some more resources.

As I pointed out in the beginning, the members of this Commission have been helpful in trying to get us more resources.

Mr. DINGELL. Mr. Chairman, thank you very much. You are very gracious.

Senator BREAUX. Thank you.

Congressman Bilirakis?

Mr. BILIRAKIS. Thank you, Mr. Chairman.

Of course, I am hopeful that the authorizing committees will make those decisions rather than the Budget Committee. I know that has always been a thorn in our side over the years.

Just a very concise but bottomline statement, Mr. Chairman. We have sat here now for approximately an hour with all sorts of questions and comments to Nancy. She has responded, and yet it is probably just the tip of the iceberg in terms of the input and the information that this Commission will continue to need from HCFA because HCFA=s a large part of this overall picture.

In the process of reforming Medicare, we can=t ignore the reforming, if necessary, of HCFA. I would hope that we would be not only issuing an invitation, but even more of a command to HCFA to work with us.

We have Bruce on the Commission, but he is wearing another hat now. We need people who currently work for HCFA and I don=t mean only in sessions such as this, but maybe on an everyday, step-by-step basis. We need HCFA=s input desperately because we in this ivory tower may be making decisions which may not jibe with what HCFA can do. So, hopefully that will be a part of our planning.

That is basically what I have to say, Mr. Chairman.

Senator BREAUX. We have a commitment from Nancy to have their staff available when we need them.

Let=s see; Senator Kerrey?

Senator KERREY. Mr. Chairman, I won=t ask a question because I don=t want to evoke too long of an answer and I don=t want to drag this thing to where we are not able to get to the second discussion.

There is some work that I think I need to do in order to make some better judgments about how to proceed, as others have said here, as we try to identify areas where we can come up with savings in either the fraud or the management areas. It may require a change of law or just for HCFA to get the job done.

As a consequence, we need to address the pressure to expand the benefits. I say to the audience that I appreciate their making an effort to come to this hearing. I see a number of people holding signs saying, >>No more Medicare cuts.==

One of the things that we struggle with as a Commission, and I say this to the audience, is that neither the current year nor current beneficiaries are our problem. I appreciate your concern about this. But I would urge you to get a copy of the report that we were given yesterday by our Modeling Task Force which shows that we are currently spending about 2 percent of our income and about 5 percent of our payroll, which is not excessive, for Medicare. I don=t find those levels to be excessive at all. They are completely justifiable. That is not a problem.

But if you will look at the outyears and how unpredictable the outyears are going to be, for someone who is 32 years of age today; a 32-year-old working American who is paying his or her payroll taxes and paying their income tax, many of whom do not have health insurance, I should point out. Remember there are 40 million Americans today without health insurance.

A median family of four, paying $34,000 in taxes, are paying $1,600 of their taxes to subsidize somebody else=s insurance and health care. That is where we get our money. I point out that I am surprised at the response earlier to some of the questions about the difference between HCFA and the Federal Employee Health Benefit Program. And HCFA is an insurance company.

If the Federal Employee Health Benefit Program was spending $200 billion a year of tax money, we would have a much different attitude toward that agency. You are spending $200 billion a year. You are cutting checks that come from the American taxpayers in some fashion.

So, the problem that we are addressing, it seems to me, is one where people are saying, >>What=s the problem?==

It seems to me that we have got to be able in some clear fashion to articulate what that is. As I see it, from 1995 to 2010 we double the percent of total payroll. It=s 17 percent of total payroll in 2030. That is an unacceptably high level.

Now, I am not going to be alive in 2030. So, I guess I could hold up a >>No More Medicare Cuts== sign as well for me. I would say that it is not going to affect me. The people who are paying the Medicare bills are people who are in the work force. It seems to me that we have got to balance our concern for current beneficiaries with our concern for the people who are paying the bills. Otherwise we are not likely to come up with any reasonable solution.

Mr. Chairman, I hope that one of the things that will come about will be some answers to the questions having to do with how to get at fraud in the system. I must tell you that I have not found a lot of people in Nebraska who are doctors or hospitals that think they are engaged in fraud. Nonetheless, they are involved with extensive efforts today of having to put a lot of extensive work into paperwork in verifying that they are not engaged in fraud. They say that it is not us; it is somebody else.

How do we get at this management thing? Are there ways for us to reduce the costs of both managing not only HCFA, but managing on the other side as well. One of the most difficult questions that any doctor or hospital has to answer is, No. 1, who is going to pay; and No. 2, how much are they going to pay?

That is the problem that an administrator has to face out there. They have to put a lot of time and energy into getting payment. If the payment comes 60 days or 90 days after the procedure is provided, that costs them a lot of money. That has an impact upon their capacity to be able to provide services.

So, Mr. Chairman, I hope that as a follow-on to this management discussion that we can get some opportunity to get some of the questions that were asked both about the management comparisons between HCFA and the Federal Employee Health Benefits Program, as well as the questions related to fraud and abuse.

Otherwise, it seems to me that we are going to run into a wall of >>Let the People Speak== and >>No More Medicare Cuts== and this Commission is going to find itself with recommendations that are going to go nowhere.

Senator BREAUX. Congressman McDermott?

Mr. MCDERMOTT. Thank you, Mr. Chairman.

I think one of the things we have done here is talk about all the problems of the past. I really want to talk a bit about what I see as a major problem that faces us within a very short period of time.

HCFA is preparing to send out this document, 40 pages worth of explanation of the choices that senior citizens have within the system after October 1. One of the questions that has troubled me is what happens to the person who says, >>I am going to go into an HMO and then if I leave the HMO and I want to go back to the fee-for-service original Medicare plan, will I be able to get my supplemental policy?==

So, I said I would go through this brochure and figure out what it says. Here is what it says, >>If you are 65 or older and you lose your health care plan coverage under certain circumstances, you will have the right to purchase Medigap policy A, B, C, or F as long as you apply within 63 days after losing your other health care coverage.

>>The circumstances include the following: Your Medicare plan stops providing care, you move outside the plan service area, you leave the plan because it fails to meet its obligations to you, you are on an employer health plan that terminated coverage, your supplemental insurance terminated your policy and you are not at fault.

>>You may want to talk with someone in your State health insurance counseling plan for more information.==

That is what we are going to tell senior citizens to do. If you have got a problem, you call your State insurance commissioner and ask him or her how they deal with this supplemental problem. I am really worried that when 38 million people, 26 million households get this brochure mailed to them and they start reading it, and they say, >>Wonder what this means?==

To whom are they going to turn to get clarification? Are they going to turn to HCFA=s non-existent field service staff or the Social Security Administration who is, as Mr. Vladeck suggests, already divorced from this whole issue?

How do they get these issues clarified? October 1 is 1 month before election. You are going to have 26 million households receive this document and confusion is going to begin to reign. I see that we are going to have ourselves a problem.

I don=t know how this will be dealt with. I am interested to hear how the hot line idea is coming and what other plans you have to deal with these kinds of questions when they certainly start coming to congressional offices. Our casework staff will be inundated.

I think Ms. Gordon can talk about that, but I think that everybody is going to be inundated with these kinds of questions with very little understanding of what goes on.

Senator BREAUX. Nancy, can you comment quickly, please.

Ms. DEPARLE. Yes, I can.

I am glad that you have had a chance to look at the draft. We are focus-testing the booklet around the country right now with seniors and actually have already been doing that over the course of the spring. We have also been consulting with some of your staffs about how it looks.

This is going to be very different. We have to be very honest about where we are starting from. As Bruce Vladeck said, before a few years ago, when a beneficiary signed up for Medicare, they went to the Social Security office a few months before and got a card. That was basically it.

We are trying now together to make some improvements to it. It will not be perfect the first year. I hope, Congressman McDermott, that all the calls won=t go to the congressional offices. We have been working very closely with the State insurance commissioners, with the State insurance counselors that deal with Medicare, with the agencies on aging.

But there is no question that when people get information that they have not gotten before, they will have questions. We will have a toll-free line set up. We are doing the best we can. We appreciate the Commission=s support.

I am sure it won=t be perfect when we first get it set up, but I think that we are moving along.

Mr. MCDERMOTT. I understand that the cost of the hot line is about $60 million. Where do you get that money from?

Ms. DEPARLE. We are using the money that was appropriated to us last year with the help of our authorizing for the Medicare+Choice Program to set up the toll-free lines.

Mr. MCDERMOTT. So, do you have enough money to have nationwide hot lines?

Ms. DEPARLE. This year we have enough for what we are doing; yes, sir. But as you say, and I am glad to have an opportunity to point this out, this is the first time we have ever done something like this. So, we are going to be learning as we go along.

Some of you are familiar with other agencies that have done toll-free lines. It is not an easy thing, but we believe we have enough to get started on it this year. We will have to have discussions about the future.

Senator BREAUX. Ms. Gordon, you had a question?

Ms. GORDON. Could I interject, please.

I agree with Congressman McDermott. We are going to be flooded with calls and letters on this. I wish you would test this in Mississippi.

Ms. DEPARLE. It may be, ma=am. I can=t remember; I saw the list of where we are doing it and it may actually be in Mississippi.

Ms. GORDON. They are not going to get any answers from the insurance commissioner. They are going to look to us.

Senator BREAUX. Mr. Watson?

Mr. THOMAS. May I interject, Mr. Chairman.

I do think we are off on a partially wrong track here in terms of the provision that was read. That is a provision in which, through no fault of the beneficiary, the insurance provider is removed.

Ms. DeParle, your response was not as direct as perhaps we could make it. The section that Jim McDermott read is when, through no fault of the beneficiary, the carrier does not continue to provide insurance.

But if the beneficiary under the current rules wants to change programs, don=t they have the ongoing option of a 30-day window, under current law when they move into this, to change programs. The warning in the structured statement that he read was where insurance carriers pull out and leave those beneficiaries hanging.

That is why they are to call other areas, because a number of these insurance programs are governed by the State insurance commissioner. That is one of the reasons you would call them. The reason they quit offering insurance was because of State regulations and problems.

I do think selecting that particular provision out of context attempts to misrepresent the choices that beneficiaries have. The choices the beneficiary has when they move into a Medicare+Choice plan is that every 30 days they can leave that plan and go to another plan if they don=t like it. They have full movement in and out of the traditional Medicare Program or the Medicare+Choice Program.

Once again, that provision is only where through no fault of the beneficiary, the insurance company quits offering the plan. That is why they would be suggested to call the State insurance commissioner. But if it is an ongoing plan and the beneficiary doesn=t like it, they have full freedom to move to another plan every 30 days.

Senator BREAUX. Mr. Watson? Final point.

Mr. WATSON. Debbie Steelman and I are sitting here watching everybody get aggressive. We are wondering what everybody had for breakfast this morning. [Laughter.]

Senator BREAUX. We had pure coffee this morning. There=s no decaf on this team.

Mr. WATSON. To confuse a Federal employee=s health benefit plan with Medicare and to bring up other subjects out of context is doing a disservice to Medicare. Medicare is a unique Federal program for our elders. We ought to keep those contexts in mind.

I provide health care to 50,000 Federal employees. I might add that in dealing with employers, the Federal Government has one of the stingiest health packages I have ever seen. So, I don=t know how you could compare it with companies that provide total costs of health insurance to their employees.

A Federal employee has to provide his own deductions and copayments because the Federal Government will not pick up the total costs of his insurance. So, in that instance we deal with the Federal Government as an employer. On Medicare we deal with them as a regulator and an insurance company. It is completely different.

Senator Gramm, I wish I had had more time. But I became quite concerned when you talked about the prices. I had one of my staff quickly--we couldn=t get all the prices--but on the walker you said the VA pays $50 and Medicare pays $80. We pay $44 for a walker. On the quad-cane where the VA pays $15 and Medicare pays $44, we pay $22. On the bedside commode, we pay $60.

On the lightweight wheelchair, you can only rent those. You can=t buy them. We are still looking at the prices for the oxygen concentrator. But on the hospital bed I pay $880 as compared to $1,922 or $945. I must remind you that when they contract with me for Medicare, those savings and benefits are built in because I am prepaid. So, that is not a universal condemnation of the whole system. There are efficiencies.

The last thing I want to warn us about is this: Let=s not get carried away with trying to compare Medicare with every other circumstance in the world. There is great danger in doing that. I don=t know of any private contractor or private insurance company that could match the efficiency and the breadth of administration that HCFA does for Medicare.

If we are going to look seriously at it, we ought to look at bolstering their ability with resources to provide a sophisticated surveillance of this program into the future.

Senator BREAUX. I will point out that Mr. Watson=s is not a fee-for-service plan. You are a managed care and you are able to pass those savings on.

Mr. WATSON. The last point about patients on any level, on a serious note I want to bring up that Greg and John Dingell have been working hard on the Patients= Bill of Rights. I really do support those. That=s a beginning to protect people, a national standard and bill of rights that the members can have. You can build regulations on that on a universal station about appeals and processes so that people can make sure they get health coverage.

Senator BREAUX. OK, last comment on this subject. Senator Gramm?

Senator GRAMM. Well, Mr. Chairman, I think one of the advantages of having contracts like we have with you, Mr. Watson, is that you do have an incentive to go out and shop these things. What I was trying to point out is that we have another government agency that by doing a different system does it better.

But the point I want to raise, Nancy Ann, is another concern. I wish I had my chart. All the members of the Finance Committee have seen this chart many times. But I think it is a very telling chart. What I did in this chart is look at what the Federal Government, in partnership with its employees, is paying HMO=s in various cities throughout the country for people who participate in the Federal Employee Health Benefits Plan.

Then I looked at the price we are paying through Medicare for Medicare beneficiaries participating in HMO=s. Now, obviously Federal employees are younger. So, one line is generally lower than the other. But the thing that stuns me is that there is almost no relationship at all between the price that is being paid in a more competitive system where people are choosing HMO=s or other providers of care and the Medicare costs.

You may have in Austin a certain price and you may have in Seattle another price for the Federal Employee HMO purchases, and the one is Austin may be higher. Then when you get Medicare buying it, the one is Austin may be half the price you are paying in Seattle.

Now, I have probably not picked the right example. But the point is that I would like to get you to look at it. The point I want to make is that this is another area that needs to be looked at which I believe is probably the same kind of problem we have in purchasing durable medical equipment. It makes no sense whatsoever that the government, through a competitive system like the Federal Employee Health Insurance, is paying one rate and Medicare has an entirely different rate.

Now, obviously it is higher because you have got older people. But somebody really needs to look at that distribution, because it is obvious that there is just no relationship whatsoever between what is being competitively paid for HMO=s by the same government in a different program and what is being paid in an non-competitive system like Medicare.

I will try to bring that chart the next time to pass it around. It is stunning.

Ms. DEPARLE. You have described the difference. In FEHBP, it is my understanding that they go out and say, Here is what we want you to provide; here=s how much money we have. Who wants to bid on it?

Senator GRAMM. Yes.

Ms. DEPARLE. With Medicare, we set the price based on what the local area prices are in the fee-for-service world. That=s the difference.

Mr. THOMAS. No, there is another difference. If we are going to discuss these comparisons, we have got to be totally open and honest about the differences. The Office of Personnel Management talks about a general basic package, but the private sector makes adjustments and modifications. It is a fixed-dollar amount. That changes the dynamics, I think you will have to admit, significantly when you are out shopping product.

Ms. DEPARLE. That=s what I meant when I said the Federal Government says this is how much we will pay.

Senator BREAUX. And that makes an argument for our combination of the two.

Nancy, we want to thank you very much for being with us during this discussion. It has been a good discussion. We have extended the time a number of times. We thank you. We look forward to working with your people. Thank you for being with us.

Ms. DEPARLE. Thank you, Mr. Chairman.

Senator ROCKEFELLER. May I add that I am grateful that Nancy Ann was, in fact, open and honest in her answers unlike some have suggested. Those who have suggested that perhaps did not listen as carefully as they should have.

Senator BREAUX. All right. Thank you, Nancy.

We will now move on to the question of financing a very important part of any discussion on Medicare. Before we do that, I have one announcement. We have made a change because of the extension of the time. The luncheon has been moved to H-163. It is the Committee on House Oversight=s conference room. It is in 1309 Longworth House Office Building. That is Congressman Thomas= committee office.

Following that luncheon, the Commission members can walk over to the House Oversight=s hearing room which is 1310 Longworth to start the Reform Task meeting. We will do it immediately following the lunch. So, we will not have any break there because of the extension of time.

We would like to start the question now of financing. If you will again look to the little box, we have set up a theme. The theme is taxes, budgeting, financing for the non-aged populations, role of beneficiary resources, financing for non-insurance functions. All of those are part of the discussion on financing.

I would toss out some thoughts for discussion with regard to financing. The question first of all that I would propose: Is it realistic to think that we can solve Medicare=s problem by simply raising taxes?

Chairman Greenspan testified at our last meeting and said there comes a time when you cannot increase taxes without negatively impacting the overall economic well being of the country.

Another point is the question: Should beneficiaries be asked to pay more toward the cost of Medicare? Or should only beneficiaries with higher incomes be asked to pay more?

Obviously the question of the purpose of deductibles and coinsurance is at issue. The point is that it hopefully gives beneficiaries a financial stake in health care decisions they make. Is it appropriate? Is it proper? Can it be increased? Should it be eliminated completely?

Another question in which a number of members have an interest and Bill Frist in particular: Should Medicare continue to finance the graduate medical education for doctors in this country?

So, we now would like to begin the question of financing. The floor is open for comments from any of our Commission members.

Senator Gramm?

Senator GRAMM. Mr. Chairman, I would like to begin on the last issue that you raised, and that is graduate medical education and disproportionate share.

Senator BREAUX. Excuse me, Senator. Let me ask the audience if they would please keep the discussions in the audience down to a minimum so that we could hear. Thank you very much.

Senator Gramm?

Senator GRAMM. My guess is, having watched this process in other areas where you have got lots of money, that what happened is the Part A Trust Fund looked like a big slush fund that was available to fund virtually anything. So, we find ourselves now funding basically the graduate medical education of the country out of Part A Medicare.

Part A Medicare is funded by a payroll tax. So, that 20 percent of all income, the income derived from capital pays no Part A taxes. So, basically we are funding graduate medical education by taxing working people. We are exempting all capital income from that tax.

It creates several problems. One is a terrible inequity problem because it is skewed toward lower income workers paying the tax. The second problem is that we are taking money from a trust fund which is going broke and we are funding a program that has little specific linkage with Medicare.

So, I think at an absolute minimum, one of the things we ought to do here is to recommend to Congress that they no longer pay for graduate medical education out of the Part A Trust Fund and out of Medicare.

Senator BREAUX. How would it be funded under that suggestion?

Senator GRAMM. Well, I think--I tell you another problem with it is that we made it an entitlement. So, I don=t know how many people noticed it, but last year we started paying people not to train doctors.

So, it is like we now have the old Soil Bank Program in graduate medical education, because we now have an entitlement where medical schools get money to not train doctors. They are entitled to it; so, we don=t vote on it every year. So, it is automatic.

So, now that we have got more physicians in some areas than we need, HCFA has set up a program to actually pay medical schools and hospitals not to train doctors rather than going back and changing the entitlement.

My recommendation, Mr. Chairman, is that we place this under an authorizing committee so that there could be constant oversight. We can look at how many doctors we need, how many specialists we ought to be funding, and then we could provide money through the appropriations process.

The second issue is similar. Disproportionate share payments are basically a subsidy that we pay to be sure that lower income people get access to health care. It is a very important program, but again there is no reason that it ought to be paid for by workers through a payroll tax. It seems to me it ought to be funded through general revenues and that all Americans, whether they earn their money with their wages or earn their money with their capital ought to pay for it.

Funding indigent care is very important. But why should Medicare do it? So, I think both these items should be taken out of Medicare. They both should be put under an authorizing committee where we can have real oversight, something that we have never done. There has been no effective oversight over either one of these programs.

I think they ought to go through the appropriations process every year. If we are training too many physicians, we ought to have a debate about it so that we reduce funding rather than get into this silly business where we pay hospitals to not train doctors.

Senator BREAUX. Senator Kerrey; then followed by Dr. Altman.

Senator KERREY. Mr. Chairman, the narrower problem of graduate medical education as well as the disproportionate-share issue, both of which this Commission has talked about before, we need to address, especially GME. As you move to more and more managed care, we are going to have to address that anyway. We need a solution to that problem.

In addition to that, one of the things that I constantly struggle with is how to make a decision about a program that is an entitlement, an authorizing law for current beneficiaries that will not be unaffordable until sometime in the future. The economy is so strong today that we can discuss all kinds of possible expansion of benefits for current beneficiaries.

The problem is that whatever commitment I make today is a commitment that I have got to keep not just today, but I have keep it 10 years from now, 20 years from now, 30 years from now. I am not just making a commitment for current beneficiaries. With 2 percent of total income going for Medicare, if you look at that number all by itself and you say, >>Gosh, in a country like ours, we ought to be able to afford to expand benefits for current beneficiaries.==

But if you look at the growth of the program over the years, both as a percent of income just under the intermediate scenario that HCFA uses, both as a percent of income, but especially as a percent of payroll, you stumble into a wall. You stumble into the wall that says I can make a commitment today, but what if the economy turns sour? I get the income from people who are working. The way I see Medicare, it is social insurance. It is a very strong, inter-generational commitment.

I allow myself to be taxed today with the understanding and promise that when I am eligible, somebody else is going to allow themselves to be taxed to pay for my benefits. I think it is a terrific program that way.

The challenge, it seems to me, that we face, is balancing the commitments that we are making for today=s beneficiaries against the promise that we will be making for tomorrow. Frankly, I don=t know how to do that. In an environment that is increasingly hostile to making changes in current programs, it seems to me that is our most important challenge.

It does appear with our economy as strong as it is right now that we ought to be able to expand benefits. Indeed, this Commission is likely to make some recommendation along those lines. The dilemma for us, however, is that commits us not just for today; it commits us out in the future as well to be making those kinds of expenditures.

Senator BREAUX. I would point out on that point too about the payroll tax, somewhere around 80 percent of Americans pay more today in payroll taxes than they pay in income taxes. That is something that has to be considered when we talk about financing.

Next would be Stuart, then Senator Rockefeller, followed by Dr. Ganske.

Mr. ALTMAN. I have two different issues. One I want to talk about is the graduate medical education. I am sorry for myself; I have been a critic often when I thought we were paying too much. I think we need to put on the table just what is going on here. That is that two-thirds of the graduate education money is in what is called Indirect Medical Education.

It is a misnomer; it is not a medical education fund. It is an amount of money that is built into the DRG system to pay teaching hospitals for the higher cost of providing care to Medicare beneficiaries. Now, I think we could make a legitimate argument that we have been paying too much. In fact, the Balanced Budget Act of 1997 does reduce that amount.

However, to say that we are going to pay teaching hospitals no more money than a non-teaching hospital for the same service is inconsistent with what the private sector does. The private sector pays substantially more to teaching hospitals, even the managed care system pays more to teaching hospitals. So, I think we need to look at that.

Second, most people believe that with all the complexities, when you really get sick, you want to go to a teaching hospital. Therefore, we are prepared to pay more for a quality access whatever it is.

So, indirect medical education is a legitimate expenditure of a program that pays for it. Now, I would suggest that it may be done differently. We could do this kind of experimental authority that we are talking about. But to cut it all out and put it into a general revenue is not correct.

On the other hand, however, direct medical education is a payment for teaching. I support Senator Gramm. I think we need to move direct medical education into a fairer taxing system and not put it on the payroll tax.

But two-thirds of the money we are now spending under that big category is in the indirect. So, don=t think we have about $9 or $10 billion. If you take all of it away, I think you are going to put serious access problems to teaching hospitals for Medicare beneficiaries.

So, I would even use the private sector. Let=s find out what the private sector pays, both managed care and non-managed care for teaching and then pay no more than that. So, I am not opposed to what you are saying, but I just need to put that on the table.

Senator BREAUX. Well said.

Senator Rockefeller and then followed by Dr. Ganske.

Jay?

Senator ROCKEFELLER. Thank you, Mr. Chairman.

Dr. Altman somewhat stole my speech from me. But I want to add on to it.

I have been troubled by this myself. I remember just before the Clinton Health Care debate ended, Senator Moynihan and I were waiting on the floor with each about 5 feet of paper to go after each other on precisely the problem of graduate medical education.

Seventeen percent of all residents in this country reside in New York City. So, it is a matter of some concern to him. I, on the other hand, am more of the RBRVS, Resource Based Relative-Value Scale that says that you ought to be compensated for what it is that you put out in work and services, and not just how much you know. It is your education plus the intensity factor and all kinds of other things.

This tends to take generalists and primary care physicians and increase what they get paid. It takes specialists and decreases what they get paid under Medicare. But I will admit to being troubled by all of this.

I always rue the day, and that day has now come when seniors would find out that, in fact, Medicare was paying for indirect medical expenses, as well as direct medical expenses not only for the teaching of American-trained doctors, but also for the teaching of doctors who receive their medical degrees from overseas without which West Virginia would have no access to health care for a large portion of our population. I dare say this is true also in East Texas.

So, it is a problem. I worry about it with the Senator from Texas. That was our frustration. Neither RBRVS worked; we couldn=t do anything about GME, et cetera. So, we paid hospitals to train less.

The question that I have is, if we were to move it outside, and this is where I am skeptical, would the Congress, in fact, have the sustained will in the authorizing committees and the appropriating committees to make sure that we had the highest-quality training of doctors in this country. That, in fact, makes it possible for those who are sickest to go to the teaching hospitals, of which Texas has many, which are the greatest medical institutions in the entire world.

When the Senator was asked by Chairman Breaux how to pay for this, he declined to answer that. I think that is the great question. Is there, in fact, an alternative which is absolutely dependable? The future of the quality of our health care professionals depends upon it. The Veterans= Administration depends on it as well, 50 percent of all practitioners being trained there.

So, my question is: Is there any dependable alternative? I am skeptical, but I am willing to listen.

Senator GRAMM. Let me say this. The advantage of earmarking a funding source is that you guarantee the funding source. Under certain circumstances, I would be willing to support that. But here is my concern about it.

The problem of dedicating a funding source is then you eliminate any judgment as to whether that is the right amount of funding, whether it is too much or too little; whether you are training the right number of physicians. What we have now with a dedicated funding source is starting in New York and soon to spread all over the country, we are going to be paying medical schools and hospitals not to train doctors.

So, if we could get a dedicated funding source but have a real review of it and the ability to change the program when it does not make sense, then we could get the best of all worlds.

Can we do that? I don=t know. You are obviously right; second only to New York, Texas probably has more medical education per capita than any other State. I am concerned about it, but I don=t want a program that is going to spend money automatically with no review or oversight. Then we would have to set up other programs to try to correct it.

Senator BREAUX. Chairman Thomas?

Mr. THOMAS. Mr. Chairman, we are going to set up a separate review structure for graduate medical education. I just find it ironic that in the relatively short time we have left to discuss taxes that no one seems interested in talking about the fact that the payroll tax source of the Part A Medicare Trust Fund is currently projected to go bankrupt by 2008.

In the Balanced Budget Act of 1997 we shifted over the fastest-growing area of Medicare costs, the home health care, which now produces 50 percent of the funding for that portion or 37 percent of the entire Medicare Program which is now coming out of the general fund.

Do we want to continue to do that? Does that make sense in terms of a balanced payment? I know that graduate medical education is an important area. But since we have set up a separate discussion structure for that, it would seem to me that our time might be better focused on the fundamental financing of the program: Why historically we have shifted it more and more to the general fund and whether or not payroll taxes make sense today and for tomorrow.

Senator BREAUX. That point is well taken. We are spending a great deal of time on graduate medical education which is an important part of the program. But it pales in comparison to the overall question of financing for the entire program.

Dr. Ganske?

Mr. GANSKE. I will try to be brief. I wanted to say something about graduate medical education since it was brought up.

This year we are spending about $7 billion on GME; about $2.4 billion on DME; and $4.7 billion on IME. When we did a balanced budget in 1995, we looked at a mechanism for setting up a trust fund for that.

I appreciate Dr. Altman=s comments particularly in distinguishing between DME and IME, and also Senator Rockefeller=s comments about a steady stream of funding for something that is very important for our country=s health. I look forward to working with Dr. Frist on this issue in more depth.

I would just like to say this. I think that a steady funding stream is very important for our teaching hospitals. When I was at Mass General where Dr. Frist trained as well, 1 day there were 2 guys out mowing their lawn. They were on a terrace and decided to move the mower down to the next terrace.

They both put their fingers underneath the lawnmower to carry it down without turning off the mower. There were soon 16 fingers on the ground. It took every single resident, all the staff, and 36 hours of surgery to get those finger reattached. There was no private hospital; there was no non-teaching hospital that could have done that for those people.

I think that when we look at this issue and I appreciate Senator Gramm=s comments about looking at manpower needs, I would like to give an incentive for reducing the numbers of residents somewhat similar to what we decided to do with the farm bill. We decided to do a transition program to ease into a better policy. That is what we are trying to do on that issue of the manpower needs.

Senator BREAUX. The point is to turn off the lawnmower before you pick it up. [Laughter.]

Dr. Vladeck?

Mr. VLADECK. As an employee of the Mount Sinai Medical Center, I am not going to say anything about graduate medical education.

I do want to talk about the broader financing issues. In discussing our Modeling Task Force report yesterday, the tables we have before us point up the danger of discussing pieces of this program without discussing other pieces.

What I mean by that is that at the presentation, some of the commissioners heard from Professor Rhinehart in conjunction with our last meeting. He pointed out that if you use the timeframe from now to 2030, per capita real income in the United States will increase between 50 and 100 percent.

That means that even an increase in tax rates will leave the average citizen enormously better off in the year 2030 than he or she is today. It also means that in general with great power it has always been the case that the more affluent a nation is, the more money it spends on health care.

Part of that is that nations with older populations tend to be more affluent. As people in society have more income, they tend to want to spend more of it on new kinds of health care technology and new services and drugs.

So, I think it is important to look at this long-term issue of percent of payroll or percent of GDP in a way that requires us to think about if those forecasts are correct, then the same model produces a society where the average individual is 50 to 100 percent more affluent than he or she is today. I think then the question of tax and financing burdens is a different question.

What we do not yet have, but have asked the staff to produce, is information as to whether that increase in per-capita income will extend to people of retirement age or not. My suspicion is that it does not. About one-half of the people in the current work force will be retirees then; they have reasonably generous provisions for their retirement income. The other one-half have nothing but Social Security, the benefits of which will grow more slowly.

So, when we ask what is an affordable burden for the generation of workers in 2030 to pay to provide health care for us who are retired in 2030, we have to get beyond thinking of doubled tax rates of people now. That is not what we are talking about. We are talking about people=s take-home pay in real pre-inflation dollars which will be twice as great as it is today.

Senator BREAUX. OK. Dr. Tyson?

Ms. TYSON. I also wanted to address the general financing issue. I want to start with these projections. In thinking about the burden on the economy, the right measure is actually spent on GDP. We have just decided that we fund certain funds through a payroll tax.

The issue from an economic point of view is a question as to the overall size of a tax burden on a society. Then you can look at the best composition of taxes; that is, how much in payroll, how much in value-added, how much in income taxes?

So, I don=t think the payroll numbers themselves are very helpful here. The issue is that we have predictions of GDP from Medicare going from 3 percent in 2000----

Senator BREAUX. What are you reading from, Laura?

Ms. TYSON. I am reading from our summary table yesterday, the Modeling Task Force.

The projections are something like Medicare spending in 2000 is 3 percent of GDP, to go up to 8 in 2030, or 6 in 2030 depending on which set of assumptions you look at. A key thing to remember in this number is that behind this number there are also going to be increases in private health care spending as a percentage of GDP. That goes to Bruce=s point and that Alan Greenspan made as well, which is that health care in this society in particular is what economist call a positive good. As income rises, people tend to and want to spend more on it.

So, we should keep in mind that some of the reasons we have a growth in Medicare spending and overall health care spending is because that is what our citizens want.

Second, is the Medicare and the private health care system we currently have in place as efficient as it could possibly be? That is a different question from the question as to how big is the share of GDP devoted to health care. So, I think we should spend our time in the Commission talking about how to make the Medicare system more efficient.

Or we should talk about ways to adjust the financing mechanisms for Medicare. But we should not focus on the percentages devoted to health care, but we should change the way with which we finance Medicare. The fact that we pay more in payroll taxes than in income taxes is something that we can reverse. We can undo that decision.

So, when we think about how to finance the system, we must ask if the financing mechanism an efficient one. That gets to issues such as copayments and deductibles. Also there is the issue of fairness. Fairness and efficiency are not the same. Frankly these numbers projected for 2030 are not going to change the fate of the U.S. economy.

Senator BREAUX. Ms. Gordon?

Ms. GORDON. Concerning the educational question, I have some research on that which I will defer to the committee. Just let me say that in Mississippi, we have the worst physician-patient ratio in the Nation. Yet our teaching medical school is given only $50,000 per year, per resident. In New York they are allowed $100,000 per year, per resident.

So, I will defer this to the committee, Mr. Chairman, for them to look at.

Senator BREAUX. Senator Rockefeller?

Senator ROCKEFELLER. I want to raise a question related to and triggered by our discussion of graduate medical education. It is easy to take groups out or programs out; we tend to take out programs and start all over again or we take what we have got and try to modify it.

I am not sure if one or the other is the answer. It may be some combination of the two. One of the groups I worry about is the so-called non-elderly that are involved in Medicare. I am referring to disabled and end-stage renal disease folks. One of the things I worry a lot about is that there may be an effort to separate them, to bifurcate Medicaid.

You say Medicare and people think only for the elderly. If one is not elderly, we think they should be somewhere but not in Medicare. I just want to pose that problem or my profound worry on my part just as point of information. The time will come when we will discuss that. These are people who have no voice and almost nobody knows they are covered by Medicare.

Senator BREAUX. Chairman Thomas?

Mr. THOMAS. The Senator makes a good point. When we analyze what we are doing with the future of Medicare, just as Social Security over the years became a hook used by Congress to attach a number of good and worthy programs, probably in a completely objective sense, these should have been placed somewhere other than on the Social Security hook.

One of the difficulties we will have in analyzing what the program should be and how it should be funded is the question of discrete groups who have no place else to go. When you listen to Congressman Dingell telling of the prime motives for Medicare, seniors as a group were one of those prime motives. They had no place else to go.

So, it is totally legitimate that we talk about setting up a program that takes into consideration a structure that will deal with the needs of people, both public and private and not recreate the problems of the past in terms of setting up a program which then gets partially distorted by having these folks not having anywhere else to go.

One of the concerns we must face is to take a step back from the percent of GDP, the growth questions. Whether or not we will have a higher disposable income; I just find ironic that currently there are people arguing in the paper that our current standard of living is not what it was back in the seventies. You can generate almost any statistical comparison to show that you are worse off it that is your goal.

The concern I have that someone who is somewhat responsible through one of the authorizing committees for the program, is that it may have made some sense to produce the Part A payroll tax, the hospital insurance program and then the supplemental, Part B, to cover physicians. It was a premium structure in which you did not get it by a payroll tax; you purchased the premium through a voluntary structure. It was one-half on the beneficiary=s side and one-half on the government=s side. Currently it is 25 percent on the beneficiary=s side and 75 percent on the government=s side.

The problem is we shifted one of the fastest-growing payment programs out of the hospital trust fund which was one of the ways we extended the years of the trust fund. But we placed it over in the supplemental or Part B, the 75 percent of which is funded out of the general fund.

At the same time, the way in which health care is delivered is changing. The distinct separation between hospitals and physicians as we know it is completely blurred now by the mixing of the way in which health care is delivered. The Part A and the Part B became an anachronism. We have been trying to keep the program afloat without addressing fundamentals. That is one of the jobs of this Commission, to address the fundamentals.

I know in conversations not around this table, everyone has said A and B should be combined. If you say that and support that, that introduces a whole series of decisions that have to be made about how a combined structure would work and to what extent is there an automatic draw on what will amount to 372 percent of the general fund.

I know that Dr. Tyson said that people want to spend more on health care. The problem is under the Medicare Program is that the money they want to spend is largely other people=s money. What we need to do is take a look at the overall structure where in many instances there are disincentives built into the program.

If Congress is unwilling and if this Commission is unwilling, then I don=t see how we are going to solve the problem to tell people who hold up placards and who demand one particular position, and let=s assume it is >>No more Medicare cuts,== then fine. If that is the position we are going to take, then there are consequences that flow from that.

Or we are going to talk about creating a structure in which there is a defined amount dealing with particular benefits. If you want more benefits, it is going to have to be wherewithal provided by the beneficiaries themselves beyond the 25 percent. You just can=t have it both ways. At some point the idea that the future will take care of itself got us into this current problem.

Our job is to fundamentally rethink the financing structure that will put it on a permanent basis regardless of the delivery mechanism and which contains a fair amount of choice because that is what people want in an informed way, but which requires wherewithal in order for individuals to get more of the benefits. Clearly society provides a good package of core benefits beyond what we offer now; it is adequate as a stand-alone package.

Those, I think, are the issues we are going to have to wrestle with in this Commission because we have tried it in Congress and Congress was not able to address the more fundamental problems. We were able to address some of the ancillary problems. This Commission I hope will take head-on the fundamental question of what, when, and how.

Senator BREAUX. We have got to finish at 11:30 a.m., and I have got four or five members that still need to be recognized.

Dr. Tyson, you have a followup on this?

Ms. TYSON. I just want to say that I agree with almost everything you said. I did not want anyone to think that we cannot do a number of things to make the Medicare Program a more efficient program by improving incentives.

We don=t yet have the appropriate incentives for users to make cost-effective choices or for providers to make cost-effective choices. So, I am very much interested in reform. We are in the process of reform in the private health care system. Medicare was performing as well as the private health care systems. I am concerned that this Commission not get unrealistic about what they think we can save by reforming the system.

Senator BREAUX. We could debate this all day. We must move on.

Dr. Frist passes. So, Stu Altman?

Mr. ALTMAN. We have come into this discussion with our own hobby horses. I want to jump on mine. I am concerned about this notion that we have a fixed amount of money that flows through the treasury and that if Medicare continues to grow, it will gobble up an increasingly large percentage of that money.

I am totally in favor of restrictions that make sense, changing the financing, and introducing the coinsurance. The issue we face is the baby boomer generation approaching 65. This has been a part of this country for 50 years.

The school systems in 1950 saw ahead of them this large number of toddlers for whom they had to make choices to prepare for them. They had to re-think and re-tool the funding for public education. We grew the public education system. Between 1950 and 1960 enrollment grew by 50 percent in public education and expenditures grew by 116 percent. Between 1960 and 1970, enrollment grew another 27 percent; spending grew by 100 percent. With that baby boom having passed through the school system, the numbers fell.

I suggest we have a similar situation here; to assume that the Federal budget is going to be fixed. The number of 38 percent for Medicare is technically true if we do nothing about the Federal budget. I suspect that funding from the seniors will have a significant component of the Federal money. We must do in health care what we did in education. We can survive.

Senator BREAUX. We are going to try to conclude with Congressman Dingell.

Mr. DINGELL. I don=t think there is anyone in this room that wants to do away with programs or hurt senior citizens. I do think that reiteration of certain points is in order.

The elderly do spend a disproportionate share of the incomes on health care. It is estimated to be about $2,605 out of pocket or 21 percent of their income. The poor and nearly poor Medicaid beneficiaries spend about 30 percent of their income on health care. Seventy-three percent of the elderly have an income below $25,000. Less than one-half of the elderly poor are on Medicaid.

It should be noted that long-care facility costs account for about 40 percent of beneficiary out-of-pocket spending; prescription drugs about 18 percent. Physician cost-sharing service make up another 20 percent.

I don=t think we are going to come to some of the conclusions that I would suggest, but I do think that we ought to keep in mind that less than one-half percent of payroll change will resolve this on both the employer and the employee. That will take care of it through 2030. We can go a full 1 percent through 2075 which is well beyond the end of rational prediction.

I would observe that we are running into huge resistance to payroll tax increase. Individuals don=t like it; employers don=t like it. But there is value added tax and a number of other things. We can keep this program alive and viable. Changes, reforms, reduction of waste, fraud, and abuse are important. Cutting administrative costs will be very counterproductive on what we are trying to do.

I just say these things so that we can keep in mind what is the mission of this Commission. I am sure my colleagues will agree.

Thank you, Mr. Chairman.

Senator BREAUX. Thank you, sir.

Now, Senator Gramm and Congressman McDermott.

Senator GRAMM. Mr. Chairman, I will touch on a couple of points.

By our own numbers, if we don=t see a speed-up or a slow-down, to fund the current program we would have to see the payroll tax equivalent go from just over 5 percent to 17 percent by 2030. That is a mega-increase. I don=t think we could suggest that just changing a point or two will affect it.

We are talking about more than tripling the payroll tax to fund that program. That is the cold reality we are looking at. We don=t have the cap on the amount of income that the tax is applied to in Medicare. So, as Americans find their wages rising in the future, they will pay more Medicare taxes. Medicare will be the beneficiary of any economic growth.

We use the payroll tax with the design that people were paying for the retirement medical care of current retirees out their payroll. In turn they were going to have someone else pay for theirs when they retire. If we move away from the payroll tax, we are really breaking that link, but are not hiding the increase in cost.

What is magic about 19 or 20 percent of GDP? We have never managed to collect more taxes than that. Even in the war efforts of the Civil War and in World War II, the plain truth is we have historical evidence to suggest that you will get about 19 or 20 percent in taxes. Medicare alone will take about 40 percent of what we have traditionally collected in taxes.

We ought to look at disability. The mortality rates and morbidity rates have fallen and by every evidence Americans are healthier. Yet the number of people qualifying for disability has exploded. It is something we need to look at very carefully.

Senator BREAUX. Final point from Congressman McDermott.

Mr. MCDERMOTT. I don=t know which of those issues to take on first. One thing about medical education; just remember that the Northwest has the WWAMI Program: Washington, Alaska, Montana, Idaho, and Wyoming all use one medical school. So, remember that when you decide to disconnect the payment from patients and give it to States.

I want to concur with Senator Rockefeller around this question of disability and end-stage renal disease people. They are people that nobody wants in the insurance industry; nobody will take care of them unless we make it an entitlement. The culprit came from our own State. Senator Magnuson stuck the end-stage renal disease program in Medicare and it was there because it was the only Federal program you could put it into to cover the United States.

If you have kidney failure, you are taken care of by that program. If you stop that entitlement which is a $25,000 per year cost to an insured, no insurer will cover those cases. With genetics you can now tell who has polycystic kidney disease and you can predict. So, you must be careful with changing entitlements such as this.

This was raised yesterday as to whether there is any room for any more revenue. But if you want to look for additional revenue, I don=t want to raise taxes; I would just like to broaden the base from which we draw it. Let=s tax unearned income.

So, if someone has $100,000 per year of unearned income and no earned income, they take benefits out of the Medicare Program and never pay one dime into it. So, there are some places to find extra income without raising taxes at all. Just broaden the base.

Senator BREAUX. I thank everyone for their participation. We have moved the luncheon to 1309 in the Longworth Building. The meeting will be at 2 o=clock in 1310, right next door.

We have a news release which will be available to everyone about the concept of covering America. I would like for Bert Seidman to make a comment on public hearings.

Bert?

Mr. SEIDMAN. Thank you, Mr. Chairman, on behalf of the National Council of Senior Citizens to thank you for the opportunity to hear a very important discussion on issues which are of great consequence to the elderly and their families and to all who are covered by the Medicare Program.

We will look forward to the opportunities you have suggested such as field hearings and other ways in which elderly people can have an opportunity to express their views concerning the Medicare Program and the decisions you and the Congress will make.

On behalf of the National Council of Senior Citizens, we are not just concerned about the problems the elderly have in health care. We are concerned that 41 million people in this country have no health care coverage at all.

Thank you very much, Mr. Chairman.

Senator BREAUX. With that, we thank all of our guests.

We will now move to our luncheon at 1309, right across the street.

The meeting will be adjourned.

[Whereupon, at 11:40 a.m., the meeting was adjourned.]

----END----