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FUTURE OF MEDICARE

COMMISSION MEETING

Washington, DC

Tuesday, January 5, 1999, and Wednesday, January 6, 1999

MEMBERS OF COMMISSION

SENATOR JOHN BREAUX, Statutory Chairman

REPRESENTATIVE BILL THOMAS, Administrative Chairman

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

BOBBY JINDAL, Executive Director

THE NATIONAL BIPARTISAN

COMMISSION ON THE

FUTURE OF MEDICARE

Transcript of

Tuesday, January 5, 1999

Commission Meeting

The Commission met at 1:45 p.m., Senate Dirksen Building, room 106, Senator Breaux presiding.

Present: Senator John Breaux, Representative Bill Thomas, Stuart Altman, Representative Michael Bilirakis, Colleen Conway-Welch, Representative John Dingell, Senator Bill Frist, Illene Gordon, Senator Phil Gramm, Sam Howard, Senator Bob Kerrey, Representative James McDermott, Debbie Steelman, Bruce Vladeck, Anthony Watson, and Bobby Jindal.

Senator BREAUX [presiding]. If we could ask our distinguished members of our National Bipartisan Commission on Medicare to please take their chairs.

We’ll begin this afternoon’s meeting.

Let me start by welcoming all of our members back and hope that everyone had a good holiday recess period, and are anxious to get back and solve some of the problems that are facing our Commission as well as other areas that we are dealing with.

I would point out that, for the Members of the Senate, that Senator Gramm is here, and I hope Senator Kerrey’s here; welcome back. You can devote full time to this effort now.

We have a very busy schedule in addition to this, tomorrow, as I know the House Members also have. We have our swearing in in the Senate tomorrow.

So we would like to ask all of our Commission members, and for the benefit of the public, we are scheduled to meet tomorrow morning at 9 a.m.

I would like to change that until 8 o’clock tomorrow morning, so that we can begin a little bit earlier tomorrow.

OK, today’s meeting we’ll try and focus on three subject areas, and tomorrow we will devote, in the morning, starting at 8 a.m., to an additional separate subject area.

I’d like to just outline for the benefit of the members and for the benefit of the public.

This afternoon, we will start with a discussion which I will lead dealing with conforming Medicare’s eligibility age with that of Social Security’s eligibility age.

And I want to have a dialog on pros and cons. I mean, I think this is not that complicated a subject area. It is controversial but it is not that complicated, but I’d like a real good discussion on the pros and cons, and if we move in that direction, how we might take care of some of the obvious problems that would be presented by such a move.

After we finish that discussion, Bobby Jindal will lead a discussion based I think, to some degree, on a paper that Dr. Bruce Lattig, that Bruce has spent a great deal of time developing on Modernizing the Fee-For-Service Program under the current Medicare structure.

And you have received an outline of how we’d like to approach that discussion which I think would be helpful in following the discussion and getting input in that area.

The third session for this afternoon will be Medigap reforms. It will be a discussion of the impact of the supplementary insurance program on the current Medicare Program, and we’ve received a great deal of testimony about the impact of the Medigap Insurance Program and how it affects the utilization of the Medicare beneficiaries’ benefits.

And we will have a discussion led again by Bobby Jindal on that subject.

We will break after that, and I know we have various caucus leadership meetings following that this afternoon.

Tomorrow, we will start at 8 o’clock, and what we will devote tomorrow morning’s discussion will be concerning the concepts of a premium support program.

You’ve all received a side-by-side comparison of the current Medicare Fee-For-Service Program and the Medicare+Choice Program, the Federal Employees Health Benefits Programs and the CalPERS Program.

The basic features of each one of those programs have been outlined in side-by-side discussion papers.

The hope here is with this discussion on premium support, that we would be able to hear from you about the pros and cons of utilizing these various existing programs to try to develop a premium support concept that would be workable to see which features of a Federal plan would be helpful, which features of a CalPERS Program would be important, which features of the existing fee-for-service plan would be important to maintain in any type of a premium support program.

It would be the intent of the Chair, after all of these day-and-a-half of discussions, to try and pull together the recommendations, the consultation with all the members, and hopefully be prepared to present in the future, a chairman’s mark for discussion and ultimately for the beginning of the voting process.

We have discussed, I think with your offices, the sum of you individually, the possibility of having an additional meeting this month in January toward the latter part of January. We’re looking at a timeframe January 27, 28, somewhere in that timeframe, following with the February meetings, moving toward the March deadline.

So that’s what we hope to accomplish today, and I invite everyone to participate as actively and as forcefully as they can and would recognize Congressman Bill Thomas for any comments Bill might have.

Mr. THOMAS. Thank you, Mr. Chairman. I don’t really have any comments except to say that I know we’ve used this term frequently and it’s used in the legislative process, ‘‘Chairman’s mark.’’

I think for most people’s understanding, they should not assume that we’re adopting a legislative profile in dealing with this, as we would with the Chairman’s mark, and then a discussion, section by section, title by title, suggested amendments and the rest.

I think perhaps a term that might be more appropriate to what we are contemplating in doing is a structured proposal.

That is, we’ve discussed a number of different approaches. We will, as you have clearly outlined, today and tomorrow, be looking at specific areas.

Now is the time for the members of the Commission to make their very critical comments, their supportive comments, or suggested alternative comments.

And that out of the 30 meetings that we’ve had previously, and especially this one, and the ones that we may add to make sure that we have enough meetings prior to the March 1 deadline, we would propose a structured proposal directed specifically at an approach that we believe a majority of the Commissioners could support.

So although we’re familiar with the Chairman’s mark, I think a structured proposal is probably a term that would be more appropriate in what I believe we’re talking about.

Senator BREAUX. We used to have marks. Maybe John Dingell would remember this. I remember one time in the Merchant Marine and Fisheries Committee, we held a markup in concept which was absolutely the most bizarre thing I’d ever attended.

Ours will be more structured than that, but probably less structured than a specific legislative proposal, but it will be structured enough for us to know pretty much exactly what we’re talking about.

But Bill’s comments are well taken.

Let me begin our first session this afternoon with the concept of proposing, for the benefit of the Commission members, that we do with the Medicare eligibility, what Congress has already seen fit to do with the Social Security Program.

The proposed concept would be one that would be identical to the one that passed the U.S. Senate last term during the consideration of the Balanced Budget Act of 1997.

Under that proposal, Medicare’s eligibility would increase from the age of 65 currently to the age of 67 over the next 24 years, a period beginning in the year 2003, and ending in the year 2027.

The rate of increase, I would point out to our colleagues, is a rate of increase of approximately 1 month per year until we reach the maximum eligibility; 1 month per year is what it averages.

Those currently aged 62 would not be affected. Those turning 65 between the year 2001 and 2025 would become eligible for Medicare based on an increase in Medicare’s retirement age, as I said, of an average of 1 month per year.

For those who are currently 38 years of age or under, they would become eligible for Medicare at age 67.

As I pointed out, the Senate did debate this last year, Bob Kerrey and Phil Gramm were very involved in this. And we adopted this proposal in the Senate by a vote of 62 to 38.

It did not become law obviously and was dropped in the conference.

Increasing Medicare’s eligibility age, I would point out, does not save a lot of money. It does not save a lot of money primarily for two principal reasons.

The first reason is that Medicare beneficiaries between the age of 65 and 67 are the least expensive beneficiaries in the program to cover.

They are generally the healthiest, they are the youngest and are the least expensive to cover.

Second, some beneficiaries in that category who are in fact very sick and who otherwise would be affected by this proposal may be in a category of being disabled who are already eligible for Medicare and would continue to be eligible under the disability portion, even with the increase in the age eligibility.

So the point is that it doesn’t save a lot of money, primarily for those reasons that I’ve outlined.

Now the policy rationale, the policy rationale for the increase is obvious. People are living longer, they’re working longer, they are healthier than they were, and they’re receiving benefits longer now than they did when the program was first passed.

And here’s an example, and then I’ll open it up. In 1965, when Medicare was created, life expectancy was approximately 66 years of age for men and 74 years of age for women.

Today, that life expectancy is 73 for men and nearly 80 years of age for women.

And the suggestion is that the Medicare eligibility should be adjusted to reflect the changing demographics in this country to the increase in the life expectancy.

When Medicare was enacted, the program paid for 1 year of health care for men, on average, and 9 years for women on average.

That was how long they lived after they became eligible.

Today, Medicare pays for 8 years of health care for men on average, and 15 for women. This kind of age inflation will continue unless some changes are made.

Thirty years ago, there were 5½ workers paying the payroll tax for every Medicare enrollee. Today, there are 3.9 workers per Medicare beneficiary.

In the year 2030, there will be 2.3.

And obviously, the changing demographics and the dependency ratio obviously affects Medicare’s viability.

So the concerns, it’s a controversial proposal, obviously, particularly at a time when many people are actually losing health insurance, to extend the time for eligibility is very controversial.

I would point out the obvious, which all of you I think clearly understand, is that although we increased the eligibility age for Social Security, you still can take an early retirement under Social Security with reduced benefits at 62.

It is difficult to craft a Medicare early eligibility age to get partial coverage. I mean, you can’t agree to pay for part of an operation. I mean, it’s very difficult to do that.

This raises a question--and I will finish on this, John. It is early buy-in which has been considered as a way of addressing this problem, or perhaps even considering some type of a standard for early eligibility which is less than disability, depending on the nature and conditions of the person, that they find themselves in, to help solve this particular problem. So those are some of the concerns as I see it, and a suggestion that is now being kicked around.

Congressman Dingell?

Mr. DINGELL. Mr. Chairman, you’ve covered the point I was going to raise, and that was simply on the buy-in. I think, if we’re going to consider this, we have no choice but to consider the idea.

Senator BREAUX. Use the mike, John, a little bit, so the audience can hear you, as well.

Mr. DINGELL. Mr. Chairman, I commend you. You had covered the point that I was going to raise, and that was the question of buy-in.

It is my personal view--and I think there are a number of Commissioners who join me in this--that if we are to raise the age for eligibility, that simple justice requires that we should extend the right to buy in so that people would not be in difficulty with regard to the availability of health care.

I also would remind everyone here that most of the major U.S. corporations which provide health care for their retirees have essentially a wraparound plan which covers health care but adds to the Medicare benefits, and the two are almost hopelessly intertwined.

Thank you, Mr. Chairman.

Senator BREAUX. Senator Kerrey?

Senator KERREY. Mr. Chairman, first of all I support this proposal. One of the difficulties, though--and I wonder if you’ve given some thought as to how to address this--is that, in the current debate we’ve not defined our objective. In other words, one of the things you said in here is it doesn’t save that much money.

I would argue that over 30 years it saves a tremendous amount of money. But the problem is it is relatively easy to oppose the proposal, because you are not required--those who oppose it are not required to come up with any alternative.

They can simply object to the proposal and cite all kinds of reasons why it is bad and terrible things are going to happen, but there is no need. There is no--we have not defined the problem sufficiently that we are trying to address.

And that is, I think, one of the most important things for us to do is to say at least we need to make an effort to tell Americans what this would do:

How it does reduce the pressure on taxpayers in the future; and how it does increase the benefits to those beneficiaries who will be needing the Medicare Program at some point.

The second thing that I would like to see as a part of this proposal is an analysis that’s done of what’s happening with current retirees. Specifically, I think it is very important to look at what is happening with the current Social Security Program.

My understanding is more than 70 percent today of Social Security beneficiaries are taking early eligibility.

They are not waiting for the normal eligibility age of 65--and I underscore this, by the way, because one of the things that those of us who propose moving this eligibility age always find ourselves dealing with is an interview with somebody who is 75 being asked the question: What do you think about moving retirement age?

We are not moving retirement age. We are moving eligibility age. And the best way I think to demonstrate the need to change this program is to look at what beneficiaries are currently doing.

More and more and more Americans are leaving work early. They are not waiting to age 65; they are getting out early.

One of the reasons that there is demand for a buy-in to the Medicare Program today, I believe, comes from that rather unusual, but I think very important, fact.

So I hope staff could give us some analysis of what this does save so that those who are objecting to it can propose an alternative that will save at least a similar amount.

Second, do some analysis for us so we can get an understanding of what currently is going on, what kind of trends are going on, with Americans who are becoming eligible for Social Security.

Senator BREAUX. Let me ask Bobby to quickly address the question of savings, and then Deborah is next, and then Phil and Bruce.

Mr. JINDAL. Sir, let me just give you the numbers in two different ways. If you look at it in terms of cumulative dollars and the 10-year savings, it would be $21 billion.

The 20-year cumulative savings would be $120 billion.

The 30-year savings would be $620 billion.

These are cumulatives. That is not to say that in the 10th year you’d save that----

Senator BREAUX. Not enough to fool with.

Mr. JINDAL [continuing]. Annually.

Senator BREAUX. He said not too much----

Mr. THOMAS. What are those numbers again?

Mr. JINDAL. For the 10-year cumulative, it is $21 billion; 20-year cumulative, it is $120 billion; 30-year cumulative, it is $620 billion.

As a percentage of GDP, let me just give you one other set of facts, and I will be quiet.

In 2020, that is equivalent to reducing Medicare spending by 0.06 percent.

Senator KERREY. I am sorry to interrupt you, but here is one of the reasons I think it is important to do this is that I noted in the last couple days that one of the things that the President is likely to propose is a tax credit to enable people who are taking care of either a dependent relative or somebody else’s dependent to provide that care for them.

As I understand, his proposal is $6 billion over 5 years? Is that correct?

Mr. THOMAS. Twenty-five for the total package.

Senator KERREY. Let’s say $6 billion over 5 years. Let’s presume it is just--extend the mass. Let’s say it is $14 billion over 10 years. Well, this is $21 billion over 10 years. I mean, that’s what this can pay for.

I mean, that is why it is important to consider this kind of a change. I mean, there is a limited amount of money.

The limitation is the total amount of the U.S. economy, and we are extracting money from that economy to pay bills.

The question is what bills are we going to pay? So those who object to this have to understand that they are objecting to taking $21 billion of savings, and either leaving it in the economy or probably more likely, using it for other expenditures on people over the age of 65.

So I think it is very important to put in the context of this savings, put the savings in the context of other things that we are attempting to do, whether it is prescription benefits or long-term care or other things that we are attempting to do by making this change.

I think of all the things that the chairman said that are important to remember is that people between 65 and 67 are less sick.

We are subsidizing people who are less sick to begin with, and I think it would be very helpful for us not only as we make our decision as to whether or not we are going to support this, but if we do support it how it is that we explain it to the American people.

Senator BREAUX. Well said.

Deborah Steelman?

Ms. STEELMAN. I have a couple of questions really just for the group.

Are these trends of early retirement something we should encourage or discourage? I think this boils over into the Social Security debate, where, I assume, we are going to be talking about ages beyond 67 fairly soon.

So whatever we do would be matched to Social Security, not matched to the 1983 agreement on Social Security. That would be my preference.

But if that’s the direction we’re going, don’t we want to do something that encourages people to work and to not have early retirement? Whereas this kind of buy-in will not only encourage employers to drop coverage, but also would encourage people to retire even earlier.

I am also curious whether or not people are actually leaving employment or just leaving a job and going to another job, which may or may not offer health insurance. And certainly, if we allow the buy-in, it won’t offer health insurance.

I am also concerned about creating yet another categorical eligibility when we have a huge mass of uninsured people and a fairly significant set of problems with the individual insurance market, which perhaps we could address our attention to as opposed to carving out this little piece of the puzzle.

So I just would put those observations on the table going forward even though I am very sympathetic to matching Medicare to whatever age of eligibility is put forward in Social Security.

Senator BREAUX. How would you answer the question for those who say that they are in very difficult jobs that do not allow them to continue to work until 67?

Ms. STEELMAN. That is really the question of whether or not we want to have an insurance market that functions for individuals in this country. We don’t really have one.

But that to me is a question that deserves an answer on a greater population than just this sliver.

Senator BREAUX. Senator Phil Gramm.

Ms. STEELMAN. Again we are trying to accomplish good things without disrupting or causing perverse incentives in the marketplace that we have, and the buy-in does have a lot of perverse incentives that come with it.

Maybe the problem it solves is greater than the problem it causes. I am just not sure of that.

Mr. MCDERMOTT. Mr. Chairman----

Senator BREAUX. Phil Gramm----

Mr. MCDERMOTT [continuing]. Mr. Jindal was interrupted when he was giving the figures about what the savings were and you’ve given it in dollars, but you did not give it in percent of GDP.

Senator BREAUX. Let him finish that, then Senator Gramm.

Mr. JINDAL. It was 0.06 percent of GDP in 2020.

Mr. MCDERMOTT. Point 0? Zero?

Mr. JINDAL. 0.06 and 0.2 percent of GDP by 2030.

Mr. MCDERMOTT. Thank you.

Senator BREAUX. Senator Gramm?

Mr. DINGELL. How does that compare with the costs of Medicare? To get a picture of this, GDP may not be the best yardstick to measure with.

Mr. JINDAL. Sure. If we take the trustees intermediate baseline, if you look at Medicare in 2010 as a--let me take it as a percent of--well, as a percentage of the Federal budget, for example, by 2030 this would change it from 28 to 27 percent, as a percentage of the Federal budget.

Mr. DINGELL. Can we infer that that means 1-percent difference?

Mr. JINDAL. That’s right.

Mr. DINGELL. Or does it not? I’m not sure whether it does or does not.

Senator GRAMM. One percentage point which, in this case, is a little over 3 percent.

Senator BREAUX. Yes. Senator Gramm.

Senator GRAMM. Mr. Chairman, first of all, if we are in an environment where $620 billion is not much money, it seems to me we are wasting our time. I think this is a big proposal.

I think, second, the proposal is important because it accrues savings not so much during the next 10 years when we do not have a crisis, but it produces the savings exactly when we do have a crisis, which is 30 years from now.

I wanted to elaborate on something Bob Kerrey said. And that is, when we look at the problem of the costs of Medicare and Social Security, we really attribute it to two things--the explosion in life expectancy, which is obviously a blessing; and a decline in the fertility rates in the country, which is a good thing or a bad thing depending on your perspective.

But there is really a third factor that we don’t talk about, which has been a very big factor, and Bob touched on it, and that is that in the fifties, only about 10 percent of Americans retired early, retired at 62. We now have a situation where about 60 percent of workers are retiring before they turn 65.

So when we are talking about a buy-in program, I think one of the things we have to be very careful about is the unintended consequence.

And as I look at these numbers, as I did when Bob and I discussed this amendment in the Finance Committee and debated it on the floor and in the Health Subcommittee, part of the problem with a buy-in program is that one of the reasons that we still have a large percentage of workers who work until they are 65 is because they are concerned about losing their health insurance.

If we have a buy-in program with an eligibility age below 65, the unintended consequence you are going to have is inducing more people to retire early, which will put more pressure on Medicare and Social Security.

Obviously, you are going to have substantially more people on disability. If you look at Western Europe, as they have raised retirement age or eligibility age for various programs, their disability rates have gone up as you would expect them to.

It is possible we could have a double screen, a disability standard and an income standard, but I think that if we should decide to raise the retirement age and go with a buy-in program, it cannot extend back below 65. I know some people have proposed a buy-in program at 62. That would be a brand new benefit.

We have no way of knowing what it will cost and, more importantly, it will be a huge incentive for more people to retire early.

So, if we are going to consider a buy-in component to this proposal, I would just like to make these points:

No. 1, it cannot apply to anybody who is below 65. We do not want to create benefits that do not exist now and incentives to retire early that don’t exist now.

And second, it seems to me it has to have a pretty tight screen in terms of at least some degree of partial disability, and it ought not to apply to high-income people.

It is one thing to leave your job involuntarily because you can’t do it and have assistance.

It is another thing to decide that you want to retire when you are 55, and because you want to spend time on your boat or at the mountains or whatever, and then expect government to assist you in health care.

The two are entirely different situations, and I think we ought to have a program that tries to separate the two.

Senator BREAUX. Bruce Vladeck.

I’m sorry. Sam, and then Bruce, excuse me.

Mr. HOWARD. I only have a brief comment. In looking at the paper on eligibility, there was no mention of the concern that African-Americans, particularly African-American men, do not live to age 65 today. So what you’re doing is just raising the bar just a little bit higher for a subsidy for a longer period of time for a whole group of people.

I am not sure that is fair, unless you are going to provide some means for them to participate in this program at an earlier stage.

That is my concern, that----

Senator BREAUX. Do you know that----

Mr. HOWARD [continuing]. You just keep raising the bar, and pretty soon it’s 70, and then--the average age does not go up that fast. It just takes a while.

Senator BREAUX. Do you know the comparable African-American life expectancy just out of curiosity for men?

Mr. HOWARD. Less than 65, I don’t know.

Mr. WATSON. Thirty-five.

Senator BREAUX. In New York?

Mr. HOWARD. It’s less than 65. I don’t know the number. It’s less than 65, but I just don’t know the number.

Mr. THOMAS. You’re absolutely right.

Senator BREAUX. Good point.

Bruce?

Mr. VLADECK. Just three very, very quick points.

Mr. THOMAS. At some point in history, you were correct.

Mr. VLADECK. I’m sorry, Senator Gramm has left. I don’t know how you can talk about unintended consequences of a buy-in and not talk about unintended consequences of taking away a benefit people have been contributing for for 30 years.

There seems to me a certain asymmetry in the logic of that discussion, particularly in light of Congressman Dingell’s comments about the extent to which every retirement health benefit plan in the United States is based actuarially, and every financial statement of every publicly held corporation that provides financial--provides retirement benefits on an assumption that people will become eligible for Medicare at age 65.

So you are going to have unintended consequences with any policy change whether it is adding benefits or taking benefits away.

Second, it is not--if I may disagree with the chairman--it is not technically hard to design a buy-in, I think.

It was necessary for me to leave the administration before they could figure out how to do it, but I am not in that business any longer, so there are lots of people in this town and in the Congress, and in the executive branch and elsewhere, who could do it.

I think a number of us on the Commission feel very strongly that we would not support any increase in the age under the rhetoric of conforming with Social Security, unless you really conform to Social Security and let people, beginning at age 62, participate in the benefits of the program.

It is not hard to figure out how to do that.

The third point I would make is that after asking the staff of the Commission for 6 months for data on patterns of retirement among American workers and getting none whatsoever, I went and asked myself for some folks, and I am advised by Prof. Joe Quinn at Boston University, who’s working with the Department of Labor on this data, that the reduction in average age of retirement in American men which prevailed from the period after the Second World War basically stopped in the early 1980’s.

Since the early 1980’s, average retirement age among American men has been increasing. Average retirement age among American women has been roughly constant but is complicated by the very different patterns of labor-force participation among women, particularly women who are currently in their fifties and sixties, most of whom experience protracted periods of time outside the labor force.

So I would just suggest that if we are going to be talking about all these things which have very major implications for lots of folks, it would be really nice to have some data.

And it is not, you know, the dark side of the Moon we are talking about here. In fact, what we find is an increasing income differential that blue-collar workers are continuing to retire in their late fifties and early sixties, and white-collar workers are continuing to have employment-based income at later ages.

Senator BREAUX. All right. Stuart?

Mr. ALTMAN. Well, I too have some sympathy for this proposal, but I do think fairness requires that we sort of at some point lump this proposal into a variety of other proposals in terms of asking beneficiaries to pay more in the future for this potentially substantial gulf between what we have and what we need.

This may be a good one, or it may have paled by some of the others that we come up with, and I also would put it up against contributions to be made by the government to solve this problem and contributions to be made by the people that provide the services, which are the three groups that are going to have to chip in to make Medicare work in the future.

This is a form of asking current beneficiaries or future beneficiaries to sort of pay more, and on its face, it has some appeal.

I would say, however, that, Senator Gramm, my reading of the research suggests that the major contributor to either early retirement or later retirement are subsidized benefits as opposed to unsubsidized.

And maybe we can make this an income-related buy-in, which would get at your issue about--rather than cutting them off, I think you would agree with me, we’d like to sort of slide these things and not have sharp corners there.

I think you were implying that the low income disabled can get in for maybe a subsidized rate, the middle can get at a fairer rate, and the upper can pay a little extra. And why not think about it to age 62, but I’m not critical about that.

One of the things I’m fearful of is that if we do this and don’t do any kind of a buy-in, we’re going to be adding to the uninsured rate in a way that just doesn’t seem like it’s right.

So, on its face, it has some appeal. I’d like to see it in the context of other ways of getting beneficiaries to contribute more, and up against, as I said, having the government contribute and the provider community. I think at some point, all are going to have to put their hands in their pockets.

Senator BREAUX. A buy-in is one way to help alleviate, I guess, the pain, if you would, for extending the eligibility age. There are some other concepts out there that could also address this problem.

Bill Thomas, and then we’ll move on to the next subject.

Bill?

I’m sorry, Bill Frist.

Senator FRIST. I’ll just comment very quickly that I support slowly increasing the age of eligibility over a 24-year period, and conceptually would like for it to parallel the Social Security format that’s been laid out in the past.

I do think it is important, for the reasons expressed by Dr. Altman and others, that we allow some type of buy-in at means adjustments at 65 to whatever that sliding age is over time.

There are two areas: One would be economic, which may help with African-American issues. I’m not sure, and I think that maybe our staff could analyze, if we really look at retirement, death, potential benefits, African-American age 65-67, it would be helpful.

It may be that the impact isn’t as dramatic on the African-American group, if we can build in a sliding economic scale.

And also, potentially--and this gets very confusing--is what Senator Gramm mentioned, which is the whole area of disability. What is disability?

As a physician, it’s been very confusing. Just about anybody can walk in my office and I can call them disabled, and all of a sudden they fall into this disability entitlement.

We’re probably not going to be able to address that as deeply as we would like, nor the concerns of using that as a potentially expanding category.

On the other hand, when we look at any sliding scale of economics in a buy-in between 65 and 67, we might also look at disability. Who is disabled, at what age? What are the requirements, again, making sure we don’t have this abrupt transition, but one that, over time, we could address and readdress.

Senator BREAUX. Good point.

Senator Gramm, you had a response?

Senator GRAMM. Yes, I just wanted to make several comments. I do think there is a relevant distinction of intended and unintended consequences.

Obviously, if you are raising the eligibility age, an intended consequence is to encourage people to work longer. That is intended.

But what I’m saying is, in looking at this buy-in proposal, we need to be careful that we don’t produce an unintended consequence. And I think, clearly, we probably would, and I would be very fearful to have it apply to anybody below 65, because then we are creating a totally new benefit. We have no idea what it costs, and the consequences of it could be very large.

In terms of people who are 65 and 66, I think you could come up with a set of criteria that could be brought together, Stuart, in almost any way.

One would be looking at income. The other would be looking at state of health or disability.

It seems to me that we can establish a program to help the maybe 5 or 10 or 15 percent of people who would not be able to work when they’re 65 and 66, but who still might not be able to qualify for disability.

And that is a big deal if they’re poor; it is not such a big deal if they have high income.

The other thing I would mention--and I think we ought to look at it if we are going to look at any buy-in at age 65 and 66, is that there clearly is something wrong with our disability system. It is a very big factor in qualifying people for Medicare.

You basically need a physician to say you’re disabled.

But we know that the mortality rates, and the morbidity rates, are down. And we know the level of injuries on the job are at an all-time low per worker.

So we know that people are healthier, and we know that people are retiring sooner, so you have fewer older people who are working, relatively speaking, and yet the disability rates are skyrocketing.

I think if we’re going to look at a buy-in proposal, that we ought to look at disability policy, because an ever-increasing part of the Medicare cost is that when you become disabled, you qualify for Medicare.

Senator BREAUX. OK, I don’t want to prolong the discussion, but I know Congressman Dingell had a point, and Colleen had a point, and then Joe Thomas, and that’s it.

Mr. DINGELL. Thank you, Mr. Chairman. Just very, very briefly, you know, unintended consequences caught my eye, and I began looking at some notes I had here.

And they indicate to me that, first of all, the costs may be rather low, as low as a billion dollars, which means the savings would be low.

I’m not sure whether that comports with Bobby’s figures or not. I’m interested in that.

But then there’s a possibility of increasing the health care costs for other seniors in the program. If you do this in a curious way, you may find that you let--if you raise the retirement age, you pull out the healthy and the young and the affluent, and you wind up with higher costs remaining for the balance of the people who are in the program.

It’s a similar situation with regard to increasing costs for employers. A study by the Kaiser Family Foundation projects that if Medicare were to immediately raise the eligibility age from 65 to 67, a typical large company with a predominantly older work force would pay 18 percent more in lifetime retiree health benefits for its employees, while a company with a younger work force would pay only about 16 percent. That would be a 2-percent savings for the company with the younger work force.

And so I think if we’re going to tinker with this, we’d better have a pretty careful understanding of what it means in terms of costs and who we help, and, very frankly, who we hurt. And you may find that we’re going to be very surprised about who we’re helping, and even more importantly, surprised about who we’re hurting.

Senator BREAUX. Good point.

Colleen?

Ms. CONWAY-WELCH. I just wanted to also support the idea of moving the age forward a bit. One thought that occurred to me is that suppose, instead of looking at the issue of disability, we look at the issue of ability; not what you can’t do, but what you can do, and kind of reverse that thinking?

I’ve been involved in a variety of issues with SSI and Workman’s Comp, et cetera, and building the case for the disability gets into a very convoluted and extreme definition.

There may be some other ways of looking at this, of identifying what you can do, that might be helpful to think about.

Senator BREAUX. Good point. A final, Bill?

Mr. THOMAS. Thank you, Mr. Chairman.

I have a couple of points: In discussing this, one of the things that I noticed almost always in our discussions is that if we talk about raising the eligibility age, although the chairman indicated, for example, that the 1983 law, which extended Social Security to 67 doesn’t complete its cycle until 2027, you can say that, and then you move on.

We then have the debate as though, tomorrow, everyone is going to have 2 years before they retire.

For example, the Senate package that passed, which the chairman talked about, would affect all the way down to those who are currently age 45. It would add only 1 year to their retirement, notwithstanding the fact that it moved 2.

You have to go clear down into people who are in their thirties before the full impact of the 2 years would occur. So, although we debate it in a kind of a current context, obviously any shift to a Social Security age structure would be one that would be stretched out over the next several decades.

So, the impact would be on those people who were 20 years older than they are today. Take a look at the life expectancy chart and see what that’s going to be in 20 years.

One of the sad things is that the changes that we made in 1983 to conform to 67 in 2027 is that we may be chasing a moving target, moving away from us faster than we’re catching up to it in terms of life expectancy.

The second point about a buy-in is that, although there’s some symmetry with 62 with Social Security retirement, there are a significant number of people who, in safety occupations, currently have a 55 retirement age, and once you start down the age factor for buying into an aged medical program, there really is no limit.

What we’re saying is that the current system is dysfunctional, it doesn’t work.

Who said health insurance is to be tied to employment?

Now I’m not going to go through that big argument right now, but it just seems to me far more fertile for us to indicate that the problem is not that Medicare should be stretched to a lower age, it’s that we ought to fundamentally examine the primary tax support and advantages for health insurance tied to employers in today’s tax code, and address what seems to be far more logical to me, and that is health insurance provided to individuals with a comprehensive universal support for those in need. A reasonably appropriate tax credit for all, above which, if you want more, ought to be after tax dollars.

That solves not only the 62-year-old’s problem, but the 55-year-old’s problem, and the 42-year-old’s problem who doesn’t have a job, and who has gone beyond the current structure of COBRA, et cetera.

We ought to address the fundamental problem in the system and not just stretch Medicare to try to cover some of those who are currently impacted by the fundamental flaws in our tax code’s health insurance structure.

The other factor that concerns me has to do with the President’s proposal in terms of the long-term care tax structure.

I think it makes all kinds of sense, if we’re going to discuss stretching retirement age on Medicare to match Social Security, whether that’s 67 or 70, not to pull that age up as the Senate program did, to a new minimum, but to keep it at 65.

And as several members have indicated, perhaps deal with those who meet certain criteria during that 65 to whatever the new eligibility age period is.

I think it is possible to be fairly objective, and I agree that disability is not a good way to look at it. Perhaps activities of daily living or criteria of not being able to do well would be a criteria that could be used.

The difficulty with that is that it puts an emphasis on chronic care concerns more than it does acute care, and we’re talking about Medicare trying to focus on acute care.

One of the reasons we have problems with Medicare is because home health and other more chronic care associated payments have grown so rapidly.

So the President’s proposal as a first step in terms of chronic care, but perhaps the Commission again indicating that we need to address chronic care as an issue that needs a time value of money factor contributed to it would be a better way to deal with chronic care.

But if we are going to raise the age, I think there’s general agreement there has to be a way to allow those who would have had it at an earlier age to get it.

But if you push it down below the current 65, it seems to me, as Senator Gramm indicated, you open up an entirely different set of issues.

And then last, the idea that the private sector would have difficulty conforming it because Medicare is now a 65-age structure and all of the employers’ structure is wraparound. Business had retirement and health care programs before Medicare was initiated in 1965. They had no problem conforming to the new world. They’ll have no problem conforming to the new world that we would create because the private sector responds very quickly and very rapidly to governmental changes.

The problem is you don’t get the other way around rapid responses.

Our job is to try to create a structure which works. Others will make sure that their structures conform as well.

Mr. MCDERMOTT. Mr. Chairman?

If I understand correctly the comments of those people who are proposing this and think it’s a good idea, it sounds like there’s no downside to doing this, or it’s a very easily dealt with downside.

And what puzzles me is why do they stop at 67? Why didn’t the proposal go to 75?

And since there’s no downside, where is the point where it makes any difference whether you have Medicare or not?

I would suggest that the screen that you ought to make is that as soon as somebody gets sick, they get into Medicare a day ago so that if they are suddenly wiped out, then they can get into Medicare.

That’s the only screen that’s going to work for the carpenter who somehow works to 59 and scrapes through to make it to 65 without being decimated by an illness or injury. What he worries most about through that whole 6 or 7 years after he’s quit working on ladders and climbing up and down all over the place is his health care.

So I don’t see why you don’t recognize that the downside for people who have jobs that have to do physical work, rather than people like us who sit around, is that if they are not healthy, they don’t get hired. They’ll hire young people as opposed to hiring old people.

Senator KERREY. Mr. Chairman?

Senator BREAUX. OK, we’ve got to end this discussion. Otherwise, that’s all we’ll talk about all day.

Senator Kerrey?

Senator KERREY. What Jim is making is the point I was making in the beginning. I mean, you say that we haven’t described any negatives.

I’ll guarantee you that every Member of Congress is going to think about a 30-second ad that it’s going to describe the negative, not just the negative that you just described, but they’re going to say the sky’s going to fall. That every single American who is currently eligible for Medicare, currently on Medicare, is going to suffer as a consequence.

I mean, the problem isn’t that we don’t have a sufficient amount of negative examples of why we shouldn’t make this change. The problem is we have too many.

I mean, yes, I could have offered all kinds of reasons of why we shouldn’t do this, but the dilemma that we’ve got, Mr. Chairman, is there is no incentive to make this kind of a change.

I mean, 38 percent of the Federal budget in 2030 is going to be Medicare. But we don’t have any imperative here to deal with that issue. We don’t have to deal with that problem. We can presume that that’s going to somehow drift away, solve itself.

Let’s just give people a chance to buy in early. Let’s put a prescription benefit on it. Why not do long-term care while we’re at it. Let’s load this thing up and we’ll all get reelected.

But the problem is we’ve got a program as a consequence of demographics that’s getting so expensive that we don’t have enough money left to do all the other things that we try to do with our Federal budget.

So somehow maybe we can do it at dinner, maybe we can do it at another meeting, but somehow we’ve got to have a construct that says, this is what we’re trying to get done here, on the fiscal side. All the other reform gets relatively easy.

But we have to have something that says, OK, here are the things that we’re trying to get done.

I don’t necessarily disagree with what you’re saying on the negative side at all, Jim. I’m just saying that at some point on the fiscal side, this may be the easiest choice we’ve got.

Of all the choices we’ve got to make and we’re trying to save money, this one may be the easiest. I don’t think it gets any easier after this.

Senator BREAUX. Now----

Senator GRAMM. All proposals have downsides. It’s just that the downside of this one’s not as big as a lot of other things we are going to have to do to solve the problem.

Mr. THOMAS. Mr. Chairman?

Senator BREAUX. Bill?

Mr. THOMAS. I don’t think anyone need assume that the Senator’s comment about maybe we do it at dinner was meant in any seriousness since no business is conducted at dinner.

Senator KERREY. No, I meant it seriously.

Senator BREAUX. That’s enough, that’s enough to give us indigestion at dinner. Let’s not do it then.

All right, it’s been a good discussion. I mean I think obviously, as I said, it’s not that complicated to understand the proposal. It’s a fairly simple proposal, and we know the downsides on it.

And I think there’s been some good discussion on how to alleviate some of the obvious problems that are created by increasing eligibility. I mean, when we passed Social Security as an example, the idea was to have a certain percentage of a person’s life taken care of in retirement.

As a person lives a lot longer as time progresses, it became a larger and larger period where they were going to be retired with fewer and fewer people working.

And I mean this suggestion I think has merit, but it also has to be tempered by addressing some of the obvious problems, and we’ve got some good suggestions to do that.

All right, let me call on Bill Frist who’s been working very hard on a DME proposal. This will not take long, but Dr. Frist wants to bring us up to date on where the graduate medical education thoughts are.

Bill?

Senator FRIST. Thank you, Mr. Chairman.

I will be brief, but I did have an opportunity to talk to a number of people and I wanted to bring people up to date with where we are, and also solicit their input and their thoughts with regard to graduate medical education.

I’m also going to mention DSH. We’ve held a number of open meetings, open hearings that many of you have participated in, and many of you have given written comments as well.

So what I’m about to say will summarize a large part of that.

First of all, what are we talking about with DME and DSH. We’re talking about $11 or $12 billion a year so not a huge amount, but huge in terms of its contribution to the future of health care and quality of health care for not just Medicare and Medicaid beneficiaries, but all people.

The staff gave a paper to everybody back in December outlining six or seven alternatives, as we look forward to structuring a more rational graduate medical education funding mechanism.

Where we are today is combining the best features of several of those proposals as presented in that particular paper.

Going to the bottomline, where are we in terms of a proposal? Many--I don’t want to say most--but many people have begun to at least center upon three points:

No. 1. To remove the DME, the direct medical education--I’ll come back and define these shortly just to remind everybody--but to remove the DME payments from Medicare part A funding, and move it to a discretionary funding source.

Mr. MCDERMOTT. Would the gentleman yield for just a second?

Are you reading from some piece of paper that we have?

Senator FRIST. No, I am not. This is basically just to bring everybody up to date, and then we can discuss it a little bit now, and over the next few days.

And what I’d really like to do is, based on that, get some paper out to people.

But this is really just an update as to where we are in terms of ideas.

Mr. THOMAS. But, Senator, this does follow the seven point paper----

Senator FRIST. Yes.

Mr. THOMAS [continuing]. That you had distributed earlier.

Senator FRIST. There’s nothing new, there’s nothing new since that December document which was distributed which was six or seven pages, seven points outlined.

Mr. MCDERMOTT. But what you’re now putting together is some mix and match of those pieces?

Senator FRIST. That’s right.

Mr. MCDERMOTT. Or pieces of the pieces.

Senator FRIST. That’s right. Based on the input, both all the written input, all the hearings, and having talked to as many of you as I could reach over the last 2, 2½ weeks.

Again, this is nothing final at all. It’s really just an update so we can see where to go as our next step.

Let me go through them real quick.

Three points.

No. 1, I just mentioned, move DME from part A to discretionary funding.

No. 2. Continue IME, the indirect medical education, and just to remind people, direct medical education’s about $2.2 billion a year; IME is about $4.5 billion a year.

Keep IME right where it is today in terms of in the Medicare Program itself, and there’s a rationale for that.

But stipulate that we go back and look at to whether or not we’re using the correct formula. There’s mixed information out there, but most of the information says that the formula that we use today is not based on the true cost of IME to hospitals today.

Mr. DINGELL. What are you saying there?

Senator FRIST. Indirect medical education, keep it in the part A trust fund, and that the IME, if you look at the data, in terms of indirect medical cost, in terms of compensation, does the formula reflect the true indirect medical costs?

There’s debate.

Mr. DINGELL. Are you saying it’s higher or lower?

Senator FRIST. Most of the data referenced in reports says that it’s too high.

I have a question about that which I brought up at the meeting 2 weeks ago.

Mr. DINGELL. Much earlier than we should.

Senator FRIST. That’s right.

That the true indirect medical expenses today are less than the hospitals are being reimbursed.

Now I expressed my concern with that data, and I’m not convinced that the data being used is accurate data. So what I think we should do is say that let’s make sure that formula is accurate, come with a recommendation from this Commission, we don’t know what that true formula should be, but let’s go back and look at it since the data that’s been provided is mixed.

So that’s my own feeling where we are today.

No. 3, and this is one that is controversial, and I would say, since Senator Rockefeller is not here, probably would have real questions about this in our discussions and a number of people do.

And that is what to do with DSH. DSH payments, which are about $4.5 billion a year are subsidies to hospitals. They have very little to do with Medicare per se, although that’s the mechanism that has been used in the past.

But the third component would be to move DSH payments from part A trust fund payroll tax-type mechanism, move it, don’t cut it, don’t reduce it, but move it to a discretionary environment, and that would be about $4.5 billion which would be shifted.

I’m not saying how we’d pay for it. If it were discretionary, we would have to increase budget caps, which can be done, working with the budget committee.

Those are the three items that I’d like to throw out for discussion.

Rationale real quick.

DME payments, those are the salaries and benefits of medical residents, people who’ve graduated from medical school during the residency program. Their salaries and benefits are paid by the Medicare trust fund.

Heart transplant surgeon Bill Frist was trained by the payroll tax, regressive tax, part A trust fund. Is that the correct way to do things?

Many people would say no, that we should move DME to where all other--not all but most other Federal support for education is, and that’s in the discretionary category.

And I can go through what other types of education is over there.

Those costs are really tangentially, only tangentially related to the Medicare Program at all. Most people understand today, that they are more related to other types of Federal spending, so that’s the rationale.

The IME payments, the indirect medical education payments, which are about $4.5 billion, we’d leave where they are, and the rationale with that is they are more directly related to the cost of delivering care to Medicare beneficiaries.

That is, the higher cost of diagnostic testing and the like over time, we would come back and say, relook at that for me, and make sure it’s an accurate formula; it’s a formula that can be held accountable. Most people would say it does not accurately reflect true costs and expenses today.

The DSH payments are basically just flat out subsidies, that’s all they are. DSH payments are subsidies for hospitals that serve large numbers of uninsured patients today.

Does that relate to Medicare directly or not? We can talk about that. It appeared to most people on the committee that if you look at the Medicare part A trust fund, the subsidies to the low income uninsured don’t relate directly.

The goal of DSH funds is very important. They don’t need to be cut, but why pay for it through a Medicare part A trust fund?

Why not pay for it through a discretionary program where you can periodically look at it and say how large should that subsidy be?

Inherent in that is why do we pay for it with a regressive payroll tax, both the DME and the DSH payments. Why not pay for it with a much broader general revenue tax funding source?

With that, I’ll stop.

That’s where we are today. Nothing in stone yet. Would like people’s input. I know we don’t want to spend a lot of time on it today, so we can do it at a later date, or people can comment today.

Senator BREAUX. Thank you, Bill.

We have a couple of questions. Phil Gramm, Bruce Vladeck, John Dingell.

Senator GRAMM. Well, I just wanted to add a couple of points to what Bill said.

There’s another issue here and that is, as you know, we are now paying medical schools not to train physicians.

What we have is an entitlement program, which is on automatic pilot. We have far more specialists than we need in any kind of competitive medical market.

And to turn the pilot light down in this entitlement, we are paying medical schools in New York $400 million not to train doctors.

So the proposal to take DME and put it in a discretionary account where we can actually have an authorizing and appropriating committee look at the amount of training we should be undertaking seems to me to make eminently good sense.

In fact, I think Bill’s proposal is too modest, because I think we ought to do the same with indirect medical education expenses as well.

For those who are concerned that we are not going to have funding for graduate medical education--I can’t speak for every House Member, because not every House Member has a medical school in their district.

But I can assure you that this is going to be the same kind of sacred cow that we have in many programs that have done well in the appropriations process like the National Institutes of Health.

We will provide funding for graduate medical education. The point is, though, we will have oversight and the ability to tailor it.

Rents, interest, and profits pay no taxes to support any of these programs. It makes no sense to have Medicare payroll taxes funding what basically is general graduate medical education and general medical subsidies.

So, I think these proposals are important. It seems to me, again, it’s not to say that there aren’t any downsides to it, but the point is, compared to the heavy lifting we have to do when we are trying to save a bankrupt system, the first thing you do if a store is going broke, is you try to stop people from stealing from it.

And what happened here is that both these things got put into Medicare when Medicare was really fat. They never should have been there to begin with, and we ought to take them out.

Senator BREAUX. How do you feel about this?

Bruce?

Mr. VLADECK. Thank you, Mr. Chairman. I’m not going to respond to Senator Gramm’s inaccuracies about the New York GME payments. I just want to pick up on something that Mr. Howard said before about the differential effect on African-Americans of moving the Medicare eligibility age back because of their lower life expectancies.

If these proposals were to be enacted, you wouldn’t have to worry about it, because the hospitals that serve African-Americans in most of major communities would be out of business.

The point of these subsidies is that Medicare exists to provide hospital services to its beneficiaries and some hospitals, because of the populations they serve or the communities in which they are located, cannot survive without subsidies.

And if those hospitals do not survive, Medicare beneficiaries will not receive services.

This attack on DSH is a politically focused attack on those constituencies and those clients which are in minority congressional districts in the United States, which are the major beneficiaries of this, and the people who live in them.

Without Medicare DSH payments, access to health care for Medicare beneficiaries in those communities and those districts will be seriously damaged.

Senator FRIST. Let me just say, to clarify, that I don’t know what the attack on DSH was, but the proposal basically says that the funding for DSH, which is about $4.5 billion, the budget cap be increased on the discretionary side and moved from the trust fund there. It’s not to cut DSH.

These subsidies are critically important to the health care system in this country. I just want people to understand what the proposal is.

Mr. VLADECK. Well, the appropriated DSH moneys in the Federal Medicaid Programs and state programs have been reduced much more substantially in the last few years than have the Medicare DSH payments as a reflection of the politics in an era of balanced budget of providing health care to low income people of color.

I think that to take DSH payments out of Medicare, I would predict, whatever our recommendation might be, would put those payments substantially at risk of further kinds of reductions of the kinds we have seen in Medicaid DSH payments in half the states in this country.

Senator BREAUX. Congressman John Dingell.

Mr. DINGELL. I would make a couple of observations.

This is a different DSH than the Medicaid DSH. Some of my friends here know that I have had a long interest in Medicaid DSH. It’s a wonderful opportunity for scamming.

I won’t mention any of the states that have done it. My state has been very derelict in not having stolen more money from the DSH system. [Laughter.]

Senator BREAUX. There have been some leaders in this area.

Mr. DINGELL. Well, there have been some outstanding leaders--roads and prisons and bridges and mental health programs and other health programs that are totally unrelated.

Senator Gramm, you should be offended; your state, being very large, has not done very well.

Senator GRAMM. I know.

Mr. DINGELL. So you can join me in distress at this matter. We’ve got that cut back, but----

Senator GRAMM. Louisiana beat us to it. That’s the problem. [Laughter.]

Mr. DINGELL. Well, I wasn’t going to mention any state, and if somebody wants to mention a state, I might want to quarrel with them and I might not, but on this one, I won’t quarrel.

But I will say that the State of Louisiana is very diligently represented by some very fine Members of the Senate, and they have seen to it that this practice has gone forward. [Laughter.]

But having said that, I think we should take a very careful look at two things: One, to see whether the scamming that’s going on in Medicaid is going on here.

I think it probably is not, or at least to a very limited degree.

I also would observe that you should be very careful about it. As Senator GRAMM mentioned, not every state has a fine school like Texas University or A&M with a fine medical school in it.

But almost all of them do have one or another, and unless you’re very careful, you’re going to find some political pressures here that are going to gray your hair.

I also would observe that a lot of hospitals are in serious difficulty, and you’re looking at a real possibility, if you do this wrong, of some very significant adverse impacts, not only on the training of doctors and other things that are important, but, very frankly, on the recipients of this program.

Senator BREAUX. Colleen Conway-Welch?

Ms. CONWAY-WELCH. Bill and I have talked about this a lot, and I just wanted to make a couple of comments relative to how we assembled the data and how we reviewed the data, because it obviously is an issue that both of us are very concerned about.

I understand that Medicap is coming out with some numbers that could have some influence on our recommendations, but that won’t happen until early fall. And one of my hopes is that we will be able to construct recommendations that could be informed with the future data as it comes in, since it’s not too far away.

A second concern that I have is particularly for the Academic Health Science Centers--there are about 120 of them, plus or minus; that they have the effect of the BBA of 1997 on their lines, bottomlines, has not been fully appreciated yet. However we construct our recommendations, we need, again, to realize there are going to be some additional input coming in that well may influence them.

Third, the issue of the payments that go to the individual hospitals for the residents, the DMEP’s, it varies between $40,000 and almost $180,000 per body to the hospitals for DME.

And I’m curious as to how there is such variation. I understand that there are some geographic variation and whatever, but even, say, for example, Vanderbilt gets somewhere around $60--and I’m not exactly sure of that number, but it’s a ball park number.

But suppose, just for the sake of argument, that we took the average of 60 or 70 and considered just capping it that; that that would be the maximum? What kind of results would that save?

Now, it probably wouldn’t save much, but it would save something. I realize there could be significant political issues attached to that, but nonetheless, it would--the reasons for those disparities, I think it might be helpful to understand.

Another issue is the actual number of providers needed in the work force. I don’t know what the right number is, Senator Gramm. I don’t have a handle on that, and it’s not because of lack of trying.

We have a confusing, complex assessment of who we need to give care. We frequently talk about the fact that our medical schools should graduate 50 percent primary care physicians, and yet that number is messed up now that it really is very difficult to argue from that perspective.

But we do know that we need certain types, and we do know that we have more of some or at least they’re in the wrong places than others, to work with some of the title VIII and title VII committees that have tried to take a stab at work force prediction, but many times have been in some ways looked at in isolation, depending on your discipline, as opposed to looking at the whole gestalt.

We do have a source that might be helpful to us in actually looking at the number of people--people--who give primary care, and the number of specialists, of physician specialists that this country actually needs.

Finally, just to put something on the table that may also have some significant political ramifications, but suppose you got rid of GME and just leveled the playing field or maybe lowered the playing field is a more correct word.

We have about 3,500 hospitals in this country, about 600 of them are for profit, and about 230 of them are Academic Health Science Centers. That leaves you with 2,770, approximately, of not-for-profit hospitals.

Suppose we ask them to pay taxes and put that, use that in a way that would be in some fashion helpful to GME?

They do make money. The not-for-profit is--they still want to break even or make a profit.

I realize the political ramifications of that are probably very significant, and I may not make it back to Tennessee. [Laughter.]

But nonetheless, I think that these would be some things that would be helpful to get some advice from staff as we go forward with these recommendations.

Senator BREAUX. Good points.

Bill, do you want to comment on that?

Senator FRIST. Let me comment. I know Dr. Altman has really thought probably as much or more about this than anybody.

The differential DME, direct medical education, which covers salary and fringe benefits, does vary from $40,000 per person up to $180,000 or $200,000.

Just about everybody agrees that that differential does not make sense. It’s historical, came out of the 1980’s, continued forward.

But I think it draws attention to the problem that we have today where, whether it’s work force or this differential in payment, it is locked into this part A trust fund entitlement where there’s little oversight which could work better because you can point to all of these problems.

By taking it out and putting it in an authorizing appropriation arena, it means that you do get constant oversight. You ask the questions about work force.

We, in our study group, have people coming forward and saying this is what we ought to do for work force. We’ve got too many physicians; there are too many specialists here.

This Commission can’t decide that, but what we can decide to do is take it from this part A trust fund morass that nobody ever looks at ever, that’s on autopilot for the last 10 or 15 years, and put it in an arena where we have authorization and appropriation, and we can at least debate it year to year.

Both of those are good examples, the $40,0000 to $200,000, where everybody says it’s a problem, but we can’t touch it. Nobody touches it.

It can be addressed. I’m not sure I agree with your approach of taking the median and capping it, but at least you could talk about it.

Senator BREAUX. Stuart and then Senator Kerrey.

You had a response to that?

Mr. ALTMAN. I find myself in sympathy with all three of the proposals, but I want to focus on the third one, in the sense--as I understand Senator Frist, the disproportionate share is a subsidy. There is no question about it.

I also agree with Senator Gramm that it was put in at a time when hospitals had a serious problem dealing with large amounts of uncompensated care.

Now, I made this little speech last time we met, and I’m going to make it again. This is not the only subsidy program in the Medicare Program.

The Congress has used Medicare a number of times to subsidize what they consider, what you consider to be important aspects of our health care system that needed help.

And I think fairness dictates that if we’re going to go after these subsidy programs, we should pull in at all of them or as many as we can get a hold of, and put them all up there.

The staff prepared a memo indicating the large number of subsidy programs that go to rural hospitals in this country. I want to make it very clear that I’ve supported them, that I believe that they are valuable to this country.

So is the disproportionate share. If we want to pull them out and put them into a separate set of funds to be annually reviewed, I can understand that. There’s a logic to that.

But logic dictates that we go through the Medicare Program and pull them all out, and not just pick on this one.

Now, Congressman Thomas pointed out correctly that the bucks are here, and there is no question about that; this is a big one. But as a proportion of people, it’s probably no bigger than supporting a 30-bed rural hospital with a substantial amount because it happens to be the only hospital in the area.

As I said, I supported that; I wanted to believe those people needed care. But I also believe these urban people need care, too.

So, again, if we’re going to go as a policy for this Commission to pull out subsidies, we’ve got to pull them all out, and we’ve got to look at them all.

Senator BREAUX. If you had some thoughts on that, Stuart, I would suggest----

Mr. ALTMAN. I think the staff did it. I applaud the staff work.

Senator BREAUX. We can look at it.

Senator Kerrey?

Senator KERREY. Well, Mr. Chairman, Bill and I have talked about this before, but one of the concerns that I had coming into this Commission, and that I have with this proposal, though I told Bill that I would support the proposal because I think one of the most important parts of both the DSH and the GME is that their costs are relatively constant.

They’re not growing and not putting pressure on discretionary spending as a consequence.

But to Bruce, I mean, I have a great deal of concern for what would happen if the proposal was like this was on low income populations.

But I have a much larger concern about what’s happening right now with low income populations as a consequence of a Federal budget that’s decreasingly available to them for the things that they need to lift their standard of living.

I mean, that’s the problem that we’ve got with the growth of the mandatory programs. To be clear, for those who are here over the age of 65 who are watching this, I don’t think we spend a disproportionate share of our current income on people over the age of 65.

But also to be clear, they are the most politically active and effective organizations in America today, 37 million of them, and they are terrific to influencing the people’s Congress. They are highly effective.

And though I don’t think they’re taking a disproportionate share today, by the end of the baby boom generation’s retirement, we will be allocating a disproportionate share of income to people over the age of 65 at the expense of lower income people’s education, whether it’s a title I or college.

I mean, I’m willing to support this because it’s $4 billion and $4 billion and it’s relatively constant over the next 10 years. This is not one that’s growing relatively rapidly.

But I think it’s very important for me to, No. 1, say that this does in some ways make the problem of mandatory versus discretionary worse, not better. We’re taking $8 billion from mandatory and pushing it over into discretionary funding that already is under attack as a consequence of steady, inexorable growth as a percent of the total budget.

Now, the second thing that we’ve talked about that I alerted Bill Thomas to, because I understand you’ve got some problems with the proposal to allow children’s hospitals to get a fair allocation of money for residency programs. I don’t know if that’s true or not, but I presume that by shifting this money over, that children’s hospitals would have an opportunity for that direct medical piece.

Third, I just surface an idea that you and I have talked about privately, and that is if we end up, this Commission, making a recommendation for a board, if we end up with a premium-based system, at least for a portion of our proposal, I would hope that some, both of graduate medical education money, as well as research money, could be controlled by that board.

I think both of them have a tremendous impact, not only on practice patterns, but also upon total cost of our health care system.

Senator BREAUX. Let me let Bill, and if anybody else feels like they need to make a comment, we’ll do it. I want to move on to the next subject.

Bill?

Mr. THOMAS. First, I want to congratulate Senator Frist. It’s obvious that, given the fact that he is a medical specialist, that he has provided us an opportunity to examine this in a way that we perhaps wouldn’t have examined it otherwise.

Although it’s obvious from the discussion that’s been made, this is a very sensitive area, and there are a number of people who, from a professional point of view, have a concern about the way this area is dealt with.

But I do think that it has to be discussed. It’s fairly obvious that you can spin very quickly--and I’m surprised no one mentioned foreign medical graduates while we’re discussing as to who those doctors actually are who are being trained with taxpayers’ dollars--because you get to that argument fairly quickly, especially between specialists, GP’s, nurses, or other health care professionals that aren’t counted based upon the real contribution they make in the system.

It just seems to me that the idea of taking what are more the fundamental educational costs of training medical folks, should be treated more like other educational costs, and that suggestion, I think, is a good one.

On the indirect medical education, some of you may not be aware, but in the Balanced Budget Act of 1997, there was a major adjustment. The increase was reduced from the 7.7 percent factor to 5.5.

There are groups that are analyzing it, as Senator Frist indicated, as perhaps a smaller number might be appropriate. But at least we’ve elevated the discussion to trying to get the facts to do it right.

And one of the more sensitive areas, obviously, is disproportionate share. And I guess, Bruce, I would have more willingness to agree with you in your argument if, in fact, the disproportionate share hospitals, that is, money from the Federal coffers, especially the regressive payroll tax, as the Senator indicated, actually went to the hospitals who conducted the uncompensated care.

The problem is the formulas we have now distribute money to teaching hospitals in areas that actually have less of a profile of patients in the beds than other areas who don’t get the uncompensated care.

So if our discussion is ‘‘does the DSH Program have merit,’’ then, at the very least, what we have to do is examine the formulas under which that money is distributed.

Any examination of the program, no matter how you slice it, will require us to reexamine the dollars going to teaching hospitals in the State of New York and principally New York City and Chicago. That is the problem.

I understand the concern, but it seems to me that if we’re going to deal with the subsidy who buy their profile in the bed should be supported. One, it doesn’t have to be in a teaching hospital, and, two, it ought to go to where the people who meet the profile are in the beds.

So, I am very grateful to the Senator that this Commission might be able to make some fairly clear statements about what Congress needs to do to address an area that is clearly and woefully overdue for a fundamental reexamination.

Mr. VLADECK. If I may, Mr. Chairman, I have no quarrel, Bill, with the notion that the DSH formula ought to be substantially reexamined and probably changed, although----

Mr. THOMAS. Let me respond directly to that.

Mr. VLADECK [continuing]. You yourself know.

Mr. THOMAS. Your comment was to play off of Sam’s statement about low income people of color. People who need uncompensated care are not just people of color.

Mr. VLADECK. But they are disproportionately people of color, Bill.

Mr. THOMAS. Yes, and there is a disproportionate amount of money going to that group.

Mr. VLADECK. Through the existing DSH formula, as inadequate as it is.

Mr. THOMAS. I appreciate that concession.

Senator BREAUX. Colleen, you had a final comment?

Ms. CONWAY-WELCH. I wanted to make a point, and ask staff to check some numbers.

Just the Academic Health Science Centers give approximately half of the uncompensated charity care in this country, and that’s not always recognized.

The other thing that I think would be helpful, again, the concept of putting this in a vehicle where it can have adequate and timely review, there’s been a lot of discussion of this vehicle and whatever the appropriate process might be, would have firewalls and multiyear funding and that kind of thing.

For those of us who aren’t used to the specifics of that, it would be useful to get an idea of what is a firewall or firewalls, and how would that work and that sort of thing. Perhaps, Bobby, you could help us with Bill?

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

Ms. GORDON. Yes, sir.

I think early on that I made this statement to the Commission about the inequity of appropriations to hospitals. And I was directly thinking about the State of Mississippi.

In fact, I had a conversation with Dr. Connelly about 2 weeks ago, and he was telling me about the lawsuit that was filed where they did recoup some money several years ago.

But we have the worst ratio of doctors per patient in the nation, yet we are severely underfunded. We are inadequate in the funding, and we just need a vehicle.

I think Senator Frist did answer my question awhile ago, that this would be a correction to that inequity.

Senator BREAUX. A final comment? We’ve got two more huge----

Senator GRAMM. I just want to make this point: We have on this Commission, one of the greatest oversight Congressman, I think, in the history of the Congress in John Dingell. He has done extensive oversight into DSH as it relates to Medicaid, and has uncovered all kind of inefficiency and fraud.

Why has no one ever done that with Medicare? Because no one has a jurisdiction, because it’s on automatic pilot.

If we put this in appropriated and authorized accounts, not just DSH, but GME, can you imagine what would happen on the Commerce Committee in the House when they look at a program where we’re training more doctors than we need in the wrong specialties and some are being paid $50,000 a year, and some are being paid $200,000 a year for exactly the same training?

We say, well, it doesn’t make any sense. But the point is, nobody has done anything about it even though it is in the second most popular program in the country, which is going broke.

Well, if we want to save this program, then it seems to me, having oversight on all these programs makes eminently good sense, but we’ll never have it as long as these programs are hidden in Medicare and basically stealing from the Medicare trust fund.

Senator BREAUX. All right, a final word, and we’ve had a good discussion on this. This is supposed to be just a short little toss-out point, but it ended up being a major discussion.

John, you get responsibility for all of this.

Mr. DINGELL. Just a request to the Chair. I want to thank my friend, Phil Gramm for his kind comments.

But just a very quick request: Could we get some appreciation of the numbers and what they mean in terms of the subsidies that are going in different places, different states on this?

Senator BREAUX. That’s available.

Mr. DINGELL. And the benefits achieved, and the needs of the institutions getting these benefits?

I think that will help us come to a better judgment that we might if we just used the raw numbers and just say we’re going to do this or that or something else.

We can have that.

We will now move to the same subject, which will be the question of modernizing the fee-for-service under the current existing Medicare Program.

There’s been a number of proposals made. Dr. Vladeck has contributed in this area particularly, along with suggestions from everyone else.

I’d like Bobby Jindal to kind of outline the suggestions that we’ve heard for modernizing the current fee-for-service Medicare Program and get discussion on that.

Bobby?

Mr. JINDAL. Thank you, Mr. Chairman.

At the last meeting, at the Commission’s December meeting, there was a lot of discussion around premium support and some of the ideas raised in the Restructuring Task Force.

At that last meeting, Commissioner Vladeck offered to work with staff to help prepare, for this discussion, some of the ideas that came up in the Reform Task Force.

And so if you’ll remember, at the Reform Task Force’s very first meeting, we actually had a witness from the National Academy of Social Insurance. Paul Ginsberg was the study panel chair of their committee, their task force on fee-for-service reforms. He actually came and opened the Reform Task Force’s very first meeting in the summer.

Since then, the Reform Task Force has heard from a number of witnesses.

The Reform Task Force has, for example, heard from Lynn Etheridge, Bill Scanlon, who is the Director at GAO of Health Financing and Systems Issues.

We heard from Lynn Nichols, we heard Murray Ross, the executive director of MedPAC, and Robert Waller at Mayo, as well as many others.

The reason I list all these different witnesses and people that came and talked to the Reform Task Force is that as I go through this presentation, I’ll oftentimes reference ideas or concepts that may have been suggested to the Reform Task Force by these various witnesses.

So I just want to let you know that we have borrowed from the comments that the task force has received before.

In particular, NASI has provided a framework when their fee-for-service task force reported back and issued their report, which we distributed to the members. They actually provided a framework that I’m going to try to loosely follow.

So I do want to credit them and credit that testimony.

I also, like I said, want to thank Commissioner Vladeck who has been generous with his time and his ideas.

As I go through this, I’m going to quote quite heavily his recommendations. So I do want to note that I’ll be quoting directly from a lot of his suggestions.

And finally I also want to thank the people at HCFA. In a very short timeframe, they gave us information in terms of where they are with certain things required in BBA in terms of demonstration projects.

They were very generous as well in providing that information.

I’d like to turn your attention to a 2-page outline you should have gotten. It may be helpful for you to follow along as I talk about these concepts.

First, in the introduction, there is outlined three questions, the three fundamental questions that seem to be raised, not only by the NASI report, but also by the ideas we’re going to talk about here today about potential reforms to the traditional Medicare Program.

The first question is whether the private sector has adopted management tools not traditionally used within Medicare which might decrease costs or improve the quality of care.

The second question is, if that is the case, should the traditional Medicare Program adopt some of these tools.

In other words, are these tools appropriate to the traditional Medicare Program, or are there unique characteristics of the Medicare Program that make these tools more or less useful or appropriate.

And then finally the third question is what has been HCFA’s experience in implementing some of these types of reforms.

There were various demonstration projects, for example, in the BBA.

As always, as we go through these, these are examples and sample options. These do not, at this time, represent official recommendations of either the task force of the full Commission.

With that, what I’d like to do is break this down into three sections.

First, NASI I think did a nice job outlining some of the challenges facing the traditional program.

I would like to spend a few minutes talking about those four challenges first.

Second, I’ll actually talk about some of the sample solutions and options. Dr. Vladeck was kind enough to give us some ideas and details.

And then finally, third, I’d like to talk a little bit about the current status of some of the demonstration projects.

First, in terms of the challenges:

Observation No. 1. The first observation is that the private sector has adopted management tools not used within traditional Medicare in an attempt to decrease costs and improve quality.

And NASI went on to talk about and give some examples of what these might be.

These were, for example, case and disease management.

Incentives to use selected providers.

Competitive procurement.

I remember that when Bill Scanlon and Mr. Etheridge came to talk to the full Commission in August, they both mentioned the fact that these had been used in the private sector with varying degrees of success, but that these have not been traditionally used in the traditional Medicare Program.

So the first observation is that the private sector has adopted some of these management tools in an attempt to control costs and improve quality.

The second observation----

Mr. DINGELL. Bobby, what are those and how are they working? I’m not saying do it now, but can you give us some expansion of these very excellent points that you’re raising here, please?

Mr. JINDAL. Sure. And one of our goals would be to try to produce a longer paper to expand on some of these comments, and we’ll certainly do that.

Mr. DINGELL. And whether it requires statutory or administrative implementation.

Mr. JINDAL. The question was also what’s required for implementation, whether it’s statutory or administrative authority.

The second observation is that the administrative structure of the fee-for-service Medicare Program continues to reflect the choices and focus common to employer-based insurance in the 1960’s and 1970’s.

NASI went on to say that the traditional Medicare Program continues to maintain its original focus and talks about three examples of what it meant by that.

First, that it continues to reimburse providers on a fee-for-service basis, that the traditional program has delegated actual bill-paying to the claims processors, actually doesn’t do that itself, and focuses more on its regulatory role.

Second, the traditional program emphasizes allowing the participation of most providers. The emphasis is currently on providing beneficiaries with freedom of choice, and the result of that has been that there are few conditions for selecting providers based on cost or quality.

And finally, third, there’s been an administrative emphasis on payment rates, rather than on the quality or volume of services provided. There’s actually a prohibition, and I’m quoting here, from any supervision or control over the practice of medicine, a statutory prohibition that’s part of the reason that you see these three trends.

It should be noted this was the common form of private insurance in the 1960’s when Medicare was enacted. This was the reason that Medicare was patterned after this when it was enacted.

And we also heard again, from some of these same witnesses, about the fact that the current program’s tools may not be adequate in terms of controlling utilization, looking at volume and looking at issues of quality.

The third observation is that Medicare’s reliance on administered pricing, which is based on legislation, rather than market-based payments, means that it is less able and slower to respond to a rapidly changing health environment.

And we heard again from a variety of witnesses. Bill Scanlon from GAO told the Commission in August, while historically an innovator in seeking lower fees, Medicare is now seen as less aggressive than many health plans.

We also heard, you may remember, there was a famous quote from Len Nichols that it is hard to get 10,000 prices right in each of 3,000 separate counties at a task force meeting.

Mr. VLADECK. Bobby, can I just add on this observation that it’s metrical, as all the Medicare HMO’s are now whining that just as legislative prices don’t fall as quickly in Medicare and the private sector, they don’t rise as quickly, either.

Mr. JINDAL. Sure. And provide comments because obviously many of these thoughts are ones we’ve worked on together.

Mr. THOMAS. And neither of those situations may be desirable.

Mr. VLADECK. It depends what your agendas are.

Mr. JINDAL. The final quote on this observation, and there were certainly several others, but the final memorable quote, you may remember Lynn Etheridge, said that the current national price control system was a textbook example of regulatory capture, and talked about some of those different agendas.

So the third observation is that Medicare’s reliance on administrative pricing, which is based on legislation rather than market-based payments, means that it may not be able to respond as quickly to a changing health care environment.

Finally, the fourth observation, NASI has laid the foundation, if you will, for some of the recommendations we’ll talk about in the second section, but they do have a caveat.

The fourth observation is that in terms of trying to explain the reasons for the current situation is that there are statutory limitations, there are certain political and bureaucratic obstacles and certainly the size of the traditional Medicare Program that must be considered because these variables may inhibit its ability to adopt best practices from the private sector or otherwise innovate.

And NASI briefly talked about the need in the public sector to have a different type of accountability, and it went on to list some specific issues that may prevent or may inhibit the adoption of some of these tools within traditional Medicare.

For example, congressional limits on flexibility, procedural requirements like rulemaking, and procurement policies. For example, the necessity of going through RFP’s and following civil service rules, the limitations on Medicare’s current demonstration waiver authority, and finally the need for Medicare and HCFA as a public agency to act with a different type of transparency than is normally required in the private sector in private companies.

That would be the last of the four observations.

The four observations are first, the private sector has adopted management tools not used within the traditional program in an attempt to decrease cost and improve quality.

Second, that the administrative structure of fee-for-service Medicare continues to reflect the focus and priorities common in private insurance in the sixties and seventies.

Third, this reliance on administrative pricing, based on legislation, means that the traditional Medicare Program is less able and slower to respond to a changing environment.

And finally, fourth, there are very real statutory and other obstacles that may inhibit the ability of the program to adopt some of these methods used by the private sector.

I’d now like to turn to the second part of this paper, and if you’re following along on the 2-page outline, it’s toward the bottom, it’s labeled ‘‘Potential Reforms to Traditional Medicare.’’

We’ve grouped these reforms, you can see, in five different letter categories.

What I’d like to do is describe each of the reforms.

Ms. STEELMAN. Before you go into the specifics, can we just spend a little time talking about what is this concept?

This is a question not really of modernizing the benefit package, which we’ve talked about, not modernizing the payment system, which has been really a process underway for the last 20 years but of changing the mission of the agency in some fundamental way, as I understand it.

To move the agency from a bill payer to something I think, as the Ginsberg report says, that would be held accountable by the Congress for the quality of care and the volume of services.

It’s that sort of the concept.

So one of the first questions is about the role of HCFA. In the original statute, HCFA Medicare was prohibited from any sort of interference or influence in medical practice.

That seems to me the first place where we’re going to have a discussion here, because some of these things suggest that HCFA would play a much greater role in clinical decisions, or at least, if not that, then at least at the level above it in terms of sanctioning certain protocols or doing the kinds of things that a medical director would do in a health plan.

So it seems to me that’s really the first question is, is that appropriate, is that desirable, is that necessary to accommodate the kinds of fiscal concerns over the long term--I won’t give Senator Kerrey’s speech, but you can pretend he’s here--is are these kinds of authorities necessary to get there?

Are we saying we simply cannot do it through additional payment reforms and we have to consider a HCFA role in something beyond payment.

Mr. VLADECK. Well, let me sort of make three observations about that, Debbie.

The first is we have asked the HCFA actuaries to score these proposals, and so we’ll get some sense of the extent to which they would have an impact on the long-term financial well-being.

The second is that I would distinguish, and I think it’s important to distinguish, for purposes of our having any hope of a useful conversation, whether a certain step, such as say, buying laboratory services through competitive bidding would be good public policy, and whether HCFA should do it.

I think there are a whole set of administrative and organizational questions that are logically and conceptually quite separable from the question of a particular administrative agency and so forth.

And my review of this literature suggests that people often disguise their dislike for a policy choice by HCFA bashing, and don’t address the real issue.

The third issue is, we have been talking about a variety of methods to increase the participation and perhaps turn the program entirely over to the participation of private plans because of their putative superiority in a variety of ways.

And these proposals and these observations speak specifically not so much to more general authorizations in the Medicare Program, permitting the Medicare Program to behave more like these private programs.

And I would argue that the appropriate question is, not only is it appropriate for a government insurance program to do A, B, or C, but if it’s not, is it appropriate to give government money to a private entity to do A, B, or C without the accountability that is inherent in a public program.

So I do think you have touched on pieces of the issues, but I think we ought to be as clear as we can about what they really are.

Ms. STEELMAN. OK. So part of it is changing or enhancing the payment authority through turning that into a purchasing authority. So you could limit the numbers of providers?

Mr. VLADECK. That’s what these options speak to.

Ms. STEELMAN. So part of it is payment and part of it is whatever these other utilization tools might be, whether they’re case management or whatever.

So it’s really twofold.

And then the bottomline question is should you do this most effectively through the government entity or through health plans.

Does the authority differ in any material respect?

Mr. VLADECK. I think the issue is, if some set of activities are desirable or laudable on the part of private plans, why should you not be able to benefit in what continues to be the much larger and more expensive part of the program?

Senator BREAUX. All right, let’s get some of these proposals on the table.

Mr. JINDAL. Thank you for the question.

I do think it points out two things.

First of all, let me point out what we are not covering. This document certainly doesn’t cover all the topics raised in the Reform Task Force.

Ms. Steelman’s right in that it doesn’t cover things like benefits or some of the other issues raised.

It does focus rather on how HCFA might purchase services differently, whereas the focus has been previously on the freedom of choice aspect, on maximizing provider participation.

This would really focus more--we’ll go through each of these in detail--it would focus more on transforming the traditional Medicare Program into more of a local purchaser and more of a discriminating purchaser.

And what I’d like to do, like I said, we’ve grouped some of these proposals. I’d like to go through each of them in five categories.

What I’ll do is rather than going through some of the types of concerns that are raised under each one, I’ll do each of the proposals, and then for each grouping, I’ll try to give you a couple of the sample types of concerns.

Once again, not trying to be comprehensive or not trying----

Mr. DINGELL. Wait a minute. Did you say into a local purchaser or a national purchaser? That’s a very important decision.

Mr. JINDAL. That is, and some of these tools will speak to that more specifically. I said local, because in terms of being able to discriminate on the basis of quality, price, and some of these other things, it will be I think important to do that on a local basis.

I think some of these tools, once we get into the specifics, will raise that issue.

Mr. VLADECK. John, I think there’s a lot to be said both for recognition of how much variation there is.

At the moment the fact though in how the Medicare Program works, not what the benefits are, or what the entitlements are, but who the providers are and how it pays for its services and how the services are delivered from one community to another, and I think given the growing heterogeneity in the health care system, the program will work better and better for beneficiaries to the extent it has greater flexibility to adopt to local circumstances, so I think that’s what Bobby was trying to articulate.

Mr. THOMAS. Just briefly, as we describe these, if we’re going to have--I understood you to say that HCFA’s going to try to score these various proposals or actuaries are.

It seems to me that there are going to be a series of assumptions made that we’re going to have to look at, because I understand you just mentioned two terms in which the local purchaser could make decisions, one on price, the other on quality.

Price I think is a fairly standard, easily measured factor.

Quality gets into an enormously difficult area, and if HCFA’s going to judge these changes based upon a particular definition of quality, and give us what they mean by quality, then that’s one thing.

But if they are simply going to score it based upon some unknown determiner of what quality is, then that scoring’s not going to be worth a whole lot. Because I know CBO looked at it, and said they couldn’t begin to score it because there aren’t nearly enough details there to understand what it is that you mean by terms like quality.

Mr. VLADECK. I think that’s fair. And I think again this is a summary document and clearly the actuaries will only score proposals that have enough specificity to be scored.

Mr. MCDERMOTT. Mr. Chairman?

Senator BREAUX. Yes?

Mr. MCDERMOTT. I just have a little bit of trouble when I think about these observations.

When you say the private sector’s adopted management tools not used within traditional Medicare, in an attempt to decrease costs and improve quality.

And then I look at Sunday’s New York Times that reports that the majority of HMO’s lost money in 1997, accumulating nearly $800 million in losses.

And then I think about what we struggled over in the Congress with respect to a patient bill of rights. We’ve given all these tools to the private sector. They used them apparently and lost $800 million and have the patients in an uproar. [Laughter.]

Now, I have a hard time understanding----

Mr. DINGELL. And the doctors in an uproar too.

Mr. MCDERMOTT. Well, I wasn’t going to worry about the providers. I was going to worry about the patients. And it’s hard for me to understand why we would--I mean, why we’re not discussing what’s going on in the system right now.

We are talking as though we’re going to move more people in that direction. And I don’t understand where we are at the moment.

If we’ve already had 500,000 or so people be knocked out of HMO’s, how do we talk as though we’re going to move forward in this?

Senator BREAUX. Well, let’s get the proposals on the table and then we can get some discussion on what they are. Otherwise, if we just debate the theory for a long time, we’ll never get through the schedule, which I’m trying to keep.

Mr. THOMAS. But Jim’s statement is that somehow we have given them these tools. It says that, under observation No. 1, the private sector has adopted management tools in an attempt and the duty of the private sector is that when they adopt them and they fail, they’ll change.

They didn’t get these from us. Government didn’t give them tools that they have. They are looking desperately for new, innovative ways to deliver the same or better service at a cheaper cost with improved quality.

So the idea that somehow these tools were given to the private sector by government is a concept I find baffling.

Senator BREAUX. OK, Bobby, get on with it.

Mr. JINDAL. All right.

The first group of options, actually the first option is called the Administration of Reforms, and this point probably follows up Ms. Steelman’s and Dr. Vladeck’s conversations directly, in that it directly talks and discusses about expanding HCFA’s authority, and I do mean HCFA in particular, HCFA’s authority to waive statutory requirements and implement changes to the Medicare Program.

This is the flexible Medicare Administrative/Demonstration Authority.

This would start by allowing HCFA to waive certain statutory requirements. The rationale of the proposal is that this proposal would allow HCFA to use rulemaking to make changes to Medicare based on the results of demonstrations without the need for legislation.

Therefore, HCFA could modify Medicare if the changes are cost effective for the program, do not increase beneficiary costs, and do not reduce the quality of care received.

So this first proposal----

Mr. DINGELL. What changes could it make, Bobby? What changes are you talking about here?

Mr. JINDAL. Well, the rationale is that the types of changes would be, and I’m quoting, it would be the strategies used by private insurers and managed care plans in the private sector.

For example, payment through negotiated rates.

Some of the other tools below talk about specific policies, but what this first proposal says, before you even talk about the policies, what would happen if you gave HCFA more authority to implement those changes. It would give them broader authority----

Senator BREAUX. As an example, John, I mean, HCFA tried to do demonstration projects in I think Baltimore and in Denver, CO, the congressional delegations get involved and put a lot of heat on them, and made them literally stop the demonstration programs.

This concept is to give them authority to do more demonstrations, giving them the authority to do it.

Mr. VLADECK. Well, there’s another piece, though, that’s important. And, again, in the Balanced Budget Act, for example, we expanded the PACE Program which had existed as a demonstration only at that point for more than 10 years, and which for the majority of the time, everyone had agreed was a very successful experiment and ought to become part of the Medicare Program.

But under the existing demonstration authority, unless Congress authorizes, either as they have done with social HMO’s, for example, a continuation of the demonstration, or changes the law, the program dies, no matter how successful it’s been.

And I think this recommendation speaks specifically to being able to take a successful demonstration, and through a rulemaking process, modify the program to learn--to take the lessons from.

Mr. THOMAS. And/or have a Congress that’s responsive to proven demonstrations, and allowing them to go forward in a permanent fashion as the 94th Congress did with Republican leadership. [Laughter.]

Ms. STEELMAN. OK, so there are three pieces of this question, as I see it. There is the question of whether or not HCFA should be able to waive statutory authority, and that’s just a process question. Does the Secretary have the authority to say I don’t like the way this statute operates in this area or nationally or whatever, and I want to do something different; I want to try something different?

And then there’s the second piece of whether or not that has to be done in a demonstration authority which has all the evaluation and all the reports to Congress and all that business.

And the third is whether it can just be done in some sort of experiment, so it doesn’t bring all that demonstration baggage with it.

Or maybe the last one is what you said, where you would take a demonstration and allow the Secretary to make that permanent without coming back to Congress.

Is it all of those things?

Mr. JINDAL. My understanding of the proposal is that it would allow HCFA to waive statutory requirements to make these experiments--to implement these experiments on a national basis.

Ms. STEELMAN. So it’s just the last thing I said?

You’ve got these congressionally authorized demos, you find that they’re successful, and so you have the authority at the administrative level to simply make them national?

Mr. VLADECK. I believe the problem is also----

Mr. THOMAS. You can craft it either way.

Mr. VLADECK. Also expanded some of the demonstration authorities which are now quite limited, although they would still continue to be demonstrations in the sense of requiring the formal evaluation.

Ms. STEELMAN. And to that extent, it wouldn’t correct the problem that you were talking about, Senator Breaux, because you’d still have people up here.

Senator BREAUX. Yes. You’ll always have Congress saying----

Ms. STEELMAN. You should mandate that it should be initiated at the beginning of odd-numbered years. [Laughter.]

Mr. JINDAL. Let me make sure I’m clear then. It would allow HCFA to initiate demonstrations without congressional authority?

Senator BREAUX. Yes.

Mr. VLADECK. Authority which it now has, but in a very limited circumstance. This would broaden that authority, as I understand it.

Mr. JINDAL. All right, and like I say, I’ll briefly give examples of the concerns raised, in addition to the rationale.

There is concern raised as to whether Congress would be willing to allow the waiver process to be the normal means of amending Medicare statutory requirements.

This would obviously be a big change in the way that normal changes are made now to the Medicare Program.

The second group of options at the top of the second page are entitled Change in Medicare’s philosophy.

NASI had a second recommendation that it was necessary to change the statutory language to make Medicare explicitly responsible for utilization, quality, and the cost of care it finances.

As we previously discussed, there is currently--and when Medicare was enacted--there was a statutory prohibition on Medicare actually influencing the--let me make sure I quote it correctly--there was a statutory prohibition on Medicare influencing the practice of medicine.

Medicare was not supposed to exercise any supervision or control over the practice of medicine. NASI purposefully broke out a separate recommendation, and this is separate from the actual tools it recommends.

It actually presents a separate recommendation on changing the philosophical culture, if you will, of shifting the philosophy of the traditional fee-for-service program, recognizing that it is one of a number of options.

It went on to say things like, for example, developing, quote/unquote, a culture of experimentation.

So even before you get to the specific tools and specific purchasing strategies, this says that it would be helpful for Congress to actually pass language making Medicare responsible for these things that it’s not currently explicitly responsible for.

Mr. ALTMAN. Bobby, excuse me, I just--we’re talking about a different Medicare Program than I know.

I thought this provision in the 1965 law was really essentially repealed in 1971.

I think the introduction of the PSRO Program and then the PRO Program and then the Utilization Review Programs in Medicare and then passage of a whole slew of provisions in Medicare essentially repealed the idea that Medicare does not influence quality and utilization of the care it provides.

Mr. JINDAL. But whether it----

Mr. ALTMAN. Now, that doesn’t mean that you wouldn’t want to go further, but I don’t--I think one needs to be careful.

What existed in 1965 is not the Medicare Program that we know and love today.

Mr. JINDAL. I think you’re certainly right that many would argue that Medicare certainly does have a large influence over the delivery of medicine.

I think the point of this was to go even further. Throughout the report, many have commented that Medicare, through private contractors, for example, has delegated authority to local medical societies or the PSRO’s to do that kind of supervision over volume and quality in utilization.

What this is saying is, it’s going a step further and saying the traditional program is explicitly responsible for those functions.

So you’re right that certainly the current program currently does have an influence.

Mr. ALTMAN. Well, they’re pretty strict on what--they evaluate PRO’s on how effective they are.

I mean I don’t want to--I think that it does sort of take on its own discussion, but I don’t--I think the way you drew the picture is that here is a program that doesn’t impact on quality and utilization, and the introducing this that allows it, isn’t the reality of the world we live in.

Ms. STEELMAN. I think it’s different. I mean, if you read the Ginsberg report, it’s a different statement. PSRO’s and a lot of what HCFA does--and this is not my area of expertise, so correct me if I’m wrong--those are generally post facto statistical reviews.

And what Ginsberg is talking about is putting HCFA in a more proactive medical director type----

Mr. VLADECK. No, I don’t think that’s correct. I think the issue is that the statutory authorities to do some of these things and control some of these things are very fuzzy and very much unclear.

And what this suggests is to make it much more explicit statutory authority to, in fact, legitimate things HCFA has tried to do for many years, often with difficulty because of the fuzziness of the statute.

Ms. STEELMAN. Like what?

Mr. VLADECK. For example, the ability to require a diagnosis on a laboratory order slip as a way of ensuring appropriate medical care and eliminating overutilization of lab services. That’s something that is now done by about half the carriers in the United States.

Senator BREAUX. If we face passing some like this recommendation, how do we--I can just see the outrage from AMA and everybody else that Washington is going to tell them how to practice medicine, even more than they are already telling them how to practice.

Mr. VLADECK. Let me just emphasize that this is NASI’s recommendation; this is not mine. I think this is an academic recommendation.

Senator BREAUX. OK.

Mr. THOMAS. So if we accept this, it doesn’t get your vote. Well, then, let’s move on. [Laughter.]

Senator BREAUX. Colleen, do you have a comment on this?

Ms. CONWAY-WELCH. So you would reject this?

Mr. VLADECK. I just don’t think it’s important.

I mean, I think it’s----

Senator BREAUX. Let’s move on.

Mr. VLADECK. This option No. 2, again, I think is a statement of philosophy, and I think statements of philosophy are nice, and I wouldn’t oppose a statement of philosophy, but it’s the substance that matters.

And if anybody is uncomfortable with a statement of philosophy, why bother.

Mr. JINDAL. And without dwelling on this, I think it’s important to address this concern, as we do talk about the specific tools, whether or not the Commission talks about this particular observation or philosophy.

There is a point that the traditional Medicare Program currently does have a profound impact on the delivery of care.

But the question that some of these tools raise is whether that impact is more explicit and more flexible. So I do think this point will come up even if we----

Ms. STEELMAN. But I’m really more interested in what the tactics are underneath this anyway. What is it that HCFA would do differently than it does today?

Mr. JINDAL. Why don’t we move to the specific tools then. Why don’t we go on to the next recommendation.

I’m sorry----

Ms. CONWAY-WELCH. I’m not quite sure where this belongs, but you mentioned, I think in the context of this, of instituting a culture of change in HCFA.

I think that is an important question because there--specifically how do you do that?

I’ve had lots of interactions with HCFA that have suggested that it is not as responsive to change, and the culture of the private market is more responsive to change, for better or worse.

One of the questions I would have, which I do think bears some relationship to the philosophy is, specifically, how do you make this huge organization accountable to a culture of change where very different behaviors are required?

Senator BREAUX. Well, these next specific suggestions, I think would address that.

Mr. JINDAL. Like I said, even if we move off this topic, these are thoughts that members may want to discuss in a different context.

The third set of options, of policy options are under the heading, Specific Purchasing Tools.

Option No. 3 is the adoption of preferred provider arrangements. It recognizes that in the private market, most fee-for-service plans have developed networks of preferred health care providers that agree to deliver services at a lower cost.

For example, Blue Cross in the Federal Employees Health Benefits Plan, offers incentives such as lower cost sharing to encourage their beneficiaries to use their preferred providers.

Other plans may offer extra benefits in addition to lower cost sharing.

This proposal as described here would permit DHHS to develop preferred provider arrangements, either nationally or by region. DHHS then would be able to negotiate global payments or discounted fee-for-service payments with these preferred providers.

And it may, for example, start in those regions where the private sector has already brought payment rates down below Medicare’s costs.

So that’s option No. 3, the development of preferred provider arrangements.

Option No. 4----

Mr. VLADECK. Let me just suggest that this is an expansion of an existing activity; that, in fact, the so-called Centers of Excellence Program is largely a preferred provider negotiated price without any incentive of disincentive to beneficiaries to use preferred providers.

And that the fact, though, the way in which Medicare has covered heart transplants, is with a de facto preferred provider network, although no negotiation on the price. But not every hospital in the United States that does organ transplants is permitted to get paid by Medicare for it.

And the data is very clear that the results are that Medicare beneficiaries have better outcomes from transplant than privately insured people.

Ms. STEELMAN. So in what way should the authority be expanded? Should it be expanded to private?

Mr. VLADECK. Those are both very limited demonstration authorities. The heart transplant, they’ve gotten away with only because it’s a relatively small phenomenon. The ability to not----

And so HCFA was able to write qualitative criteria for participation in transplant as provider criteria that have worked very well.

Contracts with the Centers for Excellence Program have been stalled for the last 5 or 6 years by the limitations of demonstration authority.

Ms. STEELMAN. But how should this authority be expanded? What’s needed?

Mr. VLADECK. What’s needed is legislative expansion to permit, under whatever kind of circumstances--and you can specify some--that when there are identifiable sets of providers or sets of services where you can determine that there is no immediate risk to access for services, where you can get professional consensus on the measurement of quality, and when there is a sufficient supply of quality providers in excess of the volume of service needed by Medicare beneficiaries to permit a contractor or HCFA to enter into selective agreements in which only those providers get paid or only those providers get average--get some benefit from it.

You might want to explore whether you can give beneficiaries a reduction, a sharing in the savings if they go to those preferred providers, and a negotiated price in return for the presumed increase in volume for being--receiving that Medicare designation.

That would be what the authority would do.

Ms. STEELMAN. Keep it on sort of high cost--some definition of indications?

Mr. VLADECK. I think there are two separate issues. I think that’s what this proposal is.

There is a separate issue of being able to exclude unnecessarily expensive providers of local--abusers, who you can’t criminally convict of Medicare fraud and abuse, for which the program now has no authority.

But that’s not in this proposal. It’s another idea that I think ought to be talked about.

Ms. STEELMAN. It sounds like we need some more specifics on what are the PPO authorities that you’re talking about.

Senator BREAUX. Bill?

Mr. THOMAS. Part of my concern is putting it in the context of the real world. I can understand the initiation aspect.

Let’s go ahead and institute everything that you have just outlined, Bruce.

And when we go through this process, now I’m going to do something that I have difficulty doing; I’m going to look at the world as a Senator.

And I’m going to say that given this criteria, which I thought was pretty good, for creating Centers of Excellence, I cannot believe that this group of folks looked at my state and couldn’t find one Center of Excellence in my entire state.

Mr. VLADECK. That’s not happened.

Mr. THOMAS. I think it’s going to, if you’re going to give HCFA the authority to make the decisions and to pick where it’s going to occur.

The initiation is one thing in a political environment; the continuation of that policy is another, especially since you said that substance counts. Philosophy is nice, but substance counts.

As soon as HCFA makes a substantive decision overturning statute which they have the power to do, or failing to recognize what is obvious to me, you’re going to get a vehicle moving.

The political realities are, you may be able to institute some of these, but you simply cannot insulate it from the political aspect of government making decisions shaped on one person’s perspective of what the outcome ought to be, versus another’s.

Mr. VLADECK. Let me just make sure I understand it, Bill. I think this is a very important issue for the Commission more generally.

What I understand you to be saying--and I don’t agree with it, empirically--but we can talk about that separately.

I understand you to be saying that the problem with innovation in the traditional fee-for-service program is that the Congress won’t keep its hands off it in a way it will keep hands off of private plans.

Although, again, I think if you look at what’s happened to some of Medicare regulations of Medicare managed care plans, to believe that they are somehow more protected from that sort of political interference than the fee-for-service program is, that’s where I would argue with you and disagree with you, empirically.

Mr. THOMAS. Right, and what I would say is that we’re going to be testing that probably in the 106th Congress. I hope we have sense not to go in and make some of the decisions that are going to drive the costs of medical care up even beyond what they are now, with no lasting and permanent benefit.

No, I think I’m kind of underscoring what Commissioner Welch said. I think, as you did, you can reorganize HCFA every 5 years, but no one is going to give them these kinds of responsibilities on a permanent basis unless that reorganization produces a reculturalization, and there is a comfort level with the decisionmaking that goes on there.

What we’re talking about is modernizing HCFA. I agree with a number of the modernization suggestions, but only in the context of a reculturalized HCFA.

To say they’re going from a bill paying to one of these innovative inserters beyond statute in a decisionmaking process in which they’re responsible to themselves, is going to require fundamental reculturalization, not just a reorganization.

Mr. VLADECK. Again I don’t think this is an argument, necessarily here, and I don’t think it’s germane to this issue, particularly.

Every major effort to reculturalize HCFA under administrations of both parties in the last 15 years has been stopped by the Congress.

Senator BREAUX. All right.

Mr. VLADECK. That’s an empirical reality.

Senator BREAUX. I appreciate the arguments, but I really need Bobby to get through with the presentation, or we will be here forever and not finish anything.

So, let’s move on to the next proposal.

Mr. JINDAL. Option 4----

Ms. STEELMAN. I’d just say that on that one, what I would like to see is a definition of the kinds of PPO authorities that are being contemplated. It seems to me there’s a whole raft of them, and in order to really talk about this below----

Mr. VLADECK. I think we’ll have the level of definition of this as specific, with as much specificity in this as any other proposal the Commission has been asked to address.

Senator BREAUX. Colleen?

Ms. CONWAY-WELCH. Could I just also ask the--if I’m understanding this correctly, in terms of the concern about providers who behaved in certain ways, would be on panels, and that those who didn’t wouldn’t, and certain operations would be paid for, and certain wouldn’t, based on practice guidelines and that sort of thing.

What makes me nervous is how--and perhaps we could have some more details on this. How would you compete in Tennessee or in California? How would a private company compete with the structure of HCFA and the resources of HCFA?

I mean, I----

Mr. VLADECK. But that’s arguing that the problem with these proposals is that they will work too well.

Ms. CONWAY-WELCH. No.

Mr. VLADECK. If they can’t do them better--if they can do them better, they’ll be able to compete effectively. If they can’t do them better, they won’t.

Mr. THOMAS. But if they define better themselves----

Mr. VLADECK. I don’t understand what the definition of better is.

Senator BREAUX. Sam?

Mr. HOWARD. I only have one problem with the report. What we’re doing is creating a monopoly with no accountability.

I mean, there is no accountability. If we give you all this authority, who are going to be accountable to?

Mr. VLADECK. You’re not giving it to me. The Congress is going to do it, and if the Congress can’t----

Mr. HOWARD. You have a monopoly which controls 30 percent of the health care budget, and they decree and decree today, decree tomorrow.

Mr. VLADECK. I would argue that there is more accountability in HCFA than there is in the plans that currently enroll 6 million beneficiaries and get a check from the government every month.

What we’re trying to do is talk about parallel equivalent structures of accountability so that this market can work on a level playing field.

Mr. ALTMAN. I want to ask the general question because I’m a little with Sam on this, and I think it makes a big difference in my mind, whether we’re talking about the existing structure where 70-85 percent of the population is in one plan and dominated, and where it is almost a monopoly, even though it’s benevolent and run by very good people who have nothing but the best intentions in the world to do it. It’s just, by its very nature.

That’s one model, and then you have to be a little careful. I personally get uncomfortable with that kind, versus whether it’s a premium support, FEHBP where there’s good market competition where the numbers change, where people can opt in and out of, and if they become too bureaucratic and aren’t flexible enough, people can opt to another plan.

I see them quite different, and in the second, I think this plan--Medicare definitely needs more flexibility to compete on the level playing field.

I see it quite differently in an environment where they are 85 percent. I personally don’t have as much problems with an administered pricing system and limited controls over quality when they control 90 percent.

I see that that’s a very dangerous world, if you give--I can see where the AMA would get uncomfortable and so would I.

But where they control 20 or 30 percent and if they provide poor quality care and you can flip to another player and there is choice, then I see a different market.

So, when you’re talking about these, Bobby, what are we talking about? Are we talking about it in the current environment? Are we talking about it in a restructured environment?

It changes my view of it.

Mr. VLADECK. Again, I think we’re talking about proposals for very small parts of the market. When we talk about preferred provider arrangements for, for example, certain Centers of Excellence, you’re talking about one----

Mr. ALTMAN. I don’t have any problems with that. If we want to make a sleek, efficient HCFA, which I think has some value in an FEHBP-type model, I’m all for it.

I think that they have to compete in a fair way. We should not tie their hands behind their back. We should not make it an inefficient program that can’t compete.

I think the concerns that Sam and others have raised about, in an environment where you’re 85-95 percent and call all the rules, then there’s a difference.

Mr. VLADECK. I want to ask an economic question of you, Stuart, since you’re the economist and I’m not.

What you’re saying to me is that the market power--we’re worried about the long-term financing of this program.

Mr. ALTMAN. Yes.

Mr. VLADECK. We’re worried about being able to continue to provide benefits without an undue burden on taxpayers, and what you’re saying is that the administrative and political implications of market power are such that you want to give away the economic advantages of that.

You do not believe that Medicare should maximize the market power intrinsic in its market share?

Mr. ALTMAN. No, I didn’t say that. I’m not as uncomfortable in an environment where Medicare uses its market power in an administrative pricing system and backs away from being very tough on quality and utilization when it is the 1,000-pound gorilla.

That’s a safer environment.

Mr. VLADECK. But what about using----

Mr. ALTMAN. But if you had both.

Senator BREAUX. Let me make an observation. We’ve got a wonderful recorder who’s sitting back there trying to record everything that is said. So when two people speak at the same time, this poor lady goes absolutely crazy.

I mean, she’s taking down every word we say, so, I mean, let’s have a dialog that allows her to make sure we are recording everything properly.

Mr. ALTMAN. Let me just finish what I was trying to say. I am not for making HCFA more efficient and doing a number of things, but I’m trying to listen to what these proposals are.

I want to know whether I’m listening in the current environment or in a new environment.

And then I might support them under both. I just--it makes a difference to me. They’re different markets.

Mr. VLADECK. I would argue that the hypothetical new environment is so unconnected with any reality with which we have experience, that there is no way to have an empirically grounded discussion of your so-called new reality. I’m sorry.

Then you’re adding--you’re comparing levels of fantasies here.

Mr. ALTMAN. Some of us have faith.

Mr. VLADECK. It is faith, Stuart; it’s not evidence.

Senator BREAUX. John Dingell?

Mr. DINGELL. Thank you, Mr. Chairman.

I have some real concerns. If we consider this all in the abstract, then it creates one consequence.

If we’re talking about in concert with what would happen with regard to Medicare as we know it now as fee-for-service, then we might be talking about a situation which would cause Medicare as we know it, the fee-for-service program, to wither on the vine.

I’m hopeful that we won’t get to that point. I would regard that as a source of great personal, and, I think, political distress to all of us hereabouts.

But having said that, I think we’re going to have to understand that we do--we can’t tell HCFA, HCFA, you can’t do the things that are necessary to assure that the system functions efficiently and well and appropriately.

If we do that, we may either be creating a situation where we aren’t going to make the changes that we need to make or all the changes we need to make, or we may ultimately wind up with a situation where we freeze Medicare FFS in place.

The practical result of that is that we wind up with Medicare as we know it now which is very much respected by its recipients in a situation where it won’t be able to change within acceptable terms for the beneficiaries of that.

I just hope we’ll keep all of this in mind, particularly as we’re addressing this, because not only the desirable changes that we might want will be foreclosed, but very frankly the protection of the Medicaid fee-for-service as we know it will be jeopardized and very seriously so.

Senator BREAUX. All right, these are good comments. I really--we have got about five other proposals.

We are getting all this dialog on this. This is wonderful, but we have got about five other proposals just under this section.

Then we are going to have to do the whole entire next section on Medigap insurance.

Jim? [Laughter.]

If it’s essential, I am dying to hear it. [Laughter.]

Mr. MCDERMOTT. That is really a nice entree to a question, but I am trying to understand this debate I heard back and forth between Stuart and Bruce Vladeck about the so-called preferred provider relationship.

Are you talking in the same sense about pharmaceuticals, so that if Medicare had the ability to buy pharmaceuticals for 33 million people, that they should not have that ability to go in and drive the toughest bargain possible?

Mr. ALTMAN. I wasn’t talking about this one provision. I was talking about the whole discussion.

I think that--excuse me if I wasn’t clear. I think that the whole discussion about what kinds of flexibilities and how HCFA operates on all of these makes in my mind a big difference, depending on the structure of the market, and I think it responds directly to Mr. Thomas’ point.

I think the flexibility and culture change of the post office, for example, became very different when it faced the market and Federal Express and all that kind of stuff versus when it had, you know, the pony express and the market.

It is just a different world, and so I just want to know what we are talking about here.

Mr. THOMAS. And your point is really well taken, because my comments were addressed to the assumption that this discussion of modernizing Medicare could be in lieu of other options like a premium support model, and that if you discuss it in that atmosphere, I have difficulty understanding Bruce Vladeck’s argument of market share, when market share is given to you courtesy of government control.

This problem of defining--and that is why I agree with you. Now if the discussion is we have accepted the premium support model as a way in which flexibility can be provided and a good pricing mechanism structured and those who have fee-for-service still administered by HCFA ought to be given a fair chance to survive in a truly competitive world, then, yeah, let’s talk about modernizing it.

But my understanding is that Bruce Vladeck’s concept is don’t do a premium support model.

Mr. ALTMAN. No, that’s why I was asking him that. I didn’t want to put words in his mouth.

Mr. THOMAS. Yes. I think it is modernized Medicare, and let the government monopsony structure define the marketplace, and I agree with you.

That is the reason I came back to my chair quickly. If in fact we are talking about a premium support model, we have to create a more competitive model, as John says, so that those people with HCFA haven’t a chance to compete.

But I have no desire to provide HCFA without that kind of an environment which would force a reculturalization or they are out of business in a totally government-controlled structure as we have now.

Senator BREAUX. All right. I think it’s important to try and get all of the things we’re talking about.

Stuart, I mean, you were talking about you want to see the whole picture, and that is what we are trying to get out on the table.

Mr. ALTMAN. No, I just wanted to know. As I said, it’s what Bill said.

Senator BREAUX. All right. Let Bobby get the other items that we’re talking about reforming Medicare with on the table. Go ahead, Bobby.

Mr. JINDAL. Thank you. The preferred provider arrangements was the first of four specific purchasing tools.

The second was competitive bidding and negotiated pricing authority.

Mr. THOMAS. Mr. Chairman, having made those statements, I don’t know how we go on discussing this unless this is a substitute for a premium support model.

Is that the concept, Bruce? Is modernizing traditional Medicare, providing it with the tools on this sheet, in lieu of doing something else like a premium support model?

Mr. VLADECK. Mr. Chairman, I think there was some discussion in this Commission--I know in some of our informal discussions there has been in meeting--that you could do a premium support model while retaining the entitlement to the ‘‘traditional Medicare fee-for-service program.’’

I think it is fair to say that I have had private conversations with a significant number of members who don’t believe they would support a premium support model that totally eliminated the traditional Medicare fee-for-service program.

Mr. THOMAS. That wasn’t my question.

Mr. VLADECK. No, and then the question is: If you’re going to have a premium support model that works well and that includes the traditional Medicare fee-for-service program in it, do you make efforts to improve the way in which that traditional program works?

Some of us believe that if you are concerned about the financing of the program, you would save more money through operating the traditional program with these reforms than you will save through a premium support model.

Senator BREAUX. That is inconsistent.

Mr. THOMAS. With that last statement, I still don’t know where we are.

Mr. ALTMAN. You twisted it back.

Mr. THOMAS. You just went all the way back to square one, Bruce. It is a very simple question.

Are these modernizations viewed as part of a premium support system? Or are these modernizations viewed to make HCFA acceptable in a new world without the need, therefore, for a premium support model?

Mr. VLADECK. We have a semantic problem here.

I believe we have been talking, at least some of us, about a premium support model that incorporated as an option for beneficiaries----

Mr. THOMAS. With a new----

Mr. VLADECK [continuing]. With a formula for establishing the government contribution, the existing Medicare Program.

Then the question is, whether under such an approach, one would seek to improve the existing program or not.

Mr. THOMAS. So we are looking at Medicare modernization within the context of a premium support model.

Mr. VLADECK. Well again a premium support model in which premium support determines a way of affixing the government contribution toward a benefit package, whether provided through ‘‘the traditional program’’ or through alternative plans. Yes.

Mr. ALTMAN. That’s good enough.

Mr. DINGELL. Well I would like to ask a different question. Are we talking about a premium support----

[Many simultaneous comments.]

Senator BREAUX. OK, again this poor lady is having a difficult time.

John Dingell?

Mr. DINGELL. Thank you, Mr. Chairman. Are we talking--I’m going to ask this question--are we talking about terminating Medicare as we know it now and substituting there for a premium support system.

Senator BREAUX. No, I think----

Mr. DINGELL. That causes me vast distress.

Senator BREAUX [continuing]. That the concept that we’re talking about at least as I understand it, Bruce--Bruce, as I understand it, you’re talking about a premium support concept that would be out there and be available, and also retaining a new and improved Medicare delivery system under the traditional fee-for-service system.

Mr. VLADECK. That’s correct, and trying to establish that the marketplace that evolves therefrom is one in which the existing program is able to compete effectively, because I believe that once we see some scoring of these different alternatives, that if you permit the existing program to use its market power more effectively, it will be very difficult for anyone to outperform them.

Senator BREAUX. OK. All right, let’s get the----

Mr. VLADECK. I believe the empirical evidence is, to that effect.

Senator BREAUX. Let’s get the other concepts that are possible out on the table. Deborah?

Ms. STEELMAN. Given the late hour of the day, I’m going to help you. Don’t look like that. [Laughter.]

It seems to me that we have come to kind of an interesting construction here that deserves a paper and some specificity on both sides of the equation, and that this conversation would be more enabled at a next meeting with some paper supporting it where we can go through some of these other ideas and that we could shift to the insurance--or the Medigap conversation now.

I don’t know if anybody else feels that way?

Mr. ALTMAN. I would support that, Mr. Chairman. I think that this is--if we would agree that, and I think there’s a lot of agreement around the table, that an efficient HCFA or a Medicare classic in a premium support should have a number of these, and I don’t know whether we need to specify one--we are not at this level of detail in any other thing--versus a discussion of what kind of reform would take place without a premium support.

I think there was general support that this would be in the context of a premium support. Each one of them seems to make some sense in that and you are going to find much less opposition to them all.

So I would recommend, also, that we move on.

Senator BREAUX. Well if everybody wants to do that, that is fine with me, but I mean there are other options that we are talking about adding.

I mean, it is important for everybody to know what they are, Bobby. So do you just want to run through them, I mean, giving traditional HCFA these other tools to work with as well, and these tools would be, what, because we also have a public audience that would probably like to hear what we’re talking about?

Mr. JINDAL. Sure, and I do know that the audience does have the outline.

Option No. 4 was competitive bidding and negotiated pricing authority, including the ability to selectively contract.

Option No. 5 was the ability to purchase through global payments, for example, to do things like case and disease management.

No. 6 was to give the program flexible purchasing authority. The flexible purchasing authority was, for example, to take advantage of potential discounts from providers, and to modify payment or administrative procedures for individual providers, suppliers, or physicians.

Those were the four specific purchasing tools. I won’t bother going through all the concerns. I mean, I think we’ve hit some of the concerns that were raised in terms of things like monopsony power, and the pressure on HCFA to define quality.

Senator BREAUX. Debbie, Ms. Steelman, can I ask you exactly what you want, which, in turn, would mean generating more paper on this, so that the staff can have a better idea, or do you want to just talk about the generalities a little later on about it?

Ms. STEELMAN. Bruce and I have talked about it. I think it’s in the nature of the same kind of document we’re going through in the morning, the premium support, which just puts some definition under it.

The NASI report has a draft statutory language at the end of that, so I would kind of like to talk through that.

Senator BREAUX. All right.

Ms. STEELMAN. Maybe there could be an informal or formal task force that could get together and decide.

Senator BREAUX. I think at least one thing has been established, and that is the concept of doing this in terms of a premium system, and a new and improved Medicare system with additional tools to be able to compete in the marketplace, is what we’re talking about in tandem, not an either/or.

Mr. THOMAS. Notwithstanding the fact that we’re starting with 85 percent of the market.

Senator BREAUX. Notwithstanding that.

Mr. VLADECK. It’s so much quicker to respond that that should be a transient phenomenon. [Laughter.]

Ms. CONWAY-WELCH. About 15 minutes ago, I had this question, and I think Bill just retriggerd it again.

As we look at what I think are these sort of separate animals, can we do anything as you’re scoring it to identify what the market share is?

That’s going to make a difference. Is that what we’re asking? That would help me.

I mean, are we looking at--I know we’re looking at a slimmer version.

Mr. THOMAS. Maybe a different way of saying this is that as you analyze what you need to make fee-for-service competitive in a truly competitive environment, some of these will be essential; others might be desirable, based upon the way you look at the world.

What we need to do is in that new environment, what clearly would be essential, what would be desirable, we’d tend to agree on the essential and then discuss what would or would not be the desirable.

Ms. CONWAY-WELCH. That would do it.

Senator BREAUX. All right, Jim?

Mr. MCDERMOTT. I just want to put a caveat in here that if we’re talking about premium support, and we’re talking about HMO’s going down the tube, and we’ve got the American Health Plan Association President, Ms. Ignagni, calling for more money, that the Balanced Budget Agreement of 1997 was too tight and it ought to be loosened up, have we given up the idea of saving money?

Is that what we’ve now agreed to here?

Mr. THOMAS. Not at all. In the discussion tomorrow on premium support, we will have some discussions on potential savings as a result of moving to that plan.

Mr. VLADECK. Or increasing age or any other option we’ve got.

Mr. ALTMAN. OK. Medigap reforms----

Mr. VLADECK. What this does, Jim, if I can just add a final word, what this does is if you can’t save money from premium support, this ensures you that you can save some money for the program.

Mr. ALTMAN. That’s a whole different discussion.

Senator BREAUX. We will save that discussion until later and move on to Medigap.

Mr. THOMAS. Just because he says it’s the final word doesn’t mean it is the final word on that subject. [Laughter.]

Senator BREAUX. Medigap.

Mr. JINDAL. My understanding is that at the conclusion of the modernizing traditional Medicare session we will continue to work with Dr. Vladeck and other Commission members before the next meeting to be able to provide longer papers with more details on what these options mean.

The next topic is discussing not only Medigap, but all forms of supplemental coverage with an emphasis on individually purchased supplemental coverage, as well as that coverage provided through employers.

You’ve got a paper in your briefing books, and I know the public has also got some background facts on supplemental coverage.

What I’d like to do in this presentation is highlight five points. What I will do is tell you those five points and then go back to them and try to pull out facts that you’ve got in your briefing book in front of you.

The first point is that supplemental coverage is very common, and therefore must be considered whenever we think about changing Medicare.

The Commission should consider all sources of spending on beneficiaries’ health care when looking at various proposals and options.

This point came up earlier today. I think Dr. Vladeck brought up the point of the impact on employer-sponsored coverage, for example.

The second point is that the different types of supplemental coverage especially need to be considered when we discuss any types of changes to the Medicare benefits package, as each change would impact each type of beneficiary differently.

Very specifically, one of the things the Commission might want to consider is this notion of displacing private spending with public dollars, or requiring beneficiaries to pay more for benefits they already receive. So it is important to think about each type of beneficiary by insurance status or by coverage status.

The third point is that there may be opportunities when you look at the differences between individually purchased supplemental coverage versus employer-sponsored coverage, and there may be opportunities to make that coverage more efficient and to make it offer better coverage.

At least, today, what we’re going to do is contrast individually purchased supplemental coverage with employer-sponsored coverage.

The fourth point is that employer-sponsored coverage differs from individually purchased Medigap coverage in significant ways, for example, in the benefits covered and the cost control methods used, and may offer insights for the Commission to consider.

Finally, the last point, the fifth point, is that as we presented this information on supplemental coverage, there is certainly a lot of data that is available, but there are also certain gaps, there are certain things that the Commission may want to do.

There are certainly discussions today of highlighted areas where the Commission may want to call for further analysis.

For example, we may want to request in the future that there is consistent reporting of trends in the supplemental coverage market whenever future entities consider reforms to Medicare.

It is an important part of the overall package in looking at Medicare beneficiaries.

I’d actually like to start with the last point first and talk about what data is missing and would be helpful on an ongoing basis.

Certainly we have a lot of good data from a multitude of sources, which I will point out, and is listed in the document. But certain things that would have been helpful: Certainly more comprehensive historic data on a national level on premium and benefit trends, especially for individually purchased supplemental coverage. A lot of the data we do have is from multistate analyses, but it’s not collected by one agency or in one place on a national or historical basis.

Second, certainly it would have been helpful to have additional survey data on consumer reasons for purchasing coverage, their attitudes toward cost sharing, and the current benefit structure.

There is a GAO survey that’s done, but it’s limited in the questions it asks. It would be helpful to have a regular instrument to measure consumers’ attitudes.

The third would be a better correlation between beneficiaries’ assets and insurance coverage. We did have good data on each of those, but it wasn’t very well correlated. It would be nice to have specific projections of future, especially not only current but also future beneficiaries’ income, assets, and insurance coverage.

Fourth, there were certainly limits on self-reported data that we used. For example, beneficiaries are known to report lower than actual incomes, and also to underreport health care utilization.

Fifth, certainly the most helpful data in many of these questions was MCBS data and the comprehensive data set collected by HCFA.

But there is a timelag between when that data can be collected and some of these trends can be found, so that some of the data you’ll see we do refer to 1995 or 1996 data, and that was certainly before some of the increased HMO enrollment and the BBA changes.

Finally it would certainly be helpful to have additional and more recent comprehensive analyses of appropriate versus inappropriate utilization, especially for the over-65 population.

I think we’re all familiar with the RAND study and some of the early work done, but there hasn’t been, at least we haven’t been able to find comprehensive work done on the post-65 population to provide further insights on that population.

As I said, I started my last point first, and I’d now like to go back and capture the first four points.

The first is that beneficiaries currently receive coverage from multiple sources. We’ve heard not only in the Reform Task Force, but at this Commission, that there are multiple sources of financing for health care services provided to Medicare beneficiaries.

We’ve heard often the fact that Medicare covers about half the health care spending for Medicare beneficiaries.

But when you look at what that includes, that includes not only the acute care services for which Medicare provides the majority of funding, but it also includes things like nursing home care, routine services not covered by Medicare such as eyeglasses and hearing aids, but also other expenses like over-the-counter drugs and other procedures that are not covered by Medicare.

If you were to take a slightly different perspective on that same notion, rather than looking at overall health care spending, if you were to look at what might be called a major medical package, in other words, if you looked at the services that Medicare covers, plus prescription drugs--if you were just to combine those two--even for that limited definition of services, Medicare pays about 67 percent of the cost of this package, versus funding that comes from out-of-pocket or from other sources.

What you see is that Medicare is an important and a large payer for services received by beneficiaries, but it’s one of a number of payers.

Looking at MCBS data, we see that about 80 percent of beneficiaries do have some form of supplemental coverage. Now, this coverage varies widely in quality, accessibility, comprehensiveness, and efficiency.

For example, not everybody has access to this coverage. We’ve heard about adverse selection problems, especially when it comes to purchasing prescription drug coverage.

We’ve heard about first-dollar coverage and its impact on utilization, which we’ll talk a little bit more about.

We’ve also heard about the fact that coverage of benefits does vary widely. For example, even with those beneficiaries with both Medicaid and Medicare coverage, they don’t all get the same level of benefits. Those that are in QMB/SLMB, for example, don’t get prescription drugs, while those are dual eligibles do.

We’ve heard that different employers offered different benefits packages. So supplemental coverage certainly varies widely in quality, accessibility, and some of these other factors.

Behind me I’ve got four charts. These are all charts that are found in your notebooks. I’d like to turn to the first one.

Once again, all of these charts are in the handout in front of you.

This first chart merely provides information on the number of beneficiaries by insurance type. It’s based on MCBS data in 1996.

As you can see, it starts with fee-for-service Medicare only, at 11 percent, and we’ve got the number of beneficiaries to the right.

You’ve then got Medicare+Choice only at 8 percent.

Individual Medigap coverage at 28 percent; employer-sponsored coverage at close to 30 percent; and those beneficiaries with both employer-sponsored coverage and Medigap at 4 percent; those with Medicaid and Medicare coverage at 16 percent; and those in other programs, a little under 2 percent.

Other programs in this case would be things like the Veterans Program, state assistance programs and other programs.

This data slightly overreports the number of beneficiaries in fee-for-service Medicare only, and Medicare+Choice only, just because of the way the data is captured. But it’s not that far off.

This data also, you will notice, predates--not predates, but it captures in midstream, some of the recent trends in terms of how people have been switching--you’ve got a higher enrollment in Medicare+Choice than would be indicated by this data.

We’ve certainly seen recently that you’ve got more people joining Medicare+Choice plans than was reflected in this 1996 data. Actually, if you look at chart No. 2, which is chart No. 7 in your packages, what this does is, it, over time, shows the number of people that are in fee-for-service, the number of beneficiaries that are fee-for-service Medicare only.

If you look at the solid bar, at first glance, it almost looks like there has been over time, a decrease, but then a recent increase, but when you look at it more carefully, you look in detail, we’ve broken out the fee-for service only line, versus those that are fee-for-service and managed care.

And if you look at that, if you look a the fee-for-service only bar, you see that has decreased, and the reason that that’s been decreasing is that you do have more beneficiaries joining Medicare+Choice plans.

So that if you look at the numbers of individuals that don’t have supplemental coverage, about 42 percent of those are currently in Medicare risk plans, or Medicare+Choice plans.

These plans tend to provide a fuller benefit package. For example, between 73 and 83 percent of beneficiaries in these plans receive prescription drug coverage through those plans.

And these beneficiaries, therefore, have lower out-of-pocket prescription drug costs than those with other forms of private supplemental coverage.

Despite this fact, despite the fact that many of these beneficiaries are switching over to Medicare+Choice plans, and despite the fact that they are getting this drug coverage, 29 percent of these beneficiaries still have some form of private supplemental coverage.

It’s not the fact that everybody joining these plans drops their supplemental coverage, and that may be because they retain the coverage as a safety net, in case they desire to leave the risk plan.

It may be because they don’t realize the benefits overlap. We don’t have very good survey data on why that is so, but we do know that some portion continue to maintain their supplemental coverage, even after they switch to the risk plans.

Finally, the last point in this kind of broad overview of the fact that beneficiaries receive coverage from multiple sources is the fact that when you look at this fee-for-service Medicare-only population, and you think about who the most vulnerable populations and beneficiaries might be, it’s likely to be the low income beneficiaries in Medicare fee-for-service without supplemental coverage.

This is the population that doesn’t have wraparound coverage, does not have supplemental benefits.

Approximately a third of these beneficiaries in fee-for-service Medicare-only without supplemental coverage have incomes less than the poverty cutoff, which was approximately $9,200 for couples, and $7,3000 for singles.

That’s a little over a million beneficiaries.

Another 22 percent, about 775,000, earn above that, but less than 135 percent of poverty, which is just over $12,400 for couples, and $9,866 for singles.

We’ve been able to correlate that with income. We’ve not been able to correlate that with asset data.

We’ve got good asset data. Unfortunately, we don’t have it in the context of the survey, and we do suspect that that will become more and more important over time.

So this first point is simply that beneficiaries do receive coverage from multiple sources. As you can see, the vast majority do have some form of supplemental coverage, even though the numbers of people with fee-for-service Medicare only is decreasing as some beneficiaries chose to join Medicare+Choice plans, there are still a number of people--a number of beneficiaries that are in Medicare fee-for-service only without supplemental coverage with relatively low incomes.

The second point----

Mr. MCDERMOTT. Mr. Chairman, maybe I missed the introduction here or something, but what problem is it we’re trying to solve that this data is leading us toward some conclusion?

Senator BREAUX. One of the questions I think that is going to be explored is utilization of the services by people with supplementary insurance, the inadequacy of the supplemental insurance, are two concerns.

Mr. MCDERMOTT. You mean, if people have too good a supplemental insurance, they use too much?

Mr. JINDAL. I think the notion is to contrast the kind of coverage most often found in individually purchased plans, with that provided by employer-sponsored plans.

You will find, for example, that individually sponsored plans are more likely to have first-dollar coverage for deductibles and copayments, but you are less likely to have, for example, prescription drug coverage.

So it’s not a matter of one being good or better coverage, but rather that they are different types of coverage. The employer-sponsored coverage spends those dollars differently.

So the point is to point out the differences between the individual-purchase market and the employer-sponsored market.

Mr. MCDERMOTT. So the conclusion that we come to is that the more people get into managed care where they don’t have first-dollar coverage, necessarily, the better off we would be for utilization; is that it?

Senator BREAUX. Not really, no. That’s not the point.

Mr. THOMAS. I think that on the list of the five items that Bobby indicated, the most important one was the fifth, which is that data is not as good as we would like.

When you begin talking about this world which is, in fact, part of Medicare, we don’t often have the conversations about what the full world looks like.

And when you look at 29 percent of people who have Medicare have employer-covered Medigap, in essence, supplemental or wraparound insurance, and 28 percent have one of the statutorily required Medigap products, you have two interesting populations.

Probably of more concern would be the 11 percent of people who have Medicare in which the vast majority of seniors indicate that they don’t think that’s enough.

And we’ve got to focus on those people who are not covered by government programs, either in terms of the so-called QMB’s or SLMB’s. That, I think, is an important point, and we need to deal with that question.

But you also are invited to take a look at the 29 percent who have employer supplemental and the 28 percent who have the current statutory Medigap insurance and simply take a look at what that means in terms of the specific insurance products, and you get a remarkable contrast between what is governmental and statutorily required, and what the employers offer as a supplemental.

There are fundamental differences. The key point then is the first one that he made, that supplemental is common and must be examined.

If we’re talking about making changes in the program, we need to know what the vast majority of seniors have in this world, both statutorily required in Medigap and employer supplemental, and who don’t have anything or who have both, so that when we make a change in one, we know what will happen in the other areas.

Mr. MCDERMOTT. One of the possible outcomes of this could be that we would say that you couldn’t have first-dollar coverage; it had to mirror what’s done in the private sector in the employer-covered retirees?

Mr. THOMAS. I think a far more appropriate one would be to say what’s happened to medical practice in the last 10 years and the significant influence of drugs and how few of the statutorily required Medigap Programs have adequate drug coverage versus the employer supplemental where drug coverage is a very common practice.

Mr. MCDERMOTT. It could lead to a requirement that the Medigap cover prescription drugs, as an example.

Mr. THOMAS. That, I think, is a far more likely outcome, although the one that you indicate is also one that should be looked at.

Mr. JINDAL. The second point--so, the first point was about the commonality and the need to consider supplemental coverage.

The second point and related to this point is that it is necessary to consider supplemental coverage when talking about or thinking about changes to the Medicare benefits package.

Certainly there is a very pragmatic reason, given the program’s fiscal challenges, for the Commission to consider using all of the current spending as efficiently as possible, rather than displacing that private spending with public spending or tax dollars.

When you look at how proposed changes might impact different populations, it’s also important to remember that there isn’t just one average Medicare beneficiary, but rather that there are different types, depending on their different supplemental coverage status among other variables.

For example, if you look at the catastrophic bill, one of the things that has been talked about is the fact that one of the complaints from people who opposed that bill was that some of them felt like they were paying--some of the beneficiaries felt like they were paying taxes for coverage they already received.

And there was also some complaints from employers about requiring a maintenance of effort, that type of employer mandate.

So what I’d like to do is just walk through very quickly, these different populations, and point out characteristics that would be relevant when thinking about any changes to the benefits package.

There are many in the Medicare fee-for-service only category that are low income. Some portion of this population chooses to self-insure, or for whatever reason, chooses not to purchase supplemental coverage.

And it is important to think about them a little differently than those that are in that category because they cannot afford supplemental coverage or because it’s not offered them.

For example, we currently know that a little over a million of these beneficiaries have incomes above 175 percent of the poverty level or $16,000 for couples and $12,790 for singles.

We are working on trying to get more specific data, but once again we don’t have good asset data to correlate with this.

The second population----

Mr. THOMAS. Bobby, I’m sorry. Are we trying to get data which shows an age profile of those who have that kind of activity as well?

I just think that a 66-year-old and a 76-year-old might be fundamentally different. I know it’s difficult, but if we could create a timeline of the type of coverage or the fact that they don’t have coverage, it might be useful to see the changing pattern over time within the seniors.

Mr. JINDAL. What we can try to do is maybe take a snapshot in time and look at the different categories.

The second category is beneficiaries in Medicare+Choice Plans. As we already talked about briefly this population already tends to receive more generous benefits than that found in the Medicare fee-for-service package alone.

Therefore one concern might be that when considering any expansion of benefits, we might want to consider the impact of increasing the part B premiums for this population in exchange for benefits they may already receive.

Also expanding the Medicare’s benefit package may reduce incentives for beneficiaries to switch to private plans.

One of the things we’ve heard is that one of the reasons that motivates beneficiaries to choose the Medicare+Choice plans is the availability of these extra benefits.

The third population is beneficiaries with individual Medigap coverage. This is already a regulated and defined product in the sense that Congress, through the NAIC, has already defined what products beneficiaries may purchase.

The challenge is to make sure that the current dollars, both public and private, are being spent most efficiently.

Also in this market, it’s important that, as we think about any changes, we think about how to use those dollars most effectively, and we do think about the current spending on this population.

As one example of some of the administrative challenges, whenever you talk about making changes to this coverage, any change will cause disruption and increased administrative costs.

For example, in the demonstration project we were talking earlier in modernizing fee-for-service in the CABG demonstration, there were some complaints, from Medigap insurers about combining the part B and part A cost-sharing, even though it was done on a budget neutral basis for their beneficiaries.

So there will be some opposition to changes in this segment.

The next population is those beneficiaries with employer-sponsored coverage. These beneficiaries usually receive coverage that is defined according to what kind of benefits employers offer their active employees.

Therefore, it tends to be more generous than either Medicare fee-for-service or Medicare plus Medigap.

Senator BREAUX. Is it first-dollar coverage?

Mr. JINDAL. No, it’s not. We will get into the employer-sponsored coverage. It does tend to be, it does tend to have lower deductibles, about a $300 deductible. It does tend to have stop-loss coverage of approximately $1,750, and it does tend to have more generous prescription drug coverage.

Now it is true that it is----

Mr. VLADECK. Bobby, here your appropriate caveats earlier about the average beneficiary and the range is particularly apropos. Employer-sponsored plans are all over the line.

Mr. JINDAL. That’s right.

Mr. VLADECK. And those averages are very misleading in that regard because they are so diverse.

Mr. JINDAL. And it is certainly true that larger employers have tended to provide different packages from small employers, and actually it’s a nice segue to the next point that coverage usually results from negotiations between employers and employees, depending on what particular employers wanted to offer.

And so we do need to consider that when we talk about changes, either to this market, or to the benefits package, that they will impact a negotiated result between those two groups.

It’s also important to note that whatever changes we discuss, we be careful in terms of not giving employers incentives to drop coverage in favor of allowing employees to receive subsidized coverage, government-subsidized coverage.

This was a point that was also raised earlier with the buy-in option. There has to be some notion of not giving employers an incentive to switch from employer-sponsored coverage to government-subsidized coverage.

Mr. ALTMAN. Excuse me. Where’s the subsidized coverage here in the individual----

Mr. JINDAL. I’m sorry, I was talking about the employer-sponsored coverage.

Mr. ALTMAN. I know, but I mean, what’s subsidized here? Medigap isn’t subsidized, is it?

Mr. JINDAL. No. What I was saying is it’s important, as we think about any kind of changes, that we not displace those supplemental products which are not subsidized with subsidized dollars.

Mr. VLADECK. They are subsidized, aren’t they?

Mr. THOMAS. I don’t know, but your point’s a good one. It’s not in terms of trading in this market, it’s in changing other products which then result in a change in the wraparound package, not switching between wraparound packages.

If we make a decision in fundamental fee-for-service, it would impact the Medigap market different than it would impact the employer supplemental because they are different insurances.

Mr. DINGELL. This all happened a long time back. It happened when Medicare was put in place and employers which had programs that covered their retirees began to rearrange the structure of that.

Now I’m assuming that there was probably some of the thing that my friend Stuart was referring to, that is, a shifting of benefits around so that in fact there was some kind of a subsidy that went to the employer plan because of the existence of the newly created Medicare coverage.

I don’t know what that was, and I don’t even know how to quantify it. And I’m not sure whether, after 26 years or so, we can criticize it.

It’s a very good point, but I think it has some relevance, but I’m not quite clear what it is.

Mr. ALTMAN. I didn’t know what he was talking about.

Mr. THOMAS. Roll with the punch.

Mr. JINDAL. All right.

The final category, Medicare Coverage. Like I mentioned earlier, this varies by your asset level, whether you qualify as a QMB and SLMB, and therefore have your premiums and sometimes cost sharing paid for, or whether you qualify as a dual eligible and therefore receive Medicare benefits including prescription drugs.

For example, 43 percent of Medicaid and Medicare eligibles are dual eligibles with prescription drug coverage. The majority do not have that coverage, but rather the majority with both forms of coverage receive cost-sharing subsidies.

Mr. THOMAS. And the determination of who you are is totally income?

Mr. JINDAL. Income and asset.

Mr. THOMAS. Income and asset.

Mr. JINDAL. And for the dual eligibles, it is determined at the state level, whereas for the QMB and SLMB programs, it’s defined at the Federal level, but then implemented at the state level.

You may remember in Minnesota during a site visit, we certainly saw in that state one example of a state with a waiver authority to actually mix and coordinate their spending between their Medicare and Medicaid Programs, and we heard how not only how innovative that was, but also how rare that was.

That was one of a very few number of sites where they’ve been able to get that kind of waiver authority.

We’ve also talked briefly today already about the PACE and SHMO exceptions that do allow states, in certain instances for certain beneficiaries, to again integrate those dollars from Medicare and Medicaid funding to provide a more comprehensive package of services.

I would just note that any changes certainly must be coordinated or we must consider the impact on states who also pay for a portion of this coverage.

Mr. VLADECK. Bobby, a technical but not trivial correction. The states in SHMO and PACE don’t integrate the funds; the providers integrate the funds.

Mr. THOMAS. They’re allowed to.

Mr. VLADECK. Right.

Mr. JINDAL. Thank you.

And finally in terms of other coverage, I won’t go into detail, but there are things like state drug assistance programs, Department of Defense retiree programs, the Indian Health Service and Veterans’ Administration.

We’ve got numbers on that, but for the purpose of this presentation, we won’t spend a lot of time on them.

Mr. DINGELL. How do those fit into this problem, though, Bobby? I’m not quite sure how they work. Is there an exclusion of Medicare recipients who are eligible for VA care?

Is there a VA wraparound of the veterans who are eligible for Veterans care which wraps around the Medicare Program, and how do some of these other programs work?

Do they relate the same way as an industrial plan would?

Mr. THOMAS. John, you’ve just hit on an ongoing and very interesting area of negotiation between the Department of Defense, the Veterans’ Administration, and Medicare.

You’ve got a number of people who have gone through the services, thought that their medical service should be delivered through the services even after they retire. They are Medicare-eligible.

The Department of Defense would like to service those Medicare-eligible patients at the military hospitals and be paid by Medicare.

We have a demonstration program doing that.

We would like to do the same with the veterans, the Veterans’ hospital, I believe, that they can serve Medicare-eligible veterans better at their facilities.

And we are in the middle of working out programs to see if we can in fact utilize Medicare dollars more efficiently through those existing structures, or whether ultimately it may make more sense to fold those people, by their definition of their being senior, into the Medicare Program and phase out the health programs in the Department of Defense and in the Veterans’ Administration, integrating them.

And it’s an ongoing concern.

Mr. DINGELL. I’m curious though how that impacts on what it is we are discussing. This does appear to be probably an important point, but I don’t know how it affects our concerns here about providing good service and reducing costs and getting Medicare back in balance.

Can you give us some guidance on that, Bobby?

Ms. STEELMAN. Let me say I think this is really an interesting and important question because, and this is something that Reischauer wrote about a couple of years ago in a Health Affairs article in which he talked about the fact that when you begin to think about modernizing Medicare, you have to think about modernizing or changing the hybrid that it is for every beneficiary.

For some beneficiaries, it’s a hybrid of Medicare plus Medigap; for others it’s Medicare plus employer sup.; for others, it’s Medicare plus Medicaid. We’ve seen for others it’s Medicare plus VA or Medicare plus military.

How can we make the most positive impact in reform without disrupting arrangements that people have either through law or negotiation or savings or whatever, and in the government programs, Federal employee, civilian, military, VA-service employees?

They are very different arrangements, and some of them have situations where they want Medicare to pay for the services in the facility. Some of them would rather have Medicare benefits improved because the services are cutting back on their benefits.

So how do we accommodate all of these different patterns without disrupting a very significant set of beneficiaries, which is an exercise we’ve been through before.

Mr. ALTMAN. Deborah, if you would excuse me, I mean, Bill Thomas gave a lecture, well done I thought, in terms of how private companies sort of are very flexible and respond around government programs when we were talking about age.

I would suggest we run the tape back and play that again, because I think the idea that to worry about the existing structure on this, and not to worry about it on age, suppose you phase this in over 10 or 20 years. These programs would adjust and--I can’t do it as well as Bill did.

Mr. THOMAS. I agree. No, no, I agree. But what you have to realize is this is a slightly different dynamic and that is, we vote money to the Veterans’ Administration to take care of veterans. Every veteran from World War II is Medicare-eligible.

Should we require a maintenance of effort? And if in fact, Medicare does pick up all those folks, do the dollars continue to go to the Veterans’ Administration?

So it is something that will need to be worked out over time, but I do think it would be useful if the Commission had an interest in making a statement about, at some point, integrating the Federal dollars that go toward seniors in the most rational way because right now it is very difficult to deal with that issue.

Mr. DINGELL. You also have a huge budgetary quarrel over who gets any savings.

I know the military and I know that the VA are very concerned about whether they’re going to get the savings, or whether the savings goes to Medicare.

Mr. THOMAS. Well, right now, John, my fight is to not have them use Medicare dollars and keep their VA or Defense dollars at the same time.

Mr. VLADECK. That’s been an ongoing problem.

Mr. DINGELL. I think they got a little different idea.

Senator BREAUX. And they want to keep both. Bobby?

Mr. JINDAL. To close up on this point and also to go back to that same Reischauer article, when he did talk about the multiple sources of funding, I do know that that was one of the reasons he talked about in his article about a premium support system.

And one of the things that premium support does try to do is try to provide an opportunity for these different types of beneficiaries to integrate their multiple sources of funding.

I go to my third point. My first point was supplemental coverage is common and must be considered when we think about changing Medicare.

Second, that certainly when we think about changing the Medicare benefits package, we need to think about each type of beneficiary differently.

And my third point is to focus on the individual-purchased supplemental coverage market. Now we’ve certainly received much testimony and heard a lot about this market.

You may remember even back at our first meeting with testimony, Ms. Davis and Ms. Wilensky both actually testified on the current Medigap market not being a good buy and the potential to make it a better buy for beneficiaries.

I’d like to talk about that in a couple of different ways, but first I’d like to describe a little bit about the kinds of coverage that most beneficiaries currently receive in the individual-purchased supplemental market.

If we could turn over to chart 3, which again is in your book. I’m not going to go through each of these level of details because you’ve got this in your book. You can look at this in more detail later.

I just want to make a couple of points about what this chart says because what this chart shows, if you look at the 10 standardized Medigap plans across the top, it defines each of those 10 plans, and then down along the rows, it defines which services are provided in each of those plans, and then talks about how many beneficiaries are in each of those plans, as well as the median premium for a 65-year-old.

Of the 12 million beneficiaries with individual Medigap coverage, roughly half are in standardized plans. Roughly half are in one of these 10 types of plans, a little over 6 million; 5.8 million are in prestandardized plans.

In other words, they were grandfathered in after Congress made the changes in 1990.

The two most popular plans among the standardized plans are plans F and C. They have approximately 55 percent of the enrollees with standardized coverage. They’ve got about 3.3 million beneficiaries.

These plans offer, and you can see from the chart, the specific benefits, but they basically offer full cost-sharing for the part A and part B deductible. They offer full cost-sharing coverage of the part A and B coinsurance. They also offer additional hospital days, blood products, the skilled nursing facility coinsurance, foreign travel coverage, and some other benefits.

The point is that about 60 percent of beneficiaries in standardized plans or about 3.7 million beneficiaries choose plans with almost total coverage of Medicare deductibles and coinsurance, and thus aren’t exposed to the program’s cost-sharing controls on utilization.

So two points about the individually purchased supplemental market; the first is that currently, many beneficiaries are receiving first-dollar coverage through the Medigap market.

The second point about the supplemental coverage market that I’d like to make concerns prescription drug coverage.

In addition to having first-dollar coverage, it’s also true that relatively few beneficiaries obtain prescription drug coverage through their Medigap plans, and when they do, the coverage does tend to be limited.

For example, 14 percent of beneficiaries are in one of the three standardized plans, on this chart, plans H, I, and J that do offer prescription drug coverage. And you can see some of the reasons why on this chart.

The median premium for these plans is nearly double that of the most expensive Medigap plan without drug coverage.

And we’ve certainly heard of the fact that adverse selection makes this problem even worse as people who buy these plans and stay in these plans are those beneficiaries are the ones that most likely need prescription drugs, you tend to get more and more expensive plans.

For example, a study cited by the Lewin Group of policies in six states showed that plans with drug coverage, the H, I, and J, three types of Medigap plans that offer drug coverage, were more expensive than you would otherwise expect on an actuarial base for those benefits because of this kind of adverse selection, and they gave some numbers.

They said, for example, plan H was 39 percent more expensive; plan I was 57 percent more expensive; and plan J was 127 percent more expensive.

Probably more important than the numbers is the fact that this confirms some of the anecdotal events we’ve heard about the fact that adverse risk selection does tend to make these plans more and more expensive.

Senator BREAUX. OK, Bobby, obviously any reform proposal that will require all Medigap plans to offer prescription drugs would address the adverse selection and hopefully bring out the premium costs for everybody.

Mr. JINDAL. Depending on how it was done, certainly if you could assume that you could design a product that was attractive to a wide range of enrollees, you had a similar number of enrollees continuing to want to purchase supplemental coverage, yes, you would be basically spreading that risk over a broader range of beneficiaries.

Mr. HOWARD. Bobby, did you say that 50 percent of the people who have individual policies do not have one of these standard plans?

Mr. JINDAL. Yes, that’s right.

Mr. HOWARD. Do they have prescription drugs in their plans?

Mr. THOMAS. No, but Sam, remember that in 1990, when this really was restructured, there was a decision that people who had insurance policies at the time could make, that is, they could be grandfathered in under the plan they had prior to that, or they would go to this.

So 50 percent are standardized under this. It isn’t that 50 percent don’t have insurance. It’s that it’s not on this chart.

Mr. ALTMAN. What’s interesting is there’s really no what one might think of as catastrophic coverage, and they all tend to start from the bottom and work up.

Senator BREAUX. Long-term care?

Mr. ALTMAN. Well, whether it’s long-term care or saying I’m not going to cover the deductible in coinsurance but I’m going to cover drugs over $1,000, and I’m going to cover expense coinsurance over $25,000 or some of them. None of them. They start from a nickel and stop or a nickel and a dime, or a nickel and a quarter. They work that way.

Mr. VLADECK. But most of them offer catastrophic insurance for Medicare coverage.

Mr. ALTMAN. Yes, but not for the prescription drugs.

Mr. VLADECK. The efforts by states to put together true catastrophic insurance plans show that the higher the deductibles and copays, and the more of a cap there is on total liability in a plan, the worse your adverse selection problem.

Mr. ALTMAN. Oh, I think you’re absolutely right. I mean that’s the real problem. The more you design catastrophic production for drug expense, the more you drive that market into a hole.

Senator BREAUX. Congressman Dingell, you had a point?

Mr. DINGELL. Mr. Chairman, I think this is a very useful point. I need a little help in getting myself focused to understand where our concerns lie.

I don’t think we greatly concern ourselves with the subject of whether or not there is Medigap or some kind of a Medigap supplement.

I think we are concerned mostly about its impact on Medicare. And if I remember some of our meetings, we were discussing the impact on the deductibles and impact on the other cost-control mechanisms that had been built into Medicare.

Is it appropriate if we ask if there’s some thought here at this time, or at some future time, about what steps should be taken on this matter?

Because it occurs to me this is something we should be discussing.

Mr. JINDAL. Actually, I think that would be very appropriate. The next chart does speak to that point, not to provide recommendations but to provide some of the data you have discussed before in terms of the impact on cost-sharing and utilization and the impact on the Medicare Program of Medigap coverage.

Let me just make two last points about prescription drug coverage. Let me turn to that point directly.

The second-to-last point about prescription drug coverage is that the current coverage is somewhat limited when you compare it to----

Senator BREAUX. Is somewhat what?

Mr. JINDAL. Limited. When you compare it to average, and once again, Dr. Vladeck’s point is well-noted, average employer-sponsored coverage in the sense that it has a $250 deductible, 50-percent coinsurance, and institutes a benefit cap of somewhere between $1,250 and $3,000.

The final point is as a result of this, the prescription drug coverage within Medigap only covers 40 percent of the prescription drug expenditures for those beneficiaries with one of those three plans; it’s 30 percent if you just take all Medigap plans. But if you take those in one of those three plans, it only covers 40 percent of their expenses for drug coverage. That’s the lowest percentage of all private supplemental coverage.

So when you compare that to Medicare risk, Medicare+Choice plans, you compare that to employer-sponsored plans, that’s a lower portion of the drug coverage than those plans.

Once again reinforcing the point that relatively few beneficiaries do get drug coverage through their Medigap plans, but for the ones that do, the coverage can be expensive and also can be limited.

Now to turn to Representative Dingell’s point about, and the second point about individually purchased supplemental coverage.

What is the impact of first-dollar coverage on program utilization and program spending.

And if we could show the final chart which again is in your books as well.

What this chart shows is the utilization----

Mr. DINGELL. Which chart number is that in our books?

Mr. JINDAL. It is chart 8.

Mr. DINGELL. Eight? Thank you. Thank you, Deborah.

Mr. JINDAL. The chart 8 shows again the data that we heard directly from PPRC’s, now MedPAC, representative at our summer task force meeting.

It merely presents that data again showing the different impact of different types of coverage.

And what it shows is that if you look at these three bars, it shows the utilization for those with Medicare-only coverage, those in Medicare plus employer supplemental coverage, and finally those with Medicare plus Medigap supplemental coverage.

And what these charts show is that on average, Medigap beneficiaries spend more in terms of the Medicare covered expenses, $1,400 more or 29 percent more a year than Medicare-only beneficiaries.

Now there’s certainly, and one point that has been raised before, there’s certainly no good estimate of the quote/unquote proper utilization that constitute this versus what might be quote/unquote overutilization.

Certainly many policy analysts have concluded that some portion of this is due to overutilization, but there hasn’t been, as we started off saying, been any kind of comprehensive study of this population.

Certainly there were RAND studies of different populations that suggested that at least some of that utilization was overutilization, but there hasn’t been comparable studies for this population.

Senator BREAUX. Let me ask you a question, Bobby.

Haven’t we said that generally the employer-provided supplemental is generally better than the Medigap coverage?

Mr. JINDAL. It is certainly more generous when you look at, on average again, the prescription drug coverage.

When you look at the cost sharing, it does tend to maintain a $250 to $300 deductible; but instead of first-dollar coverage, it does offer stop-loss coverage of approximately $1,750, on average.

So once again, whether that is better or not, it is certainly a more generous prescription drug coverage.

Mr. VLADECK. Do we have any data on the relative health status of beneficiaries with retiree health coverage, as opposed to those with individually purchased coverage?

My impression was that the individually purchased individual market was much more likely to be women, and somewhat older than those with retiree benefits. This may have nothing to do with benefits’ design. It may be an artifact of who the populations are.

Mr. JINDAL. Right. And at least for this data, that has been controlled for gender and health status.

I know we are working to try to get the demographics of who fits these different profiles, not only for individual Medigap but for the other profiles as well.

I do know from the utilization data that it has been controlled for.

Mr. THOMAS. It has been controlled for. I think you need to underscore that, both for age and for sex.

Mr. JINDAL. That’s right. And health status, as well.

Mr. MCDERMOTT. And health status? Because I think Bruce raises the question I wanted to raise. That is, the health status.

You could look at that as underutilization----

Mr. JINDAL. It is controlled----

Mr. MCDERMOTT. Twenty-eight percent.

Mr. JINDAL. It is controlled for health status, as well.

Mr. MCDERMOTT. So they’re all equally healthy? And one used 28 percent less health care costs?

Mr. VLADECK. And as the document, the very good document, staff prepared, as PPRC has noticed, that those with Medicare only are much less likely to have a regular source of health care, to have physician visits at all, or to receive preventive services.

Some of the difference is clear. We know some of the difference is underutilization. We don’t know how much of it is overutilization.

Mr. THOMAS. I think you will get unanimity in arguing that those with Medicare only and no other supplemental insurance probably have underutilization.

The argument that those with Medigap spends 29 percent more than those with the handsome employer supplemental are not overutilizing is, I think, a much more difficult argument to make.

Mr. VLADECK. That difference is not 29 percent, Bill, as I understand--unless I misunderstand the chart.

Mr. MCDERMOTT. It’s 12 percent.

Mr. VLADECK. So there’s only a 10-percent difference.

Mr. JINDAL. In absolute terms. But the difference would be $500 per person----

Mr. VLADECK. So that’s 10 percent, not----

Mr. JINDAL [continuing]. Between those with--individual Medigap versus employer-sponsored coverage, 11, 12 percentage points in absolute dollars.

Senator BREAUX. Congressman Dingell had a question?

Mr. DINGELL. Thank you, Mr. Chairman.

I am trying to get some concept of how we quantify the best resolution of the difficulty we seem to be skirting around the edge of. That is, what is the best cure?

Do we address deductibles?

Do we address stop-loss?

Do we address the impact on the----

Senator BREAUX. Let’s spend a little bit of time on that, because we have, I think, some suggested ideas of how to address some of the things we have just looked at.

Mr. DINGELL. But I am also concerned about government programs, Federal Civil Service retirees, industrial pensioners and, very frankly, VA and that kind of thing, because those are going to raise not only substantive but very frankly some political questions, as well.

Senator BREAUX. Let’s spend a few more minutes on this. We are scheduled until 5 o’clock. I have, unfortunately, to be at a leadership meeting for the Democrats at 5 o’clock that I really have to go to, but we will continue.

Mr. THOMAS. I have to go to a 5 o’clock, as well.

Senator BREAUX. We both have 5 o’clock meetings. But we can continue this discussion, I think----

Ms. STEELMAN. We are all burned out.

Senator BREAUX. Yes, I think we are all burned out. We are all eligible for Medicare. [Laughter.]

Ms. STEELMAN. So we can do this after a break.

Senator BREAUX. Let’s try until 5 o’clock.

Go over some of the reform suggestions which address the problems.

Mr. JINDAL. Let me do this quickly, then. In terms of the individual purchase market, the last two points, there is the Medicare Select Program, which has now been expanded to all states under which the insurers can establish preferred provider networks.

And finally, we do have some data in your books--you have got this in front of you--about the recent increase in the premium cost for individual-purchased Medigap coverage.

For example, there is a Lewin study showing that premiums rose for a couple of popular plans by 20 percent, and 12 percent in a multistate analyses over the last year.

Moving very quickly--and once again, there are many more details on premium increases and that other information in your books--let me move to the last point in terms of employer-sponsored coverage.

I think this begins to respond to the Congressman’s question. Certainly these are not necessarily the only types of reforms or recommendations that can be considered, but one way to think about the supplemental market is to contrast individually purchased products with employer-sponsored products.

Employer-sponsored products differ from individually purchased products in three significant ways.

First, they require beneficiaries to face some cost-sharing. In other words, they attempt to continue pre-retirement coverage.

Second, in those instances where they’re reducing the cost-sharing, they are moving more and more toward introducing some elements of managed care.

And finally third, they do provide more generous prescription drug coverage. They may also provide more generous dental and vision drug benefits. We’ve got more data on the prescription drug coverage.

In terms of cost sharing that we have already talked a little bit about, the average plan being a $300 deductible, 80-percent coinsurance on outpatient services, with a cap on out-of-pocket expenses of $1,750.

Therefore, neither is necessarily more or less generous; it’s just a different ordering of the cost-sharing benefits package.

Given the fact that they do not typically provide first-dollar coverage, that is one of the reasons, the main reasons, you do see a difference in utilization on this last chart.

So that for employer-sponsored coverage, again you have got $500 less utilization than those with both individual Medicare and Medigap coverage.

Moving to the second point:

So not only does employer-sponsored coverage tend to require some forms of cost-sharing; it is also moving to incorporate elements of managed care.

Employer-sponsored coverage is beginning to use provider incentives and other management techniques even as it reduces some of that cost-sharing. So you are beginning to see more and more employers put their retirees, or give incentives for their employees to choose managed care plans with lower cost-sharing, or nominal cost-sharing, in exchange for some of these prior-authorization methods to also control utilization.

Finally, the last point is that employer-sponsored coverage on average again tends to offer generous prescription drug coverage, whereas selectively few of those in the individual Medigap market purchase a plan with drug coverage.

Nearly 90 percent of employer plans offer a prescription drug benefit. This benefit on average tends to cover 64 percent of beneficiaries’ drug costs, 69 percent if you consider only those plans that do offer drug coverage.

Remember, if you looked at the Medigap coverage it was only 30 to 40 percent of the beneficiaries average drug cost.

So once again, the difference is 64 to 69 percent versus 30 to 40 percent. Typically this drug coverage involves $5 copays for generics, and a higher, $10 to $15 copay for brand-name drugs. There tends not to be a dollar limit on coverage.

It tends on average to have an actuarial value of anywhere between $500 and $750 per beneficiary.

So in quick summary:

For the employer-sponsored coverage, three differences are: They do tend to require beneficiaries to face some cost sharing; they are incorporating elements of managed care in terms of controlling utilization; and they do tend to provide more generous prescription drug coverage.

Senator BREAUX. Stuart, then Sam.

Mr. ALTMAN. There has been a phenomenal amount of information. Bobby was forced to rush through this because of the lateness of the hour.

It seems to me this is as important an area as we are going to face because it so wraps into the premium support.

I would suggest, Mr. Chairman, that we start tomorrow and leave some time to follow up on this stuff, because there was just--you know, he gave us the benefit, and we need to just----

Senator BREAUX. Yes, I mean I think that is a very helpful suggestion.

Sam--I’ll conclude on that--but Sam, go ahead.

Mr. HOWARD. I will wait until tomorrow because I just had a question.

Senator BREAUX. I think it is a good point. I mean, because we have to depart because of the leadership meetings, but we can continue informal discussions later on at a different time.

So tomorrow we will begin the session at 8 o’clock, and the session will begin with a little bit more discussion on the Medicap. We will finish it in the morning before we go to the premium support concept, if that is all right. Colleen?

Ms. CONWAY-WELCH. Why not 7:30 a.m.?

Senator BREAUX. Seven thirty a.m., has been suggested. We are getting ridiculous.

[Simultaneous objections.]

Senator BREAUX. We have heard an objection----

Senator FRIST. Some of us have to do surgery at 6 o’clock, so----

Senator BREAUX. So we will meet at 8 o’clock.

Congressman Dingell?

Mr. DINGELL. Can I ask Bobby, would you please try and give us some appraisal of whether there is meaningful savings here? And if there are, how they should be achieved?

I think this is a point that I think there is a consensus here this is a doable thing, but we are going to have to figure out (a) whether there are savings; and (b) how much; but (c) how to come up with something where we leave people a little better off than they are.

Senator BREAUX. Bill?

Mr. THOMAS. John, beyond that, let me say that what was just explained is something that we need to talk about because if the Medigap insurance has a higher utilization, they spend more money. And if they don’t have drugs, and the employer’s supplemental has drugs, and they don’t spend as much, then the drug money for those other people on Medigap is coming from somewhere. And the place it is coming from is out of their pocket.

So when we talk about savings, we have governmental savings but I think we at some point need to put all of the dollar costs that seniors have for medical needs, and a lot of it in Medigap because they don’t have drugs and it is coming out of their pocket.

And although we can’t show government savings for that, certainly as a society, if we provide a more rational insurance program they would be spending less and the society would be better off, although the government savings would not show.

Mr. DINGELL. If the chairman would permit me, I want to agree. Because I know a lot of people I hear about that are going to a doctor and getting a prescription, and if he’s got a good bedside manner they feel better, but they haven’t got enough money to pay for the prescription.

Mr. THOMAS. Right.

Mr. DINGELL. So they can keep going back to him to have a taste of good bedside manner, as opposed to getting the prescription that is going to help them feel better.

Mr. THOMAS. And the dollars that they pay for do not show up on this chart if it is out-of-pocket.

Mr. DINGELL. Right.

Senator BREAUX. All right. We will adjourn this meeting until tomorrow morning at 8 o’clock in this room, the same place at 8 o’clock.

[Whereupon, at 5:01 p.m., Tuesday, January 5, 1998, the hearing was recessed, to reconvene at 8 a.m., Wednesday, January 6, 1998.]