FROM THE OFFICE OF PUBLIC AFFAIRS

Secretary Summers made clear in his remarks why the President's proposal will create real competition among all plans in Medicare while protecting beneficiaries and ensuring that competitive reform does not mean a new increase in Medicare premiums. For any who might remain skeptical about our commitment to use well-designed competitive reform to strengthen Medicare, I just wanted to emphasize how widely we applied principles of competition in developing the entire proposal. Indeed, we followed the Presidents charge to build on the best ideas of the Medicare Commission to produce a proposal that is suffused with competition but would foster the right kind of competition that does not put the most vulnerable at risk.

First, in our proposed drug benefit we categorically and unequivocally reject price controls in favor of competitive bidding by private-sector pharmaceutical benefits managers. Price controls reduce incentives for research and development and are difficult to administer. Instead, under our proposal, benefit managers would be selected through a separate competitive bidding process in each region of the country, and the bidding will be opened every few years to keep competition vigorous. This is the same approach used in the private sector. It is a system that will be administered entirely by private companies, just as is the case in large firms and the health plans for Federal employees today, and so it is in no way conducive to price controls. Private benefit managers would submit bids to provide the defined drug benefit, and these private managers would do all of the negotiation with drug manufacturers and pharmacies.

It is also important to note that under our competitive reform proposal, if private plans can provide this benefit at a lower premium or can add to the drug benefit, it would provide another competitive incentive for Medicare beneficiaries to switch to more competitive plans. At a time when employers are dropping drug benefits, they would receive a new subsidy to continue coverage. Competition will be further enhanced because all private plans participating in Medicare will have to offer a drug benefit that is at least as generous and unlike current law will receive a direct subsidy for doing so.

It is also important to recognize that effective competition could not take place unless an affordable and meaningful drug benefit is available to all beneficiaries. Currently, private plans often attract beneficiaries by offering some drug coverage though recent data also suggest that these benefits are being designed to attract only healthier beneficiaries. By providing a defined prescription drug benefit to all those in Medicare, the Presidents plan levels the playing field which permits competition only on price and quality. This approach should also help private plans since they would be explicitly subsidized to provide drug benefits the same subsidy that an enrollee in traditional Medicare would receive. As a result, beneficiaries should gain greater confidence in managed care plans, since they would not have to worry as they do now that their plan will drop its drug benefit or make it less generous.

Second, the Presidents proposal would not only generate more competition between private plans and traditional Medicare; it would also make the traditional program itself more competitive. No longer would Medicare pay all the managed care plans the same flat rate regardless of actual cost; payment would be based on their competitive bid price. If beneficiaries chose lower cost plans they would receive 75% of the savings with Medicare retaining the balance a win-win situation for both. To attract beneficiaries, the traditional Medicare program would thereby have powerful new incentives to control costs appropriately. All of us on the panel have endorsed the idea of traditional Medicare competing head-to-head with private plans on price and quality. We and most experts believe that competition works better when plans are all competing to provide the same defined set of benefits; beneficiaries can then compare apples to apples and don't need to purchase benefits they do not desire.

For such competition to work, though, and to move away from the current system of regulated prices, we need to give the administrators of the traditional plan more latitude to negotiate payment arrangements and make purchases based on competitive bids -- just as preferred provider organizations and point of service plans do today in the private sector. Thus our proposal follows the recommendation of the Breaux-Thomas plan and of my fellow panelist Stuart Butler and gives the traditional Medicare program more flexibility to use some of these innovative purchasing tools.

While there are many points of agreement about competition, there are some differences. The major difference between our plan and Breaux-Thomas is in the types of incentives used, the balance between choice and penalties, and the mix of carrots and sticks. Under our system, if traditional Medicare does not keep up with private plans then these private plans can attract beneficiaries with lower premiums. This is because we key the level of government payments to costs in the traditional program. Breaux-Thomas would tie support to the average cost of all plans, with beneficiaries left to pay 100% of the difference in higher-cost plans. Since traditional Medicare program is expected to cost slightly more that the average, this has the unfortunate effect of raising their premiums sharply. In order to assure that all beneficiaries gain from competition, it is important to provide protection to the large percentage of Medicare benefici-aries on fixed incomes. The Administrations price competition provides incentives to join efficient managed care plans not by raising the premiums of traditional Medicare beneficiaries, many of whom do not have good private plan alternatives, but by letting private plans offer lower premiums for the same defined benefits. We must not forget that two-thirds of beneficiaries live in households with annual income of less than $25,000 per year, and that many are on fixed incomes. Moreover, about one-third of Medicare beneficiaries are seriously disabled or impaired. It is too risky for this population to implement competitive reforms without keeping a safety net of traditional Medicare.

I also want to make sure that as we discuss the many important aspects of bringing more effective competition on Medicare, we do not lose sight of this fact: Even if we enacted all of the sensible reforms to Medicare that all of us could reasonably support, every independent actuarial and economic projection about the fiscal future of Medicare reaches a clear conclusion: Medicare will need additional resources to meet our commitment to provide high-quality medical care to The Baby Boom when it retires, if we are to do so without indebting future generations. The number of Medicare beneficiaries will double over the next 30 years, and medical breakthroughs are likely to continue to lead to effective new treatments for diseases. To extend Trust Fund solvency by even a decade through reductions in provider payments would require drastic cuts. To prepare for these challenges, we must take difficult but necessary steps now to enact Medicare reform that modernizes the program and helps control its costs. But we must also take the fiscally prudent step of securing Medicares finances for the upcoming demographic shift.

That is why the President first things first approach to the budget includes the dedication of a substantial amount of the budget surplus to the Medicare trust fund. Not only will this help us eliminate the public debt by 2015 reducing government interest payments along the way, and freeing up resources for private-sector investments that will strengthen our economy for the 21^st century. It will also extend the solvency of Medicare for the next quarter century.