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FUTURE OF MEDICARE

COMMISSION MEETING

Washington, DC

Monday, August 10, 1998

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

Monday, August 10, 1998

Commission Meeting

The Commission met at 9:07 a.m., Cannon Building, room 345, Caucus room, Senator Frist presiding.

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

Senator FRIST [presiding]. The meeting will come to order. Senator John Breaux will not be with us this morning due to traveling difficulties with his flight last night back to Washington, and I will take the liberty of opening the meeting with some comments drawing upon his original remarks, discussing a bit about where the committee has been, and then ask our first panel on graduate medical education to come forward.

I would like to welcome everybody here today for this meeting of the National Bipartisan Commission on the Future of Medicare.

I want to thank all of our Commissioners for coming to Washington, or coming back to Washington, for a meeting in the middle of August when many people are on recess at home in their districts. With a March 1, 1999, deadline we must continue our work so that we can develop and debate recommendations later this year.

Today we will have the opportunity to hear from all three of our task forces and continue the work that each task force has undertaken since our last full Commission meeting in June.

We will also have a discussion on the topic of graduate medical education, GME, which we are specifically charged by statute with examining as part of the broader debate on Medicare reform.

Before we begin, let me take just a few minutes to summarize where this Commission has been, what it has accomplished thus far, and where we are headed.

Since our first meeting in March, the Commission has met 20 times. This includes meetings at the full Commission level and at the task force level.

The focus of much of our work has been to gather information to educate ourselves about the scope and the nature of the problems facing the Medicare Program.

We have three task forces. The Modeling Task Force has recommended two baselines against which all of the Commission=s recommendations will be measured and analyzed. Any analysis of any proposal using these baselines will take into account not only the effects of the proposal on the solvency of the program, but also focus on the nonfiscal issues which are equally important to our deliberations.

A second task force, the Reform Task Force, has had several meetings and to date has focused on two of the five areas that the full Commission identified as topics we should tailor our discussions to: benefits and costs.

Today=s Reform Task Force meeting will focus on the third area, which is management and administration. Future meetings will focus on the two remaining areas--which are, eligibility and financing.

We are also planning to have a full task force meeting on the issue of the chronic care needs of the Medicare population, and the implications for financing and service delivery.

This was a topic that Senator Rockefeller asked the Commission to discuss, and we will devote a full task force meeting to this issue.

Finally, the third task force is the Restructuring Task Force. This task force has heard from a range of experts who have discussed proposals that fundamentally reform the current Medicare Program.

We heard from Thomas Saving, who discussed his proposal to fund Medicare with prepaid individual accounts. We heard from Dr. Ted Marmor about the relevance of international experiences with single-payor systems and the idea of using more Government-based price controls and budget caps to achieve long-term solvency.

The Restructuring Task Force also heard from a panel which included Dr. Stuart Butler, Bob Moffit, and Dave Kendall that talked about the Federal Employees Health Benefits Program as a model for Medicare.

In addition to these task force meetings, and in response to the suggestion of many of our Commissioners that we get out of Washington, DC, to listen to real people outside of the beltway, we held a field hearing in Minneapolis, MN, last month.

It was a useful, well-attended, and productive meeting that gave real people the opportunity to express their concerns, their ideas, and their suggestions to the Medicare Commission.

Next month at our full Commission meeting we will hear from a full range of groups and individuals who will present their suggestions for reforming Medicare.

If Commissioners agree, we will actually open up part of our 2-day meeting in September to groups and associations who have a stake and interest in the future of Medicare and hear some of their proposed solutions to ensure the long-term solvency of the program.

The bulk of the Commission=s work to date has been on analyzing and identifying the problems facing the program, while at the same time developing a framework to consider any options the Commission puts forward.

Obviously it is much easier to identify what is wrong with a program than to reach consensus on how to fix it, but it is critically important that the Commission do the necessary information-gathering so that any recommendation is firmly grounded on the facts and on the issues, both fiscal and nonfiscal. We must give people who are affected by the program an opportunity to be invested in the outcome.

If we continue to follow this natural progression, the Commission will be ready to have a well-informed debate on a range of options later this year.

Today we have a full agenda: initially, addressing the issue of graduate medical education, followed by meetings of each of the task forces who will make presentations before the panel.

Before we begin with our first panel on graduate medical education--and I will go ahead and ask them to come forward while I am talking--I would like to allow any other Commissioner the opportunity to make an opening statement if they wish to do so at this time.

Ms. STEELMAN. I would like to welcome our newest Commissioner. I believe this is Colleen Conway-Welch=s first meeting with us, and on behalf of Chairman Breaux, Chairman Thomas, and your fellow Tennesseans on the panel, Sam Howard and Senator Frist, welcome you to join us.

For those of you who have not run into Colleen in Washington in the last 20 years, which would be fairly difficult, let me just briefly say that she has probably more commission experience than any of the rest of us. She has served on numerous commissions--most recently as a Presidential appointee on the AIDS Commission in the early 1990=s. Of course Colleen was appointed to the Medicare Commission due to the resignation of Representative Ganske. We cannot be more thrilled with Speaker Gingrich=s choice.

So, welcome.

Ms. CONWAY-WELCH. It is an honor to be here.

Senator FRIST. Welcome.

GRADUATE MEDICAL EDUCATION

We will hear from three panelists this morning. Each have been asked to make a presentation of from 5 to 10 minutes. We will continue until 11 o=clock.

We will have each of the three panelists make their presentation and then open the floor to discussion among the Commissioners and have a question-and-answer period and a discussion.

Graduate medical education, just to set the overall stage, is the training period for physicians and certain nurses in America=s teaching hospitals. We will talk about what academic health centers are, and what teaching hospitals are, but I thought, being a physician, that I=d put it in my perspective from my own training.

I went to college for 4 years in pre-medical training, followed by 4 years of medical school. There is a lot of confusion with some assuming that we are talking about the 4 years of medical school when we say graduate medical education.

We are not talking about the 4 years of medical school; we=re talking about the graduate medical education which occurs after one graduates from medical school.

This is a period in which one will typically, just looking at my training, do a year of internship--sometimes called a first-year residency now--followed by anywhere from 1 to 3 to 4 years of residency training. In my particular case it was 5 years because I was in the field of general surgery.

Graduate medical education includes that entire period of time--and we will talk about how it is financed--but then after that 5 years of medical training I did what is called a >>fellowship== in cardiac and thoracic surgery.

That is in addition to the first 5 years, and that is part of the graduate medical education which I undertook.

In addition, there are a few people such as myself who kind of keep going with that graduate medical education and, after doing a fellowship in cardiac and thoracic surgery, there was this new field called heart and lung transplantation--actually, lung transplants had not been invented then--it was heart transplantation. So I did an additional almost 2 years on the west coast in a graduate medical education program called a fellowship where I was trained in the field of heart, and eventually lung, transplantation.

It is that period of time, not the pre-medical training, not medical school, but it is a period of internship, of residency, of fellowships that we=re talking about today.

I mentioned in the opening statement that Congress specifically asked us to look by statute at graduate medical education. Why is that? It is because Medicare dollars are the single largest source of funding for GME programs.

The real major issue that we are going to be addressing is how to fund GME. We will be talking about it being a public good. That the investment that society has chosen to make in GME is a public good; that it is a program that benefits all Americans and thus in some shape or form deserves the support of all.

We will talk about the specifics of how Medicare pays for GME. It pays with a payment to teaching hospitals for every resident trained.

There are certain incentives in the system for that reason: the more residents you train, the more money you get from Medicare.

In addition, there is an implicit entitlement payment in the form of the adjustment to prospective payment system reimbursements.

This implicit payment has really increased dramatically over recent years.

There are a number of tough questions that we will be taking about Medicare GME funding. There are a number of questions about Government oversight of GME. Our study group that we will fashion after today will look closely at several GME program concerns--for example, size of residency programs; do we scale back GME size; what is the responsibility of Medicare in funding.

I look forward to scrutinizing GME carefully, remembering all along the valuable role it plays in providing patient care.

I would now like to introduce our three panelists who will be discussing this issue today. The Commission will look at the implications of Medicare=s role in GME.

Our first speaker will be Dr. David Blumenthal, director of the Institute for Health Policy at the Massachusetts General Hospital, and executive director of the Commonwealth Fund Task Force on Academic Health Centers.

Also making a presentation this morning is Dr. Roger Herdman who is a senior scholar at the Institute of Medicine. Dr. Herdman will discuss the report of the IOM=s Committee on Implementing a National Graduate Medical Education Trust Fund.

And the third panelist is Robert Helms, director of Health Policy Studies at the American Enterprise Institute.

Dr. Blumenthal?

STATEMENT OF DAVID BLUMENTHAL, M.D., DIRECTOR, INSTITUTE FOR HEALTH POLICY, MASSACHUSETTS GENERAL HOSPITAL, EXECUTIVE DIRECTOR, THE COMMONWEALTH FUND TASK FORCE ON ACADEMIC HEALTH CENTERS

Dr. BLUMENTHAL. Thank you, Senator Frist, and members of the Bipartisan Commission. It is a pleasure and a privilege to be able to appear before you today to share the findings and recommendations of the Commonwealth Fund Task Force on Academic Health Centers concerning Medicare=s role in graduate medical education and the other social missions of academic health centers.

Let me start by acknowledging the debt of the Commission to the work of the Congress, including members of this Commission, on the topic of graduate medical education. The provisions of the Balanced Budget Act of 1995, including provisions for the graduate medical education and Teaching Hospital Trust Fund that were included in that legislation, were very influential in stimulating the task force=s consideration of these issues and in directing their thinking about them.

In my brief remarks today I would like to cover three general issues. First of all, I would like to clarify some of the jargon that circulates in this area of graduate medical education.

Then I would like to talk about the principles that the task force has used in considering these issues.

And then I would like to address a couple of controversial issues that I think may come up in your thinking about these issues to share the task force=s thoughts on these.

First concerning the jargon that surrounds the graduate medical education issue:

I think one of the most confusing things that has occurred during discussions of graduate medical education is the very use of the term >>graduate medical education== or GME itself.

The fact is that the provisions of Medicare that support graduate medical education were never intended to support only, or even primarily, the training of physicians and health professionals. Rather, the extra payments received by academic health centers and other teaching hospitals were intended to support the Medicare share of the extra costs associated with receiving care in academic health centers and other teaching hospitals.

Now those extra costs do reflect costs associated with the training of health professionals, but they also reflect the costs of other equally compelling and important social missions.

These include: The conduct of research, including clinical research; they include the provision of highly specialized and sometimes rarely utilized but important and vital services such as organ transplantation which Senator Frist referred to, burn care, highly specialized trauma care; they include the continuous innovation in patient care that goes on in academic health centers; and they include provisions related to services to the indigent.

So the bottom line is that the GME debate or discussion is not just about graduate medical education. It is about how to support the full range of social missions that are provided by the Nation=s academic health centers and teaching hospitals.

In thinking about Medicare=s role in supporting these social missions, I think it is essential to be clear about the bedrock principles that should guide that thinking.

The task force has been guided by several such principles which I would like to share with you today. The task force concluded, first, that the social missions of academic health centers--teaching, research, the provision of highly specialized quaternary and tertiary care services, indigent care innovation--have intrinsic value, are unlikely to be adequately supported in unfettered private markets, and thus deserve public financing.

The reason that these goods are unlikely to be supported adequately in private markets is, as Senator Frist indicated, they have characteristics of what are called >>public goods.==

Everyone benefits from having them available, but most of us do not benefit directly enough or immediately enough to pay their full value. Thus, they tend to be undersupplied in private markets.

Second, the task force believes that the spread of competition in health care markets creates an inherent unfairness between institutions that are involved in the production of these social missions, these public goods, and those that do not get involved in that process.

One goal of public policy should be to level the competitive playing field between providers who engage in research, teaching, the provision of highly specialized services, indigent care, and other institutions that don=t bear the costs of those functions.

This will make competition work better and will also assure that these public goods remain available to the American people.

Third, the task force believes that everyone who benefits from social missions performed by academic health centers, or any other institutions that produce those social missions in the health care system, should contribute fairly and equitably to their costs.

There are a number of ways to arrange this, but it is clear that Medicare and the taxpayers who support it cannot and should not do that job alone.

Fourth, the task force believes that academic health centers or any other institutions that are financed to engage in social missions of the type we have been discussing must be accountable for their use of public funds--more accountable than they have been in the past.

Guided by these principles, the task force recommended the creation of an Academic Health Services Trust Fund as one approach to assuring the effective and accountable provision of the social missions we=ve been discussing.

Such a trust fund could be financed in a number of ways, but it should have a secure and stable source of funding that is based on contributions from all who benefit from research, teaching of health professionals, the provision of highly specialized services, indigent care innovation, and health care.

Contributions from Medicare and private payers of health care would be one way. General revenues would be another.

Before concluding, let me address two issues that will undoubtedly arise in your deliberations. The first concerns the margins that academic health centers and other teaching hospitals earn from taking care of Medicare patients on the inpatient side.

These have been generous recently, and such high margins will encourage you to cut back on the extra payments that Medicare provides for funding the social missions of academic health centers.

Because of price competition in private markets, academic health centers--especially those in advanced managed care markets--do not do as well from their private business as they do from Medicare. In fact, many lose money on that. They become, as a result, overly dependent on Medicare to support their social missions.

If you desire to correct this imbalance, I think it is important that you pay attention not only to the margins that Medicare contributes to, but to the overall goal of providing a stable and secure source of funding for the social missions of academic health centers.

The second issue concerns the need for academic health centers to become more efficient and accountable. The Commonwealth Task Force believes that academic health centers and teaching hospitals must make substantial internal reforms in order to conduct their clinical business and also their production of public goods as effectively and efficiently as they can.

Encouraging such changes is another important goal of public policy.

Thank you for your time and attention, and I would be happy to answer any questions in the discussion period.

Senator FRIST. Thank you, Dr. Blumenthal. Dr. Herdman?

STATEMENT OF ROGER HERDMAN, M.D., SENIOR SCHOLAR, INSTITUTE OF MEDICINE [IOM]

Dr. HERDMAN. Mr. Chairman, thank you for asking the Institute of Medicine to speak before the Bipartisan Commission.

I regret that the chairwoman of the committee that is responsible for our study--and I hope that all of you have received a copy of the Institute=s report--was not able to be here, Dr. Rosemary Stevens from the University of Pennsylvania.

I would just note that Dr. Stevens and I have actually written a paper based on this report, which is not an official document, but which we would also be happy to submit for the record.

I also remind you that this study is 2 years old, so that in certain cases events have overtaken the study and in fact some of the things that were recommended have been implemented in past congressional sessions.

So let me say that this study is a set of principles supporting recommendations for a payment structure to support graduate medical education in teaching hospitals that would be open to new entrants, less restricted than at present, and more responsive to changes in the health care marketplace.

It is not a discussion of the problems of international medical graduates or the work force size or composition. It addresses, however, some of the problems which I will enumerate a little later on in my presentation.

It is based on a request from the House Ways and Means Committee which was sent to the Institute of Medicine by Chairman Archer, Chairman Thomas, and Chairwoman Johnson. However, it is not a study of a particular trust fund--for example a House trust fund or a Senate finance trust fund; it was just that the trust fund concept was a given in preparing this study and is not necessarily meant to imply that if the Institute of Medicine had been asked for an opinion on how to finance GME it would have come up with a trust fund. You have to understand that there was a given; we might well have, but not necessarily so.

I want to make three important points and then talk a little bit about the distribution of a trust fund.

First of all, as Dr. Blumenthal has so eloquently said, graduate medical education is a legitimate cost of health care. It adds to the cost of health care because it has included in it the cost of training, the cost of additional tests of care, the use of special care units, the care of nonpaying and sicker patients, the cost of technology development and unsponsored research, all of recognized general societal value. And these things are the foundation in my view and in the IOM=s view, as it says in the report, for national standards of care insofar as there are such national standards of care, foundations for the quality of health care delivered in this country which is good, and for the progress in medicine that has been made continually over time.

The Commission probably knows this but I want to re-emphasize, there is in this report a very nice history of Medicare funding of graduate medical education which I urge you to familiarize yourself with.

There is a strong historical precedent and a strong rationale for Medicare funding of graduate medical education.

The House, after the passage of Medicare in House report No. 213, made the point that this was a valuable part of the health care delivery system and needed to be supported by the Medicare Program.

In addition, States have taken up the cudgels in supporting GME through the Medicaid Program, and GME is of course a legitimate part of Medicare patient care in teaching hospitals.

Third, a trust fund, as the IOM envisioned it, is a very important principle and accomplishes certain important things.

It creates a prospective Academic Health Center/Graduate Medical Education Fund which could be based on a prospective assessment of the needs of graduate medical education and teaching hospitals as a response to an analysis of the economic status of that sector it absolutely controls because each year you make an appropriation to this fund.

It absolutely controls prospectively based on economic data and a sense of the status of GME and teaching in this country the total expenditures made in support of graduate medical education, and it fixes--because you can appropriate to direct and indirect funds--the ratio of direct support--that is, the support of resident salaries, supervisory personnel, and overhead--and indirect support--that is, the indirect costs of performing teaching in the teaching hospital sector.

It eliminates--because there is a fixed appropriation--the need for complex formulas and so on, and it allows you to make an annual update just as you do for the prospective payment system.

It solves the AAPCC and the DISH problems because it is an appropriation. You do not have to worry about whether there is DISH or AAPCC in there. You have made your appropriation and you can deal with those issues separately.

The committee, although it was not asked, also I might say--and this I think reflects what the Commonwealth study did, too--allowed for and discussed in the report the non-Medicare source of funding given, if Medicare pays its share why don=t other payers pay their share as well.

The committee was well aware of the problems--and let me just briefly enumerate them--that were at that time, and to some extent prevail today, with GME.

No. 1 was the enormous variation in support of residents in the direct medical education component. That is, a tenfold variation which basically reflects historical allocation accidents in the 1984 cost base.

In many cases this also means that DME is a substantial overpayment and, as such, both DME and IME, which also has been historically an overpayment although both these issues have been addressed more recently, provides incentives to add residents.

This was addressed, or can be and was addressed, to some extent by freezing the number of resident slots. However, the IOM did not feel that was the best way to proceed. And so, because there are residencies like dentistry, podiatry, and so on, which are caught up in the physician control system and may not necessarily be overstaffed, the IOM felt that financial control with some distributional controls provided more flexibility.

There may be needs in certain sectors of the country and for certain kinds of residencies for more residents rather than fewer--although we all understand that currently there are more residents than are needed.

The IOM also realizes that the international medical graduate situation was out of control. The enormous expansion of residencies in the early 1990=s was essentially the result of expansions in the international medical graduate, but again fixing numbers was not and I can answer the questions about that in the question and answer period.

The IOM did not look--did not feel that--rather preferred that the work force composition issues be left to the marketplace rather than trying annually or at some frequent periods to manipulate that through weighting the DME, the direct medical education, payments, which actually has very little effect.

The IOM recognized, in addition, AAPCC issues which I referred to, again, and also had some concerns about the indirect medical education component which goes up proportionately with the number of residents. And there is a question about whether each additional resident and each additional year that resident may stay should obligate the same indirect expenditure.

Let me just finish by saying a little bit about what the report did in recommending distribution.

The IOM recommended that the DME payments move toward uniformity with some recognition of differences in local inputs. That is, that there be some recognition of local differences but essentially they become much more uniform.

We did not recommend any further tinkering with work force composition.

We did recommend eligibility for direct payments to be expanded to managed care organizations, to ambulatory units, and to children=s hospitals and the like.

We wanted to modify the incentives to add residents. If you go to a uniform system, you can add residents at that uniform rate or the lower of the existing rates, or the existing rate, whichever is lower; and a fixed DME fund means that even if you do add residents there is no additional cost to the Treasury.

In terms of indirect medical education, the committee in the report divided IME into two parts: One, the historical part based on historical funding to each teaching hospital so that the hospital could cut residents without losing funding; and one, a formula half which would continue to reward hospitals by the existing formula--of course it really would not be an >>existing formula== because the total fund would be fixed, so that the formula numbers would not actually make any difference in terms of the total expenditure.

The IME, by formula, would continue to reward hospitals for serving Medicare patients.

And finally, the committee recommended that the ambulatory sites be included in full-time equivalent counts for indirect medical education, a feature which of course was changed subsequently by the Congress.

So that concludes my remarks, Mr. Chairman. Thank you.

Senator FRIST. Thank you, Dr. Herdman.

Mr. Helms?

STATEMENT OF ROBERT HELMS, DIRECTOR OF HEALTH POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE [AEI]

Mr. HELMS. Thank you very much, Mr. Chairman. It is a pleasure to be here.

Let me first say that these are my own views and not those of AEI.

Senator GRAMM. Could you move that mike closer so we could all hear?

Mr. HELMS. How is that?

Senator GRAMM. Great.

Mr. HELMS. OK. And also I will say that I do have a different view of this. This issue would not be any fun if everybody agreed with David over here.

I was a member of the Institute of Medicine Committee that worked on this report. I think there is much useful information in there, but I am not here to represent the IOM report, although I did learn a lot from Roger and the other committee members about this issue.

My objective this morning is to ask the study group and the Medicare Commission: To think carefully about GME funding within the context of Medicare=s long-term financial situation; to question the stated rationales that are usually given for this funding; and to consider some alternative policy approaches that have the promise, I think, of improving the efficiency and effectiveness of public subsidies.

Let me say up front that I think medical education is important. American consumers of all ages benefit from having highly trained and skillful medical professionals, be they nurse physicians, nurses, or other allied health professionals.

Medical education is, and has the potential I think to become, an important export sector of the U.S. economy as we train medical professionals from all over the world.

But the public policy issue today is not the value of medical education but who should bear the burden of financing this education.

The health and safety of consumers depend on many types of education. For example, well-trained engineers who design and build safe bridges and automobiles; computer programmers whose programs control for example Metro cars, which I think about every morning; and the Air Traffic Control System, which you obviously think about from time to time.

Another example is thousands of people who distribute and process our food supply and have an incentive to protect us from contaminated food.

Just because an area of education is important to our health and well-being does not mean it requires a public subsidy or a Federal trust fund to bring it about.

It is not required that the Congress pass a special tax on automobiles to assure that there is an adequate supply of engineers.

In other words, I explicitly disagree with David and others who argue that the academic medical training requires public subsidies to produce an optimal amount of medical training, research, or patient care.

I do believe that there may be a public goods= rationale for public support of basic science, the type we now do through the NIH and the National Science Foundation for example, and there are some other ways that we do that, too.

But applying the public goods= argument to a rationale for Medicare funding to academic health centers or teaching hospitals I think is misleading as a guide to public policy.

I will skip my comments about the history of GME, but I do recommend that history that is in the IOM report. Let me just say that I think it was based on a cost-plus system, going back to before the passage of Medicare, and now Medicare is sort of locked into this cost-plus system which we are trying basically to deal with.

The present situation is characterized by basically an open-ended entitlement program that is financed directly from the part A trust fund and part B payments for inpatient care.

It goes to large teaching institutions rather than individuals.

And it exacerbates the overall financial problem of Medicare and imposes a set of inefficient economic incentives on almost all players in medical markets.

Let=s look at what I think are some more efficient ways to subsidize what David Blumenthal calls the >>social missions== of academic health centers.

Several rationales have been given to justify Medicare subsidies for GME: medical training, research, and patient care.

Each of these objectives has some benefit for some people. So the issue is not the desire to bring about worthwhile outcomes, but what is the most efficient way to achieve that objective.

GME funding probably has some positive effect on each of these objectives at the margin, but it is exceedingly difficult to identify and measure these effects.

The money flows from Medicare to medical teaching institutions, but measuring the effects in terms of the quantity or the quality of the medical training or even what result it has on medical outcomes, the specific results of research, or the amount and kind of patient care for the poor, is very difficult to determine.

In other words, we put the money on the stump for these institutions and they take it. They say they do certain things, but how to prove that is very difficult.

Let me say that there is some interesting research going on based on some very large data sets of teaching hospitals. This search so far can find no evidence that the subsidies have affected hospital research or charity care, but they are still looking at that.

But they have found that the payments do not seem to affect the relative use of inputs such as the number of residents or beds.

Now my conclusion from this preliminary study is that the teaching hospitals are indeed using the money for unintended or unidentifiable purposes.

We are far from a definitive answer about the effects of GME subsidies, but neither the Commission or the Congress should take the stated rationales at face value.

For each of the present rationales there is a more effective approach to achieving the objective than is presently provided by the present system of granting GME payments based on historic costs and Medicare volume formulas.

MEDICAL TRAINING

A medical training voucher could be made available to qualified medical graduates to be used in a set of approved teaching hospitals or other medical institutions. This would give teaching institutions strong incentives to compete for medical students by adjusting their curricula and tuition costs to meet the demands of students--in other words, be real responsive to actual market conditions and be concerned more about the costs and effectiveness of the medical training rather than using residents as a source of cheap labor.

The usual objection to a voucher system--and this was I think characteristic of most of the people on the IOM committee--was that it would be too complicated to set up and run.

But in my view it is no more complicated to set up such a system than the present system we now have. And if you question that, I ask you to look at some of the very good descriptions in this thing [indicating] and some other publications about the way the formula systems now work.

In addition, I think a voucher system would provide a much more efficient system of medical education.

Congress could establish income or other criteria for eligibility for the vouchers if it wanted to assure that poorer students had greater opportunities for medical careers.

We now have a system that spends approximately $7 billion per year to subsidize a set of professionals that become some of the wealthiest individuals in our society.

Let us take a look at the research rationale:

We already have systems for sponsoring medical research in teaching hospitals and medical schools through the peer-reviewed systems of NIH and the National Science Foundation, as I said, plus some others.

These systems could be utilized to expand any line of research that the Congress felt would be beneficial to Medicare or any other patients.

Such research mechanisms could be held more accountable than through the present system. So I do agree with David that there is a problem of accountability.

Now let us look at patient care. A more direct way to ensure access by the poor, or the presently uninsured, would be to provide vouchers or refundable tax credits that would be used by individuals to buy insurance or to enroll in a health plan. I understand you will have some testimony later today about these issues.

In conclusion, let me say that the present system of providing Medicare subsidies for medical training is a hangover from previous time.

It is no longer in the best interest of either Medicare recipients or taxpayers to continue this system. There is no evidence that it is producing the results that are claimed for it. It is not affordable, given Medicare=s financial condition.

To the extent that Congress wishes to promote any of the stated objectives of GME funding, in each case a more direct approach would achieve the objective more efficiently.

The present system subsidizes GME through an open-ended entitlement program. It is expensive, inefficient, and it denies Congress the opportunity to weigh the objectives of GME funding against other public policy objectives. Thank you.

Senator FRIST. Thank you, Mr. Helms.

We are now going to open the floor to questions among the Commissioners, or to comments, and I think we will not go in any order but just by recognition. But let me start, if I may.

We have about 1 hour and 10 minutes to carry on this discussion, but I would like to start with the bigger questions and over time let=s come down to the smaller ones and really discrete ones, because there are a lot of details we could get lost in, as well.

Let me just start with two concepts in terms of the discussion.

One is: Who really pays for graduate medical education today? To sort of set the big stage.

It is in several of the background papers, but I think, again to get the discussion kicked off on the right foot, how much does it cost? How much does Medicare pay? And who else pays?

The second one, which maybe all three of you mentioned, is that Medicare pays more than its fair share. What are the implications of that to this Commission as we look at solvency issues of Medicare as well as others.

First of all, who is paying? Correct me. Right now graduate medical education is about an $18 billion enterprise? Go ahead and correct me. Is that roughly what the figure is?

Mr. HELMS. Senator, I think that number comes from work that the task force did, and the Llewin group did, that looked at the extra costs of academic health centers and teaching hospitals after you corrected for everything else you could correct for that related to the costs of patient care, local costs of wages, case mix, and so on. That is the amount that was left over. So I would say that that is an upper bound estimate of the cost.

Actually, it is not entirely an upper bound estimate because there are some things that were excluded.

Senator FRIST. It would be helpful as we go through. We will define that better.

Of the $18 billion, how much is Medicare? Am I correct in saying it is about $7 to $8 billion?

Dr. BLUMENTHAL. Correct.

Senator FRIST. And it is the major payor paying in.

So now to any of the panelists, what is the State role right now in graduate medical education at the State level?

Dr. BLUMENTHAL. Currently, Senator, the States supply direct appropriations to medical schools which, to the best of our knowledge, are about $200 or $300 million a year.

They also spend several billion dollars through the Medicaid Program, which is partly Federal money, as well, supplying extra payments for the same graduate medical education services.

In your own State of Tennessee I think that comes to about $60 million a year in extra Medicaid funds.

Senator FRIST. And, that is, some States put in some, some States do not put in?

Dr. BLUMENTHAL. Correct.

Senator FRIST. And do you in the information you provided us have a listing of States, how much they contribute? Or does staff have that? We can have that, just state by state, how much they contribute?

[An affirmative answer is given.]

Mr. HOWARD. What is the total?

Senator FRIST. Several--in terms of State participation----

Dr. BLUMENTHAL. It is on the order of $2 to $3 billion a year.

Senator FRIST. $2 to $3 billion a year.

Let me just turn briefly to this fair share, Medicare paying more than its fair share. What are the implications?

I guess for GME Medicare subsidy payments per resident it is about $70,000? I guess that came from the IOM report that I just pulled out? So about $70,000 for each resident that Medicare puts in as subsidy?

Dr. HERDMAN. For DME. In the IOM Report, that was for DME and IME together in terms of dollars. The average DME figure is $70,000, but of course Medicare only pays its fraction of that. So it is not that amount of money. It is more like about $28,000.

Senator FRIST. But if you put direct and indirect, it is 7-0, $70,000?

Dr. HERDMAN. As of the time of this report.

Senator FRIST. As of the time of the report.

Just each of you comment briefly. When we say that Medicare pays more than its fair share, what does that mean? Let me hear from all three of it.

Mr. MCDERMOTT. Did you say who says that Medicare pays more than their >>fair== share?

Senator FRIST. I think--well, it was written in the report. Well, let=s hear what they comment. Two people said that--I think Dr. Blumenthal and Dr. Herdman said it--but it is also written in the report here. So that is what I want to get at.

Dr. HERDMAN. Well David is really the expert, but I may just take a shot at it.

I think, Congressman, that when I say that, or the IOM Report says that, it is what everybody says. I mean ProPAC has said that. Actually the Department has said that in the past. And actually Congress said that at the very outset when you were doing the IME formula and it turned out that the indirect teaching costs were something like 5 or 6 percent in the formula to add onto the IME payments.

It turned out that teaching hospitals would lose a lot of money if that happened. So you just went ahead and doubled it.

But there were no data to support that.

In addition--again going back to year- or two-old figures so you will have to excuse me if it is not quite the same now--but at that time, the Medicare margins at teaching hospitals were supporting the margins from other payers, primarily because of GME payments.

So I am not saying that Medicare should or should not particularly--I do not want to make a value judgment--but if you were looking at data and analyses about what their costs were, then the formula recognized those in a surplus way.

Mr. MCDERMOTT. So, Mr. Chairman, if I understand, then, what you are saying when you say >>fair share== is that Medicare pays and the other insurers do not pay?

Dr. HERDMAN. Well as we know, as I am sure you know as well as I and maybe even better, the private payers, managed care organizations, are competing and they are not going to pay margins to support GME if they can possibly help it.

Mr. HELMS. But that argument--and I am not going to argue that Medicare is paying more than its fair share--but the argument does go back to the history of before Medicare when you had a cost-based system, when both Medicare, or Medicare in its first few years, and the private system, the Blues and everybody, were sort of paying what the hospital reported to them as their costs.

And to the extent that they had extra costs for teaching and so on, they billed it. People paid it. But basically the private market moved away from that and Medicare was left paying that part. And that I think is the origin of the complaint.

Senator FRIST. Dr. Blumenthal, did you want to comment on this fair share distribution?

Dr. BLUMENTHAL. I think you could either say that Medicare pays more of what is actually spent than it ought to, or that it is paying what it ought to be paying and others are not paying as much as they ought to. But in any case, it disproportionately supports these functions in teaching hospitals compared to other payers.

Senator FRIST. Commissioner Vladeck?

Mr. VLADECK. I want to ask, I=m afraid Mr. Chairman, a technical question because I am so confused by this discussion.

Mr. MCDERMOTT. Bruce, why don=t you use a microphone. These are very unidirectional. [Laughter.]

Mr. VLADECK. And maybe Laura, or Senator Gramm, or one of the panelists can correct me about this, but the little accounting I learned defines the products of a teaching hospital as joint costs. That is to say, in the course of the provision of services to a given Medicare patient, the hospital is producing clinical services, it=s producing education, and in many instances it is enriching the stock of human knowledge at the same time, and as far as I got in the accounting textbook was the statement that, by definition, you cannot allocate components of a joint product to particular subproducts that are being produced thereby.

So that when you say that of the x billion dollars spent by, or received in revenue by academic hospitals in the United States, $18 billion is the cost of graduate medical education, I don=t know what that number means.

Because, again, I think their total expenditures are x dollars. They produce clinical services. They produce education. And they produce research. They produce all sort of other things, as well. And once you get underneath that total number, you are making fundamentally arbitrary decisions about how you would allocate that total expenditure among those various functions.

Or am I missing something?

Mr. HELMS. Well that I have to agree with. That is one of the first lessons I think I learned in economics, was that in allocating of joint costs there is no economic rationale for it.

Mr. VLADECK. So I got that right.

Mr. HELMS. So that $18 billion figure has all kinds of accounting problems, and definitional problems for allocating joint costs. And also to the extent that this system induces an inefficient system, or an expensive system of training physicians, all that extra cost is somehow in there.

Mr. VLADECK. But that is irrelevant to the joint-cost problem. It could be a highly----

Mr. HELMS. Right. Right.

Mr. VLADECK [continuing]. Efficient system of training people.

Mr. HELMS. You are right.

Mr. VLADECK. And it would still have the same problem. So this conversation makes no sense in those terms.

Dr. HERDMAN. Well I must say, Dr. Vladeck, that there are some costs that are real costs. I mean the resident stipends are real costs----

Mr. VLADECK. Well they are all real costs. It is real money.

Dr. HERDMAN. Yes, but I mean don=t you think those are training costs if you have to pay the salaries of the residents?

Mr. VLADECK. I=m sorry?

Dr. HERDMAN. Don=t you think that paying the salaries of the residents represents a true training cost?

Mr. VLADECK. Well we have already heard the assertion in this discussion, which obviously does not occur at the academic medical center where I work, but elsewhere, that in fact residents are cheap labor for the provision of clinical services, in which case to call it an educational cost is to perpetuate a mythology about what in fact residents do and what the educational process is.

I am just having trouble. We are back facing some of the same problems we have had in the Modeling Task Force. We are acknowledging up front that reality is complicated and that our analytic techniques do not do justice to reality.

And then we are putting that aside saying we are not going to talk about reality; we are going to talk about the analysis. I think that is a very dangerous way to proceed.

But if you can=t--if there is no scientific basis for allocating these costs--then I don=t know what the basis for this discussion is.

Senator FRIST. At your academic health center, do you make any attempt to allocate costs to the cost of educating residents? Or do you just say it can=t be done?

Mr. VLADECK. I--again, for purposes of reporting for various Government programs, we are required to undertake various allocation processes, understanding that there is a certain arbitrariness associated with that.

Senator FRIST. OK I=ve got--for questions--let=s say on this for a second--then, Senator Gramm and Senator Rockefeller will be recognized, but let=s stay on this.

Dr. Altman?

Mr. ALTMAN. I think Bruce is correct that there is no clear way of allocating costs. I think he overstates the issue by saying that there are not ways of trying to get at these using regression analysis, and I think we are doing a pretty good job. We will never be perfectly accurate. He is absolutely correct. There is no $18 billion that anyone could stamp their seal of approval on, but every study that has ever been done using every analytical technique we know suggests that teaching hospitals and the whole educational process does generate high expenditures when you account for every other factor that a normal delivery system does.

And while the number is somewhat arbitrary, I think you cannot argue, Bruce, with the statement that these institutions do take on substantially added expenditures, although the number is always going to be arbitrary.

And to say the discussion is meaningless I think presses the point a little bit.

Senator FRIST. Are there other comments on this?

Dr. Blumenthal?

Dr. BLUMENTHAL. I think there is a difference between trying to figure out what their overall extra costs are, and then trying to decide what portion of those extra costs can be assigned to teaching or research or innovation or some highly specialized thing. That is a very problematic thing to do.

But it is not very difficult analytically to compare similar hospitals that do and do not do these things and say how much more does one cost than the other, and say that represents an approximate estimate of those things, and try to control for inefficiency at the same time.

Senator FRIST. Senator Gramm?

Senator GRAMM. Mr. Chairman, I want to address a couple of issues.

Graduate medical education is something we have looked at on the Health Subcommittee in some detail. Bruce Vladeck and I have talked about it from time to time as the administration has tried to deal with the very real problem with GME that we have. Let me explain how I view this issue, which I think is a little bit different from how others view what Medicare=s fair share of GME is, and then talk about what I see as the problem, and then pose a couple of questions.

First of all, the part A trust fund is funded solely by taxing wages. So all rents, interest, and profits in the country are exempt from this tax.

The whole logic of the tax is to pay for Medicare services. And we are right on the edge of being able to do that.

So in essence what we are doing is funding a very expensive social good out of a trust fund that was dedicated to providing Medicare services. As far as I am concerned there is no debate about whether or not we ought to be funding graduate medical education out of the part A trust fund.

I think clearly the answer is >>No.== Zero amount should be funded out of the part A trust fund, in my opinion.

The part A trust fund should be dedicated to funding Medicare services.

Now having concluded we ought not to be funding graduate medical education out of the part A trust fund--and it is my thesis we did it originally because it was a deep pocket; we had lots of money in the trust fund at one time; and therefore it was a convenient funding source.

However, there is a difference between concluding that this should not be funded out of the part A trust fund and concluding it shouldn=t be funded.

Now going to a second question, which is the one I would like to ask your response to, it seems to me that if this Commission does not do anything else it ought to take graduate medical education out of the part A trust fund.

The question then is: How should it be funded?

Everybody that I have heard from who was involved in graduate medical education thought it ought to be funded as an entitlement, a dedicated funding source.

Obviously that makes sense if you are receiving the funding. But I am not sure that from the public policy point of view it makes any sense.

What we have today is this administration--and I am not being critical of it; quite frankly it is probably optimal to do what they are doingBthey are literally paying teaching hospitals not to teach.

We have instituted the equivalent of the old Soil Bank Program in graduate medical education because we have an entitlement that is driving this machine that is producing specialists we do not need, and therefore the administration, and I think rationally even though the process seems crazy, is actually paying people now not to train physicians. And the only way you get into that, just as we did with the old Soil Bank Program, is when you have a mechanism driven by a dedicated funding source.

So my argument is: The same thing that has produced a problem with the current system would still be present if we had an entitlement funding, because then you have no accountability, no oversight, and it ends up being driven by a formula and not by any kind of quantifiable need for people in this area.

So I guess, lacking an alternative, I come down in favor of the following position:

First, we ought not to fund graduate medical education out of the part A trust fund.

Second, we should have public funding for at least a portion of graduate medical education, but it ought to be funding through the appropriations= process so that you have oversight and an appropriating committee and subcommittee that is looking at this program and measuring its needs.

I am concerned that if we go from one entitlement funding mechanism, which we have now, to a new entitlement funding mechanism, that we will have exactly the same problem as we have now. I do not see how you can have a stable funding source and have responsiveness to changing factors.

Our panelists have used both those terms but it seems to me they are fundamentally contradictory. And so I would like to hear the panelists respond to the points I have made about why I do not believe you can justify funding graduate medical education out of the part A trust fund which is funded only by a payroll tax.

And second, do they see a contradiction between adjusting to changing market circumstances versus entitlement funding which in essence puts the whole thing on an automatic pilot.

Senator FRIST. We will go to the panelists and then to the Commissioners for comments on Senator Gramm=s comments.

Any of the panelists. Dr. Blumenthal?

Dr. BLUMENTHAL. Senator, I think that the rationale for--let me first say that I think there are many ways one could conceive of to pay for these things we have been discussing.

The question is: Is there a rationale for the trust fund to pay for them, for the taxpayers who support the trust fund?

I think when these extra payments--and again I am saying saying they are not just for education; they are for a lot of things that are different about the care in teaching hospitals and academic health centers--I think the rationale for doing this was so that patients who get their care paid for by Medicare could have the same access to those facilities as every other American.

And if those facilities--that is, the same access to facilities that had organ transplantation, advanced burn care, and trauma care--that had house staff and trainees being taught, and that conducted research, including clinical research on new treatments--in the absence of those extra payments it was not clear that the patients covered by Medicare would be able to pay enough to pay the costs of the care in those facilities and therefore might not be eligible for care in those facilities.

So that is one reason for clinical service care to contribute to those extra costs.

Now some managed care organizations would prefer not to have their patients hospitalized in those places because of those extra costs. And as Medicare becomes more like other managed care programs, the same issue will arise in Medicare.

But I think there is a rationale for a program that pays for clinical services to pay for the costs of certain kinds of care that are only available in certain places and certain kinds of public services that may benefit the beneficiaries of the program.

Senator GRAMM. I am not sure I understand that.

Senator FRIST. I think what he is saying, Senator, let me see if I can attack it slightly differently. At the time that the IOM did the study, teaching hospitals cost 28 percent more than nonteaching hospitals in the country. However you do the costs, that is just what they cost. That was on a per admission cost. I think it was $10,000 versus----

Senator GRAMM. Yes, but Medicare was reimbursing on a cost-plus basis. I mean, I am not sure I understand your point.

Senator FRIST. No, Medicare was reimbursing on a PPS/DRG basis at that point. This was in 1996-1997.

Mr. HELMS. But that included the extra----

Dr. HERDMAN. Well it did, because the GME was on there. What I am saying is that the teaching hospitals are and were more expensive. It seems reasonable that if Medicare wants Medicare payments to go to those hospitals--and as a Medicare recipient I like to think----

Senator GRAMM. Well, but we were paying----

Dr. HERDMAN [continuing]. That I can go there, then I think Medicare should pay for them.

Senator GRAMM. Well, but wait a minute. We were paying for graduate medical education long before we went to any fixed-payment system in Medicare. We were paying for graduate medical education through the bulk of the life of Medicare when we were on a cost-plus payment system.

Dr. HERDMAN. Indeed. You were paying for GME the whole time there was a Medicare Program. Absolutely correct.

Senator GRAMM. Well, I do not think it makes any sense to suggest that people could not have used these facilities when we were paying on a cost-plus basis.

Dr. HERDMAN. During that time you were explicitly recommending that one of the things you were paying for, and in fact why you were paying more, was GME. However that was in the original House report on the subject. I am not following.

I think that=s--I understand, and you are correct, of course. You make a point that reasonable people could disagree, and do, about the source of funding.

Senator FRIST. Mr. Helms, any comment on this?

Mr. HELMS. Well I think I tried to say in my testimony that I really object to having an open-ended entitlement. That I would, to the extent that there are some social goods and objectives that you want to achieve, it seems to me to be much more efficient in terms of the incentives that you create by the recipients, but also for the Congress, to appropriate that money on an annual basis for a specific purpose and hold them accountable. And, to debate it compared to all the other things in the discretionary part of the budget.

Dr. HERDMAN. I just want to say, Senator, that that is what the ILM Trust Fund is, a prospective, annual nonentitlement appropriation based on the economic and other factors applicable to teaching hospitals. That is exactly what we are talking about.

Senator FRIST. OK, I have got three people on this issue before we introduce another issue: Rockefeller, Vladeck, Altman, on this issue. And when we bring up another issue, let me come right back to you. Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman.

I will admit to being honestly perplexed a little bit on this subject, and I am trying to find a way out. To be quite honest, for about 10 years I have feared when the discovery would come that Medicare was paying 50 percent of a whole lot of things that the people who are the beneficiaries of Medicare had no idea that it was paying for.

On the other hand, I also think that the whole question of social good, I think that--and, Dr. Helms, tell me if I am wrong--you made the comparison of tax on automobiles to pay for engineers that make the automobiles, and it occurs to me that in the 1970=s and the 1980=s we were making pretty bad cars, and one of the things about the health care system is it can never afford to produce anything but the very best physicians insofar as we are able to do that.

So that the whole question of social good and the extra marginal cost of academic health centers, the fact--I think as you said, Dr. Herdman--that managed care is just squeezing them much more than the other kinds of hospitals.

On the other hand, I am also perplexed by the fact that, as Senator Gramm indicates, we are producing 88,000 too many physicians. Most of them are becoming, or many of them are becoming specialists. That shift in RV/RVS had a marginal effect on that.

We have a lot of physicians who are trained overseas in schools which are probably not as good as our own that come over here to do their residency. Medicare pays for them, too. And then many of them will do their mandatory 2 years and then off they go into the specialties where again the costs are driven up.

On the other hand, then I come right back to my own State--and I expect this would be true in the eastern part of Tennessee, also--that it is often the foreign-trained, the doctors of foreign-trained medical training who do their residencies here who are the only folks who will go into some of our most difficult areas.

Now the Kellogg Foundation and others, and States, are trying to take initiatives to change that, but so far people generally like to get where there is the most technology and the most so-called >>medical excitement== as opposed to out there where there are some very, very real people.

And then we talk about, as Bill Frist did, the $18 billion a year for this. And then I think, well, prescription drugs, that is about $10 billion a year. If we were to do that, how do you value prescription drugs in health care versus how do you value really well trained doctors even though they are in excess in numbers and we should be reducing that, and medical schools should be more aggressive on that and have some plans for that.

Then I look at another factor that I do not think has been brought up. That is, that 50 percent of all physicians get part of their residency in our Veterans Administration hospitals. And that is half paid for, 50 percent, by Medicare.

That is an incredibly important part of the VA health education and the VA health services because unless they were trained there they would not understand the particular problems of veterans, and in fact it is a very important part in being able to attract good doctors to VA hospitals because some of them tend to stay there. It is like medical research, having medical research at a VA hospital is much more important than having medical research at some other places because that is kind of the draw, the psychological draw that ways, hey, VA is not a second-class medical system, it is right up there with the big boys, and that counts.

So again I am still perplexed. I do not want this, as Senator Gramm does, turned over to the appropriations process because the appropriations process is up and down. We are doing well now. We may not--probably won=t be doing very well in 2 or 3 years, and the surplus may be down, and people are not sympathetic toward foreign-trained doctors, and there are all kinds of things that happen in the appropriations process, many of which are not very pleasant.

And leaving the quality of health care up to political people strikes me as not necessarily a wise idea.

On the other hand--and I am finishing my question--I come back to my original premise that this has made me nervous for a long time, because I was afraid of the day that it would all get found out, so to speak. So, what do we do about it?

So what I would just put at you is the idea of some kind of a transition:

One, I do not think we ought to start everything new. There ought to be a transition period. I mean, wisely, whether it is MSA=s or whatever, you do demonstration projects.

What about the idea of a transitional all-payer system where you put 1 percent to 12 percent of money from health insurance premiums and use that. I don=t know quite how the math works out, but let=s just take those numbers.

Or take partly an all-payer system and partly a public funding source and mix that in a transition period while we are trying to figure out if we cannot do it on this Commission in the time that we have left what is the best way to do it, but tinkering with GME, DME, IME, et cetera is very, very, very dangerous stuff in terms of what it is that distinguishes our health care system from any other, and that is by far the best in the world.

On the other hand, 50 percent Medicare is not sustainable.

Senator FRIST. All right, comments by the panelists then Vladeck, Altman, and Watson.

Mr. HELMS. Well I don=t think what is required is a new tax on the health care system because, quite frankly, once you get that I do not think you will ever get rid of it. It will not be a >>transition.==

You have really in the Balanced Budget Act established a transition for graduate medical education by freezing the number of residents, and also the resident-to-bed ratios in the formulas.

But the point is, when you get out to particularly the year 2010 and the baby boom generation starts to become eligible for Medicare, GME payments, even under those formulas, are going to increase because of Medicare volume. Because even though you freeze the residency thing and so on, you take away that marginal incentive to increase the number of residencies and keep them so long and you=ve still got the volume of Medicare which is going to drive the cost of this up.

And under the present formulas it will go up because you have got in there, it is an add-on to the DRG payments, and also the indirect medical expenditures is affected by the Medicare to total bed-days.

Senator FRIST. Other comments?

Dr. Blumenthal?

Dr. BLUMENTHAL. In fact, the task force was very sympathetic to the idea of an all-payer system in which Medicare continued its contribution and other contributions were solicited from private payers.

In fact, the reason why there may be trouble with sustaining clinical research, the care of some highly specialized kinds of patients and so on, has not to do with Medicare but the private sector=s competitive process in which it is cutting back payments for everything that it doesn=t absolutely have to pay for, including these extra costs.

The question of whether this should be through an appropriation or some other mechanism is obviously one that the Congress will have to make, and there are many ways to pay for this.

A trust fund does not require an appropriated amount. It could also have an automatic contribution to be funded by an all-payer system, or it could be funded by appropriations.

I think there are many people who look at this and wonder whether an appropriation--an annual appropriation would provide stability over a period of time for these functions.

We do not always follow perfect civics when we decide who to fund things. And if the American people value the access to clinical research, the access to highly specialized services, the teaching that goes on in these institutions, they can decide how to pay for them in a lot of different ways.

Senator FRIST. This whole concept of >>open entitlement== is one that we keep coming back to, whether it is capping the number of residents, which Dr. Helms just mentioned, that approaches it. On the other hand, you have this whole ballooning of the indirect medical, which is already where the big expense is in terms of outlay of dollars.

How we handle that open-ended aspect of the entitlement is something I=ve got a feeling is going to be very fundamental to our task force as we go ahead.

Dr. Vladeck?

Mr. VLADECK. Very quickly, at the risk of sounding a little like a broken record, Senator Gramm said that part A should be used only to pay for services to Medicare beneficiaries, and I could not agree with him more, but if you accept the logic of joint product production that is what teaching hospital payments are doing.

The fact is that we can stipulate that, all other things being equal, it costs 28 percent more, 30 percent more, 25 percent more to produce a variety of clinical services in order to care for a Medicare patient with a particular condition in an average teaching hospital than it does in an average nonteaching hospital.

We know that as a society we are getting additional benefits from that, some of which may accrue directly to that patient during that hospitalization. But just as we pay more for hospital care for that same condition in a high-wage urban area than we pay for in a low-wage urban area, we pay more for the same service when it is provided in a teaching hospital than when it is provided in a nonteaching hospital because we think it is a good thing that teaching hospitals provide those services.

It is a service payment.

Now where our confusion comes from is that we have no graduate medical education policy in this country, and no policymaking apparatus. And since there is this identifiable flow of Medicare dollars, everybody says we have a problem: we have too many physicians; we have too many specialists; we do not have enough doctors in urban areas; we do not have enough doctors in rural areas; we have a maldistribution; we have too many international graduates; and everyone says: here is a Medicare payment. This is an enormous subsidy that is obviously the cause of our problem, and that ought to be the tool for the solution of our problem.

But in fact what Medicare is doing is paying for hospital services for Medicare beneficiaries. It may be paying too much, because it may be buying that bundle of services at an inefficiently high price. Maybe instead of 28 percent more per case, it should be paying 20 percent more per case.

And in fact the BBA cuts the additional payments to teaching hospitals very, very substantially. But let us not confuse what Medicare is in fact doing with the longstanding frustration all of us have felt over the absence of any policy mechanisms with which to get at the very serious and important issues of the shape and future and size of graduate medical education.

If Medicare wants to buy some of the services it buys from teaching hospitals, which it doesn=t have any choice about given where the hospitals are and where the patients are, then it has to recognize that it is more expensive to provide those clinical services in those institutions.

And you can argue about just how much more expensive it ought to be, but to confuse that with policy about graduate medical education is to get yourself I think into a total swamp.

Senator FRIST. We will have comments on this from the Commissioners, and then the panelists, and then I have got Altman and Watson after that.

On this issue, comments from the panelists? Yes?

Ms. CONWAY-WELCH. I want to make one comment.

Implicit in much of our discussion is that GME is pretty good, pays fairly well--perhaps too well, or too generous--but there are some other realities.

For example, a total hip replacement is $1,100 by Medicare and about $2,000 with private insurance. As we go into these discussions, I think we need to be careful about the fact that we need to find some way to support training of x number of physicians.

But the idea that GME is a bounty and does very well in the system really does not work. If Medicare went up to whatever fair market rates are right now, then there would be a great deal more money in it.

Mr. VLADECK. Colleen, you are talking about the physician fee?

Ms. CONWAY-WELCH. Yes.

Mr. VLADECK. Medicare is paying a whole lot more for the hospital than the private insurer is for a hip replacement.

Ms. CONWAY-WELCH. Let me get some data for you on that. I think there are wide differences.

Senator FRIST. We will go to Stuart Altman on this.

Mr. ALTMAN. Let me--now that I have partially criticized my friend, Bruce Vladeck--let me just jump in in total support of what I think he was trying to say.

We are dealing with $8 billion of GME, but we have to remember that $5 billion of that is really payment for services.

If we go back to the history, we did a somewhat arbitrary attempt at trying to figure out what the appropriate rate should be for these teaching hospitals, and we overshot the mark and we have been coming down ever since.

I think it is fair to say that when we finish with all of the changes in the Balanced Budget Act and bring that adjustment down from 7.7 percent to 5, we will be paying substantially less than, I would suspect, most private--I=m where you are, Colleen--and I would be willing to subject a test. Which is, we get a lot of positive vibes about FEHBP. I am willing to wager a very small amount of money [laughter.]

I am a professor, after all. [Laughter.]

A very small amount of money that, if we looked hard at FEHBP and had Medicare pay the differential that FEHB pays for patients in teaching hospitals, Medicare would pay substantially more than it will on an add-on basis.

So I don=t know how you can possibly justify not including in part A legitimate extra costs associated with Medicare patients going to teaching hospitals.

And given the fact that our seniors tend to be disproportionately located in urban and rural areas, and much less well represented in suburban areas, we are going to use them in the Medicare Program always, whether they are run by the Government or run by private insurance companies, in areas that are going to use teaching hospitals.

So I don=t care which way we do it, there is going to be a substantial add-on beyond the normal patient cost in a community hospital.

I for one would subject the Medicare payment to a private-sector payment. I don=t know where you come out, Bob? And I would say, OK, let=s find out what the private sector adds on.

My friend over here, Tony Watson--he can speak for himself--but I just asked him. He pays 20 percent or more for the same services in New York in a teaching hospital than he does. And I=ve seen numbers as high as 30.

So I think we need to separate out IME from DME, which is a smaller part of this $8 billion, and have a debate about what is the appropriate way for paying for the direct education costs.

I can see a different discussion, but not the $5 billion of IME.

Senator FRIST. Just for the information of the Commissioners, for every dollar of DME there is $2 of IME. That is the ratio coming out. Commissioner Watson?

Mr. WATSON. I would like to add that 85 percent of our members are admitted to academic medical centers, and we do that by choice.

We need to make clear that the medical care at these institutions are simply better than elsewhere. There is no question about that.

I think Senator Gramm raised an interesting question, at least one part, about oversight. We are paying public money, and private insurance money--because insurance companies are taxed to provide money for our graduate medical education--and we are perpetuating money into a system where the hospital systems refuse to change--it=s antiquated, and they won=t change--and we are giving them money to keep the system going.

In medical schools we are giving them money. They won=t change their curriculums. They won=t respond to the new realities in health care. And we continue to give them money, and we argue about what percentage.

I would like to ask: How do we use--and we must publicly fund graduate medical education; otherwise, it will deteriorate--but how do we use our public officials, or whoever is appropriate, to make them change?

Mr. HELMS. Well basically I think if you look at what is really going to happen, or probably is going to happen with Medicare because of the Balanced Budget Act, the increased choice that you get and more managed care plans and so on, I think you get the effect that you are talking about.

It is not obvious to me that academic medical centers aren=t going to be able to really go in there and compete for a lot of this business, because they=re going to be able to presumably with better data and better outcomes, if their quality is better, to come in there and say, sure, we might have a little more cost, but it is very worthwhile for us to be in your plan and to be offered by your plan because, you know, some people want to get their training there.

It is sort of the reputation of an academic health center, and I think they can sell that. But that competitive process, I think, is a lot different than an automatic, formula-driven system that we have now.

Senator FRIST. The real figure, though--I don=t know what your differential is in your payment, but I think plans are willing to pay a 2- or 3-percent premium on this quality component, or 4 percent--I don=t know, but those are sort of the figures that are out there, but not 15 or 20 percent.

Commissioner Watson, what do you think that increment is for better quality?

Mr. WATSON. When you get down to costs, I start getting confused. Because if you factor in all the money you pay, in New York we pay a 9-percent surcharge tax for graduate medical education.

Senator FRIST. Nine?

Mr. WATSON. Nine percent. And we have no choice about it. That is what I am complaining about. We are spending Federal, State, private money for perpetuation of an antiquated medical system. That is what is costing us.

They will not change. They are taking our money and perpetuating their systems.

Senator FRIST. Dr. Blumenthal, what about it?

Dr. BLUMENTHAL. As I said in my statement, I believe that these institutions need to change. They need to change in important ways. And I think that some of the provisions of the Balanced Budget Act of 1997 are going to encourage those changes, particularly the movement of money out of the inpatient sector so now in community health centers and in other community-based settings you will be able to pay for training, for example.

I think that is a positive development and, for the public side of the payments for these functions, that ought to continue and be emphasized more.

I would also say, though, that there is an enormous amount of change going on right now in academic health centers. Indeed, some of it may be leading to more efficiency, and some of it may be distracting these organizations from the purposes that we hope they will serve.

In Boston, two teaching hospitals have basically closed by merging with other institutions. All around the country, teaching hospitals are merging. Around the country they are forming networks of primary care physicians to compete, and network services especially serve to compete.

They are investing enormous amounts of money in those functions. And in the process, the competition has the danger of making them look a lot more like community hospitals and less like teaching hospitals once they finish this process of investing capital that would otherwise have gone to support research, or teaching, or some other purpose, into becoming an integrated health system.

Now there are many aspects of those integration processes that are very beneficial and I think will lead to some efficiency, but there are also some concerns that I think the Commission ought to take into account:

How much do we want these institutions to change to become like their competition, as opposed to like the institutions they used to be?

There are some things that clearly ought to change. They ought to be more responsive to their communities.

We have studied teaching hospitals in Tennessee and we found that one of the positive results of the TennCare Program was actually that the teaching hospitals in Tennessee started having to pay a lot more attention to their local communities, and that was a positive benefit.

One of the problems with the TennCare experience was that there wasn=t any provision for these extra costs that are legitimate in teaching hospitals, and that also needs to be attended to.

Senator FRIST. Let me go down my list, because we have about 20 minutes. I=ve got Steelman, McDermott, Tyson, Gordon, Gramm, Conway-Welch. Commissioner Steelman?

Ms. STEELMAN. I would like to go back to the question of accountability, which all three of you raised in a slightly different context, to specifically focus on what you think the Medicare Program should do to raise the accountability to it.

Specifically, if these payments are made on behalf of Medicare patients, how can we ensure that they are in fact used in that fashion and not just fungibly for other purposes at the institution?

Second, accountability to the larger public. If this is a social good, and one of the arguments we are talking about here is whether or not Medicare pays for it disproportionately, and whether or not other people should pay for it, et cetera, how do we have GME be accountable to the public at large? Through what mechanism? What institution? What oversight body does that occur today?

Dr. HERDMAN. I do not put myself forward as an expert on this, Commissioner Steelman. I think there are a couple of ways.

The IOM was helped a lot in its report, and I think identified a way in which accountability can be improved and information can be made available and studies can be done, at that time, by the Prospective Payment Assessment Commission, which as you know has now been merged with the Medicare Payment Commission, but that is one of the tasks of that Commission.

I have a high regard for that Commission and its work. They did a good job in identifying some of the situations and problems that existed at the time its predecessor ProPAC did.

I also think--I am not sure why there is such a--I don=t know. Of course Bob has me at a disadvantage because I don=t know the study he is talking about--it is preliminary, so of course we will have to wait to see what it shows when it is final--but the Department does carry out audits, and there are Medicare cost reports. It seems to me that might be a good place to start.

Mr. HELMS. Well I still basically argue that the system right now is not very accountable. I think that is your point.

I do not necessarily see that sort of turning over a new body of accountants and cost accountants is going to get you very far. I mean, you know, you can employ a lot of accountants and spend a lot of money and you might have some effect that way, but that is a very regulatory effect.

I mean, basically to the extent that you can make this system more competitive, where academic health centers have to go compete for Medicare--for subsidized people through a voucher system, but also compete with health plans to get Medicare enrollees, I think they would have very strong incentives to improve the efficiencies and to do the change that Mr. Watson was talking about to get into today=s marketplace through competition.

That to me is how you really make them accountable. But they are accountable not to the Government but to consumers, to Medicare recipients.

Senator FRIST. Dr. Blumenthal?

Dr. BLUMENTHAL. I think the question you have raised is a really important one and a really difficult one because you are talking about accountability for the kinds of joint products that Bruce Vladeck was talking about, things that are very hard to disentangle and account for in the real world.

I am not more of an accountant than Bruce claims to be, and I know it is hard to measure these things. It is hard to measure the quality of teaching. It is hard to measure the quality of research. It is hard to measure the quality of care, per se. And yet we all have a strong instinct that there are differences about what goes on in these university teaching hospitals compared to what goes on in the community.

So if you were going to give a dollar and ask for something in return, what kind of information would you want? We are actually in the task force working hard on that issue to try to see whether we can get and use some indicators of quality to try to track whether quality and expenditure go together.

That is, whether institutions that are more involved with research cost more than institutions that are less involved with research.

We are going to try to follow that through to see whether we can come up with some model systems that would relate performance to payment.

But I know in advance that what we come up with is going to be open to criticism because of this joint-product question.

Whenever you try to measure something in that circumstance, you are going to be missing something else that is important.

Some people feel that the combination of teaching clinical care and research leads to an environment in which training is inherently better than in an environment where they do not take place, in part because it exposes physicians at a critical time in their training and other health professionals to a critical way of thinking. It gives them the capacity for lifelong learning that we want them to be able to have so that they can read the papers and the journals 20 years hence and understand them.

Now it is very hard to measure that, and yet a lot of people believe it is an important thing.

Mr. VLADECK. With all our attention on report cards and consumer choice and all that kind of stuff these days, I just might point out in passing that for all its flaws the best comparative report card we have for American hospitals is the recent U.S. News & World Report article. You can look at the top 50 hospitals and I would be surprised if there is one nonteaching hospital on that list.

If we want consumers to choose on the basis of quality, we are not paying enough to teaching hospitals.

Senator FRIST. Congressman McDermott.

Mr. MCDERMOTT. That really comes to my point.

I get disturbed when I listen to this because I think we are talking about running an automobile factory; that the kinds of people we are training are just technically competent; we don=t care about the art of medicine whatsoever.

When I trained at Cook County in Chicago, the old rule was: see one, do one, teach one. It is a very inefficient, hands-on system by which you train physicians.

If you go to this, if efficiency becomes the whole focus of what is happening here, you have a whole different goal for a medical school.

One of the things that disturbs me, one of my friends in the medical school education field from New York came to me and told me that one of the HMO=s was in New York approaching one of at least four of the medical schools in New York trying to buy them.

Now they already purchased Hannaman in Philadelphia, or at least made some arrangement with them. It=s going on in Nevada. And you can see the HMO=s getting into the business of training people from the first day they walk into medical school because they want them to think a certain way.

And there is a real change here that I think there is a real loss in the society when you change a physician, or any health care practitioner, nurse, or anybody else in the process to be nothing more than a technician, to not be a scientist--that is, to observe, to take time, and to actually have time to talk to a patient.

A lot of the stuff we are going through with the HMO Patient Bill of Rights, in my view, is because people feel they do not have time to talk to the health care professional.

One of the things that worries me, or I question, really, is how do you get the HMO managed care sector to pay for their part of the educational system?

They do not want to pay for anything except patient services. They have got it narrowed down so far, and this is some kind of worker pool that they want to reach into and put into their system and operate very efficiently, but they are never paying the cost of training their employees.

I do not understand how we do that. If we pull GME, or whatever, out of the Medicare payments and we go to this trust fund, how do we tax, or how do we get at the requirement that the HMO industry that is bottom-line oriented but never has to pay one single penny of training costs except for technicians in their system to make it more efficient, how do you get them to train doctors and nurses and some of the high-quality or high-level professionals?

Senator FRIST. Let me turn to the panelists, and I=ve got Tyson, Gordon, Gramm, Conway-Welch, and Rockefeller.

Dr. Helms?

Mr. HELMS. I am glad you brought that up, because when economists talk about efficiency they are also not just talking about some technical production process; you are also talking about the ability of that organization to meet the demands of consumers.

And if consumers really want that sort of, you know, touchy, feeley spend-time-with-me kind of care, it seems to me that these organizations in a really competitive market would have strong incentives to produce that kind of care.

It is not sort of just a medical/technical input/output kind of notion when we talk about efficiency; it is satisfying consumers [laughing] if the rest of my economist friends here to back me up on that.

Mr. MCDERMOTT. You are saying the market will solve it?

Mr. HELMS. I do think it has the potential. I think that is the kind of competition that I think--what I tried to say earlier, I think academic health centers, if they got into that kind of competition, have a lot to offer. They have a lot to go tell people about what they can do, and I think it will be valued and people will pay for it.

So will they pay as much as Medicare is paying? Not necessarily.

Mr. MCDERMOTT. So what you are saying is that all of this over in the House of Representatives around the issue of managed care and a patient=s bill of rights is simply a market adjustment?

Mr. HELMS. Oh, I don=t know if I would want to characterize it that way. There may be under today=s--basically, you have a tax system that is putting the employer in charge rather than consumers. I think that is the basic problem there.

That is a different issue. We could get into it, but I think there are a set of incentives that are distorted now in the private sector.

Mr. MCDERMOTT. But that is my point. If you train somebody to be a physician, or a nurse, and they have the feeling that they are responsible, when you then take them into the system and say, OK, those old rules don=t apply anymore. You are not in charge. We are in charge. We tell you what to do.

That is why you have to get involved in medical education, to educate people to understand that as a physician you no longer are in charge. You are operating according to what the corporation says you are going to do. It is a mindset kind of thing that we are struggling with right now.

Mr. HELMS. Yes.

Dr. HERDMAN. Just to answer your question, I think you will get managed care organizations to do some of the things you are asking about when you get drug companies to do basic research.

I am not sanguine about that happening any time real soon, but that is not to slam managed care organizations because I think they are interested in doing some clinical training.

And there were a number of the better ones around the country, I was told when we did the study, that were quite interested in ambulatory care training and having residents rotate through their facilities and training programs.

Dr. BLUMENTHAL. I think that you won=t get managed care organizations, or any other organization that is competing on the basis of price in a real-market of the kind Bob advocates, you won=t get them to pay for medical education and you won=t get them to pay for the extra costs of research, and you won=t get them to pay for the standby capacity that we need that may not always be utilized to do organ transplantation or to provide burn care or some other complicated services--because no one benefits enough at any point in time from those things to want to pay for those costs.

They are collective goods in a lot of ways, and that is where Government needs to step in. So competition drives the prices--drives the willingness to pay for those things out of the system.

I don=t blame managed care organizations for not paying for those items. I think they are just adapting to the incentives that they face and the messages they are getting from purchasers.

But on the other hand, we shouldn=t expect that academic health centers will continue to do those things in a truly competitive setting unless some source of funding for those things is provided.

Dr. HERDMAN. I think what Dr. Blumenthal is saying is: If managed care trains a physician and that physician walks out the door of the managed care organization and goes to work for the competition, that is not a benefit that you want to pay for if you are a business.

Senator FRIST. I think the issues that Commissioner McDermott addressed in terms of expanding managed care, which as Dr. Blumenthal said, is not going to have the incentive to invest in these type of intangible but very important activities, is something that we have got to address here.

We are not going to solve it today, but it is a huge, huge issue that is I think fundamental to this Commission as it moves forward.

Now we have got 12 minutes and we have got four or five--I=ve got Tyson, Gordon, Gramm, Conway-Welch, Rockefeller. Commissioner Tyson?

Ms. TYSON. Actually, the conversation you just had I think is a very good place for me to raise the question.

I think that in fact around the table, even including Mr. Helms, there=s not really much disagreement about the fact that these are important social missions. So we have accomplished something: social missions are important.

The disagreement is over both the ways to finance the social missions and the ways to exert oversight over those who are carrying out the missions to make sure that they do it in an efficient way. So there is the financing mechanism of who should pay.

Now I happen to agree with Senator Gramm. I do not see why it is part A trust fund. In fact, I think part of the important point of this Commission is to abolish the distinction between part A and part B anyway, and there is an issue of how much we are going to spend on the health care of the elderly in this society, who is going to pay it, and in what form are we going to raise the money?

So I think that we should distinguish the issue of how to pay for it. My own view right now is to think that in this area it is a social--I accept the notion of social missions. I think I much more lean toward an all-payer system in which everyone who is benefiting from the use of the social mission is going to provide financing for the social mission.

I think the toughest problem really, though, is oversight. I have not heard any good discussion of how to exercise oversight here, and frankly it leads me to ask Dr. Blumenthal and Dr. Herdman to respond to what Mr. Helms said, because he actually proposed changing the mechanism so much that the oversight came in a very different way.

So what is the matter with the idea of providing students with the support to get their medical education, and then they go and choose where they want to go?

After all, we train engineers in our society that way in the seventies and the eighties. The money goes to the student. The student takes the money and goes to MIT or Berkeley or Stanford or whatever, and they get the education.

So I guess I would like to hear what=s the--and he also proposed that we have a separate oversight mechanism for the research part of medical education, and that we have a separate funding mechanism, if we want to support treatment of burn victims in this society, if that is an important issue--and I think it is--then we should have a separate mechanism for that.

And if we had separate funding, or separate oversight mechanisms which would come through the separate funding mechanisms, wouldn=t we solve the problem more efficiently?

I would like to hear Dr. Blumenthal and Dr. Herdman, because I think that is the issue we have not addressed here: oversight; how to make this more efficient.

Dr. BLUMENTHAL. Well I think that in a funny way we already have a voucher system. The only way that a teaching hospital or an academic health center gets any money for Medicare is if a resident fills a slot.

Not all teaching hospitals fill their slots. A lot of them go empty because they=re not desirable to trainees. So the money follows the resident, as it is now, not anybody else.

And there is fierce competition between institutions to maintain that flow of residents. As a matter of fact, I suspect that we wouldn=t necessarily be happy when the dust settled with the way residents allocated themselves in a voucher system.

Because they would tend to go to high prestige urban areas and not necessarily go to rural hospitals, or rural teaching institutions or underserved areas where we would like to see some of them get trained.

So I think a voucher system would have problems from the standpoint of maintaining the kinds of values that we might collectively believe in.

I think the idea of breaking up these joint products into separate funding streams is a logical way to proceed, and we are exploring that. But again I come back to this question about what is missing when you have measured things? And are you missing something important?

I do not think that we are going to have a quick solution to that question.

Dr. HERDMAN. I would just add, there is a little section on vouchers, Dr. Tyson, in our report.

Actually, I don=t think there are any major objections to vouchers in our report. We sort of left it, because it wasn=t our charge as you know, but I would ask you to think about in a voucher system who is going to make the decisions about how many vouchers there are going to be, who is going to get the vouchers? Are we going to give the vouchers to international medical graduates? Are we going to give vouchers for generalist training, or orthopaedic training? And what institutions are going to qualify?

It does put somebody--either the Government or some other body--in charge of an awful lot of money and an awful lot of decisions about the shape of the health care system.

Senator FRIST. I think this whole issue of vouchers is an important one. We only have 4 or 5 minutes so we can=t develop it fully now, but it does come back to some earlier comments about sponsoring institutions. Right now there is a huge incentive--in fact, all of Medicare is built around residents in hospitals, and as all of us know health care is moving outside of the walls of hospitals, and all the incentives that are in legislation and regulation sort of force residents to be in hospitals.

So the idea of who sponsoring institutions should be, how decisions are made, vouchers, getting people out into the real communities where medicine is delivered today, are issues that we will need to address.

Real quickly, and then I want to move to Commissioner Gordon.

Ms. TYSON. I just wanted to make it clear that in asking that question I was not espousing a position on this. Actually, I haven=t looked at the issue of vouchers enough.

Let me say, though, one other thing that is relevant because I did say oversight is very important. I would be extremely concerned about the oversight being exercised through the appropriations mechanism.

Having watched the appropriations mechanism fairly close up for 4 years in Washington, I do not think that provides an oversight mechanism which I would feel comfortable with, either.

I think that in each of these areas we are going to have to think more and more about developing expert oversight mechanisms which are established for the purpose of oversight where you have basically users and producers of health care being the oversight body.

I honestly think you have to go to a nongovernmental oversight mechanism, not a governmental oversight mechanism. Government provides the money, and the government has the ability to appoint the oversight, but the oversight is more of a peer review or customer and producer oversight body.

Senator FRIST. Commissioner Gordon?

Ms. GORDON. I would like to know who makes the determination, or how the determination is made, on how much money a teaching hospital gets; and if there is any consideration given to the doctor/patient ratio.

Dr. BLUMENTHAL. The allocation is made actually on the basis of a resident-to-bed, partly on the basis of the number of interns and residents, and that a certain amount of money goes for each one of those, and they are easily counted.

And the other key determinant is what the ratio in fact of interns and residents is to beds. That is, how concentrated it is; how intensely this institution is involved with teaching.

So those are the two basic indicators. And then in the latter case there is a certain amount paid per case per Medicare patient admitted. That is going to be changed somewhat under the Balanced Budget Act of 1997.

Senator FRIST. Commissioner Gramm?

Senator GRAMM. Well Laura made several of the points that I wanted to make, so let me just try to be brief because we are short on time.

Nobody is arguing that teaching hospitals do not provide better care. Nobody is arguing that they do not cost more money. The question is: How do we pay for them?

Should we pay for them, or at least the GME portion of them, out of Medicare part A?

My answer is: No, we should not.

I also do not buy into the idea that the appropriations process cannot be a reasonable source of funding. If you believe that, then you have a question of how government itself works, and I have never been a strong proponent of big government.

On the other hand, we have had the appropriations process around a long time and there has not been any serious movement to get rid of it. I would just remind people that we fund programs like the Center for Disease Control through appropriations, and we have had a very consistent source of funding.

We fund the National Institutes of Health, and fund them well, through the appropriations process.

So I just think if we--back to Tony=s point--if we want to change the process, if we want to eliminate the necessity of paying hospitals not to train doctors, which clearly we want to do and the administration is now in New York paying people not to train physicians as we used to pay people not to plant corn--I think the logical thing to do is to end this automatic pilot system that we have and go to a system where, when we are training too many physicians, that we can reduce the amount of funding; when we=re not training enough, we can increase it.

If there is a consensus that the distribution is bad, we can change it.

But as long as it is on automatic pilot, nothing happens. Nobody changes. The whole process goes on. Resources ultimately are wasted, even though the quality may be wonderful, even though the product may be the best in the world, ultimately it is just not an efficient way to do it, in my opinion.

Senator FRIST. Commissioner Rockefeller?

Senator ROCKEFELLER. Mr. Chairman, just two points.

One is that I would like to ask the panelists--and Dr. Blumenthal began on this--part of the problem here is that free economics and more doctors, free market and more doctors is not a rational comparison.

The more doctors you have, the more services you are going to have. Doctors will find a way to be needed, and patients will find a way to get to them, whether it is in Medicare or outside of Medicare.

So what I would like to know is: What is the American Association of Medical Colleges doing, or what should they be doing, to send you less physicians?

When you said that academic health centers in fact are not filling up a lot of their residency slots, that may be true at Massachusetts General Hospital. I doubt that is true in many other places, because there is too much money to be made, so to speak, by filling those residency slots.

So I would like to know, one, what AMC is doing, and what the Academic Health Centers specifically are doing, to diminish the number of people requiring the 50-percent Medicare subsidy?

My suggestion, after you answer the question, is going to be that we set up sort of--not to have the appropriations process do it; I think that is a really bad idea because, as Phil Gramm points out about communicable diseases, that=s right, but when it comes to research and development into areas that count, as Bill Frist and I know, appropriators do a terrible job of putting money out.

I mean, appropriations is not a reliable, stable process, period. That is just the fact of it. So what are these two groups doing? What are you doing?

And what is AMC doing to reduce the numbers of doctors so that we do not have to, as Phil quite properly says, bribe hospitals, academic health centers, into not training more doctors?

Dr. BLUMENTHAL. Well first, Senator, I have to correct a misimpression I left which is that--otherwise, they won=t let me home--and that is, that the Mass. General Hospital is not filling its residencies. [Laughter.]

It is filling its residencies. But there are other hospitals--and I don=t want to name them--but there are some others that don=t.

I don=t know what the AAMC=s position is on reducing the number of physicians, and I am sure they would be glad to----

Senator ROCKEFELLER. Yes, but you have got to have thought about this subject. I mean, we have all these extra doctors. That is a tremendous amount of Medicare money that we do not need to spend.

Dr. BLUMENTHAL. The task force recommended that in fact the amounts of money available for training be reduced so that it ceases to be advantageous for institutions to continue to train as many as they are right now.

One can cap the amount of money that goes into a trust fund, one can cap it at an amount that basically makes it prohibitive to continue to train more physicians than you are willing to pay for.

So I think there are things that we can do from a public policy perspective that will reduce the number of physicians being trained.

I do think we have to pay some attention to the international medical graduate issue because in fact if you look at the increase in physician-supply in this country, it is almost all attributable in recent years to the influx of foreign medical graduates.

Senator ROCKEFELLER. Actually I do not think that is true, but I would like to know what you mean by >>doing something about it.==

Dr. BLUMENTHAL. Well I think that the recommendation of the task force was that the amount of money made available for training be enough to train the graduates of U.S. medical schools; and that if institutions want to train people from other medical schools that they would have to bear more of those costs internally.

Now I recognize fully that international medical graduates, as you pointed out, do provide valuable services especially in innercity and rural areas, and those services need to be provided.

Whether they should be provided by continuing to train residents in supplies greater than we need I think is questionable.

Senator FRIST. Dr. Helms?

Mr. HELMS. Let me just respond that there was a recent CBO study in which I think one of the major conclusions was, when they looked at where the new residents were coming from I thought one of their major conclusions were that they were coming from foreign medical graduates; and that the domestic medical graduates have been pretty stable over the last several years.

But also in that study they measured, using 1993 data, the marginal revenue for getting an additional resident. They put it on average of about $70,000 for a medical school. But about a quarter of the medical schools were getting over $102,000. It goes back to those cost reports which they had years ago.

And so if any school did not fill their residency--well, I think the Balanced Budget Act changed that calculation now; you do not get the marginal amount because they have capped that now--but if any school did not fill their resident, I think that calculation would still apply to them. They are giving up a lot of revenue, and it is not obvious to me why they cannot fill those slots.

Senator FRIST. With that, I think we need to move to our next panel. Let me thank our three panelists for an outstanding discussion.

This really kicks off our Graduate Medical Education Study Group--it=s not a task force, but a study group.

Tom Dowdal, who is sitting to my right, will be staffing the study group, and I would encourage Commissioners to either talk to me or to Tom directly as to what our next step might be with regard to further panelists and the framework in which we can address the many issues that were brought forward today.

Over the remainder of the morning we will have the Reform Task Force, and I will shortly turn the chair over to Commissioner McDermott. And then this afternoon, as I mentioned earlier in my opening statement, we will be looking at the two other task forces. First, the Restructuring Task Force, and then the Modeling Task Force.

Again, thank you all three for participating in our discussions today.

Commissioner McDermott.

Mr. MCDERMOTT. Thank you, Senator Frist.

I would ask one thing of the staff: To circulate to the members of the Commission the information from the WWAMI Program, which is Washington-Alaska-Montana-Idaho and Wyoming, that represents 27 percent of the Nation=s land mass, about 4 percent of the population, and it really has been a very effective and efficient way to educate physicians.

Sixty-five percent of them stay in the area, in rural areas, in these States. So it is at least another view, contrary to what you hear from Boston, Chicago, and New York, where there are heavy concentrations.

If you would--we welcome you to the Commission this morning.

We are going to talk today on the Reform Task Force about management and administration. The Reform Task Force has already examined the issue of out-of-pocket spending, supplemental coverage--that is, Medigap--employer-sponsored coverage and Medicaid, and long-term care, and Medicare provider payments.

The purpose of this meeting is to consider the advisability and potential for HCFA to more actively manage the Medicare Program to improve quality and service while also trying to control cost.

Now the speakers will assess whether Medicare should adopt some of the techniques used by private-sector purchasers such as Case Management Centers of Excellence, provider profiling, and improved fraud prevention.

Today=s discussion of management and administration will include presentations by Lynn Etheredge, who is a member of the National Academy of Social Insurance--a panel on fee-for-service Medicare.

Most of you remember Lynn from his participation in the Jackson Hole group which developed the concept of managed competition.

The second panelist is Dr. Bill Scanlon who is with the GAO=s Health Financing and Systems Issue area. Bill was a familiar face before our congressional committees.

And our final panelist before the Reform Task Force is Dr. Robert Waller who has served on the Mayo Clinic Board of Trustees since 1978 and is an ophthalmologist.

So we will look for some clear view of this issue.

Mr. Etheredge, why don=t you begin, and thank you for coming.

STATEMENT OF LYNN ETHEREDGE, MEMBER, NATIONAL ACADEMY OF SOCIAL INSURANCE PANEL ON FEE-FOR-SERVICE MEDICARE

Mr. ETHEREDGE. Thank you for the invitation to discuss new management strategies for the Medicare Program.

Medicare faces major challenges to control not only its future spending, but also to become a better health program and improve the health of its beneficiaries.

I believe that selective use of Medicare=s $200 billion of purchasing power could be a highly effective strategy to accomplish those goals.

In the last few years the Nation=s large employer=s have shifted to a new purchasing strategy and their costs are now rising at the slowest rate in 35 years.

If it operates more like a business and purchases health care intelligently and well, instead of just paying bills with national price schedules, Medicare should be even more successful.

Medicare=s market share is more than 100 times larger than most large employers. It controls over 20 percent of health spending, and in many services where its expenses are concentrated like cataract operations, hip replacements, it is up to 80 or 90 percent of the market.

It has an unparalleled data system compared to private employers= ability to tap into CDC, AHCPR, and NIH to develop quality measures in advance of quality purchasing.

With $200 billion of purchasing power in many health care markets having 30 percent or more excess capacity, an active purchaser interested in both economy and quality should find a responsive health sector.

Now Medicare needs new purchasing initiatives because its current national management strategy--national fee schedules--is not particularly useful for many of the tasks that need to be accomplished if Medicare is to be a better program.

At its most basic level, costs, or price x quantity, in fee schedules deals just with price. Trying to use them to deal with volume and quality issues is sometimes useful, but it is like trying to build a house using only a hammer. It is OK on nails but not the best tool for plumbing and wiring.

In the future, Medicare=s challenge in management is to increasingly address the variations in rates of change in clinical practice in health services= use.

Most service use varies very widely in the Medicare Program: 400-percent variations in coronary bypass surgery, for example; or a 3 to 1 variation in the rates of increase in part B spending across States.

And quality issues need to be addressed, as well, such as large variations in outcomes for many surgical procedures.

There are many examples like the Mayo Clinic that show that top quality medical care uses less service and costs less than what Medicare typically pays. Price controls will not get us to that kind of health system.

Now in my outline I noted that the national fee schedules, which were a major advance when they were adopted nearly 15 years ago, are now performing pretty badly even at getting good prices for the Medicare Program.

I use the term >>regulatory capture,== a political science term for describing what often happens to Government-set rates in the U.S. political system.

What it boils down to is industry interests being successful in getting politically set prices that are higher than what a good purchaser could now get in the market, and that is now quite common in the Medicare Program.

The largest example of political influence leading to Medicare overpayment are the DRG rates. When we designed DRG=s, they were intended to be calibrated to national average costs. Hospitals could make profits, but they had to be more efficient than average.

If the DRG=s got out of line, we figured they would be re-based to the new national average costs. But the DRG system is no longer saving money for the Medicare Program.

According to MedPAC last week, the legislatively set DRG rates now give hospitals a profit margin of 15.9 percent above hospital costs and a 24-percent profit margin for teaching hospitals.

I heard the discussion about how high teaching hospital costs were; we are paying 24 percent above the costs for those institutions.

But that amounts to an overpayment of more than $10 billion per year. From 1995 to 1998 when the rates went off, those overpayments are now $35 billion. When there are so many services Medicare does not cover, and when there are over $40 million uninsured, I find that kind of overspending difficult to justify.

But enough on the problems with using the current paradigm. What would a new paradigm look like? How would Medicare function if it had new purchasing tools?

There are many options that I mention in the outline that we can go through in more detail, but they start primarily with targeted areas where purchasing initiatives, as we can see in health plans and private employers, where purchasing initiatives would offer the most benefit to the Medicare Program.

They range from using competitive bidding for standard services and supplies like DME to offering new Centers of Excellence, building on HCFA=s very successful program such as for hip replacements and cancer care, buying disease management and case management services, even offering new benefits like prescription drugs on a competitively purchased basis from PBM=s.

Eventually perhaps even DRG=s and the RBRVS rates could be set by competition, although that is probably not something we should do immediately. So it will take time, but I think a purchasing strategy for Medicare has a great potential for making Medicare a better program, and I look forward to discussing it with you.

Mr. MCDERMOTT. Dr. Scanlon?

STATEMENT OF BILL SCANLON, DIRECTOR, HEALTH FINANCING AND SYSTEMS ISSUES, GENERAL ACCOUNTING OFFICE

Mr. SCANLON. Thank you very much, Mr. Chairman, and members of the Commission. I am very happy to be here today as you consider the task of reforming Medicare=s administration and management. I have always regarded this as an extraordinary challenge to be managing this program.

GAO puts Medicare on its high-risk list. This is a series of programs that have been identified since 1990 as particularly vulnerable to waste, fraud, and abuse.

Medicare was one of the original members, and I think may be a member in perpetuity. In part, not because the program management has not been improving over time, but by the very nature of the task that Medicare has in paying for the health services of more than 38 million beneficiaries and dealing with more than three-quarters of a million providers who jointly determine what services are going to be received, and then have been sending the bills to Medicare to pay.

In dealing with this extraordinary task, I think it is useful to think of HCFA as dividing its role into two different functions.

First, it operates as a health insurer in terms of setting sort of the--or defining the covered services, defining the circumstances under which an individual can receive service, setting rates, determining which providers may participate, and ultimately sort of paying bills.

In this role, it is handicapped in part because it has been a national program. Policies have to be adopted that can be applied uniformly nationwide.

I think it is also--and this is where Lynn and I may disagree--it is handicapped in part by its size because of the fear that its market power may genuinely disrupt markets and therefore that market power is often restrained from being able to operate most efficiently.

The recognition of these limitations has led us to want to rely on HCFA=s other role, which is as a purchaser of health insurance. Namely, sort of through the risk contract program and now through the Medicare+Choices Program.

In that role, HCFA is able to delegate some of its responsibilities to health plans who, because they are smaller and who because they do not dominate individual local markets, they can operate much more flexibly to try and generate efficiencies.

This, though, delegation of responsibility to health plans creates new responsibilities for HCFA to ensure that it is getting value for the dollars being spent.

It must define what is going to be required of plans, how much to pay them, as well as to oversee plan performance and inform beneficiaries about their relative choices and resolve any problems they have with plans.

It is clear that Medicare=s administration involves a relatively spotty record in terms of maximizing efficiency.

As Lynn indicated, there have been points in time when Medicare was an innovator in terms of the fees that were being paid, particularly with respect to the hospital prospective payment system and the physician fee schedule.

Even today there are markets in this country where Medicare is a leader in terms of those fees, but it is not uniform sort of across the country.

With respect to the other key component of the costs, or key determinants of the costs of Medicare fee-for-service spending--namely, utilization--Medicare=s controls have largely been absent.

Unlike private-sector plans which have prior authorization, which have case managers for complex cases, which have preferred providers who may also affect utilization, Medicare has none of the above on a widespread basis.

The problem again I think is the issue of Medicare=s national role. While we acknowledge the private sector=s potential effectiveness in employing these types of tools, we are not fully aware of that these tools entail.

For reasons of proprietary sort of competitive advantage, plans do not often reveal how they choose preferred providers; what their utilization control techniques are.

For Medicare to adopt such techniques, those techniques must be transparent and visible to everyone so that the program=s equity and fairness is also transparent to all.

In moving more toward purchasing from health plans, Medicare=s challenges are very much like the challenges being faced by private large employers today in terms of trying to generate a market where managed competition is the norm, where plans to compete on the basis of quality, and that beneficiary satisfaction from enrolling in plans increases and more Medicare beneficiaries are willing to join such plans.

In doing so, I think there is a key step: which is, to be able to manage the measurement of the plan=s performance and to be able to disseminate that information to beneficiaries.

We need to knowledge at this point that the science of measuring plan performance is still in relative infancy, and that this science needs to be improved dramatically for it to be very effective.

Second, we need to recognize the considerable challenge of communicating information on comparative plan performance to beneficiaries.

The task that is now being undertaken for the first time by HCFA in the form of the information campaign that is being pilot-tested this year and which will be used on a full-scale basis next year to beneficiaries of sort of what their choices are with respect to health plans.

Let me just say a couple of words about fraud and abuse, since it is a subject that GAO has reported on on many occasions.

As you probably are aware, the last audit done by the inspector general revealed that about 11 percent of Medicare dollars were spent for either fraud, abuse, or inappropriate payments, which amounts to about a little over $20 billion of program spending.

For years we had declining resources devoted to oversight of program spending, and the resulting sort of persistence of fraud and abuse was something that we could naturally expect.

Fortunately as a result of the Health Insurance Portability and Accountability Act of 1996, we have guaranteed increasing funding for program safeguard activities, and we can hope to see some returns to those increased funds in the form of reduced moneys being lost to fraud and abuse.

However, the challenge of fraud and abuse is going to remain with us. The reality is we are always only going to be able to review a small proportion of claims.

We are always going to have the difficulty of defining the criteria as to what constitutes a medically appropriate service.

We are always going to sort of have the problem of establishing a strong-enough deterrent effect so that people are reluctant to submit claims.

Today if you submit an inappropriate claim, it is simply returned to you in almost all cases and there is no other consequence.

We need to think about sort of how to change that situation. We need to improve some of our information systems= tools to increasingly improve this effort, but at the end we are still going to be left with a loss of program dollars to inappropriate payments.

There probably is no way in a program structured such as this to avoid that.

I think we need to discuss innovation as a means to find efficiencies for this program. You need to recognize, at the same time, that the Balanced Budget Act lays out sort of many innovations for HCFA to implement.

Unfortunately, it also does not provide all the details needed to implement those innovations, so HCFA=s imagination is going to be challenged over the next few years; and that we need to then engage in a continuing process of finding new innovations to continue to generate new efficiencies for the program.

Thank you very much.

Mr. MCDERMOTT. Thank you. Dr. Waller?

Dr. WALLER. Thank you very much and thank you for this opportunity and thank you for your efforts.

This is an extremely important issue that we all have. There is no question that Medicare is an enormously valuable social program for America, and it is obvious that we have real problems.

It is also obvious that we can all accept responsibility for trying to solve those problems.

I would like to approach it from the point of view of a practicing physician, and a leader in a health care system of some size.

Medicare is extremely complex. There are thousands of pages of regulations, rules, and manuals, instructions, letters, and alert notices. I think we are responsible for that 45,000-page number that has been in the press of rules and regulations that are needed to review for the Medicare Program.

My colleagues in the business office say there are 132,720 pages with which they must deal in terms of the regulatory environment.

Again, we are all responsible for this. This is not to point out the Health Care Finance Administration. There are reasons for this. But in fact it is enormously complex.

Carriers and intermediaries apply rules differently in different locations. We have clinics in Minnesota and Iowa, and a regulation there will be interpreted differently from our clinic in Arizona and Florida.

So it is very complex at that level.

Medicare is also complex at the interface between the physician and the patient. I will be happy to provide documentation relative to that, but the fact is that there is an enormous amount of time consumption documenting what the patient does not have as well as what the patient does have in terms of a medical need at the interface between the physician and the patient.

This complexity has a negative effect on patient care in three ways. It steals time from patient care, and it steals time from scholarly activities that I just heard discussed in the previous panel.

As I look at the medical record over time, it is becoming more of a billing and coding and legal document and less of a document to care for the needs of the patient.

Finally, it creates honest differences of opinion and breeds mistakes. I am concerned that there is more in the media about the fact that the program is riddled with fraud, and indeed there is fraud as Dr. Scanlon said, and we must all have a zero tolerance for fraud.

But complexity is more the root of the problem, in my view. This has contributed more to the erosion in public confidence in our health care system.

Somehow we all have to figure out how to make a better system for the patient, and for providers, and for the Government, but we cannot accomplish this in a current environment of continuous accusations of fraud in the press and, as Lynn Etheredge said, price controls.

There is not an opposition to regulation, but it is prudent regulation and not excessive regulation, and I think that is the environment that physicians practicing in our institution find themselves in.

In the outline that I sent to you, I had a section on private-sector models. We deal with many insurance companies and payers, but we deal with them more as partners through a process of negotiations, and we establish goals for quality and cost and patient satisfaction and try to monitor those results.

Many of the methodologies, as Dr. Scanlon mentioned, are embryonic but we are working on those. I do not know of a single private contract to which we are a party that tries to tell us how to document the number of body systems we must examine to bill for a visit, or whether supervising the supervising physician must be in the same room when one of our nurses tests a patient=s pacemaker.

I think what I am talking about here is micromanagement, to use that term. From our view, the private sector models with which we deal spend more time managing care than managing the system and managing the providers who manage the care.

I think there is a very important, although subtle, difference between managing care and managing the system.

When we think more of managing care we need to think more about analyzing the medical practice, solid data to support change, integrating our services, bringing research advances to those services, and in fact being more accountable for outcomes, cost, and patient satisfaction and letting the markets work.

It is disturbing to me to hear physicians talk about medical loss ratios, profit margins, regulatory alliances, provider fee schedules, premium caps, price controls--we ought to be talking about managing care, not managing the system; or managing those who manage the care.

I think that the private sector models with which we=re familiar offer more of an opportunity to do so.

Let me just say one point about quality. Cost reduction through improvement is the only plausible business strategy for all of us, whether we=re in the private sector or in the Government sector. Cost reduction through improvement is the only plausible business strategy.

Someone has said: We can reduce costs in other ways, but we will not like the price in other currencies. I think that is exactly right.

Quality improvement is a continuous process, and it is not an add-on to what we do. It is not anything other than the need to be woven into the fabric of how we think, act, and feel.

The goal is to constantly improve patient care over time, not achieve a regulatory standard, at least an excessive regulatory standard.

The problem with trying to regulate quality in the presence of the explosive knowledge in health care is that what is quality on Monday is not quality on Tuesday.

If you try to regulate quality on Monday, you put a stake in the ground that makes it difficult to move forward on Tuesday.

So how do we deal with all of this?

In my outline we have some goals for Medicare reform. I am part of the Health Care Leadership Council and most of the people around the table would espouse that page in the outline.

We have to simplify this regulatory environment and the interface between the patient and physician. I don=t know how to do that, but that must be a goal of the Medicare reform activity.

In eliminating real fraud, I think the Department of Justice and the inspector general has gone a long way on June 4 to establish guidelines to try to separate the difference between what is real fraud on the one hand and what are interpretative errors and honest mistakes on the other, but there is a huge >>if.== And the >>if== is if those guidelines are followed, and I can tell you they were published on June 4 and they weren=t followed on June 18 in my own organization--I would be pleased to comment on that, if you would like--long-term Medicare needs, in our view, total restructuring based on the five principles that are in the outline that I have for you, and I will just be very brief:

A patient-centered system empowering individuals to select physicians and hospitals via the insurance plan of their choice.

The Federal Employee Health Benefits Plan gets positive remarks. I heard Dr. Altman say they provide choice among private insurance plans with the defined Government contribution. You know more about that than I.

Choice in the private market.

MULTIPLE PROVIDERS

Multiple insurance options. Why multiple? I think multiple providers promotes the competition that we talk a lot about, patient empowerment, personal responsibility, innovation, and it encourages the change that Mr. Watson was talking about.

Competition based on value. For us, quality over cost equals value. And quality to us means better outcomes, but also better service.

Innovation, research, and education. You heard an hour and a half about that. Research and education are the underpinnings of innovation.

And finally, the Government role we think is coordinating competition among health insurance plans in a manner similar to the Office of Personnel Management of the Federal Employees Health Benefits plan makes sense.

Move away from the insurance business.

A Government payment to each Medicare beneficiary based on a scientifically valid risk-adjustment method.

Providing support for research and education, but also hospitals serving rural and low-income populations.

Is the Federal Government capable of doing this? One model is the Federal Employees Health Benefits Plan of how the Federal Government can run such a program based on competition and choice without trying to micromanage those of us who try to provide care.

In a nutshell, I think individual choice, individual decisionmaking, individual responsibilities, and a basic level of coverage.

Thank you.

Mr. MCDERMOTT. Thank you.

Can I ask a question to start, because it seems like there is an inherent conflict in what the three of you are talking about. That is, HCFA operating as a manager of an insurance program, and also deciding what is covered.

If they find something new, or innovative, or whatever, and it may cost more or does not save money or whatever, or is an expanded treatment, their fiscal side may say we should not cover it.

I wonder if there isn=t a need for some kind of medical consumer organization that makes decisions about when new treatments should be covered, or changes in the medical delivery system that would be acceptable that then would be paid for by HCFA.

I mean, how do you deal with that question?

Mr. SCANLON. Well I think we might turn to Commissioner Vladeck to tell us more about the details of the process, because certainly the medical bases for new procedures or services is an important factor in determination of whether or not they are going to receive coverage, or are going to be covered.

I frankly have never heard that the fiscal side dominated in terms of coverage; in fact, that there is more deference to not interfering with the practice of medicine on the part of HCFA than we might actually sort of be comfortable with, and which it may not be the same as the private plans, as well.

Mr. ETHEREDGE. I would just add that I think you are getting into an area--I think the biggest problem for Medicare is not only the new technologies.

I would agree with you there that we need an organized, publicly accountable way of deciding what Medicare is going to pay for, and that would be an ideal role for the academic medical centers if we were looking for a quid pro quo.

Since they are the place that innovates, maybe we should require them, or ask them to do cost-effectiveness evaluations so that we have a scientifically valid basis for making judgments.

The biggest problem for Medicare is the huge variation in clinical practices that are paid for, and rules that vary, as Dr. Waller pointed out, region by region and carrier by carrier.

It is a big problem in particular because Medicare has been structured to recognize and even preserve whatever local patterns of care are there.

It was basically franchised through the PRO Program contracts to mostly local medical societies to determine medical effectiveness. So an ability to manage in effect clinical practice, even when we know that there are areas that were paying for a lot of unnecessary care, just is not there.

So I think it is a key problem, but in terms of the long term it is not just the new innovations; it is how do we evaluate the cost-effectiveness of the base.

Because we know from the Mayo Clinic and other places that if we apply good science-based medicine we would be spending a lot less on the Medicare Program than we are now doing and we don=t have a way to effect that.

Dr. WALLER. It is an enormously complex problem, but I think Lynn is right. I think academic health centers have a good opportunity to do clinical, prospective studies to determine the scientific efficacy of a treatment, but also its cost-effectiveness.

We spend more and more time on that at our own institution. But I must tell you, not too long ago we engaged in a study about a specific treatment and, in concert with an insurance organization in Minnesota, went to the State legislature and talked about the fact that a certain treatment was not scientifically efficacious at that point in time, and that more study was needed.

But ultimately the State mandated that that be paid for for a whole variety of reasons that were not based on scientific evidence.

So I think it is a very difficult arena. The best change, though, is clinical, prospective studies within an academic setting to at least assess first the scientific validity of a treatment, and then its cost-effectiveness as part of that study.

Mr. VLADECK. If I could just add, in 42 years as HCFA administrator, nothing I did generated as much controversy or as much criticism to this day as insisting that a new surgical procedure, which initially had a perioperative mortality rate of 20 percent, be subjected to a controlled clinical trial before Medicare began paying for it outside of the trial.

There are still stories running in the popular press about what an outrage it is that Medicare beneficiaries are being denied care.

So if we are going to be serious about this, there is an issue of public education and public attitudes that people need to understand is 180 degrees different from that of the consensus in the academic community.

Mr. MCDERMOTT. Senator Kerrey?

Senator KERREY. First of all, gentlemen, I appreciate your testimony. I presume I am correct that all three of you have appeared. I have seen you many times.

You understand the general workings of Government in Washington, DC? Is that a correct presumption? [Laughter.]

I just spent a week at home and one of the things that I heard repetitively talking to people who are working is their difficulty in paying for health insurance today.

Indeed, one of the striking problems that we have got is if your income is low, if you make $7 or $8 an hour, you are not eligible for Government subsidies; but if your income is higher, the higher your income goes the more eligible you are for Government subsidies.

I find an increasing number of people who are simply saying >>we just can=t afford to buy it.== We don=t pay any income tax, or our income tax rates are relatively low; thus we are eligible for a lower subsidy.

I just offer that because when I am home that is the sort of problem I am facing of growing numbers of people who are working and trying to support their family simply not being able to because the law does not provide them with a subsidy.

But let me ask you: In your testimony--and I was struck both by your testimony and the gentlemen who were here on GME that you do not start off talking about governance. You do not start talking about, given your vast amount of experience with governance, why you don=t talk about the problem of making these decisions.

I find the best applause line, the best laugh line, actually, if I am trying to get an audience at home to laugh at something I say, which I oftentimes have no difficulty doing, I will say: I am from Washington, DC, and I am here to help you.

And they will say that=s a funny line. We don=t trust that you can collectively solve these problems. And thus I was struck by what Bruce was saying.

I know you can give repetitive examples of that, of citizens who do not understand how much of Medicare is paid for with general revenues, that when you hear somebody say let the Government pay for it, there is no such thing as >>the Government== paying for it, it is some other taxpayer paying for it.

There is a lack of appreciation for that fact. You would think, given the demands right now and the political environment right now, you would think that we are underfunding Medicare. It is growing by $20 billion a year, but I do not see any folks in the audience here today, but typically these hearings will have an audience full of people holding up signs saying >>no Medicare cuts.==

We are allocating more and more and more of the total amount of the Federal budget to people over the age of 65, and less and less of our money to children.

And yet our political rhetoric is just the opposite. We all talk about children are our future, and so forth, but the graduate medical education issue is a terrific example.

The average resident reimbursement is $76,000 for Medicare. But for a free-standing pediatric hospital it is about $400.

They can talk all they want to about saying, well, we don=t want it in the appropriations process because we have watched how that works, but what they are worried about is losing money. Because in the appropriations process we have less and less money available for everything as a consequence of a growing share of the total budget that is going to these other mandatory programs.

That is the political lay of the land. The political lay of the land--I mean, it is Government of, by, and for the people and right now, it seems to me, as I listen to people talk, there is a substantial amount of misunderstanding about what this program does, where we get the money, and who is being taxed.

There is about $120 billion in payroll tax to pay approximately $200 billion this year, but the percent of the payroll tax that is being allocated is shrinking.

What is growing is the general revenues. The general revenues is paying more and more and more of Medicare, and we have less and less general revenue therefore to pay for children=s programs and other sorts of things that are, I think, significantly underfunded.

When I hear these guys saying I=m against putting GME in the appropriations process, what they are saying is we know the deal in Washington right now is there is less and less money available for appropriations and we do not trust that we are going to get it unless we get it written into law so the Congress cannot change it.

It is much harder to change those laws. I wonder if you gentlemen would talk about whether or not you are optimistic based upon--I mean I don=t know if you intentionally left out--I=ll start, Lynn, with you.

I mean you=ve been around here long enough. When you compare Medicare to what the private sector is doing, the private sector does not have 535 members on their board of directors elected by persuading a majority of people to vote for them.

In Nebraska, 80 percent of the people over the age of 65 vote. You know, Jay Rockefeller and I tried to get some people to show up at a Commerce Committee hearing on the E-rate, where the E-rate was in danger, and we had a difficult time getting people to show up for it, because all that was was education and children.

But you will have no difficulty--if this Commission was considering today some changes requiring let=s say increased premium payments, we would have no difficulty filling this room with people that would say >>no== to that.

So I wonder, gentlemen, if based on your considerable experience with Government of, by, and for the people, especially at the Federal level, you can comment on your optimism about the board of directors for Medicare, the 535 Members of Congress, being able to get it right?

Mr. ETHEREDGE. Well I started to get worried when I heard you talking about my long experience, but in truth when I first started working on Medicare and Medicaid at OMB, the combined total of those 2 programs was $10 billion.

They are now over $300 billion in Federal spending. So I am not overly optimistic about our ability to control these costs if we continue business as usual.

I also think the problem is essentially political. It has to be, I suppose, in any Government-run program. I alluded to this when I talked about regulatory capture.

But in truth politicians face a very difficult problem. There is almost no constituency for controlling the costs of the Medicare Program. Having been at OMB, I can tell you, looking around for your friends on your side, almost no one; a few Budget Committee chairmen, occasionally.

And when you look at who is on the other side, every district has dozens, hundreds, sometimes more, of interests who want to see Medicare expanded. Medicare is a huge business in almost every area of the country.

There is a dynamic for change just to grow revenue.

We used to think in the early days of Medicare that we had medicine----

Senator KERREY. Can you just----

Mr. ETHEREDGE. Go ahead.

Senator KERREY. What I was trying to get at was whether or not you think that our bosses, the people of the United State of America, have a sufficient amount of understanding of Medicare to support the kind of changes necessary to make the program better.

We work for the people. Unlike a board of directors who work for shareowners in a private-sector company, it is a much different kind of contractual arrangement.

If the people are not informed and prepared for the change, no change is going to happen, especially in a program like this.

Mr. ETHEREDGE. Right. No, I do not think the public does understand the dynamics. I think they feel that probably most of what we pay for in Medicare is medically necessary and the program is growing because of the advance of science.

I think the expert opinion is we are paying for a lot of things that are not medically necessary. A lot of the growth is revenue driven. So I think you have a major problem of not only deciding what the change is, but actually carrying it out.

I do think that in many ways a market-driven approach has more legitimacy than a Government-regulated approach.

People like the idea of being able to choose. I think they like the idea that people have to compete----

Senator KERREY. Do you have any data to----

Mr. ETHEREDGE. Pardon me?

Senator KERREY. Do you have any data to support the assertion that people like to choose in health care?

Ms. STEELMAN. No more so than in their cable TV system.

Mr. VLADECK. No, there=s data on that.

Is there any data? Are employers happier in multiple-choice plans?

Dr. WALLER. I think we have some data, Bruce, that speaks to that a bit.

Senator KERREY. Excuse me, Bruce. I love your question, but would you mind if they answered mine before they answered yours?

Mr. ETHEREDGE. Why don=t we do that. I think it is a tough job.

Let me say, one thing I am suggesting in a purchasing strategy is that right now the major management strategy--which is to set price controls in the legislature--focuses all of the interest groups right in there on the update factors, and the fee schedules.

A purchasing strategy is more run by the executive branch. So it is a different politics, and it may be more able to achieve economies. HCFA has done things like Centers of Excellence where they can document that there are quality improvements and have objective measures. That seems to me to have been a successful program.

But I think the key here, what I am talking about is PPO-type arrangements in contracting where HCFA would need to demonstrate both higher quality and lower cost.

For example, if you go contract with DME suppliers in a city let=s say with 40 suppliers, if you choose 8 that offer lower cost and 24-hour services, the beneficiary would save money and get better service, so I think you can explain that.

If you contract for home health and sort of pay it on a cost basis, the costs may go down because you aren=t paying so much travel time for aides.

You could have lower costs per service. You could offer shorter visits. For example, in the Connecticut Avenue corridor, rather than having people spending an hour or more traveling around Washington, you could assign a home health aide for an apartment building, for example, if you were contracting efficiently.

So I think in areas like improved chronic disease management, there are programs for congestive heart failure patients where that patient gets called every morning to see how they are doing, and what their wait was like.

Patients like that, if someone is checking up on them. Those simple kinds of case management, we=re finding such as in congestive heart failure, tend to reduce the costs of hospitalization by 50 percent.

So many of these kinds of initiatives for purchasing are areas in which I think you can demonstrate, or we will be able to demonstrate if we test them, we will be able to demonstrate that we can provide better services for the public at lower cost, savings to the Government, and savings to the beneficiary.

But in order to convince them, we have to first start these R&D projects, which is what we are basically talking about with purchasing, have a solid base of evidence that they work, and then I think we can take it out to the Congress and the public and tell them why we are doing this.

But I also think there have to be PPO arrangements where you give people a choice. They can stay with fee-for-service. If they=ve got cancer, they would get an opportunity to go to a cancer center that has better outcomes; it covers the prescription drugs; it gives them 24-hour emergency service, and so forth.

So I am hopeful that if you pursue the development of a purchasing strategy that within a couple of years we will be able to go back to the American public and say we have got a way that saves money and gives you better care at the same time.

We could not do it today.

Mr. SCANLON. Behind the comment I made about HCFA being restricted because of concerns about its market powers affecting providers I think was the issue of governance that you raise.

We do have a concern that there needs to be a balance between the interests of providers and the interests of beneficiaries and the interests of taxpayers in this huge program, and the striking of that balance has been left to that 535-member board of directors which has been doing the job, and the question is sort of whether you are content with the balance that has been struck.

Certainly the information that flows from the different parties is a key part of sort of how the balance is struck.

I think as we look for efficiencies we may want to change some of that. But at the same time I think we need to be sort of cautious.

When Lynn talks about having a competitive situation where we are going to have 40 providers, and we are going to choose 8, for some industries and some types of providers Medicare is the business.

And if Medicare were to come into a market and choose 8, the other 32 may be out of business. There is an issue then, what is competition going to be right in round two, or round three if the number of suppliers dwindle?

We have reported in the past on how the Arizona Medicaid Program has been very successful at using competition to contract with managed care plans, but they have devoted incredible amounts of resources to working with plans to make sure there is competition, and yet they still have I think, or should have the fear that plans that lose in one round are not necessarily going to be there in the next round to bid and to keep prices down, and to keep quality up.

So this is a dilemma I think we face when a purchaser is such a dominant part of the market that competition has difficulty in yielding the benefits we see in other markets.

Dr. WALLER. Is your question: Are we optimistic?

Senator KERREY. Yes.

Dr. WALLER. I think I could give five reasons why we are. I think----

Senator KERREY. Would Congress be on the list?

Dr. WALLER. Yes. Of course. [Laughter.]

I think maybe before you came in, Senator Kerrey, the opening comments that I made was that Medicare is one of the wonderful social programs of America, if not the globe. What has been accomplished has been enormously of benefit to American citizens.

The problem is that it has outgrown the management structure that it began with in the early 1960=s. Who is responsible for that? All of us.

Physicians are responsible for it, trying to administer it.

Patients are responsible.

All of us are responsible for solving the problem. So I think that that is an enormously important program.

One of the reasons for optimism is we are starting from the strongest base on the globe. How to solve the medical health care issue is a global issue. Every country on this globe is having similar, if not more difficult, problems.

Second, you know better than I, trade policy, immigration law, environmental legislation, does not happen overnight. It is going to take decades to resolve the issue, and I think we are making progress.

I think from our perspective we see optimism there.

I hear more from the Congress as I visit the offices that there is more opinion that research and education innovation are the key to getting the costs down; that quality improvement is the key to getting the costs down; and when you get the costs down you improve access. And that is not going to happen overnight.

I am optimistic because of the young people coming into American medicine. They are extraordinarily bright, and they will take health care in America to a new level.

I am also optimistic because there are more and more questions being asked about the appropriateness of health care than ever before.

How do you reduce hospital admissions?

How do you reduce inappropriate tests?

How do you reduce unneeded surgical procedures?

What about guns, alcohol, cocaine, domestic abuse, and tobacco?

How do we record only useful information only once?

What do we do about the unwanted and unneeded procedures at the end of life?

Those are the kinds of questions that are increasingly being asked across this country.

So I would have to say the golden age of medicine is not what many tell me of the past; it is ahead. I think there are many opportunities and many reasons to be optimistic.

I also just gave one example of the Federal Employee Health Benefit Plan as one model that is worth serious consideration in the view of many who are trying to look at this enormously complex problem, which has been a successful program that the Federal Government has had something to do with--everything to do with.

Mr. MCDERMOTT. Mr. Vladeck?

Mr. VLADECK. Dr. Waller, something you talked about confused me. You talked about some of the partnerships with private insurers to improve quality and so forth.

We don=t have any of those in New York, but we don=t have a regional monopoly, either, so that may have something to do with it.

But I am curious about your description of that, because that was very much what HCFA was trying to implement with its second-generation Centers of Excellence Program, and the Mayo Clinic declined to participate.

I wonder if you could explain that decision to me?

Dr. WALLER. A few years ago--well, the Centers of Excellence is an interesting concept. If you are a Center of Excellence in one town and you are 20 miles away from that Center of Excellence and you are not called a Center of Excellence, the implication is you may not be excellent.

I think that is of some sorry. But we applied to be a Center of Excellence, and as we went through the process it was so enormously complex that we had to walk away from it.

Now I think that that does not mean that that cannot be solved, and I think the concept is certainly a viable one, but we did walk away from that particular instance a few years ago, Bruce, and we would be happy to visit that again.

I guess the issue of private contracts, we have an example with Hormel Foods Co. which is 40 miles away. Now they are for the most part a captive audience, but they also have worldwide employees for whom we provide third-party administration.

It is basically that we will take care of you. At the end of the year we will see what it costs and try to negotiate how best to pay for the care of those employees, and try to minimize the paper, try to minimize the claim forms, and just try to take care of those 20,000 people in that particular organization.

I think the point is that private contracts are negotiated between two parties who want to work together. With the Medicare system the way it currently is, one party has more of the power to dictate the terms. That makes it more difficult.

Mr. VLADECK. But the one party is not permitted to enter into private contracts; it is----

Dr. WALLER. Right. I understand.

Mr. VLADECK [continuing]. Required to bid competitively and make all of the terms public, and I don=t--this is back to Senator Kerrey=s question.

Dr. WALLER. Right.

Mr. VLADECK. Even if you delegate to private plans, how do you get around the problem of the accountability that we require in the Government?

Dr. WALLER. Yes.

Mr. VLADECK. At some level there needs to be a public accountability in the financial relationship between the purchaser and the provider, or the plan that we insist on in public programs that we try to do everything we can to avoid in the private sector because they=re such a pain.

Dr. WALLER. Maybe Lynn has the answer to that part of the question. [Laughter.]

Mr. ETHEREDGE. Nobody looks eager to jump in on it.

Let me offer two thoughts on that. One is, I do think Medicare is going down absolutely the wrong path in trying to micromanage, but they have to to deal with all the fraud and abuse.

All those pages of regulations are there because someone tried to get money out of the Treasury and you had to write a regulation to cover it. So I am very sympathetic with that.

I do think we might be able to move in some areas to more toward a bank audit model. What we have got now is, in the hospital industry in particular, but in health care in general, is kind of the worst kind of micromanagement you can see in our country.

Only a failed savings and loan has this many people sitting in there looking at, you know, every patient, every service, reviewing claim by claim, and trying to second-guess the managers who are there, particularly when they are professionals like doctors and hospitals.

So we have got far too much scrutiny and we are going even farther in that direction with all these fraud and abuse controls.

One way to do this might be to take a bank audit approach----

Mr. VLADECK. You=re not describing a program I=m familiar with, Lynn.

Mr. ETHEREDGE. OK.

Mr. VLADECK. I mean, what you just described has nothing to do with the way the Medicare Program currently operates.

Mr. ETHEREDGE. You have reviews, and claim-by-claim payment decisions----

Mr. VLADECK. A 1-percent sample?

Mr. ETHEREDGE. Pardon?

Mr. VLADECK. On a 1-percent sample of inpatient claims? A half-a-percent sample?

Mr. ETHEREDGE. For hospitals, you=ve got a PRO review--my impression was you still have PRO reviews.

Mr. VLADECK. But we do not do random samples of PRO=s any more. We only do focused quality studies. I mean, what you are describing just is not the way the Medicare Program operates.

Mr. ETHEREDGE. Well you=re looking at home health, you=re looking at lab, at these other areas--OK.

You may already be there on some of these, on the bank audit approach, but you need to be able to get out of--I think you have some of these detailed regulations, which I would agree with Dr. Waller, we can move to a different model. But maybe you have already gone a long way in that direction.

I also think there is a fundamental problem of the way Medicare is structured of allowing the assumption that every provider who is licensed is in the program.

Therefore, when you start getting bad actors you have either got to throw them out of the program or leave them in.

In the private sector, if you used a purchasing model, you really would not be doing business with those folks.

What I am trying to get at here is, if you can work with providers you trust you do not need to do quite as much control.

Mr. VLADECK. Absolutely.

Mr. ETHEREDGE. And you do not have to be in there with all this micromanagement. Now you=re telling me, presumably, that you are trusting most of the providers. I think that is good. But I would agree with Bill, a large part of our administrative problem is having to deal with a lot of small, inefficient providers who are at the margin.

They require an inordinate amount of resources in review. Most providers do not. I agree. You don=t go after them. But you never even have the resources to go after the small, inefficient providers.

You have also got a problem with those providers because they tend to have higher prices. If you assume that everyone is going to be in the program, you have to set prices that lets everyone in, and that means that you are overpaying lots of other folks.

So again I think you can get away from these kinds of problems by developing more preferred provider arrangements with the people you do not have to review with the people that are trying to do a good job, and not make them subject to the same requirements, and you seem to have backed off on some of the administrative reviews.

So I think there are ways out of this, but they come with being able to say there are good guys in this program. We will administer them a little bit differently and we will have a different relationship, a preferred relationship with those; we try to get more patients to the preferred providers, and we shift our business there.

Mr. VLADECK. But, seriously, could you do that under the current standards of accountability we have?

What if somebody who doesn=t get selected has a grievance? Would we permit a government in this country, in this legal system, to behave in that way?

Mr. ETHEREDGE. A fair question. I think as a HCFA administrator one would need to have objective standards--the kinds of things you have done with Center of Excellence--you have to have objective standards if you are going to do a procurement.

We do not allow everyone who wants to build a B-1 bomber to build a B-1 bomber at Government expense. We actually do a procurement in making a decision.

But an administrator who wants to pursue that way has got to have it laid out what he is buying, and he has to be accountable for doing that. And I think HCFA needs to do that.

Mr. VLADECK. Then we=re talking about another 45,000 pages of regulations.

I mean, I=m not disagreeing with you. I think it is very important that we find ways to permit the Medicare Program to operate much more flexibly. But I think it is time we had a serious discussion about this, and a serious discussion begins by recognizing that it is not as inflexible as it currently is because people like being bureaucratic.

It is because, in the American political and legal system, every one of those 32 DME suppliers who you don=t want to contract with is a constituent and is a citizen with fifth amendment rights, and you are going to have to rewrite not only parts of title 18, you are going to have to rewrite large parts of title V of the U.S. Code, and raise some basic issues about how Government operates if you are going to give the Medicare Program that kind of flexibility.

Now that might be a very good thing to do, but I think it is important to acknowledge up front that that is what you are talking about.

Because what you are talking about is saying: Just because you have a provider contract with Medicare, that does not create a due process right, for example. That would be a very important step forward in giving the program the flexibility it needs to operate.

But you have to get the Congress to legislate that.

Mr. MCDERMOTT. Commissioner Howard?

Mr. HOWARD. I have a question to follow up with Bill Scanlon=s division of responsibilities of HCFA.

You had HCFA as an insurer, then you had it as a purchaser of an insurance. The question I have is whether that function should be separated and we should have another entity to do the purchase of insurance and HCFA stay as the insurer, or vice versa.

I just want to know whether we should divide that function up at this point in the game and go to something else.

Mr. SCANLON. I think one of the concerns that has existed over the years is whether HCFA has focused too much on the fee-for-service portion of the program, and that it was not giving sufficient attention to the HMO or the risk management, or the risk contract sort of portion.

Some of those concerns are being addressed now. There has been a reorganization of HCFA, as well as sort of the considerable change that is incorporated in the Balanced Budget Act of last year in laying out the Medicare+Choices Program.

I think that you can see within HCFA, from our observation, that there is a great deal of attention focused on the risk contract, or the Medicare+Choices Program.

Whether we are losing anything in terms of having people that are working some on both I don=t know that we know. We certainly have people now that are focused on the success of Medicare+Choices in a way that we didn=t have I think in the past.

We also need to sort of be aware that beneficiaries will be continuing to move back and forth between these two programs, and so there are some economies and information that needs to flow between the fee-for-service and the managed care side as well.

Mr. HOWARD. My point is that a part of the organization says we are now going to make choices available, and one of those choices is the other part of the organization where there is a CEO at the top.

The CEO says, well, I want to keep the insurance function going as long as I really can. I mean, there is no incentive to me for you not to promote your own product.

Mr. SCANLON. Well, except that I think in some respects the insurance function has compromised the long-term sustainability of this program.

I think we are here today in part because we are looking for something that works better than the fee-for-service Medicare Program.

If we can make the choices that exist in Medicare+Choices and with health plans that have the kind of flexibility that Lynn has been talking about, then that CEO may be there for a longer term over a fiscally sound program.

Mr. HOWARD. But if I was going to put a Medicare Choice Program together where I was offering options of various insurance plans, I would probably go to General Motors and ask them, let me have the personnel director, because that is the person who has been used to making choices available to people, as opposed to somebody in HCFA.

I mean, that would be my criteria for the job. This is what you have to be able to do in order to do this particular function, rather than being an insurer.

I mean, I think this is a different function.

Mr. SCANLON. We agree, and we have talked before about the fact that this is a new task for HCFA, and that this is a task that involves activities that they never really were engaged in before.

And they, I think, have recognized it as well in terms of some of the recruitment of top management, and to bring in people that have experience in this area to lead some of these efforts.

Also, the need to continue to sort of develop sort of their strength in this area, as well.

Mr. MCDERMOTT. Commissioner Steelman?

Ms. STEELMAN. Thank you, Mr. Chairman.

I would like to focus on the two threads I think that so far have come out of Senator Kerrey=s and Mr. Vladeck=s observations that the things we would do at HCFA to move along the line that Lynn recommends are not commonly performed in Government programs.

And why, given the amount of time you have put into this, Lynn, and the amount of time you have in Government, why do you continue to recommend them? And why do you not recommend something that you were well known for some years ago called >>managed competition== in Medicare in which many of these functions would in fact be outplaced to entities that have independent authority?

Mr. ETHEREDGE. Well, first, I have recommended--we have offered choice of managed care plans. I think that has a great potential in Medicare.

I am focused on for this discussion and some other work on fee-for-service because that is where most of the dollars are, and that is where most of the people are, and because it is where we have got to develop better management tools.

Ms. STEELMAN. But if the recommendations amount to really trying to make a cat fetch, which is what I hear this morning, why not just get a dog? [Laughter.]

Mr. ETHEREDGE. Let me explain sort of the vision I have got of the program, because I think maybe that will help.

We now offer basically--I am oversimplifying--two choices of the renaissance model HMO which takes care of everyone and does everything, or fee-for-service. We know this renaissance model fully capitated system, these are hard to build, hard to manage, it takes decades, maybe even 100 years to build first-rate centers, I see a future for the Medicare beneficiary as having a range of choices--not only a choice to enroll in a health plan, but also if they=ve got cancer a chance to enroll in a cancer care program that may be capitated for cancer care; a patient who has congestive heart failure being able to choose a program, a center of excellence or a program that offers benefits for congestive heart failure patients; a patient who needs home health being able to choose an efficiently managed home health agency that may be able to give them a 20-minute visit at a low cost because they are efficiently managed.

So I see Government as contracting here. Purchasing would set up a series of contracts that broaden the range of choices for, if you would, kind of PPO=s to fill in that range to give us a whole spectrum of choice between a capitated system and a fee-for-service system.

Ms. STEELMAN. But I assume all of those entities would be bound, just like they are under current law, to Medicare=s payment and coverage decisions. So it has the aura of choice, but it really is not fully formed because you are not able to independently obtain benefits or decisions outside the 45,000 pages of regulations that bind the underlying program.

Mr. ETHEREDGE. Well, first, they=re preferred provider groups so hopefully, as Bruce described, HCFA has been able to work out some less intrusive ways of dealing with good providers.

So I think it is an option. The key, and the National Academy----

Ms. STEELMAN. So obviously it would require a fundamental change in law.

Mr. ETHEREDGE. In the NASI report, what we said was that HCFA, to demonstrate these possibilities, should be able to waive everything except the basic benefit package.

So you would be assured of getting at least as good benefits as you did under Medicare.

Ms. STEELMAN. So you would give HCFA the authority to waive all law except the benefits package? All 45,000 pages except the benefits package?

Mr. ETHEREDGE. I think that is basically it, yes, to demonstrate purchasing on a demonstration basis with congressional oversight.

Ms. STEELMAN. I was just trying to get the nature of the cat down here. I think I just understood it.

Mr. ETHEREDGE. OK.

Ms. STEELMAN. I would just like to ask one other question of Mr. Scanlon.

You said the very nature of the beast is what makes it subject to the kinds of intense oversight needs that are generally unsuccessful.

What did you mean by that? What did you mean by >>the nature of this program==?

Mr. SCANLON. It is the nature of the program in terms of the number of beneficiaries, the number of providers, the fact that we cannot possibly try to determine on an individual basis whether a service is medically necessary or not.

Ms. STEELMAN. So you meant the centralized control for 38 million people and three-quarters of a million providers----

Mr. SCANLON. Right. It is both impossible and not cost-effective. You do not want to do that.

Ms. STEELMAN. Is there another system in the world that has this kind of centralized control for that many beneficiaries?

Mr. SCANLON. I=m not fully aware of all the details of some of the other national health insurance systems, but in various areas they do have this kind of control and more.

Ms. STEELMAN. They are not emanating from a single authority, though. They=re done--they have much more regional and local control than HCFA does.

Mr. SCANLON. Well that=s true, and we exercise some local control through the contractors, and the contractors are the ones that--the intermediaries and carriers establish the actual medical policies that are used to determine coverage.

I think that in many respects this is an extraordinary amount of control, but at the same time individual health plans will sometimes exercise control that it starts to approach this when they are dealing with providers.

When we talk about this flexibility and micromanagement, that also is happening within managed care.

Providers will talk to you about how intrusive the managed care organization is in order to be a participant, as compared to Medicare, where there may be that many pages of regulations and rules but it is less micromanagement than some of the managed care organizations.

Mr. MCDERMOTT. Commissioner Conway-Welch?

Ms. CONWAY-WELCH. Given the fact that we are talking about reform right now----

Mr. MCDERMOTT. Please pull the microphone toward you.

Ms. CONWAY-WELCH. I=m sorry.

Given the fact that we=re talking about reform at the moment and the 45,000-plus pages of regulation and the other couple hundred thousand that tell you how to read the 45,000, there were several suggestions of the idea of a bank audit model, or Commissioner Vladeck mentioned title V and title XVIII rewriting--I realize it is not anything that is easy--are there other specific, targeted types of reforms within this highly regulated structure that seem to be possible, or that we should be thinking about?

And I would address that to any of the members.

Mr. ETHEREDGE. Well, the first one I mentioned was that you ought to re-base the DRG system. I mean, overpaying by over $10 billion a year is just crazy. OK? That would be on the top of my list.

Second, I think you actually need to do a lot of studies in Task, MedPAC, and others, to try to answer that question to look at where Medicare may be--is overpaying and where it could improve quality.

I have got my list. DME, lab, and others; home health. I would target it for any area where you have large amounts of fraud and abuse.

I mean, it seems to me that is why you would use a preferred provider organization.

So I think--well, go ahead, Bill, you=ve got a list.

Mr. SCANLON. I would tend to agree with Lynn in the sense that Medicare is the sum of its many, many components, and that each one needs to be addressed individually, and that the particular problems that you need to deal with need to be targeted on each component.

The problem, therefore, though is that you are going to start to generate more pages. Because I mean if you think about these regulations, you can also think about them as purchasing specifications: this is what we are willing to pay for, under what terms.

And if we are going to change those, we are going to have to have new pages in order to do that. And there is that dilemma that--and again we have talked about the balance between providers, beneficiaries, and taxpayers; it=s sort of, do we become more aggressive in a way that impacts on providers, and that therefore go to the board of directors and ask for relief?

Mr. MCDERMOTT. Commissioner Watson?

Mr. WATSON. I notice how we sit here and have an elaborate discussion on Government=s role in Medicare. What about providers and other kinds of programs that commit themselves to Medicare and then in midstream decide to abandon them--and you know how difficult it is for seniors to accept change--and leave programs in limbo?

This happens all over this country time and time again.

I just wondered what your thoughts were on that.

Mr. SCANLON. We certainly recognize both the cost in terms of beneficiaries as well as that there are some costs to the program as well when providers leave.

I think this is one of the areas, or one of the issues that leads us to be cautious about using sort of competition and sort of greater flexibility, because we need to recognize that there are costs associated with change.

And, depending upon the individuals, depending upon the services, those costs can be quite high.

We have seen over and over again in the area of nursing home care, which is supported by Medicare and by Medicaid, that the idea of people leaving a nursing home is something that has very serious consequences in terms of health.

And, therefore, there is a reluctance to close nursing homes even when we find quality problems.

There would be, I would think, very legitimate concerns about trying to choose nursing homes only on the basis price, and therefore forcing people to change homes because we did that. So that is probably the extreme, but with other services it is important, as well.

Mr. ETHEREDGE. I think it is a key in my mind as to whether people are leaving the program for the right reason.

If they are leaving the program because they are substandard, they are inefficient, like patients do not want to go there and they are losing money, that is probably a good thing for the program.

The kind of competitive model I am thinking of is that those kinds of situations would occur probably more often--inefficient and low-quality providers would go out of business, but they would be going out of business because there would be higher quality providers providing better service more efficiently that people had chosen.

So if we structured the system in that way, I think we would be using competition to improve the program and it would be easier to sell the beneficiaries because they in fact would be moving to better delivery systems.

Mr. MCDERMOTT. Dr. Tyson?

Ms. TYSON. Over here we were just commenting on the fact that the barriers that have been raised here to reform strike me as--I am probably a reformist at heart--but they strike me as this is a very powerful case being made this morning for restructuring as opposed to reform.

By the way, to answer your question, Deborah, about are there other systems, I did make the observation that other systems do not have the problem of lawyers, which we have, as a problem.

I have a question, though. My serious question is: I am very interested in how changes in the medical system coming out of, say, gene therapy or telemedicine, the whole set of technological revolutions going on around us, which if you don=t incorporate into our discussions affect your notions about the possibilities or the pros and cons of reform versus restructuring.

This Commission is supposed to address long-term issues. The Balanced Budget Act of 1997 made a lot of progress at addressing short-term issues in Medicare, and actually the situation is much improved.

But if we are looking at how to change a system so it works better in 2030, we have to take into account the reality that the system structurally and biomedically and technologically is changing dramatically.

So my question is: Can you help me think through, help the Commission think through, the implications of those changes?

Dr. WALLER. Well I will take a crack at that.

I think the key is innovation, obviously. I think the key is practicing medicine within a spectrum of inquiry, is basically what it is all about.

I think if you want to use an example of the heart, I think in our institution we like to be able to do, for example, the best bypass procedure at the most reasonable cost, but we are also interested in the risk factors in children to avoid the need for that bypass 50 or 60 years hence.

Right at the moment, society does not choose to pay for that type of investigation as much as they might be willing to pay for the bypass itself.

We are also interested at the left side of the spectrum in the molecular genetics of why some patients have elevated cholesterol.

So I think it is practicing medicine within a spectrum of inquiry in addition to this whole new body of research we call health delivery research, which is so important to all of us, and which Dr. Eisenberg is trying to do a great deal about.

I think there is a growing support for the fact that innovation improves quality, and quality reduces cost, and cost improves access.

I think that I am concerned that when we are in an environment where there is so much about fraud, and in an environment where we have been under price controls since 1984, and in an environment where there is excessive regulation, that innovation is not going to take place.

I think that when we look at our own organization, our researchers in the early 1950=s discovered cortisone and that was given to the public free of charge through medical publication, and that was done because of the environment that allowed innovation to take place.

The recent publicity about diet pills and the effect on valvular heart disease came out of our institution, and that was because there was an environment where innovation was able to take place. It is getting harder to do.

I think if you take the long view dealing with price controls, and dealing with the regulatory environment, and trying to sort out what is real fraud from interpretative errors and honest mistakes I think are some of the keys to making sure that we can keep innovation at the forefront of the health care system.

Mr. MCDERMOTT. Dr. Altman?

Mr. SCANLON. Your question raises a real issue with respect to the benefits package that Medicare offers.

I mean, in the context of the current benefits package, certainly any type of innovation that is either cost-effective or sort of quality-enhancing would be something that we would want to embrace.

But particularly in the area of genetics, what we may be talking about is the development of new pharmaceuticals that could be quite effective, and yet that currently is outside the benefits package for Medicare.

I think that for the long term, I mean, thinking about that as well as thinking about the issue of long-term care, which I know you have, is something that has great import for the population in 2030 that are receiving Medicare.

Mr. MCDERMOTT. Dr. Altman, and then Dr. Frist.

Mr. ALTMAN. Lynn, I know you and I know how much you really do understand our Medicare Program. You have been around this town almost as long as I have, not quite, but I am really having a hard time understanding how this restructured program that you=re talking about is going to work.

I am with Bruce in the sense that if we could figure out a way for Medicare to be a more efficient provider, and to do a better job, I am all for it. But I want you to see where I am having trouble here.

On the one side I hear you saying what the program needs to do is to begin to select a limited number of providers who made a whole series of standards about quality, but also efficiency, and to select a substantial reduction--let=s understand what we=re talking about, and as I said, if I=m wrong, please tell me--a substantial reduction in the amount of choice that Medicare recipients now have in terms of now they can go to any home health agency, provided that meets some minimum standard.

I am assuming that you are saying that in an area there would be 5, 8, 2, 10, depending on the size, that meet these criteria.

So you cannot tell me that on the one hand I am going to get more efficiencies, and on the other hand the consumers are going to have more choice.

So if I am right, what we are talking about is reducing choice, but within that hopefully generating a more efficient, higher quality set of options that are available.

Now I am maybe all for that, but did I get that part right?

Mr. ETHEREDGE. Well not quite, Stu.

I actually think I am for expanding choice because, as I described all these arrangements, there would be PPO arrangements where you could continue to go to any provider you wanted to, but you would also have a choice to go to an organized Center of Excellence, a care program----

Mr. ALTMAN. Now--excuse me--in the existing PPO arrangement----

Mr. ETHEREDGE. Yes.

Mr. ALTMAN [continuing]. When you go outside the network, you have to pay more. So would that be part of the plan?

Mr. ETHEREDGE. No. I think initially you would try to provide more benefits. You would eliminate the cost-sharing, the 20-percent cost-sharing----

Mr. ALTMAN. Well one way or another, either I pay more or I get more----

Mr. ETHEREDGE. You get more.

Mr. ALTMAN. Well I mean we can work this all out, but essentially you=re changing the program--and by the way, when I ask these questions it doesn=t necessarily mean I object to it. I am just----

Mr. ETHEREDGE. Well you are a UCLA economist. How can you argue against purchasing and markets? [Laughter.]

Mr. ALTMAN. I never would. They are already questioning my degree [laughter].

Mr. ETHEREDGE. They work every other place, Stu [laughter].

Mr. ALTMAN. No, no, no. So I am just trying to understand.

So we have a situation where there is a preferred provider. Either you get more by staying in the program or you pay more by going out.

Mr. ETHEREDGE. Yes.

Mr. ALTMAN. OK.

So in some sense choice is different than the existing system?

Mr. ETHEREDGE. Yes. You have a better choice than you have now, but you still have the same choices.

Mr. ALTMAN. Now the problem--I like Deborah=s dog and cat idea.

Are we potentially substituting the Pentagon=s set of regulations for the Medicare Program?

Ms. STEELMAN. Do you mean by single beds?

Mr. ALTMAN. In terms of how they purchase, what the toilet seat looks like, and how the nuts turn?

Mr. ETHEREDGE. No, I don=t think we want to get into that level. As you know, I have been in favor of outcomes= measurement and moving away from that toward the things that really count.

I would think that, as with the Center of Excellence, HCFA--and some of its other demonstrations--HCFA would go out with some objective measures of performance, including satisfaction in outcomes, and the competition for selection would be based on those kinds of objective measures, and you would be able to get out of some of this micromanagement of regulations.

Mr. ALTMAN. So you would support a--I think you would realize that what Bruce was saying was not totally off the wall.

Mr. ETHEREDGE. Yes. No, but I think----

Mr. ALTMAN. Maybe we should do demonstrations----

Mr. ETHEREDGE. You get into----

Mr. ALTMAN [continuing]. And see if we can get the law changed, get the courts to agree, and then----

Would you support that?

Mr. ETHEREDGE. The process I see, Stu, is--and you----

Mr. ALTMAN. I want to do it.

Mr. ETHEREDGE [continuing]. You=re jumping way ahead of the wholly redesigned program. It is the process recommended by the National Academy of Social Insurance, and I am suggesting that we start with some demonstrations to see if it works.

Senator ROCKEFELLER. I thought your job is to answer his question. You=re not doing that.

Mr. ETHEREDGE. OK. I mean I think we have to see if it works. And then, ultimately, if it works, if we decide it is a better system, yes, then you=ve got to make a lot of these other changes.

But let=s at least try out using the purchasing power in a market which has lots of variations in quality and price to see if it is a better approach.

I have laid out probably a dozen different ways in which, not just theory, if you look at how health plans are contracting with providers, how employers are contracting with plans, they are using the kinds of approaches I have laid out.

They are finding that it works.

I think we would be better off seeing if we can make it work in the Medicare Program, and then ultimately, if it works, it will be an easier--or if it doesn=t work, we can then make a decision as to whether to expand it.

Mr. MCDERMOTT. Dr. Frist?

Mr. ETHEREDGE. But I would still keep the DRG=s and RBRVS for quite awhile.

Mr. MCDERMOTT. Dr. Frist?

Senator FRIST. Thank you, Mr. Chairman.

The Reform Task Force is really charged with looking at innovative solutions to improve the current Medicare Program.

As I have listened to the range of the discussion today, I keep coming back to quality, for a number of reasons.

The question was asked: Do people really want to choose?

That is a good question. I think Americans do want the opportunity to choose. If you are a mother and you have a daughter and she has heart disease and you have the opportunity to choose the very best care or moderate care or not very good care, you want the opportunity to choose.

That is what it boils down to. So I don=t know if you need much more hard data than that. People do want to be able to choose with something so intimate and personal as their health care for themselves and their family.

The problem as I see it, and when I think that we do have a real Federal responsibility, and one that because of the size and the magnitude of Medicare we must address, is what is the Federal role in facilitating what quality is so that that mother can choose a facility, a physician, a health plan to make sure that daughter gets the very best care possible, or within the realm of possibility.

But we do not have that data today. I think that when Dr. Waller talks about quality of care being dynamic: It is changing. It is changing all the time.

It links to our earlier discussions on academic health centers where this sort of discussion is going on: The stimulation is there; the articles; the peer-reviewed type atmosphere; the questioning of young physicians and nurses who are being trained as you look to the future is put out there.

It is hard to quantify in terms of dollars, but it is out there. You cannot drive that stake in the ground today because what is the result of a good heart operation today will be different as we learn more about it 3 years from now, or 5 years from now.

Dr. Vladeck I think made a great point when he said he spent more time on justifying a particular procedure or not paying for a procedure because it had not been proven yet through the type of clinical trials where it=s demonstrated told me very loudly and clear that I am not sure HCFA should be in the business, because of the time, because of the lack of understanding of people broadly or the culture, that they should not necessarily be in the business of determining what procedure is cost-effective or of higher quality.

Somebody has to be, but I am not sure it is them, and I think he said it very well: the culture needs to be changed.

And I think that is our responsibility.

Dr. Scanlon, early on, when he talked about the tremendous variations around the country in terms of Medicare, what is reimbursed and the fact that historically it evolved as a regional or a local entity, and now we have this huge program, and the tremendous variation there, I think in large part is explained by the fact that we don=t have an understanding that is uniform around the country of what good quality is today; that science is so new.

Then when Lynn Etheredge talks about the importance of choosing, I think it is important to be able to choose.

But we need to empower people to be able to choose. And again because of the magnitude of Medicare, because we have moved toward Medicare+Choice where we are giving people choices, I think that we need at the same time to empower people to give them the data to make these choices.

We have a Government role, and I do not think the Government is doing that adequately now.

Dr. Waller mentioned Dr. Eisenberg and health delivery research. That is a tremendous field that is in its infancy, that we as a Government do not adequately support today.

I think we need to address that as part of reform as we look at innovative solutions, because it is sort of a common thread that goes throughout all of our discussions today.

We need to support what quality is and recognize that it changes.

We need to train young investigators to enter a field to encourage the science of health delivery, of clinical outcomes, of comparing one type of system to another system. I think we need to train scientists there.

And then I think we have a role in terms of disseminating that information out across the country, whether it is to Washington State or Alaska or rural Tennessee or Boston, MA, to not mandate and not specify and act as if we know what that quality is, but to develop the systems that are able to compare quality.

And again I think we have a Federal role. I am not sure if we do that through the Medicare system, or do it the way I prefer to do it, not through HCFA, but through an entity like the Agency for Health Care Policy and Research. But we must orient the system toward quality to help empower people to determine what quality is and make these decisions.

You would have more uniformity. It would go back to the comments on complexity, regional variation. It would go back to scientific data, so people could make educated decisions.

The data is just not out there today. We have not generated it. I think that an agency like that could be encouraged to look at the cost/benefit as well, an issue which will go down to the billions of dollars of excessive billing that may have gone on in the past.

We will be able to figure out what works and what does not work.

And then last, it ties in to our earlier discussions of academic health centers. I think that there is a real role for academic health centers which traditionally have not been on the forefront of this area, but with appropriate support by the Federal Government to address this issue of quality.

That is more of a statement than a question, but I would hope that the Reform Task Force looks at this quality issue to empower individuals.

Mr. MCDERMOTT. We want to thank you for your----

Senator Rockefeller?

Senator ROCKEFELLER. Dr. Waller, the tendency of all of the discussions this morning, with some exceptions--my esteemed corn husker friend over here--has been I think at bottom in the use of the word >>quality== in the use that I used about academic health centers, the need to put out the very best product.

So in essence, if I were a reporter reporting on this session, I would say that, with some exceptions, that everybody appeared to be arguing for the status quo.

A couple of the exceptions, incidentally, have left the room so they are not in a position to fight back, but they are arguing for the status quo, and that that would be, if this were to be the end of the Commission, the probable result.

For the most part, the witnesses have argued for more or less the status quo--this panel less than the last one, and not all on the last one.

Have you given any thoughts, and what are they, to what we do--one of the objections I have about this Commission is we are looking at now until the year 2025. I got a briefing that took in the year 2050 and 2075, which is absolutely absurd----

Ms. TYSON. There are objections to going to 2030.

Senator ROCKEFELLER. Yes. I mean, all I want is what happens for Medicare from now through the year 2008. That is what makes me happy. Anything else is totally irrelevant as far as I am concerned.

Now the cost of Medicare to the taxpayer, as Senator Kerrey would say, in the form of the Government, the cost of Medicare is going to go from $207 billion a year to somewhere over $400 billion, and perhaps as much as $450 billion if we change absolutely nothing as to what we are doing.

What are your thoughts about that?

That, incidentally, we will not be able to pay for.

Dr. WALLER. Sure. I don=t believe I argued for the status quo----

Senator ROCKEFELLER. No, I am not saying that. I was asking you what your thoughts are about the increase in a 10-year period, 9a years, from $207 billion to $448 billion, changing nothing.

Dr. WALLER. Well I think in my outline our comments about reform for that 10-year period of time would be total restructuring of the Medicare system based on the five principles that were outlined there.

So I think that is not a status quo statement, I believe.

I think Senator Frist really capsulized the discussion beautifully. I think the simple answer, the short answer, because time is short, is that the focus on quality is where it is.

The better we can improve the care for our patients, the more we can focus on what is appropriate, the more we can invest in innovation, the more we can reduce cost, and when we reduce cost we can improve access.

Can it be done within the current framework of complexity? I don=t think so.

Can it be done with focusing on the five principles that I have outlined in the document that you have? I would hope so.

Is the Federal Employees Health Benefits Plan a model worth serious consideration?

It is not perfect, but I think it does offer a benchmark of benefits, and it offers flexibility in benefit design. It offers multiple choices. It offers a defined Government contribution which is augmentable by individuals should they choose to purchase more health care. And it minimizes micromanagement and maximizes individual choice.

Senator ROCKEFELLER. Was that one of your five suggestions?

Dr. WALLER. Yes, sir, it was.

Senator ROCKEFELLER. Which one was that?

Dr. WALLER. Well the Government role, under No. 5, the last paragraph:

Is the Federal Government capable of doing this? I pointed out that that is an example of how the Government can run such a program based on competition and choice.

Senator ROCKEFELLER. When you say >>Government getting out of the insurance business,== you mean FEHBP?

Dr. WALLER. No. I think what I mean is getting out of the insurance business as it currently exists with its highly regulatory environment.

Senator ROCKEFELLER. I guess I would just comment that, looking--I was specifically looking at those five, and I didn=t see the closure of the debt gap, including No. 5.

If you say that FEHBP was at the core of your thinking in No. 5, that is interesting, but it is not insofar as it is described in the paper that I have.

Dr. WALLER. Well we will be happy to provide more information, if you would like, about it.

Senator ROCKEFELLER. Do you worry about the $207 to $448 billion? I am serious. Do you worry about it?

Dr. WALLER. Worry about what?

Senator ROCKEFELLER. About this $250 billion increase in the next 9a years in the cost of Medicare.

Dr. WALLER. Absolutely. Doesn=t everybody?

Senator ROCKEFELLER. No.

Mr. MCDERMOTT. On that eclectic note, we went from toilet seats in the military to nobody worries. So I think we will go have lunch and come back for talking about some restructuring at 2 o=clock. Thank you.

[Whereupon, at 12:45 p.m., the meeting was recessed for lunch, to reconvene at 2 p.m., this same day.]

AFTERNOON SESSION

The Commission reconvened at 2:09 p.m., Cannon Building, room 345, Caucus room, Senator Kerrey presiding.

Senator KERREY [presiding]. We will start the second half of our day=s hearings.

I would like to welcome the witnesses and encourage the members to join us here at the table.

The next session is a continuation of the discussion that was begun by the Reform Task Force on ways to fundamentally restructure the Medicare Program.

The topic will be using a premium contribution approach to Medicare.

Each of our three sets of witnesses today, two individuals and a group of two, suggest ways to set up a defined contribution system for Medicare as a way to increase competition and thereby improve cost, quality, and consumer choice.

Our first witness is Dr. Robert Reischauer, a senior fellow at the Brookings Institution and a very familiar face when it comes to discussing health care policy in Washington.

Mr. Reischauer served as Director of the Congressional Budget Office from 1989 to 1995, and always has interesting insight on health and budget issues.

Our second and third panelists are Dr. Bryan Dowd and Dr. Roger Feldman from the School of Public Health and the University of Minnesota. They have written extensively on the issue of competitive bidding in Medicare.

Last, we have Dr. Mark Pauly from the University of Pennsylvania who has done a great deal of work in the fields of medical economics and health insurance.

We will begin, Dr. Reischauer, with you.

STATEMENT OF ROBERT REISCHAUER, SENIOR FELLOW, THE BROOKINGS INSTITUTION

Mr. REISCHAUER. Thank you. It is a pleasure to be here and to participate in your deliberations.

Before we craft a Medicare Program for the future, I think we need to have a clear understanding of the deficiencies in the current system that we are trying to address.

Most of the attention on this score has focused on costs. People have looked out and said that the demographic pressures of the baby boom generation and continued improvement in the capabilities of medicine could make the current system prohibitively expensive in the future.

I think that is probably a true assessment, but I think far too much emphasis is placed on this problem, which is not unique to Medicare and will not be solved within the Medicare system.

I think if we fixed >>Medicare== you might reduce the level of Medicare spending by 10, 15 percent maybe, but not alter necessarily the rate of growth over the long run; that that is going to be determined by large forces affecting the whole medical system in this country.

The more important deficiencies, for my money, are listed in items 1 through 3 in the outline that I provided for you. They are interrelated and I think they are likely to get worse in the future.

One of course is the increasingly inadequate benefit package that participants are faced with.

Second, the inefficiencies of the existing system; it is unnecessarily complex. Most participants have two types of coverage, which is confusing for them and administratively costly for providers to deal with, and there are few incentives within the current system for participants or providers to be cost conscious.

And third, the current system is inequitable. Medicare participants in one area of the country might be faced with considerably better benefits from those in the other, particularly if they are in the capitated section of Medicare; and Medigap premiums also vary tremendously across the country.

I do not think there is any way to address these deficiencies within the current system, and so the question is whether there is some different structure that might address these deficiencies.

I think the answer to that question is, yes, but I would hasten to add I would not bet my life on it. I think there is a great deal of uncertainty surrounding this question.

The system that I think could address these problems is what Henry Aaron and I have labeled >>premium support.==

It is a system in which the Government specifies a required benefit package. It divides the Nation in Medicare market areas. It takes bids from plans that wish to provide health services to the Medicare population within each health area.

It sets a Federal total premium level and a Federal contribution rate in each area based on the bids that it receives from various organizations.

And it creates an institutional infrastructure that directly or indirectly can provide participants with information about the plans, can collect the premiums, can enroll and dis-enroll participants, and distribute payments to the plans.

There is a lot of institutional infrastructure that would be required to set up a system like this.

You would also have to go through a period of educating participants, providers, and plans. Overall, I think it would take a good deal of time if you decided to move in this direction, and I would not expect a structure like this to be functioning smoothly for about a decade.

There are a lot of complex design issues that would have to be settled, and I have listed some of those under section 3 of the outline, and let me say a few words about a couple of these.

Where I come out on many of these design issues is driven by the belief that it will be some years before we have developed a good method of adjusting capitated payments for differential risk. And so you want to construct a framework in which the consequences of inadequate risk adjustment are minimized, the benefit package.

On that score, I think it should be similar to what the rest of society enjoys. In other words, it should be a benefit package that caused no more than 10 percent of the participants to think they needed supplementary insurance of any kind.

When you have two types of insurance or more, it is unnecessarily complex and costly, and it is also a way to risk-segment the participants, and I think that should be avoided.

I would allow supplementary benefits, but they would be sold and priced separately. In other words, anybody could join the basic plan offered by an insurer, and that insurer also might have a supplementary package, but the premiums for that package would be entirely separate and they would cover not only the costs of the additional benefits but also the induced utilization of the basic services.

The Federal total premium level I would not set at the lowest bid received within any market area. I would want to give low-income folks a choice. So I would set it somewhere like the median bid that was submitted subject to the constraint that plans with that bid or a lower bid had the capacity to absorb 50, 70 percent of the participants in the area.

You do not want a meaningful situation where you have 10 plans that have bid but they have the capacity only to provide services to 6 percent of the population.

The Federal contribution, which would be different from this Federal premium rate, would be the Federal payment that was made to plans, but of course it would be risk-adjusted, and the balance would be paid by participants.

I think it is perfectly reasonable to set this at a level that reflects not only the part B premium but also the costs that people are incurring now for supplemental insurance, whether it is provided indirectly through a former employer or through their own Medigap policy. So talking about premiums of $1,500, $1,700 would not upset me at all in a system like this, and I think it would keep the system in fact quite similar to what we have already.

In a plan like this, the risk adjustment that the Federal Government would do would be also enough to compensate for the adjustment needed within the participants= contribution to the total Federal premium.

The QMB and SLMB components should be federalized in a system like this.

With respect to service areas, I think they really have to be larger than they are now not only to reduce risk segmentation but also for efficiency purposes.

I think it makes absolutely no sense to have a system in which we will pay Kaiser in this metropolitan area $2,500 more for an individual who lives in Prince Georges County than one who lives in Fairfax County, when both of them might use nothing but hospitals and physicians within the District of Columbia. It just makes absolutely no sense.

As I said before, you cannot institute something like this overnight. We are going to have to do it very gradually.

Competitive bidding systems can be introduced gradually. You can start out by having 20 percent of the capitated payment made on the basis of bids, and 80 percent under the AAPCC and gradually shift that as it seems appropriate to do.

We do not know where the employer-sponsored health insurance system is headed, and for that reason I think you want to be very flexible. You want to adopt the system which is not specifying the future with great certainly.

If I sat down in 1988 and had tried to tell you where health care would be in 1998, I would have been miserably wrong, as would Stuart and I think all of us, so we should not sit here thinking that we can tell you where things are going to be in 2008.

So I think moving in the appropriate direction but in a flexible way is the future.

Thank you.

Senator KERREY. Thank you. Dr. Dowd and Dr. Feldman?

STATEMENTS OF ROGER FELDMAN AND BRYAN DOWD, PROFESSORS AT THE UNIVERSITY OF MINNESOTA

Mr. FELDMAN. Senator Kerrey and Commission members, we appreciate the opportunity to appear before this Commission and look forward to its changing ideas on the future of the Medicare Program.

Bryan Dowd and I began our work on Medicare reform in 1989 when HCFA asked us to think about the problems it was experiencing with paying HMO=s in the Medicare Program.

Since that time, we have worked on additional design projects for HCFA. We have written a book on the subject, and currently, along with APT Associates, we are providing technical assistance to HCFA on the competitive pricing demonstration.

Rather than simply tinkering with the current system, we started by asking two basic questions:

What were the goals of contracting with private health care plans in the Medicare Program?

And what sort of payment system would advance those goals?

The goals of offering choices to consumers were to satisfy diverse consumer preferences and to create competition among plans that could help improve quality and reduce cost.

And in response to a question that was asked this morning, yes, there is evidence that consumers are more satisfied when they have a choice among health care plans.

Unfortunately, HCFA=s method of contracting with private health plans did not meet those goals.

HCFA operates an administered pricing systems in which it tells the health plans how much it will pay them.

In this system, HCFA pays Medicare HMO=s 95 percent of the estimate cost of caring for similar beneficiaries in the fee-for-service sector.

HCFA=s model does not predict very well, but in our opinion a bigger problem is that HCFA never learns the true cost of providing health care in an efficient system.

If it could learn this, then it would be able to buy health care services more effectively. In fact, it could learn this if HMO=s were able to give premium rebates, but that is not allowed.

Because they don=t see any premium differences among health care plans, price competition among plans does not exist. And the usual role of prices in our economy--helping consumers decide how to spend their scarce resources--does not work for Medicare.

We refer to the lack of health care prices for Medicare beneficiaries as a >>price distortion.== It is the first of two price distortions in the Medicare Program.

The second price distortion affects the Federal Government. When the Government buys the Medicare entitlement, it buys it at the inflated price of the fee-for-service sector. And there is plenty of evidence that the price of benefits is higher when purchased from the fee-for-service sector than it is from an efficient HMO.

On account of buying services at this inflated price, we believe that the Government has lagged behind the private sector in including services in the Medicare entitlement.

To be specific, most private health care plans include catastrophic coverage and outpatient prescription drugs, neither of which is a standard Medicare benefit.

To fix these price distortions, we propose to scrap the administered pricing system and to replace it. The more we thought about what the new system should look like, the more we were struck by an analogy between HCFA and a large national employer.

Often the employer offers a self-insured plan to its employees in all locations, just as fee-for-service Medicare is offered to all beneficiaries.

In markets with managed care plans, most employers offer some of these options, as well. Unlike Medicare however, most employers ask the employee to pay some of the difference in premiums between the more expensive and less expensive health plans.

This give employees incentives to consider price when they choose a health plan, and the evidence suggests that price matters.

In addition, most employers hold annual open enrollment periods when employees can choose any plan that they are offered.

Employees have to stay in their plan until the next open enrollment. Prior to open enrollment, most employers distribute comparative information, including the results of consumer satisfaction surveys.

The State of Minnesota has purchased insurance using this model for its State employees over the past 10 years.

During that time, premiums increased by 9.3 percent per year compared to 10.4 percent experienced by private health insurance plans generally.

Now 1 percent a year may not look like a whole lot, but if you let this cumulate over 10 or possibly 25 years, whatever your project horizon is, it becomes significant.

To paraphrase Senator Dirksen, a percent here and a percent there, it adds up to real money.

The State of Minnesota is not the only employer that has saved money by using a competitive pricing system. The Federal Employees Health Benefits Plan, using a weaker version of the same system, has consistently outperformed the private sector.

By >>weaker version,== I mean that the Federal employees plan provides a 75-percent subsidy up to a premium cap, and most employees choose plans below the cap. So for most of the Federal employees, the Government is providing 75 cents of every extra dollar.

Yet, over any 10-year period in recent history, FEHBP has outperformed the private sector.

The difference is now closing, I am happy to say, because the private sector is adopting many of the same purchasing practices that are currently used by the FEHBP plan.

Finally, a study of every large city and county government in the United States, we found that employers could reduce premiums by roughly 7 to 8 percent by paying a level-dollar contribution.

STATEMENT OF BRYAN DOWD

Mr. DOWD. So our proposal for Medicare is fairly simple. What we would like to do is to transplant the best health purchasing practices used by large private and public employers into the Medicare Program.

We can summarize the proposal in five points, which are in our outline:

During an annual open enrollment period, beneficiaries would have guaranteed access to every health plan in the Medicare market.

Prior to open enrollment, beneficiaries would be given concise, reliable information on the benefits and costs of every plan.

All health plans, including fee-for-service Medicare, would submit prices for covering the entitlement package of benefits.

The Government would then set a defined contribution to premiums. We suggested the premium of the lowest priced qualified health plan in the market area. And beneficiaries would pay the additional cost of more expensive health plans out of their own pocket.

Premium differentials among plans would be adjusted for risk using the current risk-adjustment technology available at the time.

Premium increases would be based on the experience of enrollees in each health plan, not on beneficiary=s personal health status.

Every health plan, including fee-for-service Medigap plans, could offer supplementary benefits at a competitive price, but we have proposed that Medigap plans would have to become fully risk-bearing if they wanted to participate in Medicare.

Our proposal can incorporate easily any system of risk-adjustment payments to health plans, and any fairness-based aid to low-income beneficiaries such as the SLNB or QMB programs, or even Dr. Pauly=s proposal for income-related vouchers.

So that is our proposal in a nutshell.

In 1995, HCFA began to implement the demonstration project for competitive pricing in Medicare. HCFA=s model was a bit different from ours in that it excluded fee-for-service Medicare and Medigap policies, but their model contained the essential elements of competitive pricing for other health plans and improved consumer information.

As you know, that demonstration was proposed for Baltimore and Denver, but it was blocked by opposition from HMO=s in both sites.

In Denver, however, the demonstration progressed to the point that health plans actually submitted bids.

Last summer Congress mandated a demonstration of competitive pricing as part of the Balanced Budget Act, and it created the Competitive Pricing Advisory Commission, or CPAC, to oversee the design of this demonstration.

And as Roger noted, we are currently providing, along with APT Associates, technical assistance to CPAC.

During a recent CPAC meeting, one member suggested that we need to show that HCFA can run a competitive pricing system, but another member pointed out that that was unnecessary.

HCFA has already shown in Denver that it can run a competitive pricing system, and that actually was not surprising to us because HCFA was already performing most of the tasks that they need to perform in order to run that system.

Our proposal does not have any hidden agenda. Competitive pricing is already in place for much of working America. We are not trying to herd Medicare beneficiaries into one type of delivery system or another.

We believe that beneficiaries should be able to join any plan they like as long as they have good information and face prices that reflect the differences in efficiency among competing plans.

In many parts of the country we think HMO=s would be the most efficient plan. In areas with low Government payment levels such as the Twin Cities, it may be that fee-for-service Medicare is the low bidder.

As long as the price of fee-for-service care is computed accurately, so be it. And if costs go up in the most efficient health plan because beneficiaries are demanding new technologies, then that is also acceptable.

Although we are as concerned as anyone about the fiscal solvency problems of the Medicare Program, we started to work on Medicare reform before fiscal solvency was a hot topic, and in fact we would not change a word of our proposal if Medicare was on a firm financial footing.

We believe that the current Medicare Program is inefficient because of distorted prices and poor information, and improving efficiency is our primate goal because waste in the Medicare Program either takes resources away from other programs or leads to higher taxes.

Finally, we would like to comment on a debate that is becoming increasingly controversial here in Washington. That is, whether Medicare should be a defined benefit program which promises to deliver a certain set of benefits or a defined contribution program.

Our proposal actually has some elements of both. It is a defined contribution proposal because the Government=s contribution to premiums does not vary depending on which plan the beneficiary picks, but it is also a defined benefit program because every beneficiary is guaranteed access to at least one free plan in their market area that provides the Medicare entitlement benefits.

The difference between our proposal and the current system of course is that the lowest priced qualified health plan might not be the fee-for-service sector.

We appreciate the opportunity to present our proposal, and we look forward to your questions.

Senator KERREY. Thank you. Dr. Pauly?

STATEMENT OF MARK PAULY, VICE DEAN, WHARTON SCHOOL OF BUSINESS

Mr. PAULY. Thank you, Senator Kerrey; Commissioners.

I am delighted to discuss the future of Medicare, and even more pleased to bat clean-up on this distinguished panel exploring an extension of the defined-contribution approach to Medicare in the future.

My most general point is that this approach, actually already begun with the advent of the Medicare Risk Program in 1985, provides the best vehicle for flexible adaptation of the tax finance subsidy for elders= health insurance to where it is needed and does the most good.

I want to push the idea of restructuring fairly far away from simple remodeling to something which is a quite different version of Medicare than currently is present.

As already suggested, there is some debate over the definition of >>defined contribution,== so I will give you my definition.

In my view, a >>defined contribution== approach has two, and only two, essential elements: a specification of the dollar amount to be contributed as a subsidy by the public sector, and a set of limits or regulations on the minimum insurance that must be obtained in order to receive the subsidy.

The second general point I would make follows on this.

For at least a large part of the elderly population, if not almost all, in my view the best strategy is to let the specification of the dollar amount guide the form and strength of public intervention when combined with a competitive market, and to have as light a touch as possible on the rules and regulations.

Our social objective, after all, is to preserve a way of funding subsidies which induces seniors to obtain needed amounts of medical insurance and Medicare care, but provides great flexibility or freedom for them to choose what services they will obtain, from whom, and subject to what limitations.

So I do believe people want to choose. As a small commercial message, I do think it would be helpful to have more research on the variety of preferences among seniors, although I have to report that at my last family reunion my five brothers and sisters and our spouses discussed--we=re getting to that age--what we would like Medicare to be, and none of us could agree.

So I view that as at least one data point, that there are substantial differences of opinion about what the ideal health insurance plan is.

I might add that the bidding approach to setting the contribution needed to cover almost the full cost of today=s Medicare, as discussed by the previous panel members, is an especially good way of establishing a starting point that we can feel comfortable with, and that can set realistic, across-area payments, thus avoiding the furious back peddling we have seen as Medicare managed care plans pull out of Piqua, OH, and the collar counties around Atlanta.

However, bidding does not work so well for establishing how health insurance payments should increase over time.

The reason is that health insurance is not like No. 2 winter wheat, an easily specified commodity. Instead, its pricing and costs raise the problem faced years ago in trying to regulate airline fares.

Quality--defined as whatever attracts customers--adjusts to whatever price is set, within broad margins. Under competition, cost will come to equal whatever is paid, as schedule frequency or wellness programs, adjust.

The method I propose makes the choice of the annual update amount the political decision it must be.

As a way of illustrating how a defined contribution approach can provide both more flexibility and better targeting of subsidies than is true of present policies, I will briefly sketch out some ideas for income conditioning Medicare subsidies so that higher income and well seniors pay more toward their own insurance and care as a way of preserving the system for everyone=s benefits.

My suggestions here are both more aggressive and more fundamentally grounded in attention to Medicare=s objectives than the relatively modest proposals for means testing part B premiums cost-sharing that were briefly discussed during the Medicare reform debate.

My basic thought is to adapt the defined contribution philosophy to direct relatively larger contributions toward lower income seniors, and have those less in need of assistance pay more of their own way.

However, there is a modest reward to the better off for this new program: greater freedom to choose the amount, form, and operation of insurance coverage.

The plan, in simple form, would vary both the defined contribution or subsidy from the Medicare Program without making serious distinctions between the parts, vary that inversely with income above some moderate income level, but at the same time permit the coverage that must be purchased in order to receive a subsidy to be less expensive for those who receive smaller subsidies.

That is, above some income level the only requirements to get the assistance would be to purchase catastrophic coverage with the size of the minimum amount of out-of-pocket payment rising as income rises.

I hasten to add, this would only be the minimum required coverage. People would be free with their own resources to use their contribution to buy more extensive or more costly coverage.

Under a full-bore defined contribution approach, you use the subsidy to buy the policy you want. There is no notion of supplementary and basic benefits; it is just your policy.

The primary role of Medicare in the lives of the better-off would then be the dollar amount of contribution or subsidy they received. In the best but more administratively complex of this scheme, the contribution would rise both with falling income and higher risk due, say, to the presence of an identified high-risk condition, as would the required amount of coverage.

In this, risk adjustment--once we are confident we have the tools to do it reasonably well--could be integrated with the income-conditioned defined contribution.

I can even imagine that a similar scheme could be enacted for the under-65 portion of the population--possibly by recycling the $100 billion we currently put into the tax subsidy to employer-based health insurance--furnishing a seamless and well-targeted system of help for all of the population who need help.

The primary empirical motivation for my idea is shown in the table that is in my outline. That is the only data I will ask you to look at.

To an economist, of course, one table is worth a thousand words, but here is roughly what it says.

When I tabulated these numbers I was surprised to see how the distribution of income among households with elderly people in them has changed since Medicare was passed.

In 1967, the first post-Medicare year, being old was virtually synonymous with being poor or near poor. Nearly two-thirds of beneficiaries then were at or near the poverty line.

By 1997, things had changed dramatically with up to a quarter of households with incomes more than four times the poverty line, not poor by anyone=s definition, the portion of income within 200 percent of the poverty line falling to less than 40 percent.

It was sensible, I think, to provide the same Medicare benefit to almost every elderly person. In 1966 there were not enough nonpoor to make it worthwhile to single them out.

Such a strategy may not be so sensible now. The current pattern of Medicare financing, in my judgment, woefully mistargets what is otherwise the good subsidy. Changing this pattern could provide major help in saving the entire system.

I do not want to overstate the case here. For the elders, a single elderly family, or a family of two, income of 300 percent of the poverty line is only about $30,000 a year. And we would not be talking about income conditioning Medicare, or anything else, I suspect, if the taxes needed to finance current and future benefits were still at 1967=s level.

But given the shift in the distribution of income, one more pronounced among seniors than the rest of the population, and the explosion of Medicare=s cost, some redesign might make sense.

It would make sense for three conceptual reasons.

First, on pure equity grounds it would be fairer than the current system in which workers pay taxes to subsidize the health insurance of senior citizens who often have higher incomes than they.

Second, if you are interested in producing greater equality in the use of medical care for people with a given illness--and I am--basic economics and common sense both tell you that, with the same insurance coverage, the higher income person will always get more. To produce more equal results, you need more unequal coverage than the current basic Medicare plus Medigap, which of course is much more prevalent among higher income households.

Third, there is little purpose served in compelling higher income households all to have the same fairly generous coverage we may want lower income people to have. There is no need to subsidize the better off to take Medicare coverage with low deductibles and strange patterns of cost-sharing rather than the catastrophic coverage some would prefer.

Finally, in a practical sense, although I am in favor of choice, I have to tell you that the power to make a choice is the power to make a mistake. I am very seriously concerned about mistakes when made by low-income elderly people who have a relatively small cushion, but I think if we are going to give people the power to make mistakes, it may be better to tailor that to those who can afford to bear the consequences.

That is not to say, when it comes to health insurance, if you make the wrong choice you don=t always look around for somebody else to blame, but at least we can lodge that power with the people most able to bear the consequences.

No solution to Medicare=s problems is ideal. The system I propose, one might say, would be administratively complex and might discourage work effort during people=s working lifetimes.

I believe you could use the income tax system to solve most of the administrative problems, although people at the Treasury run the other way when they see me coming.

The effect on work effort is real, but it must be offsetting. It=s the probably stronger deterrent to work effort that will be posed by the enormous payroll taxes for Medicare and Social Security we are contemplating in the next 20 years.

How much fiscal good would such a scheme do? Compared to the small part B adjustments, it could give spending reductions in the 10-percent, or 10-percent/12-percent range, rather than the less than 1-percent range.

A more serious contribution would be provided if Medicare subsidy was changed so that it made less contribution toward the purchase of coverage to cover costly but beneficial new technology for the well off.

It is changes in technology that drive Medicare costs in the future. If technology were to remain at today=s level, Medicare spending could, with a little bit of luck, actually be financed with the current tax rates.

It is the burden of the projected future cost about quality and increasing technology that raises the fiscal issue, and one solution would be to have Medicare turn the task of financing that technology for better off seniors over to the seniors themselves.

If the well-off value technology sufficiently, they would be motivated voluntarily to start saving now, using efficient private sector savings vehicles with the power of compound interest--don=t stop me if you=ve heard that--to be able to fund the supplemental private insurance that could help pay for this technology.

Should they choose not to do so, that would be an indication that the latest medical technology, while worth something in terms of convenience, quantity, or quality of life, might not be worth the cost to those who could afford to pay the cost.

Of course there would still be the usual political difficult choice about what new technology to subsidize for those with lower incomes.

One thing we can be sure of concerning the future of Medicare, there is no panacea and probably not even any single blockbuster remedy.

The virtue of the defined contribution approach is that it can flexibly accommodate a wide variety of adaptations, while at the same time accommodating the substantial diversity preference among Americans concerning its most personal of public goods.

Thank you.

Senator KERREY. Thank you.

Let me try to establish some common agreement amongst all of you, if that is possible.

As I hear you describe it, this dividing line that we are seeing forming right now around the issue of defined contribution and defined benefit is in many ways a false choice or a false argument because I hear all of you proposing something that has elements of both.

Even you, Mr. Pauly, when you get into the question of lower income people, it seems to me, are prepared to say that there should be some kind of minimum benefit in place. So you are describing something in the way of benefit as well as contribution structure.

All four of you, it seems to me, are describing a mixed system.

Mr. PAULY. Sure.

Senator KERREY. With benefits--if I could add a second element; Senator Rockefeller said I talked for 20 minutes earlier, so I am going to ask a real short [laughter] question, hoping to provoke a very long set of answers.

The second part is that all four of you, the three groups, it seems to me, are saying that even if there weren=t fiscal problems, there are benefits from moving away from our current payment structure into a different kind of a payment structure.

Mr. PAULY. I was just going to say, under any defined contribution approach you need to have some limits or some minimum levels of benefit. Without a minimum level of benefit, a defined contribution is called cash.

So I think we all agree on that.

Senator KERREY. But that is in fact, I mean the simple understanding of >>defined contribution== as I hear people talking about it, at least in my State, is that you just provide somebody the voucher, x amount of dollars, they go out and make a purchase, and none of you are describing a system as stark as that?

You=re all describing something that would have various mixes. It seems to me, Mr. Pauly, you have considerably less in the way of a minimum benefit than Dr. Reischauer would, but it is basically a mixture as opposed to a start either/or choice.

Mr. DOWD. I think your characterization of the common ground is correct, from my perspective.

Ms. STEELMAN. That=s a pretty short answer. [Laughter.]

Mr. REISCHAUER. I think that is correct, too, but I would just draw a distinction between where Mark is and where I am. That is, that people=s health status varies tremendously over time.

People know what their health status is likely to be with a certain amount of uncertainty, and to the extent you allow this benefit level to be very low, you are going to create serious risk segmentation problems that can only be addressed by sophisticated risk adjustment mechanism for the capitated payment, and we know we do not have those yet. Or, maybe ever.

Senator KERREY. Well that was too short. [Laughter.]

Let me do a followup, then.

There is a third set of issues that for me, as an occasional writer of laws, and that=s what we do around here is write laws, and we=re basically asking--well not >>basically,== we are asking the question: How should we rewrite a law, in this case the Medicare law--and I wonder if any of you have given some thought to other health care laws we have got as to whether or not we ought to try to consolidate into a single system of eligibility for all Americans Medicaid, Medicare, the VA, and the income tax deduction.

I am pleased that you are noting other benefits and other problems other than the fiscal problems, because if you just follow the fiscal course, if all you do is pursue a solution to the fiscal problem, what you end up with is conclusions that are against what the American people themselves want, which basically is they=re looking to retire earlier, they=re looking for earlier eligibility, not later eligibility; you find yourself reaching policy conclusions that are at odds with human trends in the country.

So I wonder if any of you have given some thought to the broader question of whether or not we shouldn=t be thinking about doing what we are talking about for Medicare for all Americans, and changing the law as to how one becomes eligible.

Mr. PAULY. Well I already commented on the shining vision of the seamless system of vouchers, or defined contribution. I guess I am more optimistic than Bob is about the possibilities of risk-adjustment them in a feasible way.

I do think though one needs to be realistic. Not everything that people want is necessarily within the realm of affordability here.

Senator KERREY. Well that would be a switch. [Laughter.]

Yes, Bryan.

Mr. DOWD. I am also a fan of systemwide reform, particularly on fairness issues and, probably if pressed, largely along the lines as Mark laid them out in 1991.

However, we are also on record as saying that we believe that the basic problem with the Medicare Program is the Medicare Program, and that we think that reform of the purchasing system that Medicare uses could provide great benefits to beneficiaries and to the taxpayers who are footing most of the bill that don=t need to wait for national reform in order to be implemented and start providing those benefits.

Senator KERREY. Sam?

Mr. HOWARD. Noting similarities between all of your presentations, my question is: I would like for you to comment on Dr. Reischauer=s statement that he thinks it will take a decade to implement something like you are talking about.

Do you think it will take a decade to do this? Or could we do it in about 5 years or so?

Mr. FELDMAN. In the private sector, it has often happened overnight that both large corporations and units of government have put programs into place like this.

I am not going to make light of the differences between these programs and Medicare, but let me just give you the example of the State of Wisconsin government which implemented a program of competitive pricing in the mid-1980=s and, overnight, saw 80 percent of its employees in managed care with very little system disruption.

Mr. HOWARD. Thank you.

Senator KERREY. Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman.

I would ask this to Dr. Pauly and Dr. Reischauer both. And I discussed this with the distinguished Deborah Steelman just a moment ago, and I wish to have my mind put at ease by both of you, if you can do that.

In the particular State that I represent--and I think it is instructive in its difficulties--the average gross income from all sources is $10,763, on average, for Medicare-aged people.

Of that amount, they spend $2,600 out of pocket for health care expenses. Obviously a lot of that goes to Medigap. So that the total net of what is left is $8,000 for everything else in life.

Now the--and of course there are a lot of things that Medicare does not pay for. There are a lot of things that Medigap does not pay for.

Can you explain to me, from what I perceive to be the two different perspectives of there not being a huge difference between defined contribution and defined benefit, when you talk Dr. Pauly of a minimum core of benefits which would have to be there for those who are poor, and when you Dr. Reischauer express somewhat more skepticism about the possibility of that being adequate, could you each describe what you mean by that, and how it is that folks that come from places like I do cope under this mixture that you are advocating?

Mr. PAULY. Well what I have in mind is intended, actually, to preserve and possibly even enhance the benefits available to low-income seniors in low-income States like West Virginia, or whatever State they live in, and I certainly would have in mind preserving for them the same level of benefits they currently receive, the supplements provided by Medicaid--although I think that could be incorporated better for very low-income seniors--and possibly even enhancing the level of coverage in terms of things like prescription drugs.

But, having said all of that, where is the money going to come from?

Some of it could come from taxpayers, but my vision of preserving adequate benefits for low-income seniors envisions high-income seniors who do exist, according to the data, paying more for what they get.

Senator ROCKEFELLER. But haven=t we agreed that that is approximately a $3, $4, $5 billion a year add-on for Medicare revenues if you go that route?

Mr. PAULY. No, I don=t think so----

Senator ROCKEFELLER. From means testing?

Mr. PAULY. It depends of course--it is ultimately a value judgment. It depends on how far you are wiling to go in terms of having people pay more.

Senator ROCKEFELLER. But I just bring that up in terms of whether it really does pay for a lot of new, adequate benefits.

Mr. PAULY. I think you could get two or three times that savings, if you were willing to be aggressive in terms of having people well above the poverty line pay more for the health insurance than they actually get.

Now as I said in my remarks, nobody would be thinking of doing that if there were some other alternative, if Medicare could instantly be made cheap by eliminating waste, fraud, and abuse, or some other fashion, but I am just pessimistic about that.

And I think the alternative source of funds which is to go to the working age population--when I paid my kids= college tuition, I always made them promise to take care of me in my old age, so I have it in writing [laughter] but I think more generally there are incentive effects that we might not want to impose there.

So I think again it depends on how aggressive you are willing to be, but I think there is a possibility for more money than just, as I said, 1 percent or so of total Medicare spending out of that.

Senator ROCKEFELLER. So that your case rests basically upon the means testing revenue addition?

Mr. PAULY. I think as far as the fiscal part of it goes, that is correct. Yes.

Senator ROCKEFELLER. Mr. Reischauer?

Mr. REISCHAUER. You could get me started on means testing Medicare, but you shouldn=t. I disagree fundamentally with Mark for all sorts of reasons.

But to your specific question, we provide Medicare, or health benefits to the elderly right now in an inefficient way. And, as you point out, they are paying a lot out of pocket.

By restructuring the program and consolidating the insurance into one insurance rather than into multiple insurances, you can provide at least those same benefits at less cost.

I think we should provide a little more than the combined benefits of Medigap plus Medicare in a single package. And, to the extent that people have low incomes overall, the federalization of QMB, SLMB and the additional add-on in the Balanced Budget Act I think would provide equity across the country.

Those are dials that one can set as Federal policymakers anywhere you want to ensure that low-income people are not unduly harmed by out-of-pocket medical expenses.

Senator ROCKEFELLER. Do you think, as a final question, both of you, that there is a scenario under which low-income Medicare beneficiaries could receive in fact fewer benefits than they do today?

Mr. REISCHAUER. Is there a scenario?

Senator ROCKEFELLER. Yes.

Mr. REISCHAUER. Certainly one could design one. I think it would be wrong, and I would not expect that the Congress would entertain such an alternative.

Senator ROCKEFELLER. Dr. Pauly?

Mr. PAULY. Well I guess I would agree with that. Sometimes the argument is made----

Senator ROCKEFELLER. Can you use the microphone, sir?

Mr. PAULY. Yes.

That if the middle class, or the upper middle class were not fully supported by Medicare, then the political choice would run against Medicare benefits to the remainder of the population.

I guess my view on that is that I trust democracy and the political process. It does not seem appropriate to me to try to box in middle class voters, as opposed to letting those choices be made.

Senator ROCKEFELLER. Thank you.

Senator KERREY. Commissioner Steelman?

Ms. STEELMAN. I have two questions, although, if I could just further define Senator Rockefeller=s question, your concern is not for the Medicaid eligible beneficiary so much as that increment above it?

Because do any of the panelists suggest that the Medicaid protections, which is a much richer benefit package, including pharmaceuticals, would remain the same? You=re all suggesting no changes there?

Mr. REISCHAUER. Under my proposal, a lot of what Medicare pays for now would not be paid for through Medicare it would be paid through--I mean, through Medicaid, but through Medicare.

Ms. STEELMAN. It would be wrapped in.

Mr. REISCHAUER. Because the benefit package would be expanded, and any time you expand the Medicare package it reduces costs for Medicaid.

Mr. PAULY. Again it is a value judgment, but personally I wouldn=t touch anybody with incomes under about 400 percent of the poverty line, which would certainly protect people in the low Medigap purchasing population, which is the 100- to 200-percent range.

Ms. STEELMAN. 100 to 200 percent of the low Medigap purchasing piece?

Mr. REISCHAUER. Yes.

Ms. STEELMAN. My two questions are, to build on Sam=s transition----

Senator ROCKEFELLER. Would you use the mike?

Ms. STEELMAN. Thank you, sir.

Transition, could you speak to actual startup mechanisms you would use? How do we put one foot in front of the next? And what would be the timeframe during which that would occur?

We have a huge program in place today. How do you begin to mold into something else?

And second, can you speak to the fiscal consequences of all of your proposals and how likely they are to meet the 2030 test we=ve given ourselves here--fiscal solvency or viability through 2030?

Mr. FELDMAN. Well I would like to speak a little bit to our proposal. I think it is possible to implement portions of our proposal without the competitive pricing in its full-blown model.

For example, if one were to start off with an annual open enrollment period that would apply to the Medicare HMO Program, that could be done without competitive pricing in place at all.

The next step up would be competitive pricing for the managed care plans, the HMO=s alone, and the most thorough version would include fee-for-service Medicare and Medigap policies.

The experience in Denver, I think, was very promising, that we could bypass the open enrollment alone stage and go straight to an HMO-only pricing system.

So I think it is safe to begin thinking about that as a starting point.

In reacting to your questions about the budgetary implications, we did not design our program to save money. We designed it to create a more efficient system.

That is sort of a cop-out. You know, to say that we never really costed out the deal? But in preparation for this committee hearing we did some preliminary calculations. My estimate is that an HMO-only pricing system nationally would save about $5 to $7 billion per year, which is about 20 percent of the amount that Medicare currently spends on the HMO Program.

If that were applied to all of Medicare, the savings would just be multiplied by a large factor.

Mr. HOWARD. Is that available to us?

Mr. FELDMAN. We would be happy to write that up and provide it to you. We haven=t put it on paper yet.

Mr. HOWARD. I would appreciate it.

Mr. REISCHAUER. That is something about the level of prices, but your problem is not the level. If I came and waved the magic wand and said I could reduce the level of Medicare by 20 percent, then we would be 4 years ago rather than today.

You know, when you=re in 2030 you would be in 2026, and it isn=t as if the world wouldn=t come to an end a few years hence.

I think it is conceivable that restructuring Medicare the way we are talking about will, in addition to the changes that have been made in the employer-sponsored sector, change the dynamic of the health care market so that the growth of costs slows down, but I don=t think any of us knows that at this point.

Mr. PAULY. If you wanted to contemplate income condition in Medicare, you probably wouldn=t want to start it right away.

I have to go visit my parents next week. That=s one reason. [Laughter.]

But in addition, I think the current retirees have a right to expect the benefits they were promised.

But as Bob has already suggested, the real problems are the outyear problems. My view is, if you told me or people in my cohort that if you have an adequate retirement you should expect to pay more for your Medicare, especially if you want the latest technology, I think we would start saving now and start making insurance arrangements if we valued that technology sufficiently to make sure it is available to us.

But throwing the bath of cold water idea would probably not be a good strategy. It would be better to transition this.

Mr. DOWD. I agree that phase-in is perfectly feasible, either along the lines that Dr. Feldman or Dr. Reischauer point out.

I also would just like to put in a plug for demonstration projects, since we currently have one underway. We had a demonstration for tougher risk HMO=s back in the early 1980=s and my understanding is that Congress put it into law while the demonstration was still underway.

I think that was a mistake. And so I really am a big fan of demonstrations, and particularly of new ideas, and I would like for us to give this particular one a chance to run out to see what problems surface before we put it into law

Mr. HOWARD. Dr. Reischauer, would you comment on the income testing? I want to hear what you have to say compared to Mark.

Mr. REISCHAUER. This is really a very complicated issue, and it has political and economic dimensions.

Mr. HOWARD. Give me the economic dimensions.

Mr. REISCHAUER. Upper income people tend to live longer. They also tend to use more health resources than lower income people do.

They also have paid more into the system over their lives. Especially when we=re talking about younger generations and really rich people, let=s say the $80,000 and above, we=re talking about some people who will have contributed, you know, 40 years from now one heck of a lot for what they=re going to get back.

You know, the Michael Jordans of the world, because we lifted the cap on the HI tax. And I think you are getting into a bunch of very complicated political issues when you talk about explicitly income testing the Medicare benefits as Mark would have us do.

This is not rocket science. This is a combination of plasma physics and gene splicing done upside down under water. You are going to be lucky to make modest modifications in the existing Medicare system.

And so why complicate the whole issue. If we think the upper income people in this country, the aged upper income people, aren=t paying their fair share of taxes generally, we provide them with an extra tax benefit in the standard income tax. Take that away from them.

I mean, 98 percent of them are getting Medicare. We don=t have to go through the Medicare Program to do this. And raise sort of a whole bunch of redistributional issues within a health care program, which I think will be decisive and reduce the amount of political support that this program has enjoyed over the last 30 years.

Mr. HOWARD. My last question----

Mr. PAULY. Could I just respond to that as well? I guess I agree with Bob that it is complicated, but you wouldn=t have invited the mad scientists here if it wasn=t necessary to do something.

In fact, as he mentioned, higher income Medicare beneficiaries live longer. In fact, according to some research they actually end up with more benefits, as well, just because they have more to live for, I guess.

And so there is not as much redistribution from high-income to low-income beneficiaries as one might think, and moreover, at least it seems to me, we have made a social decision that there ought to be a redistribution within cohorts from high-income to low-income people.

So I would rather have Michael Jordan or myself pay for our Medicare benefits. It is hard to think of Mike and I in the old folks home [laughter] as opposed to having the guy down at the gas station pay higher payroll taxes so that we can enjoy our Medicare benefits.

The other reason I am in favor of this is not just steeling from the rich to give to the poor, but in addition as I said a kind of quid pro quo is that this would allow some Medicare beneficiaries to get out from under the heavy hand--to mix metaphors here--the heavy hand of thousands of pages of regulation that you heard about this morning and make their own choices in a much freer way, even their choice to overpay their doctor if that=s what they felt motivated to do.

And I think that is a deal which, not that everybody would jump for, but at least is some advantage both in terms of their own ability to plan their future in a way they like, but also from the point of view of overall efficiency, forcing people with one set of tastes to have the same Medicare benefit package as people with a very different set of tastes cannot be an efficient thing to do if we have some alternative, and I believe there is some alternative.

Mr. HOWARD. My question has to do with expanding the coverage, the age coverage.

Using your mechanism systems that you=ve all described, how do you think it would work if you dropped the age to 55 and decided you wanted to cover people from 55 to 65?

How would you operate that?

Mr. DOWD. Well our system that we have proposed isn=t age-dependent in any respect. And so you would just have more people.

I mean there would obviously be budgetary implications, but just in terms of technically running the program it would just be a purchasing program that would have more people in it.

Mr. HOWARD. You wouldn=t have a higher income for those individuals between 55 and 65?

Mr. DOWD. Well our proposal doesn=t have the kind of income adjustments that we=ve been hearing about. It is purely a purchasing proposal.

Mr. HOWARD. OK.

Senator KERREY. Dr. Tyson?

Ms. TYSON. Well my questions have mainly been raised already, so let me just address one that I frequently raise.

Each of you--Dr. Pauly to the least extent--but each of these proposals does assume the definition of a benefits package.

We are going out to 2030. We cut it short. We did not go to 2050 or 2075. We are living in a period of massive changes in technology.

What is the process whereby the standard benefits package will be defined and adjusted over time?

This would have, I would think, fairly significant budget implications. I would be very worried, Dr. Pauly--maybe you know more about medical technology than I do--but if I were told: all right, now, start saving so that 20 years from now you can buy the best of medical technology, I have no idea--you know, maybe I would save my whole income.

I have no idea.

So I think a very big issue here is what is the thing that we are going to give the premium support for? And what is the process by which we adjust that thing over time as technology changes?

Mr. REISCHAUER. You know one can get too caught up in definitions of benefits packages. Right now we cover, you know, hospitalization, prescription drugs, mental health, but there is tremendous variation beneath those definitions.

I mean, is the mental health with an individual provider in individual sessions? Or is it only in group settings?

There are lots of variation of this sort that exists. Right now you have a benefits package that, for all practical purposes, is frozen in ice except for administrative adjustments and occasional intervention by the Congress to expand it.

You know, one can think of all sorts of other mechanisms. You know, an independent board which reviews the package of benefits that constitutes the minimum for Medicare in light of the standard practices of employer-sponsored health care.

Or it could have an ethical element to it. And, you know, that might be something that you would want to recommend: some more automatic adjustment process.

But I would think that, in a sense, that is getting your eye off the ball.

Mr. PAULY. We could start to get creative here and begin to make suggestions about investing the trust fund in nursing homes and stuff like that, so you would at least have a hedge against technological change. [Laughter.]

I wonder why the problem is not as bad in employment-based health insurance which, after all, does cover two-thirds of nonelderly Americans, as it seems to be in Medicare.

There are some exceptions, and we heard a little bit about that this morning, that the Government does mandate certain types of benefits. Yet, it largely stays out of that area.

I don=t have a good answer for you now, but I suggest the situation is not as horrible as it seems. Because for most of the American population we have avoided the problem.

Mr. DOWD. Just as Mark is moving the microphone over, I agree with Dr. Reischauer. I think that flexibility is the key rather than over-prescribing.

We need to leave room for the system to make those adjustments. And also as we said in our summary comments, I think that we need to leave room for consumer demand, as well.

I mean, if we do have an entitlement to hospital care, I don=t believe it should be a phony entitlement; it should be an entitlement to whatever >>hospital care== means at that point in time, and whatever beneficiaries are willing to pay for on the margin.

In other words, there needs to be room for both technological advances and consumer demand in whatever system we have.

Mr. PAULY. I guess to me consumer demand is the key idea. Medical technology is not like some kind of asteroid approaching the Earth inexorably progressing toward us to pick our pockets and make us feel better in the process, of course.

Instead, it is determined by what we are willing to spend on it. As you know, even the projections of future Medicare spending grows. Eventually the rate of growth, the real rate of growth, of Medicare spending is limited to, I think it is the real rate of growth of payrolls or GDP based on Herb Stein=s law >>if it can=t go on like this forever, it won=t== [laughter] that the technology we are going to get is the technology we choose to afford.

So I agree there is some uncertainty about what the brightest discoveries might be, and I think Roger=s suggestion of medical technology futures is not entirely facetious.

But I think within broad outlines, what you save to pay for your medical technology will determine the technology you and everyone else gets. If we can=t afford it, it is not just something to say there is a lot----

Senator KERREY. Roger just stole your microphone, so I guess he was tired of listening to you. [Laughter.]

Mr. FELDMAN. To step back a level, there are three ways to control the rise of health care costs and technology.

We can have high deductible, high co-insurance policies, because we know that consumer-demand regulation works.

We don=t seem to want it in this country very much.

The second solution is an outright Government ration program, and we don=t seem to want that very much, either.

That leaves supply-side rationing of some form that is composed of incentives for the providers to deliver less care than the patients want at the point when they want it. And that seems to me to be relying on the managed care system as the future of both Medicare and the under-65 population.

Ms. TYSON. The reason I asked the question, by the way, is not because--I do think that if it is true, and maybe it is not true, but if it is true, I sit in the California, so I sit next to all of these high technology types, and so all I hear about is that we=re basically on the brink of a major sort of shift in everything.

If that is true, then it seems to me that the Congress--I assume we will have a Medicare Program; I assume it will be functioning in some capacity in 2030; I assume that the pressures on the Congress that you said, Bob, we=ve been able to withhold over time in terms of what is it that Medicare provides may get larger and larger, and I think an independent advisory board or something, some other source of making these evaluations, which after all are ethical, they=re not just medical, they=re ethical evaluations, and I don=t think, it=s not just like a consumer--to say that somebody gets to choose, I get to choose if I have enough income, a Cadillac, and somebody else gets to choose a Chevrolet because they don=t have a Cadillac income, that----

Mr. PAULY. I didn=t say that.

Ms. TYSON. That=s fine--no, no.

Mr. PAULY. We both have a Cadillac income. You pick a Chevrolet, I pick a Cadillac.

Ms. TYSON. The point is that I think that because there are these much deeper ethical considerations about the product called health services, particularly when you get to the point of reality we all know that the largest share--it is in one of your papers--of spending in Medicare is spent by a very small percentage of the population who is very sick at the time they are spending this money.

So it seems to me that--all I was really saying is I think the pressures are going to mount, or may mount, and I was struck in your paper, Dr. Pauly, where you were talking about really what we should do is say to the Medicare beneficiary today, we are promising you in 2030 access to the quality of care that you are buying in 1998.

And if you don=t save enough----

Mr. PAULY. The well-off Medicare recipient.

Ms. TYSON. If you don=t save enough to make it to 2030 for the best technology then, well, just sorry, you don=t get it.

I think I understand the argument, but I don=t think it is an argument that is likely to work very well with the ethical considerations that are behind the Medicare package.

Mr. REISCHAUER. It is also not a realistic option, because we don=t keep around old technology. I mean, I can=t go into George Washington and say: Give me leeches. [Laughter.]

I don=t want chemotherapy.

You know, there is one standard of technology and everybody who walks through the door gets that standard. Not, you can go to floor six and we=ll get the real machines up there.

Mr. PAULY. That=s because there is market for old technology. If there was a market for it, it would exist.

I think the point I=m trying to make--I am very sensitive to the ethics issue. As I said, or at least I think I said, what I am proposing would not apply to low-income people.

Ms. TYSON. Right.

Mr. PAULY. It would be for people who can afford the technology.

Ms. TYSON. You were very clear on that.

Mr. PAULY. And I would imagine the imprudent person who decided to not save for expensive technology when they retire, and then discovers the latest quality of life-enhancing product is available, they would have to reduce their consumption in order to be able to get that.

Senator KERREY. So you=re saying over 400 percent of poverty?

Mr. PAULY. That was what I was thinking.

Senator KERREY. That would be approximately $32,000 a year----

Mr. PAULY. For a single.

Ms. TYSON. For a single.

Senator KERREY [continuing]. For a single individual it would be $44,000.

Can you describe the income characteristics of somebody over the age of 65? Is that from employment? Would that be from nonemployment income, typically?

Mr. PAULY. I can only speculate. I am not an expert on that. But most of that would be from private pensions, not from employment.

And my suspicion is that the level of wealth that would accompany such an income is also fairly substantial.

Mr. REISCHAUER. We----

Mr. PAULY. Again, it is not something you would want to do if you could have the ideal world, but----

Senator KERREY. I don=t want to drag Bob back into this income tax thing, because he already said he could talk forever on it. [Laughter.]

Mr. PAULY. Right. I guess I could, too. But I do want to make one other point about technology, which is--again this is all a matter of degree, but the issue is who is to decide on what new technology would be made available to the reasonably well off?

I guess--and since I expect to be among that class--I would rather have the power to decide, myself, rather than to have even some Medicare Board of Wise People decide.

Ms. TYSON. I don=t think the Medicare Board of Wise People--I just would say, the Medicare Board of Wise People is going to decide upon what is in the standard benefits package.

The position I think that Bob has is not that you would--people can buy more in this support system, basically----

Mr. PAULY. OK, well I have the same position, then.

Senator KERREY. Doctor----

Ms. TYSON. Can I just ask a followup? OK, I=ll stop.

Senator KERREY. Go ahead.

Ms. TYSON. It really is a difference I felt among the panelists a little bit was on the degree of uncertainty about the future.

Bob Reischauer was much more, I wouldn=t bet my life on my proposal; there=s a vast amount of uncertainty.

Early on it sounded like Roger=s answer suggested it could sort of be like Wisconsin and change the Medicare system, you know, within a year.

I am struck by the fact that a lot of the evidence we have about HMO=s in the non-Medicare population is relatively recent.

That most of our studies of health care behavior has not been done among the elderly.

So are we so sure we understand the price sensitivity issues, and all of the sort of parameters we would have to have in place to make this transition very rapidly?

Mr. DOWD. I do not think we want to make light to the difficulty of installing any kind of competitive pricing system, either, again. I think that is the important role of demonstrations.

We do not want to put things in overnight untested. We want to test them first and then see what goes wrong.

I would say, though, that my impression of the literature is that in terms of comparisons of quality of care between HMO and fee-for-service systems, our very information is on the Medicare population.

It is true that studies of price sensitivity in health plan choice are more difficult to do in the Medicare population because it is more difficult to get the data, but I think the question that a lot of people are most concerned about is quality of care, and there I think we have the best studies for Medicare.

Senator KERREY. Dr. Altman?

Mr. ALTMAN. Yes, let me jump in.

Senator KERREY. You are not jumping in; you are in order.

Mr. ALTMAN. OK, but I want to follow up on this discussion.

I hate to say this, but it does sound like what you are talking about is what may have been the prevailing wisdom of 3, 4, 5 years ago about the relative benefits of one form of cost containment versus the other.

I thought you were going to--you know, I think Mark=s question is a very real one, and I like your three ways, but I thought you were going to say none of the above.

I don=t sense a great, uniform jumping for joy of having providers do the regulating versus Government versus deductibles and co-insurance.

I see people checking none-of-the-above. Of course the question is then who is going to pay for it.

But I just want to put on the table the idea that I think that is up for grabs. Maybe we are going to go back to deductibles and co-insurance. Some of us think that we ought to be in on the act rather than just having the providers of the plans pay.

And in that context--this is the question I had--you were talking about going to a competitive bidding process in stages, and you sort of implied that as an intermediate stage you would just have competition among the HMO=s.

It is my understanding that that is what led to the downfall of the competitive bidding process in the first place.

They feel, and I must admit I was somewhat sympathetic to it, that you have created an unfair situation. They are not only competing among themselves, but they are competing against the fee-for-service system.

And by forcing them to beat each other up while the other one just runs along doesn=t necessarily generate a fair world.

So I thought maybe competitive bidding might work better only after we truly created a premium subsidy program where people were buying across a choice, including fee-for-service; and that this intermediate, while it sounds like you can do it tomorrow, is quite contentious. And I am not so sure we can leap into that.

So I would like you to talk about it a little bit. I was surprised, myself, but I don=t think we are going to be able to just do competition among HMO=s and leave the other part out.

Mr. REISCHAUER. Well while they are trying to figure out what they are going to say [laughter] let me chime in. And maybe I should not. I am a member of this Competitive Pricing Demonstration Commission, but I am very skeptical about whether----

Mr. ALTMAN. I want to know the members----

Mr. REISCHAUER [continuing]. Whether we are going to learn anything from this.

I agree with Roger and Bryan that Medicare should be one player in this kind of demonstration, but if it is true that traditional fee-for-service Medicare is inefficient, then what you are saying is that 80 percent, or 85 percent of the folks in the Denver area are going to end up paying more for what they have now.

You are not an elected official, but those who are elected would immediately see the lack of wisdom of that form of demonstration project.

Mr. ALTMAN. That is what I was concerned about.

Mr. REISCHAUER. I wonder whether we ever really can learn that much from these demonstration projects, and maybe the right thing to do is to slowly ease our way in across the Nation as I suggested with 10 percent of the capitated payment being determined by competition year 1, and then go on from there, being willing at any point to stop.

Mr. FELDMAN. I guess you should never pass up an opportunity to talk, or somebody will grab it [the microphone]. [Laughter.]

I would like to just go back a minute, if I could, to Commissioner Tyson=s comment or question about price responsiveness of Medicare beneficiaries.

It is true that most of the original studies of this question were done on the under-65 population, but we now have some evidence that the over-65 population also responds to price differences.

One of these is a study of University of California retirees. In fact, the evidence suggests that Medicare beneficiaries may be so price sensitive that their health plans when confronted with the choice of charging an out-of-pocket premium or exiting from the market take the second alternative because they feel that charging any out-of-pocket premium is just death.

I will let Bryan now catch up to Commissioner Altman. [Laughter.]

Mr. DOWD. Although I would emphasize that in areas like the Twin Cities we do have HMO=s in the market that are charging out-of-pocket premiums, so there is quite a wide variation there by market area.

On the question of what consumers prefer, be it cost-sharing or supply-side controls, I agree with you. I do not think we know the answer.

So what I am in favor of is a choice. So let=s----

Mr. ALTMAN. Me, too. That is all I wanted to get to.

Now if you will excuse me, my one question is mainly to you, Bob, but we have been hearing a lot about the FEHBP plan, and that mechanism, and to the extent that I understand it, while it might bring about equality and choice among plans, it has problems regionally in the sense that the Federal Government establishes two criteria:

One is that in no case will it spend more than 75 percent of the premium of any plan and, on average, it will spend no more than 72 percent of the average 5. And to the extent that you are going to have areas that are high-cost areas, either because of high rents plus their medical, they necessarily, the people there, are going to get lower subsidies or the providers are going to have to sort of figure out a way to eat much more of the differential.

Is that, (a), your understanding of it?

And, (b), in your plan would you do the same thing?

Mr. REISCHAUER. No.

Mr. ALTMAN. Good.

Mr. REISCHAUER. That is my understanding, and the answer is: No.

Mr. PAULY. Likewise.

Mr. REISCHAUER. The Federal Government sets premiums nationwide, and it is----

Mr. ALTMAN. So you would go regionally, and so you would not use the current----

Mr. REISCHAUER [continuing]. It is market area by market area, and it is a horrendously unfair system for anybody in a national plan----

Mr. ALTMAN. I would like to put that on the record.

Mr. REISCHAUER. If you were in the State of New York in Blue Cross low option, a Federal plan, you are getting a heck of a deal.

If you are in Nebraska, you are getting your clock cleaned. Because you are paying the same premium and the costs are hugely different. And that is why you have to have these market areas, localized market areas, in the bidding within that.

I think everyone on this panel would say that of course it has to be done locally.

Mr. ALTMAN. And everyone has been beating up, including me, on the Medicare way of doing the AACPP, but the extent to which Medicare is maybe going too much to regional differences where the FEHBP isn=t going at all, I think if we=re going to think about a problem that looks like that we are not going to just be able to jump in and take it the way it is structured.

I think I am hearing from all of you--I don=t know about Mark, but I think you agree--that not only do we have to have some degree of competition across plans, but we have to have some degree of dealing with regional differences. This is a big country with a lot of differences, regional differences, in whether it is the subsidy rate or whatever.

Is there agreement across the board on that?

Mr. FELDMAN. Yes.

Mr. PAULY. Well I said I thought the virtue of bidding was that it makes for reasonable cross-area adjustments, although it is my impression Medicare is actually going toward squishing those with a limit on the variation in payments across areas.

You do get the argument the other way. Just because I happen to live in a low medical-care-cost area, whether it is West Virginia or Oklahoma, why should I get less? I pay the same taxes, don=t I, as people in New York.

So I do not think there is an easy solution to that.

Mr. ALTMAN. Well we have a number of representatives of rural States and rural areas, but I would like to look ahead 5 years and see what the implications of the Balanced Budget Act that is going to literally dump billions of dollars into rural areas way beyond what they pay for it----

Mr. PAULY. Lots of square dancing lessons will be covered by HMO=s. [Laughter.]

Mr. ALTMAN. I think there is going to be, you talk about fraud and abuse today, that is going to be a field day.

Mr. FELDMAN. Well the current implication of the Balanced Budget Act seems to be that everyone is getting the minimum update converting the system, in effect, into a competitive pricing system where the Government just plays the role of the piper calling out higher, or lower and lower reimbursement rates over time.

Mr. PAULY. Yes. That is actually another way to do competitive bidding. Just announce a price and let people respond with what kind of quality or service they will give, and then decide whether you like it or not.

Mr. VLADECK. And what if nobody wants to play at that price?

Mr. PAULY. They would deliver something.

Mr. VLADECK. Pardon?

Mr. PAULY. They would deliver something.

Senator KERREY. Senator Rockefeller, do you have a question? [Laughter.]

Mr. VLADECK. I=m sorry? This is a real issue in the State of Utah. This is a real issue in New York City at the moment at the price that is being set.

The HMO=s do not want to play.

Mr. PAULY. Then conventional Medicare must be a good deal.

Senator KERREY. Senator Rockefeller?

Senator ROCKEFELLER. As the former administrator of HCFA, I would like to ask this question [laughter]----

Again going, Bob, to you and to Mark, not to exclude the two of you, you talked about core minimum benefits as being a crossover. Put me down as highly nervous about >>defined contribution== simply because I see--well, I won=t get into that.

But everybody here is worried about the year 2025. I have not yet gotten to the year 2010 to figure out how we are going to pay for this stuff. So put me down as near-sighted.

But even by that time, 2008, 2010, can any of you imagine a minimum benefit package that does not include something now included? To wit, long-term care? [Pause.]

Mr. FELDMAN. While Mark is trying to figure out the double negative [laughter] I can certainly imagine a benefit package that does not include long-term care.

Ms. TYSON. You cannot? Or you can?

Mr. FELDMAN. I can. Yes.

Senator KERREY. I can, too.

Mr. FELDMAN. I am just looking at the private sector and hoping that Medicare can do as well as they have in including benefits such as prescription drugs and a cap on the beneficiary=s out-of-pocket expenses when they have long hospital stays.

Senator ROCKEFELLER. With the incredible--and it may be advancing somewhat--but with the remarkable failure of private insurance in the long-term care area, and with several of you having mentioned during the course of this afternoon what people feel is important to them, what seniors feel is important to them, I seriously doubt if anything comes more at the top of their list in terms of raw fear than long-term care, and that led me to ask that question just to sort of get your position.

Mr. FELDMAN. In many areas of the country the Government pays HMO=s more than they need to deliver the statutory Medicare benefits.

Senator ROCKEFELLER. I=m talking about the Medicare population.

Mr. FELDMAN. Well, they pay Medicare HMO=s more than this. I=m talking about them also.

So those HMO=s could convert that overpayment into any sort of benefit that they want, including long-term care. Therefore we have something of a market test to observe the sort of benefits that are being provided in those areas, and long-term care is not one of them.

One of the most popular----

Mr. REISCHAUER. But I mean that is not a realistic test. It is like saying bring me your sick and disabled. [Laughter.]

Mr. FELDMAN. Well, most of those--no. Most of those HMO=s do offer drug benefits, which is a guaranteed way to get adverse selection.

So they are telling us in order of the elderly=s willingness to spend the overpayment, so to speak, the most desirable sort of benefits that they can add, and it is not long-term care.

Senator ROCKEFELLER. How did we sort of get to--I mean, Roger, you are very glib and smart--but how did we get into overpayments, and fraud and abuse, as a way to pay for long-term care? [Laughter.]

Could you just help me through that?

Mr. FELDMAN. Well I think you should ask how did HCFA get to it?

In parts of the country such as southern California and southern Florida, HMO=s are receiving about $700 a month to provide basic Medicare----

Senator ROCKEFELLER. But you know there is a lot of America that doesn=t live in those two places----

Mr. FELDMAN [continuing]. Benefit, and they find that that is more than enough. So they convert it into extra benefits at no additional cost to the beneficiaries.

Senator ROCKEFELLER. Roger, assuming----

Mr. REISCHAUER. Be careful about what benefits they offer, and the limits on those benefits. And they offer prescription drugs but with very fixed limits on the amount you can use, and these are not designed to attract an excessively risky population. And providing long-term care would be, you know, an invitation.

Mr. FELDMAN. Well I guess you have succeeded in getting the panel to disagree.

I was a consultant to the California Department of Corporations when they investigated the Pacific Care FHP merger in 1996 and 1997.

In that market it was common practice for the HMO=s to offer free prescription drug coverage with a $5 co-payment and a $2,500-a-year maximum benefit.

If that ain=t generous, I don=t know what is.

Senator KERREY. Deborah Steelman?

Ms. STEELMAN. No employer plan is capped at $2,500.

Mr. PAULY. I just wanted to make a comment, Senator. I think there is an issue of what Medicare beneficiaries want. There is also the issue of what taxpayers who will have to pay for this want. And the issue is willingness of the people who will actually have to pay for it to fund something like long-term care insurance, which I have to say in my view primarily protects the bequests.

Senator KERREY. Well I=ve got to say, it is especially true. We are adding a million Americans a year to the ranks of the uninsured. Many of those are working, many of those are struggling to make ends meet, can=t afford health insurance----

Mr. PAULY. Plus there is the absence of prescription drug coverage.

Senator KERREY. Ten percent of the program is paid for today with premiums. Fifty-three percent is paid for with the HI tax. Thirty-seven percent is paid with general tax. And that number is going up.

So I think the point is exactly right. If we continue to add--that is why I asked the earlier question about is it possible to change the way one becomes eligible inside of any of the divisions you all have, because I think that is a tremendous conflict.

There are a lot of people out there today who are working who are paying taxes of all kind, and nobody comes to them and says, gee, I am really worried about you. I mean, 400 percent under poverty, or 500 percent under poverty is the median income in Nebraska.

Ms. STEELMAN. Which one of you is masquerading as me? [Laughter.]

Senator ROCKEFELLER. No, but, Mr. Chairman, I have got to object to that--I=m sorry, Deborah--I=ve got to object to that.

I mean, there is nobody that has more anger and outrage on the subject of the uninsured around this table than I feel--than I hope that I do. But that is a specious argument.

That is a specious argument in relationship to the question that I raised, which is the question of long-term care.

Senator KERREY. I wasn=t responding to your question, Senator. I was responding to the statement that was made that said that, in addition to being concerned about the benefits, we also have to be concerned and ask ourselves the question of what are taxpayers willing to pay?

Senator ROCKEFELLER. And Medicare beneficiaries, in spite of the fact that you put down that they only pay 10 percent, if that is correct, of Medicare costs, are one of the first to identify themselves as having paid into the system through co-payments, deductibles, and the rest of it, as part of the payment of the beneficiaries--of the Medicare Program.

I mean, they see themselves as part of the reason that Medicare is paid for.

So if they identify long-term care, and in West Virginia they do, as their top priority, then I think it behooves us at least to consider it with some respect. I suspect West Virginia is not the only place.

Mr. PAULY. Or, alternatively, an educational program.

Senator ROCKEFELLER. I can=t hear you.

Mr. PAULY. An educational program to let people know what they have really paid for.

Senator ROCKEFELLER. In other words, prove to them that they don=t really pay much? Is that what you mean?

Mr. PAULY. Relative to what they get.

Senator KERREY. Deborah Steelman.

Ms. STEELMAN. I would like to go back----

Senator KERREY. This is the last question, and then we will go into modeling.

Ms. STEELMAN [continuing]. To Laura=s question about the process by which we would determine a benefits package over time.

I would like to ask it in a slightly broader context.

What is the regulatory structure that would best underpin your proposals? If it is not, per se, OPM, and it is not per se HCFA, what is it? What are its main functions?

Does it have benefits package modernization authority? Does it have any fee-setting authority? Because you know fee pays Medicare rate schedules.

And that is really even a larger question: What would your system look like without the influence of the current HCFA in the market place? What would happen as a result of that?

So this is really the big regulatory administrative question.

Mr. DOWD. Roger and I are probably going to give you two different answers on this one.

My personal opinion is that HCFA is capable of running the whole thing. They already qualify health plans. They already calculate an estimate of cost in the fee-for-service sector.

They already announce the Government=s contribution to premiums.

They are already getting into the business of providing better information on health plans to beneficiaries.

Under our plan, which is sort of under the most dramatic form of our plan, the one test they would have to add would be computing the out-of-pocket premium for the fee-for-service sector and billing beneficiaries for it.

Mr. FELDMAN. It is interesting. In the discussions this morning, which were critical in many ways of HCFA=s regulatory processes and results, I did not hear anyone being critical of its process of qualifying HMO=s to participate in the program.

Perhaps this was just a criticism that forgot to be made, but this is an area that in our proposal we envision HCFA continuing to play the role of qualifying plans to participate in the program.

I do not think it would have to change a whole lot.

The only glitch that you could foresee is if they did choose a low-bidder system or something close to it, and the low-bidding plan was just an obvious stinker, I think HCFA should be able to exclude that plan=s contribution from the bidding formula--from the reimbursement formula.

But otherwise, I think HCFA is doing a pretty good job of plan qualification now.

Senator KERREY. I would like to thank the panel for coming here today, and I appreciate your testimony.

Ms. STEELMAN. Nobody else answered the big regulatory question. We are going to have to get them again.

Thank you.

We will move immediately to the Modeling Commission Report. We do not have witnesses for this.

We have met in public session as recently as I think it was 3 or 4 weeks ago and proposed a format by which we would display information on any proposals the Commission chooses to put forward.

Laura, would you like to characterize that in any way? Or should we have--OK.

Jeff, have you passed that around?

Mr. LEMIEUX. Yes.

Ms. STEELMAN. At that meeting, just to brief the entire Commission, at that meeting we chose an example of a policy. We did not make any policy. We did not make any recommendations.

The example we chose was how would we score the ending of the BBA provisions?

Again I have to emphasize that this was not a policy; it was just an example we used as one that all of us understood very easily. It was just an extension of current law.

Then we tried to figure out how we could best display the variety of information that the Modeling Task Force could bring to any scoring.

Jeff, I would like you to just run through what that display looks like.

Mr. LEMIEUX. Right. Let me start by way of background.

When we started meeting in the Modeling Task Force we discussed how to frame a baseline for the fiscal issues in Medicare and how to start discussing some of the nonfiscal issues.

We ended up coming to agreement on two baselines to compare any Medicare policy against. When we finished that work in our full Commission meeting on June 2, we split off into two paths.

The first path was to see if we could come up with some ways to think about or quantify some of the nonbudgetary or nonfiscal issues that we talked about in the full Commission meeting.

The second path was to see if we could come up with a standardized or--maybe >>standardized== is too strong a word--at least some sort of general set of tables or displays or charts that would give Commissioners an idea of what a particular Commission proposal might mean.

The reason for that was: Once we got our baselines going, it was clear that the usual CBO cost estimate of a proposal--you know, saves $1.8 billion over 5 years--was not going to be helpful for Commissioners trying to decide about whether or not to do some things over the 30-year horizon.

In our last task force meeting, we started the meeting discussing this example of a cost estimate. The example that we chose was an extension of certain provisions of the Balanced Budget Act.

What we sent to the task force members and attached for all Commissioners a couple of days ago is an up-to-date version of that cost estimate example.

It includes all the concepts that we talked about when we laid out our baselines in June, and it includes some of the changes that were recommended in our task force meeting in mid-July.

At that same task force meeting we sort of issued a call for solutions among task force members on the issue of nonfiscal discussion.

We have made some progress on that, although you do not have that in front of you at this point.

When we talk about >>nonfiscal issues,== I think it boils down mostly, based on what I have heard back from members, to consideration of the impact of policy on beneficiaries= out-of-pocket spending, and consideration of the impact of a policy on taxpayers= after-tax income. There was some mention of consideration of the impact of a policy on health providers as sort of the third of the three major groups of stakeholders in Medicare policy--beneficiaries, taxpayers, and providers.

There was some talk that we don=t particularly have a shortage of information on how Medicare policies might adversely affect providers in this town, and that it would be fairly difficult for our little task force to do very much on that, anyway, but perhaps MedPAC could help us.

We have started to make, I think, decent inroads into the impact on after-tax income and the impact on beneficiary out-of-pocket spending.

That pretty much summarizes our work until now.

Mr. VLADECK. Could I raise what is really a totally new issue, but they asked, Jeff, since I don=t know when the next meeting of the task force will be, a question about data sources that could be added.

We have heard yet again today--I am sorry Senator Kerrey had to leave before this--and I have been spending a lot of time thinking about this distinction between beneficiaries and taxpayers, as though they were not the same people.

I wonder if we could do two things, not in terms of the routine estimation associated with every proposal, but just as additional background information for the members of the Commission.

The first would be to--I have heard the number thrown around that about half of Medicare beneficiaries are subject to Federal income taxation, but I wonder if we could get some more data on the actual Federal income tax contributions of Medicare beneficiaries.

But second, what I really would like to know is, I keep hearing people talk about one group of people paying taxes to support health care for another group of people, until I realize that that other group of people is our parents.

I would like to know something about the generational family relationships of Medicare beneficiaries. I would like to know how many of those taxpayers that everybody talks about with such great concern and sympathy are in fact the children of those beneficiaries who are paying through their taxes what they are not having to pay directly.

I wonder if, in time for the next meeting, the Commission could get that data, as well.

Mr. LEMIEUX. We are certainly looking into those areas. I mean, you are obviously on a key point. When we talk about stakeholders in Medicare as being three different groups, beneficiaries, taxpayers, and providers, we are all citizens, and the impact is on citizens in their roles as these different things. But it is really the same group of people.

Mr. VLADECK. I will, at the expense of personalizing this, but we are also talking about my mother here. We are talking about my mother who is a beneficiary and a taxpayer, and my paying taxes not to support some anonymous stranger; my taxes are providing health insurance for my mother and my mother-in-law.

Now that may have a slightly different policy implication, but [laughter] it is different from a total stranger.

I think we have to start bringing people back to that recognition.

Senator ROCKEFELLER. Madam Chairman? Doesn=t that also bring up the question, not to be answered here, that we started out with some time ago that Medicare, along with Social Security, is a social sort of a trust fund?

In other words, that there is a social contract involved in this? And that as Medicare has been vulcanized into different choices and all kinds of other things, that the concept of the social contract is still of interest and I think relates to our question, Bruce.

Ms. STEELMAN. I think those both relate, the more we started to discuss the nonfiscal issues, the more it became more of a Commission discussion.

Clearly in time for the next Commission meeting I think this will be a major topic. So we probably will not have a Modeling Task Force meeting on this.

Mr. VLADECK. No. That is why I raised it. I didn=t think we would have time for a meeting.

Ms. STEELMAN. Right.

I think to the extent that those interested could help participate in creating a list of questions or criteria, or whatever, prior to that, that is really pretty much what you asked for, wasn=t it, anyway?

Mr. VLADECK. Yes.

Ms. STEELMAN. We will do that. Laura?

Ms. TYSON. Can I say that a compelling point of similarity in the last panel was the view that what they were proposing was primarily motivated by efficiency, and that the fiscal implications were both uncertain and relatively small.

So we are talking about major transformations in the Medicare system which are being proposed on efficiency grounds, which I happen to think are perfectly reasonable grounds for doing something, but they are not being proposed on fiscal grounds.

So to the extent that we focus too much attention on fiscal grounds, we are going to end up I think missing the list of problems--of which efficiency was one; Bob Reischauer went through other problems--that we really should be addressing.

Also, although I think our Modeling Task Force----

Mr. VLADECK. But I----

Ms. TYSON. Let me just conclude here.

Although I think our Modeling Task Force has done a good job of coming up with a presentation mechanism, for example if we asked our panel of experts to give us a reasonable range of estimates in terms of if you did everything they wanted us to do, what would the numbers look like in 2030, I suspect they are not going to look very different, and we might want to do that.

Mr. LEMIEUX. Absolutely. I mean, you understand the reason why I am sort of trying to jump ahead into these sorts of presentation issues? At this point the Commission isn=t really talking about lots of detailed different proposals.

But the hope is that later on this fall, if we can familiarize ourselves with a format that we are comfortable with, then we will not be fighting about the format; we can fight about the issues.

Ms. STEELMAN. Right.

Mr. HOWARD. I do not think anyone has really taken the time to focus on the financial implications of these things, except Roger indicated he has penciled some numbers together.

You can control it just by controlling the contribution. That is what you can do.

Mr. VLADECK. Right. But what do you buy for the contribution?

Ms. TYSON. No, no. It is what you buy for the contribution.

See, the reason that Bob Reischauer will not say you=re going to save a lot is because it is a contribution relative to a standard benefits package, the price of which comes out of the bidding process which fundamentally affects what is happening to the cost of health insurance throughout the system.

So if the cost of health insurance throughout the system is rising at 10 percent a year, and the bidders come in and bid, and Medicare provides a standard benefits package, the premium contribution is going to be growing rapidly. You can=t set the premium contribution--or you could, but it would be a different model than what these gentlemen were suggesting.

They were not suggesting setting a dollar amount and just saying whatever it buys it buys. They were talking about a bidding system in which the thing that determines how much the Government spends is the cost of the package, and then a separate political decision of what is the percentage of that total cost that the Federal Government will supply in a given year.

Ms. STEELMAN. And I think this is exactly the reason the conversation on what the nature of the problems are, and what it is we are trying to solve, and what the order and magnitude of those are, is exactly the place to start the next meeting, because they have characterized these.

Mr. VLADECK. Laura, I just wanted to raise just really a footnote to the efficiency issue, because part of the difficulty I have with the kind of presentations that were made here is they were contrasting theoretical efficiency with a reality of an operating program.

If you listened--if you juxtaposed the previous panel with this panel, there is reason to believe that the theoretical efficiency that might make for a wonderful dissertation is not in fact obtainable within the confines of the U.S. Government.

So I think if we are going to talk about efficiency as a criterion, there is a tendency to draw curves and do abstract analyses to define efficiency, which is like defining the efficiency of a perfect internal combustion system, but if you get 45 percent out of a real-world system you are doing real well.

I just think we have to be real careful about that as a criterion in this regard.

Ms. STEELMAN. Well we are down to one Member of Congress, so you will have to defend yourself.

Senator ROCKEFELLER. Well I will just make an observation----

Ms. TYSON. He could represent the whole Congress. [Laughter.]

Senator ROCKEFELLER. I speak for the Body Politic. [Laughter.]

Again, I would emphasize I think what Bruce says. That is, in this process--and that is why I think the process, Bobby [Jindal] of trying to pull ourselves together so we become focused, and disciplined, and dealing with potential varieties of options, I think that will clear up a lot of our way of thinking and talking.

But in the private sector, Bruce, one of the things that is most commonly done--not necessarily in health care but I am sure also in health care--is you low bid something to win a competition, and then when you=ve got the contract the price goes up.

I mean, as you say, we are dealing with your mother and that is important and somewhat sacred work.

Ms. STEELMAN. Colleen?

Ms. CONWAY-WELCH. Just one final note as we are looking at some of the modeling part.

You said we were looking at our mothers, and this is an important issue, and the fact is that the statistics in terms of the old, single women, either through divorce, or through death, whatever, of their spouses, this really is a women=s issue.

And, for a variety of reasons, I would very much like to see the numbers that we are projecting. I mean, all of the horror stories of, you know, husband dies, pension goes, that sort of thing, I think would be useful.

Ms. STEELMAN. This concludes our meeting. Thank you all for attending.

[Whereupon, at 3:50 p.m., Monday, August 10, 1998, the meeting was adjourned.]

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