<DOC> [106th Congress House Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:60972.wais] THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM AS A MODEL FOR MEDICARE REFORM ======================================================================= HEARING before the SUBCOMMITTEE ON THE CIVIL SERVICE of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTH CONGRESS FIRST SESSION __________ MAY 22, 1999 __________ Serial No. 106-50 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.house.gov/reform ______ U.S. GOVERNMENT PRINTING OFFICE 60-972 CC WASHINGTON : 2000 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania JOHN L. MICA, Florida PATSY T. MINK, Hawaii THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio Carolina ROD R. BLAGOJEVICH, Illinois BOB BARR, Georgia DANNY K. DAVIS, Illinois DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts ASA HUTCHINSON, Arkansas JIM TURNER, Texas LEE TERRY, Nebraska THOMAS H. ALLEN, Maine JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois DOUG OSE, California ------ PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont JOHN T. DOOLITTLE, California (Independent) HELEN CHENOWETH, Idaho Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director David A. Kass, Deputy Counsel and Parliamentarian Carla J. Martin, Chief Clerk Phil Schiliro, Minority Staff Director ------ Subcommittee on the Civil Service JOE SCARBOROUGH, Florida, Chairman ASA HUTCHINSON, Arkansas ELIJAH E. CUMMINGS, Maryland CONSTANCE A. MORELLA, Maryland ELEANOR HOLMES NORTON, Washington, JOHN L. MICA, Florida DC DAN MILLER, Florida THOMAS H. ALLEN, Maine Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California George Nesterczuk, Staff Director Ned Lynch, Senior Research Director John Cardarelli, Clerk C O N T E N T S ---------- Page Hearing held on May 22, 1999..................................... 1 Statement of: Duranti, Peter, agent emeritus, Prudential Insurance Co. of America.................................................... 107 Lemieux, Jeffrey, staff economist, bipartisan Commission on the Future of Medicare; Grace-Marie Arnett, president, the Galen Institute; and Becky Cherney, president, Central Florida Health Care Coalition.............................. 4 Letters, statements, etc., submitted for the record by: Arnett, Grace-Marie, president, the Galen Institute: Heritage Foundation statement............................ 83 Prepared statement of.................................... 58 Lemieux, Jeffrey, staff economist, bipartisan Commission on the Future of Medicare: Prepared statement of.................................... 8 Prepared statement of Walton Francis..................... 25 THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM AS A MODEL FOR MEDICARE REFORM ---------- SATURDAY, MAY 22, 1999 House of Representatives, Subcommittee on the Civil Service, Committee on Government Reform, Sanford, FL. The subcommittee met, pursuant to notice, at 9:20 a.m., at Sanford City Hall, 300 North Park Avenue, Sanford, FL, Hon. Joe Scarborough (chairman of the subcommittee) presiding. Present: Representatives Scarborough and Mica. Staff present: John Cardarelli, clerk; and Ned Lynch, senior research director. Mr. Scarborough. We call this committee meeting to order. Good morning, and welcome to this field hearing of the Committee on Government Reform's Civil Service Subcommittee. Today, the subcommittee is going to hear from people concerned about the ways in which Americans will pay for the future costs of health care. Since it was established in 1965, Medicare has provided the primary means of insuring proper medical treatment for Americans over 65 years old. Like many Federal programs-- Social Security, Medicaid, and Federal retirement benefits among them--Medicare has operated on a ``pay-as-you-go'' basis from the start. And, like each of those programs, the costs of past commitments are now coming home to roost. Medicare's problems result from many of our genuine achievements in the medical treatment and improved lifestyles of our people. For multiple reasons, including important advances in medicine, people live longer. When Medicare was established in 1965, the lifespan of the average American was barely over 70 years old. Today, people who reach 65 can often look forward to an additional 20 years of life. We have not, however, been especially effective in planning for both the private and the public challenges facing us if we are to provide for our needs in those additional years. The money coming into Medicare will no longer pay the full cost of health care that Medicare provides, while medical care costs continue to outpace inflation. In fiscal year 2000, President Clinton's budget forecasts that Medicare payroll taxes and premiums will fall $92 billion short of the expenses that they are intended to cover. By 2010, Medicare's receipts are projected to be $261 billion less than our anticipated expenses. Without effective corrective actions, the program will be insolvent. In response to Medicare's deteriorating finances, Congress created a Bipartisan Commission on the Future of Medicare in the Balanced Budget Agreement of 1997. The Bipartisan Commission was charged with assessing the problems that we face and recommending solutions to extend the solvency of Medicare for the coming years. It was co-chaired by Senator John Breaux, a Louisiana Democrat, and Representative Bill Thomas, a Republican from California. After reviewing the Medicare program's financial and operational challenges, the Commission looked to the Federal Employees Health Benefits Program as a model of reform. The Bipartisan Commission did not issue formal recommendations; 10 of the 17 commissioners agreed on an approach modeled after the Federal Employees Health Benefits Program, but the Commission's rules required 11 votes to issue recommendations. The Commission's majority reported its findings, however, and those findings will be the basis of both congressional and public discussion as we develop the laws and policies necessary to provide more secure health care for senior citizens. The Bipartisan Commission recognized that the current course of increasing deficits is unsustainable, and the majority identified sound principles that should guide Congress in shaping Medicare's future. The majority concluded that the Federal Employees Health Benefits Program provided the most attractive model of reform available, and it was the most attractive because it relies heavily on market forces to develop responses to needs for health care services. Federal employees have an open enrollment season each year that enables them to choose from a variety of options to meet their health care needs. People seeking more extensive and expensive treatment options pay higher premiums, but all Federal employees' health insurance premiums are supported by a Federal payment. As a result of the Bipartisan Commission's report, some form of ``premium support'' is the emerging foundation of Medicare's future. This approach is a marked departure from the Government's previous efforts to administer Medicare. So far, Medicare has established a history of command and control medicine. One witness today is going to report that this system has produced 111,000 pages of regulations while angering and threatening doctors and jeopardizing important health care services. As a result, Medicare has become a morass for both patients and providers. This welter of complex and confusing regulations has saddled doctors and hospitals with bureaucratic burdens that impede, rather than improve, health care for seniors. They have also added to the nightmares of our oldest and frailest citizens as they seek essential medical treatment. The reforms outlined by the Commission majority seem to offer a promising alternative to the bureaucratic burden. We are going to learn more about those reforms today and the Commissioners' thinking on the issues. We invite you to join us in carefully examining different approaches to addressing Medicare's financial problems and providing a brighter future for Americans seeking health care in their senior years. And now, I'd like to ask Congressman John Mica, who was the chairman of this committee last year, if he would, to please give us an opening statement. Mr. Mica. First of all, Mr. Chairman, I want to welcome you to the 7th Congressional District of Florida. You're here in the heart of my district, and I appreciate your holding this hearing today, conducting it, and also giving an opportunity for our community and local hospitals, health care individuals, Federal retiree groups and Federal employee groups to hear a little bit more about proposals from the National Bipartisan Commission on the Future of Medicare and also how the Federal Employees Health Benefits Program can serve as a model for future reform measures that are being considered. I have always been impressed with the Federal Employees Health Benefits Program. When I chaired Civil Service I was incredibly impressed with the fact that we have less than 200 employees administering a program that serves 9 million people--over 4.2 million Federal employees and retirees and nearly 5 million dependents--and doing so in a very cost- effective manner. The heart of the Federal Employees Health Benefits Program, however, is based on competition and the ability to fairly compete, the ability to have a certain set of benefits prescribed and then allowing many vendors and health care providers to compete in an open and fair system, a very basic principle that has served us well for nearly four decades in providing health care benefits to our Federal employees and Federal retirees and their dependents. I think it's great to look at that as a model. I think that we do need to also be concerned about some of the problems that we've had, particularly of late, with the program, and that is that we have experienced some substantial increase in costs. But our previous hearings have revealed, in fact, that many of the costs are brought about by additional Federal mandates, additional Federal requirements, and additional Federal regulations where the Federal Government and the Congress, sometimes very well intended, has imposed additional requirements of the providers. Not to say that we do not have problems that need to be addressed. For example, one of the greatest areas of costs, increased costs, not only to FEHBP but to health care, is prescription drugs. We've also had the experience of having imposed patients' bill of rights on the program by Executive order and have seen also that it has increased costs without providing any specific medical benefit. So I think we need to use this as a model to look at the successes, the failures, and the problems of the system and adopt the good parts as we look for an alternative to Medicare, which is so important. I say that and repeat that as we continue to provide Medicare and many folks may want to participate in Medicare, but look at alternatives that can take pressure off of the system and provide an alternative, here's an alternative that's based on competition, based on experience, and based on a record of success. So I salute you and the subcommittee in reviewing our good model and our good points and also the problem areas of FEHBP as we search for a model to provide good access and quality care to those who've worked so hard for this country to make it a success, our retirees and others who are taken into account by our Medicare program. I'm pleased that we are doing this hearing and, again, in my district. So I thank you. And one final note, Mr. Chairman, possibly later depending on your time and ability to hear requests, we have a statement from our National Association of Retired Federal Employees. Some of our NARFE folks I introduced you to are here today and I'd like to ask unanimous consent that their statement be made a part of the record. Mr. Scarborough. Well, I'm not going to object. Without objection it'll be entered into the record. Certainly that and all this important testimony will be part of our record. I thank you, Mr. Chairman, for your statements today. I'd like to ask our witnesses if they would to please stand up and take the oath. If you could raise your right hands. [Witnesses sworn.] Mr. Scarborough. Please have a seat. Today we're very pleased to have as witnesses Mr. Jeffrey Lemieux, who is staff economist for the Bipartisan Commission. He had previously worked in the Congressional Budget Office as health care policy analyst. He's going to be providing a discussion of the Bipartisan Commission's findings and discuss their majority position. We also have with us today Ms. Grace-Marie Arnett, of the Galen Institute in Alexandria, VA. It's a research organization. Ms. Arnett has followed the health care issue as a journalist and as a policy analyst and she's written about the Bipartisan Commission's recommendations for several newspapers. Our third panelist this morning is Ms. Becky Cherney, president of the Central Florida Health Care Coalition. She was recently recognized as central Florida's business woman of the year by the Orlando Business Journal and has been a tireless advocate of consumers in the health care industry. I thank all three of you for showing up today to testify. If you would like to start, Mr. Lemieux. STATEMENTS OF JEFFREY LEMIEUX, STAFF ECONOMIST, BIPARTISAN COMMISSION ON THE FUTURE OF MEDICARE; GRACE-MARIE ARNETT, PRESIDENT, THE GALEN INSTITUTE; AND BECKY CHERNEY, PRESIDENT, CENTRAL FLORIDA HEALTH CARE COALITION Mr. Lemieux. Thank you. Thank you, Mr. Chairman, can you hear me OK with this mic? Mr. Scarborough. Sure can. Mr. Lemieux. I very much appreciate the opportunity to come down and meet you and talk to you about this issue. We on the Medicare Commission worked very hard and furiously to get an agreement and came very close. I think even though the formal report was not issued by the Commission, the plans that resulted are very powerful and very helpful. I want to spend a few seconds talking about the basics of the Medicare Commission plan. Then my statement goes into a fair amount of detail which I don't intend to talk about, but you can use as a reference if you wish. Instead of going through those details I'd like to talk about how the Commission evolved its position over the last 4 or 5 months. And I'll be happy to answer any questions you have. The goal of the Breaux/Thomas Commission was to create a new Medicare that was new and modern and flexible. This program has been in place now for 30 years and it still, in some respects, seems 30 years old and in need of updating. The Breaux/Thomas plan for beneficiaries has the impact of offering more reasonably priced drug coverage. It has the possibility of reducing the need for supplemental coverage. And it holds out the promise for lower premiums for the government and, of course, by extension, the taxpayer. It would aid the budget, we think. And it would gradually reduce the need, we think, for Federal micro-management of Medicare. For health plans this system is designed to create more stability and less business risk in their operation so that they can cover Medicare beneficiaries with more of a sense of assurance that they'll be operating in a stable, fair, and competitive system. It might make a tougher competition for some of them, but we think it'll be fairer and more attractive. And finally, for hospitals and health providers the hope is that this approach would lead to a less heavy-handed system of cost control than has been used in the past, lurching between cost control measures that can be quite difficult for providers to face. The proposal would minimize the disruption to current beneficiaries. It's designed to remake Medicare, under new incentives, to be more competitive and more market-oriented, but at the same time, not to disrupt the current program. Now, what that means is that beneficiaries who are currently in the Medicare fee-for-service program or who are currently in a Medicare HMO, when this new system is implemented they shouldn't notice much of a difference. What that also means is that this proposal doesn't try to go through and rectify every Medicare problem or answer every question in Medicare all at once. This is a broad conceptual proposal that's intending to get Medicare right, not for the next year or the next 2 years or the next 5 years, but for the next decade or the next two decades or the next three decades. And as a result there will still be a great need for congressional oversight, for public input, and for continuing evolution of the program. The Medicare Commission decided to take Medicare and move to a new entity to control the operations of all health plans. They call that the Medicare board, for lack of a better term. The Medicare board would control the competition between the fee-for-service plan, which would still be run by the Government, and all the private plans. They had many objectives with this Medicare board. They wanted it to create a fair competition. They wanted to reduce conflicts of interest. And they wanted to create stability. I'm going to tell you how we got there. When we started in the Commission we broke up into two groups, one to study incremental reforms of Medicare, mainly by changes to the payment rates and changes to the compensation we give to health plans, and another task force to study more radical restructuring proposals. We quickly decided that the first task force on incremental reforms didn't have much momentum or support. Nobody wanted to just say, well, let's reduce hospital payments, fees, a little bit. They wanted something that was more long-term and more lasting. Few commissioners supported the incremental approach. On the other hand, few commissioners supported a more radical restructuring, like a voucher plan or a defined contribution plan. ``Defined contribution'' is the term in Medicare for the Government deciding how much it's going to make available for Medicare and growing that by some index like CPI or GDP or something. And that was quickly rejected also as being probably too far-reaching and too risky. They settled on a premium support proposal like FEHBP as an alternative between incremental tinkering with payments and of broader radical restructuring. The premium support proposal allows us to continue on Medicare in its current setup but also changes the incentives quite a bit. And here's how that works. Under Medicare now, everybody has to pay a Part B premium, it's about $500 a year now. It's expected to go up to about $700 over the next several years. Nobody has a choice about that. I take that back. Most people don't have a choice about that. Almost everybody pays the Part B premium. We took a look at the FEHBP formula, which instead says, if you choose an expensive plan you pay more than average and if you choose an inexpensive plan you pay less, and thought that that was a good start. Further looking at FEHBP, the commissioners and the majority decided that a powerful Medicare board would be a good thing to regulate the operations of the competition to make sure it was fair, to make sure that there wasn't risk segmentation, to make sure that there wasn't unfair competition or benefit packages that were designed not to help people with their medical needs, but rather, to attract the healthiest beneficiaries. And with a powerful Medicare board the commissioners decided that they could update the FEHBP premium formula to be more generous to beneficiaries. So what they said was for a premium that's about average the beneficiary premium would be about what it is now under Part B. If it's for a premium higher than average they would have to pay the full difference. For a premium lower than average based on a schedule their entire premium could be phased out all the way down to zero. Now, most people don't see their Part B premium now. It's in their Social Security check. They might not be too aware of it. But $500 to $700 a year is a significant amount of money, and the economists and others who studied this felt as though that would provide an incentive for people to be quite careful about the plans they select each year. And it would also provide an incentive for the government-run fee-for-service plan to be very careful with its costs, because beneficiaries would be more aware of how uncontrolled cost growth would be costing them and preventing them an opportunity. After we settled on the competitive aspects, which are pretty widely agreed among commissioners, including beyond the 10 who voted for the plan, the next tough question was prescription drugs. There were several intentions there. The first thing was we wanted to get prescription drug coverage for low income beneficiaries just as soon as possible. And the plan includes a full subsidy for prescription drug coverage for beneficiaries under 135 percent of poverty, which is a threshold that's used for some other reasons in Medicare. The second way we wanted to get prescription drug coverage to beneficiaries is by requiring all plans to have a high option including prescription drugs. And that includes the government-run plan, the fee-for-service plan. The third thing that was very important to the commissioners was limiting the expense and not creating a new very expensive entitlement and not substituting too much for the drug spending that people currently undertake privately. And I think that they intended to create a start on a drug benefit here, they intended to fund it for the poor and at least make it a fair deal for everyone else and make it available for everyone else. In the final days of the Commission, when we were negotiating with the administration, there were some other items that aren't in the plan itself. We considered a high income premium; high income beneficiaries would have to pay an extra premium, and the intention of that was to provide additional financing for subsidies for high option plans to make high option plans a little bit cheaper. So in addition to just being fairly priced, to try and make them better than fairly priced with government subsidy. We couldn't get an agreement on that, and that was dropped out of the final plan. Let me just say that as economists and policy analysts we are very pleased by the progress here and we're also pleased by the focus. I mean, we always focus on Medicare's financial crises. That's helpful, I guess, politically, to force Members of Congress and the public to address the issue. But what's more important is trying to create a better Medicare taxpayers, future beneficiaries and current beneficiaries. This program could use that second look, and we think that the Breaux/Thomas plan provides a good starting point. I'll be happy to answer your questions. [The prepared statement of Mr. Lemieux follows:] [GRAPHIC] [TIFF OMITTED] T0972.001 [GRAPHIC] [TIFF OMITTED] T0972.002 [GRAPHIC] [TIFF OMITTED] T0972.003 [GRAPHIC] [TIFF OMITTED] T0972.004 [GRAPHIC] [TIFF OMITTED] T0972.005 [GRAPHIC] [TIFF OMITTED] T0972.006 [GRAPHIC] [TIFF OMITTED] T0972.007 [GRAPHIC] [TIFF OMITTED] T0972.008 [GRAPHIC] [TIFF OMITTED] T0972.009 [GRAPHIC] [TIFF OMITTED] T0972.010 [GRAPHIC] [TIFF OMITTED] T0972.011 [GRAPHIC] [TIFF OMITTED] T0972.012 [GRAPHIC] [TIFF OMITTED] T0972.013 [GRAPHIC] [TIFF OMITTED] T0972.014 Mr. Scarborough. Thank you for your testimony. Ms. Arnett. Ms. Arnett. Thank you very much. How's this? Can you hear this OK? Hold it closer? Good. Thank you, Mr. Chairman, Mr. Mica, for inviting me to testify before your committee today. My name is Grace-Marie Arnett; as you've said, I am president of the Galen Institute. We focus on promoting a more informed public debate over individual freedom, consumer choice, competition, and diversity in the health sector. The Galen Institute also facilitates the work of the Consensus Group, which is composed of about 20 other health policy analysts, who have been meeting together since 1993 to promote public education about free-market health reform ideas. We have a couple of principles that we have developed on Medicare reform as part of a longer statement, but basically we believe that the reform of the Medicare system should expand private sector options for beneficiaries. They should be able to either elect to participate in current Medicare or to purchase health coverage or medical services of their choice in the private competitive health sector. We also believe that Medicare benefits should be defined in terms of a dollar amount, rather than in terms of an open entitlement to covered services. We hope that these principles also might be useful in guiding the congressional debate as well. This morning I would like today to do two things: First, to do a brief overview of why Medicare needs to be reformed, not only because of the future insolvency of the program, but also because of restrictions being placed on today's beneficiaries. And then I would also like to talk about FEHBP as a model for Medicare reform. In 1998, as you all know very well, Medicare spent $214 billion to provide health services for 39 million beneficiaries. The bi-partisan Medicare Commission was created because virtually everybody in the policy community, economists and anyone who studies Medicare, realizes that the current system is unsustainable as 77 million baby-boomers start to hit eligibility for Medicare. The tax burden on today's college students, if nothing is done to change Medicare, would triple from the current 5 percent of gross domestic product to 14 percent by the time they would retire. As you mentioned in your statement, Mr. Chairman, Dr. Robert Waller, who is the former head of the Mayo Clinic Foundation, which runs the Mayo Clinics, had his staff count the number of pages of rules, government rules, that his facilities must comply with in order to treat Medicare patients. They counted 111,000 pages of Medicare rules and regulations. That's three times more pages than in the Federal tax system. It's impossible for any physician or even an organization like the Mayo Clinic to know what is in those regulations. It's certainly impossible for any physician to try to treat a Medicare patient and not fear they're running afoul of Medicare rules. I'd like to offer a few examples of why Medicare is a bad deal for today's beneficiaries. Two years ago there was an article in the Washington Post which reveals where a centralized, government-run health care program can lead. The lead of the news article--this is not a commentary, it's a news article--said, People in hospice programs are not dying fast enough to satisfy Federal Government auditors. Washington is conducting special reviews of hospice records and calling for repayment of money spent under Medicare for people who live beyond the expected 6 months that they had enrolled for hospice care. This get-tough policy is part of the government's Operation Restore Trust, a special program designed to combat waste, fraud, and abuse in Medicare. Apparently Federal auditors believe that Medicare patients who are living too long represent waste, fraud, and abuse. The waste, fraud, and abuse regulations, however, are having a serious impact on today's beneficiaries. Let me tell you a little bit about a couple of doctors in Idaho trying to comply with these 111,000 pages of rules. Dr. Kenneth Krell found himself targeted by Federal auditors who came in and looked at 15 of his Medicare patient's records. And they found that Dr. Krell had overcharged Medicare by $2,355. This was primarily a dispute over whether or not what he had done either was medically necessary, according to the Government, or whether or not he had coded it properly. The Federal agents then multiplied that number by the number of Medicare patients that Dr. Krell had seen in the whole year and charged him with a bill of $81,390 as a fine. He protested loudly, and apparently the Federal Government did back down. Three other doctors in nearby Idaho Falls were also the subject of an audit, and they were told that the next time if they did not do a better job of complying with Medicare rules, which they're trying very hard to comply with, that they would then be subject to $10,000 fines for each one of their miscodings. They dropped Medicare patients altogether. Now patients in Idaho Falls have to drive 45 minutes to Pocatello to see a doctor. Other doctors in Idaho--and I think Idaho is particularly worrisome because there are not a lot of options, it's a rural State--other doctors are really considering dropping Medicare patients altogether. Section 4507 has also been of great interest to a lot of patients because this provision prohibits individuals from privately contracting from doctors if they're on Medicare to receive medical services. That's been a big dispute. It's really an example of what happens in government-run systems. And finally, privacy intrusions. The Health Care Financing Administration, as you know, is currently considering a rule that would force 9,000 home health agencies to begin collecting very sensitive data on their patients to make sure they are, in fact, qualified for home health care. Everything from their daily habits to their feelings of a sense of failure, thoughts of suicide, whether they use excessive profanity. The home health agents are to write these questions and answers down without necessarily consulting with the patients. Then these answers become part of the patients' permanent records, which are accessible to other government agencies. These are the kinds of things, as you well know, that result when doctors and hospitals and patients are subject to the Medicare regulatory system. This is the reason, I believe, that anyone who's studied this program in-depth winds up saying we've got to change this. This is not sustainable. We've got to wind up with a better system. And the system that Chairman Breaux and Congressman Thomas of California, in consultation with the expertise of Jeff Lemieux, the Consensus Group, John Hoff, and others, have come up with. The plan that they developed is a solution that would put more control in the hands of beneficiaries and less in the hands of bureaucrats. Traditional Medicare patients receiving financial assistance that they could use to purchase their own health coverage in the private market is a much better solution. The premium support model would move away from the current crushing system of price controls, regulatory bottlenecks, and restrictions on coverage, to give seniors much more choice in making their own health care arrangements. And the Federal Employees Health Benefits model really is a proven model, and your committee deserves a lot of credit for continuing to operate a hands-off approach to really let competition work in this sector. I will not go into the details again of the plan, certainly Jeff Lemieux can present it much better than I, and my testimony does describe this in detail. I would like to enter into the record a statement that I read, actually after I'd produced my testimony, by Walt Francis, who used to run the Federal Employees Health Benefits Program, who talks a lot about the details on how you could transform Medicare into a Federal Employees Health Benefits model. He said, I think interestingly, in his statement that if Medicare as it's currently constructed were offered as one of the options in the FEHBP today, to nearly 10 million beneficiaries, it would have no clients, because there are so many gaps in coverage, it's so expensive, and it puts people through so many unnecessary hoops. If it were competing with other private sector plan's customers, it would wind up not having any. Mr. Scarborough. Without objection we will put that statement in the record. 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Thank you very much. And finally, Mr. Chairman, I'd like to commend your committee for the work that you're doing on long-term care insurance for current Federal employees. I think that your committee can serve as a model for the right way to do this in providing people with maximum flexibility, maximum choice in the long-term care insurance market, thinking ahead about how important that is to Medicare in the future but today just setting up a very competitive model like FEHBP and the long- term care insurance model. So I commend you on that. In conclusion, I would hope that serious consideration would be given to using the FEHBP model for Medicare reform to give seniors much more choice and freedom in attaining health care and to save taxpayers $500 to $700 billion a year, by the year 2030 under a modernized Medicare. Instead of appeasing regulators and health police, patients would be free to make their own choices of doctors and care arrangements. Thank you, Mr. Chairman and Mr. Mica, for inviting me here, and I look forward to your questions. [The prepared statement of Ms. Arnett follows:] [GRAPHIC] [TIFF OMITTED] T0972.047 [GRAPHIC] [TIFF OMITTED] T0972.048 [GRAPHIC] [TIFF OMITTED] T0972.049 [GRAPHIC] [TIFF OMITTED] T0972.050 [GRAPHIC] [TIFF OMITTED] T0972.051 [GRAPHIC] [TIFF OMITTED] T0972.052 [GRAPHIC] [TIFF OMITTED] T0972.053 [GRAPHIC] [TIFF OMITTED] T0972.054 [GRAPHIC] [TIFF OMITTED] T0972.055 [GRAPHIC] [TIFF OMITTED] T0972.056 [GRAPHIC] [TIFF OMITTED] T0972.057 [GRAPHIC] [TIFF OMITTED] T0972.058 [GRAPHIC] [TIFF OMITTED] T0972.059 [GRAPHIC] [TIFF OMITTED] T0972.060 [GRAPHIC] [TIFF OMITTED] T0972.061 Mr. Scarborough. Thanks for that testimony. Ms. Cherney. Ms. Cherney. Thank you, Mr. Chairman and Congressman Mica. My name is Beckey Cherney, and I'm president of the Central Florida Health Care Coalition, a non-profit coalition of large public and private employers in central Florida. The Coalition is 15 years old, and its main focus is on improving the quality of health care. I am also a consumer representative on the Florida Board of Medicine. I speak with you today as a health care ``utilizer,'' not a consumer. When we achieve the convergence of information technology and evidence-based medicine, I will become a health care consumer. But at the present time, the financing, clinical care delivery system, and health plan designs are so complex, no ordinary citizen has the information required to be a true health care consumer. All doctors are not created equal. The greatest predictor of the health care you receive is the year your doctor graduated from medical school. The problem in health care is that it is the most inefficient major industry we have in our country. That is the disease that must be treated. Our ongoing efforts to focus on the symptoms of financing and managed care are a placebo that will never have a measurable impact until we treat the disease. While I applaud your efforts to look at the Federal Employees Health Benefits Program as yet another ``financial fix,'' I think the inevitable damage from attaching Medicare to that program is unfair to the people covered by that program and the people responsible for administering it. In our considerable experience with this, the almost inevitable implosion of the Medicare coverage has a terrible impact on the non-Medicare enrollees as well. Unreimbursed Medicare expenses will be shifted to the non-Medicare enrollees. Central Florida has the demographics that will exist nationally by 2010--the ethnic diversity, percentage of senior citizens, and so on. We are a microcosm of what is happening across the Nation. California's managed care market is more mature than ours; New York's is less. Let me quickly tell you the sad tale of Medicare in our market. Under the Balanced Budget Act, our two major hospital systems will each lose over $100 million on Medicare from now until the act expires in 2003. Some of these losses will necessarily be shifted to employers, because the hospital cannot make widgets to replace that lost revenue. Our hospitals have acted responsibly and with restraint as they waited for the chaos created by Medicare to resolve. As a result of that, I want to be certain I do not say anything that might shock any of you. You see, I would not want you to have a heart attack here in central Florida. We no longer have any extra capacity in our emergency rooms. Our hospital margins have been slashed so drastically by Medicare's failure to reimburse appropriately, the hospitals have not been able to expand to meet the growing demand. One of our hospitals took on a Medicare demonstration project. Before they could extricate themselves from the project, they suffered financial losses that will hamper their operation for the next decade. As a faith-based, not-for- profit-hospital, they entered into the project simply to serve their community. Thousands of Medicare enrollees had to find new plans, and many of them even had to change doctors. That is patently unfair and unsafe. The physician-patient relationship and the continuity of care are critical, and Medicare beneficiaries should never be denied that. I'm responsible for purchasing my mother's Medicare. I have had to change her twice in the last 18 months; with the pending PRU Care-Aetna merger, it's highly likely that I will have to change her again in the next couple of months. If my broker tried to churn my investments the way my mother's health care is being churned, the Securities and Exchange Commission would respond. But we don't have that protection for our Medicare recipients. Remember again that with our demographics, we look like the rest of the Nation will look in 2010. The managed care plans in our market are the same as those in the Federal Employees Health Benefits Program. We have the Prudentials, Aetnas, Cignas, and so on. When Medicare+Choice arrived, they all quickly participated. Right now, to the best of my knowledge, every single one of them has either stopped enrollments or has immediate plans to do so. They're losing too much money. Tinkering with the financial mechanism will not solve this problem. And that is being said by someone who admits that she thought she could save the world with second surgical opinions 15 years ago. Plan designs will not solve it. We must address the efficiency or more correctly, the inefficiency of the health care delivery system to correct it. And that is very doable. Working in partnership with our doctors and hospitals, we have made great strides in central Florida by linking information technology and evidence-based medicine. The greatest impediment to our advancement of that is Medicare. For the most part, we do not think doctors are overpaid; we think basketball players are overpaid. But I will tell you that Medicare is every bit as out of kilter financially as the National Basketball Association. The health care train is rambling rapidly down the track toward a large wall. The reason Congress does not see the wall is because they are always glancing to the side at some new, but not really new, financial mechanism like we are discussing today. I would like to suggest that you do not put another Band-Aid on this wound. It is going to bleed our health care industry to death unless we force those responsible to look at the real disease of inefficiency and stop treating only the symptoms. Creating the inevitable chaos in the Federal Employees Health Benefits Program will simply be another problem, not a solution. Mr. Scarborough. I thank you for your testimony. Mr. Mica is going to need to be leaving in the next 15 to 20 minutes for another important meeting across the district, but I wanted to ask each of you a question briefly, then I'll turn it over to Mr. Mica, and then I'll be asking some more questions. I'm just curious, Ms. Cherney, if I want to get the best doctor I can, you said the best predictor of health care coverage depended on what year my physician graduated from medical school. I'm just curious: Do I look for a young doctor, an older, more experienced doctor, or somebody in between? Ms. Cherney. Well, it depends on what your condition is. But, for the most part, the younger doctors have had the recent education and they're aware of the technology and the new things that are available to them. It's not the fault of the older doctors that they're not, and when you're practicing medicine there isn't a place for them to go to stay up to date. But if we had a central repository, if we had systems like I have here where I can profile the physician and I can show them how well they practice in the hospital by diagnosis, and I can show them how well they practice in their office by diagnosis, they can see where their deficiencies are. And so, if you were treating upper respiratory infection in central Florida, and your cost per episode is more than $100 and you graduated from medical school 10 years ago, so you're giving Cephalosporin and colds and cough medicine, you will quickly see by outcomes that you should be using Ampicillin and you will have better outcomes and it will be a much lower cost to the community. But the outcome is the issue, not the cost. Mr. Scarborough. OK. Great. So a younger doctor--I've been trying to convince Mr. Mica the same holds true with Members of Congress. Mr. Lemieux, I'm just curious, if you could give us some background, people of the audience, because I think it would be very instructive about the board, the Bipartisan Commission. I'm interested in the makeup of that Commission. You said there were 17 people. Could you just instruct everybody and myself also, exactly what that makeup was, who appointed those members, how many from the administration, how many from Congress, et cetera. Mr. Lemieux. I'll try to get this right. I can name the members and I'll have to think about exactly who they were appointed by. It was chaired by Senator Breaux as the statutory chairman, Representative Thomas was the administrative chairman. That was sort of a power sharing arrangement that was predetermined. Mr. Scarborough. Right. Mr. Lemieux. There were four appointees from the President. The rest of the appointees were from the leaders of Congress, from both sides of the aisle. The Members were--the congressional appointees were Congressman McDermott from Washington; Congressman Dingell from Michigan. There was Congressman Ganske from Iowa, who then left the Commission and was replaced by Colleen Conway-Welch, a nurse practitioner from Tennessee. Sam Howard was appointed by Speaker Gingrich at the time. He's an HMO executive in the midwest. In the Senate side, Senator Frist was on the Commission, Senator Rockefeller, Senator Gramm of Texas, Senator Kerrey of Nebraska. They were all appointees of the leadership. Debbie Steellman, a Republican policy analyst, was an appointee of Senator Lott. The Presidential appointees were an HMO executive from New York, Tony Watson; Bruce Vladeck, former HCFA Director---- Mr. Scarborough. Mr. Bilirakis also? Mr. Lemieux. That's right, I missed Mr. Bilirakis, who is a congressional appointee. Mr. Altman, a health economist, and Laura Tyson, who is an economist, were also Presidential appointees. Mr. Scarborough. OK. I'm just curious what was the breakdown of the people that supported Senator Breaux's recommendations and the board's? Mr. Lemieux. They were all congressional appointees. Of the congressional appointees who were opposed it was Representatives McDermott, Dingell, and Rockefeller. All the other congressional appointees were in favor. None of the Presidential appointees were in favor. Mr. Scarborough. So you had the administration actually going against the recommendation of Senator Breaux? Mr. Lemieux. Whether it was going against or not supporting, yes. Mr. Scarborough. Did you have legal training in the past also? I'm just curious. All right. Ms. Arnett, I wanted to ask you, you touched on an issue that I've got to tell you I've heard more complaints about and I think the first time most Americans were made aware of it was after a Wall Street Journal editorial talking about how senior citizens could not go to whichever doctor they wanted to go to. If they went and actually paid for the medical service that was provided for them then that physician would be kicked out of Medicare for 2 years and face financial ruin. I wanted some clarification on that. The Wall Street Journal says that came about as a result of the Balanced Budget Act of 1997. I have talked to every chairman on every committee that has jurisdiction over this and every one of them says that was the case before the 1997 Balanced Budget Act and as I find in Washington, DC, you know, it's sometimes hard to nail down exactly the bottom line. Can you clarify, for the record, right now, what your understanding is on when that ban came about? Ms. Arnett. Well, you're absolutely right, Mr. Chairman, there has been a big controversy over whether or not seniors could, in fact, pay privately for health care on their own outside of Medicare. HCFA, the Health Care Financing Administration, had said they could. Doctors were afraid they couldn't. The lawyers were all over the map. And so this was actually Senator Kyl's, of Arizona, way of trying to put something in there that said seniors could. And the administration apparently got very upset about this and in one of these, you know, 11 o'clock at night controversies said, OK, we will let seniors contract privately with a physician for health care if that doctor agrees to get out of Medicare for 2 years and not see any Medicare patients at all for 2 years just for treating that one patient. And somehow or another it wound up being part of the bill, starting out as a fix and winding up making it much worse. And we were told that this was a big issue with the White House and that they were ready to go to the mat to make sure that they didn't open the door to more freedom and privacy in the health care system. Mr. Scarborough. It's just remarkable to me in 1999 in the United States of America that the people out here--my mom, my dad, your parents--can't go to the doctor of their choice. That is about as repugnant to me and to what I thought America stood for as anything. I'm just absolutely dumbfounded as to why that got shoved in the Balanced Budget Act of 1997 and why somebody on the congressional side didn't put a red flag up before the Wall Street Journal. Ms. Arnett. Well, if more members had known that that was in there, you would absolutely not have voted for this. But it was in there. Not knowing it was there, that was the problem. Mr. Scarborough. I voted against it anyway because I thought it spent too much money. Mr. Mica. Mr. Mica. Thank you, Mr. Chairman. A couple of questions, Mr. Lemieux. Do you think it's better that we totally replace Medicare or provide an alternative for a phase? One of the problems you have is many of the seniors become very concerned when there's something sort of new on the block, and unknown, untested, and I hear a great deal of apprehension about completely replacing the system. Had you given consideration to that, and how do you think it should be approached? Mr. Lemieux. The Commission gave very little consideration to completely replacing Medicare. They wanted to remake Medicare with better incentives. But they didn't want to jettison the current HMOs that we have, they didn't want to jettison the fee-for-service plan. They wanted all those plans to compete in a better way and in a fairer way and with possibly better benefits. But there was very little consideration in the committee, and I would have known because I did the cost estimate, for something that would have been a complete change of Medicare. Mr. Mica. One of the other areas, and I think I mentioned it in my opening statement, that we've seen dramatically increased costs is the prescription drugs, and I think you talked a little bit about that. Maybe you could elaborate some more. One of the questions that always comes up is always the copays, how that operates. Could you tell us what your recommendation might be to deal with the cost of rising prescription drug costs? Mr. Lemieux. The commissioners were very concerned about the costs. They were also very concerned that prescription drugs are very important in medical practice now and that it's especially important to make sure that lower income people were taken care of. The idea of a high option drug benefit is that all plans have to have drug coverage. Now the level of that coverage was left undetermined. The idea was that the Medicare board would set up standards or examples for what would be acceptable drug coverage but that that would be left flexible so that the board and plans could evolve how things were. They were very concerned that it not all be predetermined, the copayments and which drugs were covered and which weren't. So one of their concerns with Medicare is that it hasn't been flexible to evolve over time, and they wanted to back away from prescribing exactly how it should be done. So that was left fairly open, exactly how good drug coverage had to be in these high option plans. Mr. Mica. The other item would be just premium cost and developing some scale possibly based on income or resources. What would be the fairest way? With the Federal Government employees health care plan we basically have the Federal pay and the employee copay. You have a little bit different situation with Medicare because you have people of varying means, and that would be the first part of my question. The other part would be: Was there any consideration to even expanding this to Medicaid? Because at some point if you paid 100 percent of the premium on a competitive basis you might be able to provide Medicaid assistance on a competitive basis at a lower cost. Could you answer those questions? Mr. Lemieux. When the commissioners set out to ensure drug coverage for persons under 135 percent of poverty they wanted to implement that even before the premium support and the FEHBP-style system would be ready for Medicare. We all think it would take at least 4 or 5 years to get an FEHBP-style system up and running. But they wanted the subsidies for the low income persons to start right away, and so they presumed that that would happen via State Medicaid programs, although they also wanted the States not to be required to pay more. So they added 100 percent Federal funding for that. After premium support is up and running, I think that their idea was to create a special schedule of premiums for low income persons so that they could get a high option plan at no cost to them. And they wanted the competitive aspect to still work for people under that percentage of poverty but they wanted also to ensure that they would be able to afford a good high option plan at no premium cost to them. Mr. Mica. Ms. Arnett, you described a big government system or big government program that was on the verge of collapse, and you cited the demographics that we're looking at as far as the coming recipient, potential recipient. What are our dates of concern and how quickly do we see this new mass of eligible recipients coming on board? Ms. Arnett. Originally Medicare had been projected to start spending more than it took in within the next year or two. But as you know, that has been moved forward by putting in more taxpayer funds into the system. So the date of bankruptcy keeps moving forward because the amount of taxpayer dollars continue to go into the system. But when the first baby boomers start to become eligible in 2012, a relatively short time, especially in just observation that even if changes were made today, it would take some number of years to begin implementation so that seniors have choices. And, again, Medicare as it currently is constructed should be one of the options, but let's put some more options out there. It's going to take awhile to get that machinery in place, and there's just not a lot of time. We have maybe a decade to get everything up and running. Mr. Mica. You also cited some interesting figures, the 111,000 pages of regulations which I think your testimony also outlined very graphically how it's almost impossible to comply. One of the things we tried to do in Congress since there was so much fraud, waste, and abuse, is put additional regulations on, and monitor. And some of that--you also described scenarios of how that's backfired, and I hear the same thing from physicians. I guess FEHBP, a plan adopted in that pattern, would pretty much scrap all of those and we'd have defined benefits and then I guess a series of add-ons. Could that eliminate most of these 111,000 pages? Ms. Arnett. I believe so. I understand the legislation enabling FEHBP is one paragraph long, and that's a huge difference from 111,000 pages, and it's because beneficiaries would then be in charge of making those decisions. Not either the legislation or the regulation. Yes, I believe so. Mr. Mica. The other thing you mentioned, which is something we tried to initiate and, OPM is a little slower than molasses in January, but that's on the question of providing long-term care and model FEHBP competitive system to provide--to find those vendors and health care providers that would provide plans and competition. One of the problems we ran into is that OPM says that there's just not enough folks willing to compete and also that the premiums are very high. I tend to think that if you had this open and available we'd have more people interested, participating and create a larger resource. Is that something you think would help get more competition in this area, and how should we approach long-term care, at least from a Federal employee standpoint? Ms. Arnett. Ned Lynch called a meeting with some of my colleagues from the Health Policy Consensus Group and other policy experts, and we're working closely with your committee in trying to do that. But, again, I think you're absolutely right. The FEHBP is the model to really take a hands-off approach and to allow the marketplace to provide options, to provide the resources, some basic funding level, that the consumers can use to purchase their coverage, and over time the insurance will become better and cheaper, as it has in FEHBP on a relative scale for health care. Mr. Mica. I noticed that you raised your eyebrow, Ms. Cherney; did you want to comment on any of the questions I've posed to the other panelists? Ms. Cherney. Well, the FEHB Program went up 9.7 percent last year. The numbers are due out in a few weeks. But it's going to be at least that much. Is that sustainable in our marketplace? Having seen the competitors, the Cignas, the PRU Cares, and the other people trying to do this in a marketplace that represents the demographics of 2010, it has not worked. Those plans are not competitive. They did come out with programs that were too rich. I mean, I don't know why they chose to come up with $1,200 in pharmacy benefits to start with. They should have started lower and tried to scale them up, depending upon what they could afford. But, at least in this marketplace, it hasn't worked: It hasn't created competition. It has created chaos both for the non-Medicare and the Medicare beneficiaries. It just simply hasn't worked. Mr. Mica. Ms. Arnett. Ms. Arnett. Can I just say one last thing? There have been a lot of regulations imposed on FEHBP over the last couple of years which are, in fact, forcing premiums to go up, just as State regulation is forcing up the costs on individual and group health insurance. So the model for FEHBP in how things should be done is actually being distorted by a lot of administrative direction. Mr. Mica. I think that's something that I pointed out in my opening statement and I've observed the more mandates, the more regulations, the more constraints that are put on it--and we've also lost a number of carriers. When you lose carriers you lose competition. And we've seen price increases. So the more tinkering and the more requirements we impose, again, the higher costs that we see, and it just seems to be a simple pattern. Maybe that's a simple explanation, but that's what I've seen in the past 4 years. Mr. Chairman, I thank you for allowing me to participate today. I apologize. I'm going to have to leave at this point. But a very interesting panel, and hopefully we can provide FEHBP at least the way it was intended and started out as a model for some Medicare reform, and I appreciate you coming to our district today. Mr. Scarborough. Thank you, Mr. Mica. I appreciate you taking time out of your schedule to come on by, too. I wanted to get back to this--this is a number that I think I'm going to be using an awful lot for the next couple of years, 111,000 pages, that's absolutely remarkable regarding the regulations. It really helps to explain why you have physicians and medical providers in Idaho Falls, that are just saying the heck with it, we're not going to work under this system any more. I suspect as this continues it's going to get worse and worse and it's not going to be just Idaho Falls, ID. It's going to be Sanford, FL down the road. Obviously from Ms. Cherney's testimony it appears that none of these regulations have anything to do with making sure the doctors get paid on time or making sure that health care providers get paid in time. Is this an oversight of the regulations, what about one or two pages that we add on making sure that physicians are paid on time and the health care providers are paid on time? I say that because we've got to keep as many health care providers in this system as possible to help us get through rocky times. Unfortunately if they're not getting paid for months or even years then they're going to do what the doctors in Idaho Falls did and just leave the program. What do you all recommend? I know it's going to be very hard for you all to recommend adding new regulations to 111,000 pages. But what can be done to make sure that Medicare is a bit more responsive to medical providers? Ms. Arnett. Well, one of the provisions could be to at least allow doctors that have been subject to audits and that are being slapped with these $81,000 and higher fines at least due process in challenging these. And they're not--they're currently really guilty until proven innocent. The way the IRS has treated taxpayers is how doctors are now being treated under these Medicare audits. So just allowing them some due process would help so that they don't feel so threatened. I spoke with one of the women who administers HCFA, and she said doctors are ``hysterical'' over this. And what's going to happen is they are going to start leaving the profession, and they've got to have some legal protections and they don't now. Mr. Lemieux. Mr. Chairman, a little bit larger picture on that. What we're trying to do with a more competitive Medicare is also make the government-run fee-for-service plan, which is the source of these regulations and the difficulties with providers, more responsive, more businesslike. As opposed to being a government bureaucracy that's used to running its program by dictate, instead run it more by partnership. And that sort of cultural change will take years. But we think the competitive environment will aid that and it'll reward managers, government people in HCFA who take the initiative to be very responsive and to closely work with the providers for beneficiaries' benefit. Mr. Scarborough. OK. In talking about this partnership, I want to ask you all to followup on this. I'm sure you have a response, but I just wanted to followup on something you said. I've been arguing and I'm sure that Mr. Mica and many others have been arguing that really the hope of Medicare in the future is providing partnerships between the patient and the physician and the hospital and doing this through provider service organizations--some call them PSOs, some call them PPOs. But I want to ask Ms. Cherney if you looked into provider service organizations as one type of partnership that could help the system. Ms. Cherney. Ms. Cherney. On the kinds of things you could do, in our community, our physician community is forced to provide short term financing for Medicare for 90 to 100 days. That's how long it takes them to get reimbursed. So in effect they're providing the short term financing for Medicare and it's breaking their back. But the other part of that is, if you were to take a sixth of the budget surplus, as the administration was proposing for some things, and used a piece of that to create a place where best practices could be identified and communicated to physicians, that could change things. When we sat down for the first time with our data base with cardiologists and showed them which cardiologists had the best outcome down to the one who had the lowest outcome and then showed them what the national average was so you could see who really was providing inferior medicine, that helped the hospital to know who they needed to mentor and get up. But also just looking through on anticoagulants that you use, there was a big issue there because the outcome was the same except some of them cost up to $2,000 per case more. That was new, and so that resolved itself. But arterial blood gases. A surgeon who had finished school 5 years previously had been taught to do arterial blood gases before the surgery, one after, two a day until the patient went home. The same with x rays. The doctors who had been out for 2 years had been taught that if there wasn't a change after surgery in the first arterial blood gas, don't do any more. It's a very expensive procedure. It's a very painful procedure. There are a lot of side effects from it. In that 2-hour meeting they eliminated those. We cut the cost of open heart surgery here $4,000 for every open heart surgery that's been done since then. We have that forum of communication here. But we don't have any way for the rest of the world to know that. And the President's own Commission concluded last year that anywhere from 30 to 40 percent of the medical care that's given is unnecessary. But it's because it's outdated, not because doctors are bad. They are competitive and they are bright. And if you give them good information they will make good decisions. But there is no platform for the information, and I believe that the government is probably the only one large enough to be able to create that platform and communicate it effectively. Mr. Lemieux. Mr. Chairman, before I answer your question I'd like to make two points. And that is that almost all economists, actuaries, and clinical practitioners support the sorts of things that we're talking about here as far as outcomes, research, and best practice. We feel as though it was the surge of competitive searching for value among employers over the last 7, 8, or 9 years that has helped spur some of this, and the idea in Medicare is that a more competitive system might help. Certainly these sorts of things are a key, and I think that there's broad consensus that that sort of information-gathering about how to do things right in health care is the right way to go. The second thing is when we were talking about the trends in FEHBP costs I think it's more than just the mandates that have driven up costs in recent years. There's historically always been a fairly volatile cycle of premiums in health care and in FEHBP in particular, and some of the rate increases that we're seeing now probably reflect the fact that rates were cut too much 5 and 6 years ago when we had a negative 3 percent increase. The thing that's been heartening to economists is that the payments for benefits have been growing more moderately now than they did 10, 15 years ago. So we're cycling around a little bit lower point, which we think will be nice. And the other thing is in FEHBP, a lot of the plans are having trouble with their prescription drug costs, so without having to be told they're working very hard to manage those costs better by adjusting their co-insurances, working harder with the manufacturers to create a formula that will be a better value and so on. And that can be confusing, and tumultuous; that's always the case. But the price of innovation is that things do change, and that there's hope that this is a self-correcting sort of situation. Ms. Arnett. Just one more quick fact, a paper that will soon be coming out from the Heritage Foundation reports that the Health Care Financing Administration reported that almost one-fourth of all physician and supplier claims are being either denied or challenged. So that means even when doctors are doing what they need to do to treat a patient they then have to fight a major battle with the bureaucracy. And if a Medicare beneficiary wants to challenge whether or not they felt that they were getting proper treatment, the typical administrative appeal takes 500 to 700 days to challenge. It's a little late to get prompt treatment. May I ask also if you'd like me to include this statement in the record as well? Mr. Scarborough. That would be great if you could do that, without objection. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T0972.062 [GRAPHIC] [TIFF OMITTED] T0972.063 [GRAPHIC] [TIFF OMITTED] T0972.064 [GRAPHIC] [TIFF OMITTED] T0972.065 [GRAPHIC] [TIFF OMITTED] T0972.066 [GRAPHIC] [TIFF OMITTED] T0972.067 [GRAPHIC] [TIFF OMITTED] T0972.068 [GRAPHIC] [TIFF OMITTED] T0972.069 [GRAPHIC] [TIFF OMITTED] T0972.070 [GRAPHIC] [TIFF OMITTED] T0972.071 [GRAPHIC] [TIFF OMITTED] T0972.072 [GRAPHIC] [TIFF OMITTED] T0972.073 [GRAPHIC] [TIFF OMITTED] T0972.074 [GRAPHIC] [TIFF OMITTED] T0972.075 [GRAPHIC] [TIFF OMITTED] T0972.076 [GRAPHIC] [TIFF OMITTED] T0972.077 [GRAPHIC] [TIFF OMITTED] T0972.078 Mr. Scarborough. Let me ask you all, again following up on the regulations that really have totally strapped not only patients but also doctors in the system: What would you all say to a defender of the system regarding the elimination of 111,000 pages of regulations, when they came to you and said, well, if we do that, obviously, you're going to see excessive costs going up and you're going to see the quality of care plummeting? What do you say in defense of such an argument? Ms. Arnett. The only thing they could do is add more pages, and we see how price controls have not worked for 4,000 years. Regulation winds up meaning that physicians have to cater to the regulators, not to the patients. So I think that's why, as just said, the Medicare Commission when it really looked at this said, we can't fix this system with more regulation. We have to provide an alternative system with a lot more choice, a lot less rules. Let this one stay there if people want to stay under that system, that's fine. But there has to be a choice of a different system, and that's this competition, freedom of choice, where individuals and not regulators are in charge. Mr. Scarborough. Would both of you agree with that, that you are not proposing a radical departure from this current program but also suggesting, as Ms. Arnett said, that if people want to stay in the program as is they can, but instead provide them other viable alternatives? Would that be a fair statement on what the Commission concluded? Mr. Lemieux. Yes, and I think there's some reason for optimism that even the government-run plan could do a much better and more cleanly managed job. I don't think there's reason to presume that more competition would necessarily do away with the government-run fee-for-service plan. I think there's room for optimism. Maybe I'm too much of an optimist. Certainly these things would take time. But I think there's plenty of room for the fee-for-service plan, and it has potential to do much better. Mr. Scarborough. OK. I don't want to keep you all much longer and I know we have a statement that's going to be read for the record. I could keep asking you questions all day--I've got a captive audience here--but they won't be captive here much longer. Let's talk very quickly about the costs of the program. Obviously, with regulators and bureaucrats and a lot of politicians' ideas in Washington, any time you have a problem just increase taxes. We're now even seeing people suggesting the taxes for Medicare be doubled in the coming years and yet you all know that even if we double taxes, the system still goes belly up. We cannot tax our way out of this mess. So what do we do? What hope do we have to provide our constituents that this system can be saved or that health care systems can remain solvent in the coming years? Mr. Lemieux. Well, the Commission assumed, and I estimated, that new incentives under the Breaux/Thomas plan would save some money. Not gigantic amounts of money and not really soon. But that over time it could slow down the growth rate of Medicare spending. Even a small reduction in the growth of Medicare spending can compound to a significant amount when you starting looking out 10, 20, 30 years. There were other provisions of the plan that really weren't related to the new competitive system. They were just there to save a little money. And those, of course, were very controversial. The Commission wanted to create a new trust fund system to help the public and Congress monitor how Medicare was doing. They decided to create a combined trust fund instead of having a part A fund, which is the one we always talk about, and part B, which is virtually meaningless. They wanted to create a combined fund where people's premiums would come into that fund, payroll taxes would come into that fund and general revenue contributions would come into that fund, but it would be structured so that we'd have to keep a very close eye on those general revenue contributions and if they had to be increased it would force a congressional vote above a certain growth rate. That seems to make some sense as a compromise to help us keep a close eye on Medicare spending. Is this going to be the last time we ever have to think about Medicare spending, even if we did this? Very hard to say. Very uncertain. Probably not. But it's meant to be a step in a plausible direction that has the potential to save us money as well as to help beneficiaries. It's unclear whether it really would, but it has the potential. Ms. Cherney. I don't propose that throwing more money at it will fix it. But I go back to saying that we need some help on the efficiency side of it. No physician can do that. I think we have a unique window in the next 10 years because we're going to have a surplus of physicians; that will be somewhat helpful. But failure to deal with some of that inefficiency will also create an opportunity for the surplus of physicians. They will find a way to make money, and that might be bad. But there are just the smallest things that don't cost money. For example, I cannot understand why HCFA has to have an EOB, why a Medicare recipient has to get a form that says ``Explanation of Benefits.'' It might as well be Spanish for most of them. It would say, Mr. Scarborough, you had an appendectomy. The hospital charge was this. Medicare paid this. You owe nothing. Your physician charged this, it's what's on the EOB but it's in a format people don't understand. No one is looking. All of those things cost money. That's the inefficiency. It's not just the clinical delivery, but it's the whole thing of people doing it their way and not looking at what works for that customer. That's why we don't have a consumer, because no one has thought about that customer. It isn't that at all. They are a beneficiary, not a customer. We've got to change that. Ms. Arnett. I think that's really right. One of the wonderful things that a competitive marketplace does is focus on how can I get this consumer to take their money and buy what I'm selling. And, therefore, they have to provide information that resonates with that consumer and right now the information they provide has to cater to the bureaucrats. It's written so a bureaucrat can understand it. That's why the consumer focus is so important, and the only way to get that is to get money in the hands of individuals. One of my mottos is: whoever controls the money controls the choices. Right now it's bureaucrats in Washington. They are controlling the choices because they control the money. If individuals controll the money they're not only going to control the choices but they're going to demand more efficiency and better information on what they're getting. Ms. Cherney. We call that the golden rule. We implemented the golden rule here 15 years ago in health care, and that is that he who has the gold makes the rules. It's our right and our responsibility. Mr. Scarborough. While you all are still here, let me recognize Cliff Rustia of NARFE. He has a statement that he's going to read for us, and I'd like to ask him to do that now. Mr. Rustia. Thank you, Congressman Scarborough, for this opportunity. Before I read the statement from NARFE, I'd like to make a brief personal statement, since I'm the first person with enough gray hair to qualify as a consumer of both Medicare and the Federal Employees Health Benefits Program. I've learned a lot of interesting information from the witnesses here, and I thank you for it. By the way, as an IRS auditor, we don't hold you guilty. We did civil audits and you had to prove your deductions. Guilt reply was the criminal people, and I only had three of them in 20 years. But getting back to Medicare and the availability of private physicians. When I was up north and still working, my cardiologist told me that when I qualified for Medicare, if I should live that long, and thankfully I did, he does not accept Medicare, and at that time he was allowed to charge 120 percent I think of the Medicare amount, and that was being reduced to 110 percent. He said when that happened he wouldn't take Medicare people at all. Of course, this was up north. We had a relatively small proportion of Medicare recipients. I'm down here in central Florida since 1992 and if you go into the doctors' offices there's nothing but gray hair and if they refuse Medicare patients they wouldn't have any patients. None of them are open at nights or Saturdays for working people. I don't know how working people get to see a doctor. But they're pretty busy with us old gray heads. Now, if I may read the statement from NARFE. Mr. Chairman, I am here today to express the National Association of Retired Federal Employees' views on the use of the Federal Employees Health Benefits Program [FEHBP] as a model for Medicare reform. I wish Medicare would pay for glasses, I might have better ones. Before Congress and the President created Medicare in 1965, nearly half of all older Americans were uninsured and a third lived in poverty. Today, only 1 percent of the Nation's senior citizens are uninsured and the number living in poverty has been reduced by almost two-thirds. As a result, far fewer older persons have to choose between buying food and going to the doctor. Our quality of life has significantly improved, and we are living longer. There is no question that the large numbers of retiring baby boomers will begin to place demands on Medicare starting in 2010. Hal, maybe you could read this better than I. Mr. Kelton. May I, Congressman? I'm from NARFE, too. Mr. Scarborough. You may. Mr. Rustia. If you'll excuse me, I think--I'm having difficulty with these glasses. Mr. Scarborough. That's fine. Mr. Rustia. This is Mr. Kelton, president of the New Smyrna Beach chapter, up north. Mr. Scarborough. Great. Mr. Kelton. Thank you, Congressman. There is no question that the large numbers of retiring baby boomers will begin to place demands on Medicare starting in 2010. Public policymakers would be irresponsible if they failed to review the program before this development. But at the same time, Congress and the administration must ensure that Medicare continues to guarantee basic health security for older Americans at affordable and predictable prices. In response to this challenge, some have proposed to replace Medicare with something similar to FEHBP. We can appreciate interest in emulating our program. For 39 years, FEHBP has minimized costs, encouraged insurance carrier competition, and provided a wide choice of comprehensive health insurance plans to Federal employees, retirees, and their families. Although the FEHBP performs well as an employer- sponsored health plan, its use as a substitute to a public insurance system that guarantees health security to the Nation's elderly raises many questions. The FEHBP-inspired ``premium support'' proposal made by Senator John Breaux and Representative Bill Thomas would provide beneficiaries with vouchers--or a government contribution--that they would use to purchase private health insurance. The dollar amount paid by the government would be determined by a calculation similar to the ``fair share'' formula used to set the employer contribution for FEHBP plans. Indeed, the premium support model would use a program-wide weighted average of each Medicare plan to set the maximum government contribution. However, the premium support model differs from FEHBP since it does not limit the government contribution to 75 percent. Under FEHBP, enrollees always have to pay at least 25 percent of their health plan premiums. Absent this cap in the Breaux/ Thomas proposal, the beneficiary share of Medicare premiums could be zero if enrollees select the lowest cost plans. As a result, the proposed formula would act as a powerful incentive for beneficiaries to enroll in the lowest cost and most basic managed care plans. Since the government contribution formula is weighted to the number of enrollees, a low cost plan that attracts a large share of beneficiaries would reduce the overall dollar amount of the maximum government contribution under the premium support model. Consequently, such costs would be shifted to beneficiaries. It is also important to ask which beneficiaries would choose the most basic managed care plans. Healthy beneficiaries have the least to fear from such a choice since they are low utilizers of health care. They trade quality of care and physician choice for lower premiums since they are less dependent on doctors and hospitals. Because these plans are designed to enlist healthier seniors, sicker beneficiaries would tend to remain in traditional Medicare. Adverse selection will occur as a result, and taxpayer and beneficiary costs would increase. Although current managed care plans have not created significant risk segmentation in Medicare, the incentives for healthier enrollees to join them under the proposed voucher system are far greater. That is because current Medicare managed care enrollees pay 25 percent of the Part B premiums just like participants in the traditional fee-for-service program. However, under the proposed voucher system, beneficiaries might not have to pay anything for a basic managed care plan designed to draw in healthy enrollees. Premium support proponents suggest that the incentives to cherry pick beneficiaries could be countered if Medicare pays plans less for healthier patients and more for sicker ones. Unfortunately, no one seems to have overcome the complexities of creating such a risk adjustment system. What's more, nothing will stop participating plans from running to Congress any time a risk adjustment formula decreases their payments from Medicare. As a single insurance pool, the present Medicare fee-for- service program avoids risk segmentation because it spreads individual beneficiary health costs across the full population. NARFE believes that the proposed financing scheme of the premium support model could compromise this fundamental principle of group health insurance. In addition, NARFE is concerned that the creation of a Medicare voucher system could open the program to a cost- shifting proposal that has been repeatedly suggested for FEHBP. Despite the enactment of the fair share formula in the Balanced Budget Act of 1997, the House Budget Committee sought to replace it by including a proposal in the fiscal year 1999 budget resolution to limit the annual growth of the government share of FEHBP premiums to the consumer price index [CPI]. At the request of Representatives Tom Davis, Frank Wolf and Connie Morella, Budget Committee Chairman John Kasich said on the House floor June 5, 1998 that he would not support inclusion of this proposal in the conference agreement on the budget resolution. Fortunately, the cost-shifting plan failed to receive further consideration in the 105th Congress. According to the Congressional Budget Office's [CBO] ``Options Book'' published this April, the Federal Government would cost-shift $600 in added annual cost to Federal annuitants and employees in 2004 and more in later years if this artificial limitation became law. Indeed, Federal employees and annuitants would pay an ever-increasing percentage of premium costs each year FEHBP rate hikes exceeded general inflation as measured by the CPI. CBO estimates that the average FEHBP enrollee share would grow from 29 percent to 40 percent by 2004. Given this experience, NARFE would oppose any scheme that limits the government's portion or reduces its proportional share of Medicare premiums through a formula that does not accurately reflect the updated costs of providing health care to eligible beneficiaries. Shifting costs from the government to beneficiaries would be particularly hard on older Americans who have insufficient income to further supplement their health care costs. While we realize that the Breaux/Thomas approach would not limit the government's contribution to a predetermined rate, NARFE believes that budgetary pressures could tempt Congress to accept such a cost-shifting plan. Mr. Chairman, we have several other concerns that I will not go into today, including the coordination of coverage between Medicare managed care plans and employer-sponsored plans, the ability to select the physician of your choice, prescription drug coverage, means testing, increasing the eligibility age, and copayments for home health care. As you know, the Senate Finance Committee is presently considering the totality of Medicare reform issues, and we have expressed these concerns to members of that panel. In closing, I would like to say that the guarantee of health security provided by Medicare has dramatically improved the quality of life for older Americans. While the demographic realities of the baby boomers will place new demands on this program, most Americans agree that Congress and the President must honor the commitment made in 1965 to ensure the health security of senior citizens. NARFE strongly believes that the present benefits, protections, financing responsibilities and principles of insurance must be preserved if this promise is to be kept. Thank you. Mr. Scarborough. Thank you very much. I appreciate it. Let me ask the panel if you all have any response to the statement from NARFE's national office. Ms. Arnett. I'm sure, Jeff, that you especially do. If I may just make one quick comment. The statement that you have graciously allowed me to enter into the record by Walt Francis, who is really the preeminent expert on FEHBP, addresses many of these issues. Obviously, too many to go into here. But in particular and just to read one quick passage about risk segmentation, he says: In fact, in FEHBP there is a large and continuing premium disparity among fee-for-service plans with similar benefits that have continued for many years without debt spirals. There are several large and distinct risk groups within the programs, such as the large cohort of elderly retirees without any Medicare coverage. The FEHBP tolerates this. They have 300 different plans competing that spreads risk and that really does not wind up causing the kinds of risk segmentation that many fear. Competition and the free market has a marvelous ability to tolerate and to even out many of these risks. And I'm sure, Jeff, you have many other---- Mr. Lemieux. We were concerned in the Medicare Commission that risk adjustment be done. That it would be more necessary in Medicare than in FEHBP. FEHBP doesn't have it and FEHBP gets along OK without it. But we thought it would be very important in Medicare. So we think your point is well taken. And I'm not so pessimistic as the statement that it can't be done acceptably well in the next 5 or 10 years. We're getting closer. And we do have to look forward to the future of Medicare and what we can do 5 and 10 and 15 years from now when we're making our plans to get started now. And so I appreciated your statement. I think that was very helpful. My only other thing is that you compared the premium support to the fair share formula. And we usually don't call the fair share formula in FEHBP a voucher. That tends to confuse people. It makes them think they're going to be left all out on their own with a sheet of paper or a coupon, and that's really not the intention. I think there needs to be a better word than that for how the FEHBP and how the Breaux plan would work. Mr. Kelton. I will certainly point that out to the writer of this. I didn't write this. This comes from the national office of NARFE, one of the legislative assistants up there. We didn't get notice of this hearing. I didn't hear about it. I was at a convention in Ft. Myers until Thursday afternoon and at the convention, somebody said people from Sanford should be aware that there's a hearing taking place at Sanford and some of you who are near there should try to get there and hear what goes on. Cliff and I really appreciate the chance to speak at this hearing. And then when I got home from the convention I did have a letter from Mr. Mica that arrived while I was gone. So I did a little bit of homework last night. And one of the things that I would like to point out--I think it's covered in this but I would like to say it in plainer language--one of the big differences between the Medicare risk pool and the FEHBP risk pool is that the FEHBP risk pool represents a very healthy kind of cross-section of the population. It includes both employees, 20 and 25-year-old people, and it includes people like me, I'm going to be 73. Now, when I was in the Federal employment I didn't call in my health benefits for decades. I literally did not go to a doctor for decades. Now, I'm going to five doctors a year. Last week I had a cancer cutoff my leg. So we're really concerned about health care and the premiums involved in it. Medicare, the risk pool is all elderly people. There are no young people in Medicare, and that's something that ought to be taken into consideration. One of the concerns that we have in FEHBP is that many of us also have Medicare. See, my wife worked all of her life and she's been able to make us eligible for Medicare. And we need it. If these premium support models don't work with Medicare and it becomes necessary for Medicare to start finding a way to save money through deductibles--or increasing deductibles and changing the premiums and the benefits my supplemental, Blue Cross and Blue Shield, has already indicated they're not going to participate in it. You see, it's a complicated situation. So thank you very much for considering these things. It's not simple. Mr. Scarborough. No. It's certainly not. I appreciate the statement you read. And as I said to them, it did come from the national office. But I think what we do see, though, through that statement, through the testimony today, is that we're going to be on a high wire and we're going to have to balance the commitment made in 1965 and make sure that commitment is made and kept into the 21st century but at the same time recognizing that there are just absolutely incredible strains that are going to be placed on the system over the next 10 to 15 years with the baby boomers moving toward retirement. Ms. Cherney, I believe, you had a statement? Ms. Cherney. I just wanted to make a comment with regard to the opening remarks that the gentleman made, before he began to read the statement where he mentioned that his cardiologist, when Medicare reimbursement got to 110, said that he would no longer treat him. In our market, and we're not different than other places, most of these managed care programs you were talking about that you want to participate are reimbursing at 83 percent of Medicare. Remember, they've got to have marketing money and they've got to have profit, and so if physicians didn't want to provide the care at 110 percent, you can believe there's a whole bunch of them going to get out when it's at 83 percent. They're getting out now. Mr. Scarborough. Let me say it's 5 until 11 and we're coming up on 2 hours. I'd say that they will be turning the microphones off in 5 minutes, at 11 o'clock, but I don't think they've really turned them on. But if somebody wants to get up here, we've got about 5 minutes for any statements--I've seen a couple hands go up--and ask our panel any questions. Come on up, sir, if you'd like. Mr. Duranti. Good morning. Mr. Scarborough. And if you could, state your name, for the record? STATEMENT OF PETER DURANTI, AGENT EMERITUS, PRUDENTIAL INSURANCE CO. OF AMERICA Mr. Duranti. Yes. Good morning, my name is Peter Duranti and I'm agent emeritus with the Prudential Insurance Co. of America and I am on Medicare. And I believe that we need to address fee-for-service, because competition lowers rates. And competition is what America is built on. Not on government bureaucracy. I pay $44 a month for Medicare. Now, the average cost of a health plan is about $150 to $200 a month. So we are running behind on the whole plan of Medicare. And Social Security was never designed to pick up Medicare. It was for retirement. Now, I would say this, I would recommend this in a sincere way that we could calculate what the average cost of Medicare for a recipient was over the past 5 years, then issue an annual benefit statement to that person, to the Medicare recipients, for what that amount would be. And have it available in a Medicare recipient fund under their Social Security number and they could go to any doctor they wanted to. Now, we could measure what the cost of a recipient was in the past 5 years, let's say it was $30,000, let's say it was $100,000, whatever it was, we could then as I say, issue a statement to the new people in the future of what is available to them. They could go to any doctor they want to at that time. Then we could also say if people are well off they don't have to go on Medicare. They could choose their own plans. Why should we have to pick Medicare? If I'm a wealthy man, which I'm not, but if I were a millionaire I would say, I don't want Medicare. I don't want to pay $44 a month. I'll pick my own plan. We've got to get back to basic economy, fee-for-service. Thank you very much. Mr. Scarborough. I appreciate your statement, and I would guess that Ms. Arnett's group actually wrote that for you. You'll find no opposition, I'm sure, from her organization. Any quick statements as we conclude this hearing? Ms. Arnett. One of the things that really upsets me about Washington is that they think they're smarter than you are. I think you're smarter. And I think that this $6,000 a year that Medicare pays for the average beneficiary, that if you had control of that $6,000 you'd make much better decisions and you would not tolerate some physician having to jump through 111,000 pages worth of regulations to give you medical care. You want health dollars. Mr. Duranti. I'd like to go to the doctor that I wish, you know, and I'd like to pay for it. Thank you. Mr. Scarborough. Thank you very much. This hearing is adjourned. [Whereupon, at 11 a.m., the subcommittee was adjourned.] -