CONTENTS

Advisories announcing the hearing

Altman, Stuart H., Brandeis University

Breaux, Hon. John B., a United States Senator from the State of Louisiana

Francis, Walton J., Fairfax, Virginia

Georgetown University, Judith Feder

Progressive Policy Institute, Jeff Lemieux

Advanced Medical Technology Association, statement

Alliance to Improve Medicare, statement

Citizens Against Government Waste, statement

Healthcare Leadership Council, statement

National Association of Chain Drug Stores, Alexandria, VA, statement

TREA Senior Citizens League, Alexandria, VA, statement

MEDICARE REFORM

Wednesday, February 28, 2001

House of Representatives,
Committee on Ways and Means,
Subcommittee on Health,
Washington, DC.

The Subcommittee met, pursuant to notice, at 10:04 a.m., in room B-318 Rayburn House Office Building, Hon. Nancy L. Johnson [Chairman of the Subcommittee] presiding.

[The advisory and revised advisory announcing the hearing follow:]

Chairman JOHNSON. Since the Senator is here, we are going to start. I understand Mr. Stark is on his way, and when he comes, we will let him contribute his opening thoughts as well. But let me start welcoming you all to this first hearing of the Health Subcommittee of the Ways and Means Committee. We do have a formidable agenda this session, and this first hearing on Medicare reform follows a half-day retreat that we had yesterday to begin to lay a stronger foundation among ourselves of facts and information as we look at the issue of prescription drugs for seniors and the future of Medicare.

Medicare is as important a government program as there is in America at any level of government. And as you all know, local governments and State governments do some things that are pretty important in people's lives. The whole movement to shelter battered women didn't start in Washington, it started in communities. So I say that Medicare is as important a program as any program any level of government has ever developed, with a very deep respect for the programs that other levels of government have developed to address terrible needs in our lives.

Medicare unfortunately is also an antiquated program. It is one of the few health programs that doesn't cover prescription drugs. It is the only program I know of that legally prohibits preventative care. It is really truly quite astounding and a good indicator and reminder of the era in which this program was founded and the degree to which it is desperately behind in the quality of health care it provides to its recipients.

It has become incredibly bureaucratic, incredibly bureaucratic, and any of you who don't believe that, get out of Washington. Go home. Look and see what your nursing homes are hiring their nurses to do. They can't hire them for patient care because they have to hire them for paperwork. Sit down with home health agencies in New England, who looked me straight in the face 10 days ago and said, you let that demand billing memo go through, this is not even a regulation or a guideline, this is even lower than that, and we will have to stop serving dual-eligibles; from agencies who have sacrificed, raised money, struggled to keep in there providing home care services in our urban neighborhoods.

So if you don't think this is program is on the verge of denying care in every category to the seniors of America, then you don't -- you aren't thinking, and you are too in Washington, and I don't want to know, because I am telling you I consider this program as troubled a program as any program I have ever had contact with, including the programs that we put in place with the States to manage children at risk.

So I face our challenges very seriously. I believe they are formidable. And when the 77 million baby boomers retire, and the number of workers per retiree declines from 4.1 today to 2.1 in 2030, if we have not prepared for that, we will not be able to meet the needs of our seniors. And I am bound and determined to meet those needs, though I appreciate the enormity of the challenge and the difficulty of the choices we will have to make.

Nearly 2 years ago, by a 10 to 8 majority of the bipartisan Medicare Commission, the premium support program to modernize Medicare was supported. Now, that wasn't the majority required by the law, so the Commission did fall one short, one vote short, of the supermajority statutory requirement to officially report recommendations to Congress. But the Commission's recommendations, because they rested on a vast amount of information, research and discussion among a remarkable group of people, have lived on, have been very useful, and are providing a useful framework for reforming Medicare. President Clinton responded with a Medicare reform proposal of his own, which was then followed by proposals put forth by Members of both parties in the House and the Senate.

Today the Subcommittee begins to examine all of the major reform proposals in an attempt to develop consensus on how we can best modernize this critical program so that it ably serves beneficiaries, taxpayers, and providers in the decades ahead.

We will continue our investigation throughout the spring and build upon the work already performed with fresh and new ideas of our own, but this is going to be real work, and we are going to welcome ideas and those who want to contribute to the thinking about how -- where we go and how we get there.

[The opening statement of Chairman Johnson follows:]

Chairman JOHNSON. Mr. Stark.

Mr. STARK. Thank you, Madam Chairman, and thank you for calling this hearing.

I have submitted to you a written statement describing in detail a bill that I have introduced to "save" Medicare for the long run. It contains a number of reforms, including a generous drug benefit with tough cost containment.

It uses a competitive bidding system, similar in some ways to the Breaux-Frist II legislation, as I refer to it, to obtain some savings in the program, but it does so without hurting beneficiaries who need or choose to stay in traditional Medicare -- I want to talk about that in just a moment. It uses new purchasing tools to provide better coordinated care, most of which are designed to improve quality and outcomes, and some of which will also generate savings.

It makes major changes to narrow the differences in medical spending in this Nation, which seem to have no relationship to outcomes, quality or need. There is no reason to be paying two or three times as much for a patient in Miami as we do in Minneapolis, without getting better quality in Miami.

Most of all this bill recognizes that we will need new revenue to keep Medicare sound through the retirement of the baby-boom generation.

We had a wonderful seminar yesterday in which it was explained to us that the number of people on Medicare are going to double. They are going to live longer. They are going to want to access more new technologies. We can try to preserve Medicare if we just shift the cost to the beneficiaries, cut providers, and claim that there are massive efficiencies that will save us from needing new revenues. But I am afraid we are going to have to look for revenues. Nobody wants to do it. Nobody has done it.

Tobacco related disease for instance, costs Medicare $20 billion a year in treatment costs. Once before this Subcommittee voted narrowly to increase the tax on cigarettes to pay for some of the health care costs.

Senator Breaux, I appreciate your being here and your work on Medicare. But I urge you and my colleagues to start reform discussions based on Breaux-Frist 2000 and not the first bill. Many of us believe the first bill would shift huge costs onto vulnerable seniors and push many of them into HMOs that basically do a poor job.

I believe it would be possible to develop a bipartisan bill by using Breaux-Frist II as a base and by improving it with a provisions from the Moynihan-Clinton bill from last year, while ensuring the plans compete on the basis of core package of Medicare benefits and that payments are risk-adjusted as soon as possible. And if we take this road, I also urge you to look at many of the ideas in our bill that improve quality, save money and would make Medicare a much better program.

However, if we are going to truly look and learn, and I appreciate the Chair's efforts to educate us and learn what is going on, I think we have to recognize that managed care has not been overwhelmingly popular with the beneficiaries and their families. The public wants the patient's bill of rights because they don't like what managed care is doing. Managed care is unpopular with the physician community. Managed care is unpopular with the hospitals. Medicare managed care costs more than fee-for-service. It is supposed to cost less. It is supposed cost 95 percent of fee-for-service costs; instead, it costs up to10 percent more. Its quality is of dubious character. And too many of the managed care companies are being sued by various providers and others who have to deal with them.

Managed care has not helped Medicare. Quite the opposite. It has wasted money. Too often, it has provided less than adequate services. It has aggravated the beneficiaries and the providers. Why we keep looking to managed care as a solution eludes me.

I hope in the hearing today we can see something that says there is some evidence that managed care helps the system; otherwise I think we ought to erase that one and start over, look for something completely new, and I would like to join the Chair in that search. Thank you.

[The opening statements of Mr. Stark and Mr. Ramstad follow:]

Chairman JOHNSON. Thank you, Mr. Stark. And I do agree that there is a real opportunity for us to work together on this Committee and develop a bipartisan solution. I couldn't disagree more strongly with your closing analysis of managed care, and I think the evidence is the extraordinary outcry of unhappiness when the managed care plans leave the market, and seniors were forced back into regular Medicare. But that is a discussion for another day, and certainly one will have to look more carefully in terms of the data.

But I do consider it a great advantage, Mr. Stark, to have you as Ranking Member with your long experience with Medicare and your very deep interest in health care and commitment to our seniors, and I look forward to working with you and my Democrat colleagues. Mr. Cardin, who has always, from the Ways and Means Committee, taken a special interest in health care issues.

And I would like to welcome our esteemed colleague from the Senate, the Honorable Mr. Breaux of Louisiana, but for the great privilege of introducing him in greater detail, I am going to yield to my esteemed colleague Mr. McCrery, also from Louisiana.

Senator BREAUX. That is enough.

Mr. MCCRERY. Thank you, Madam Chair.

It is my pleasure to introduce my colleague from Louisiana, Senator John Breaux. Senator Breaux and I come from different sides of the political aisle, but having worked with him closely over the years, on behalf of the interests of our home State of Louisiana and on other matters affecting the entire Nation, I can tell you there is nobody on either side of the aisle that is more dedicated to doing things that will make this country a better place in which to live. And he is a recognized expert on Medicare and health care generally, and it is an honor to work with him on these issues, and it is certainly an honor for our Subcommittee today to have him before us to hear his testimony.

Welcome, Senator Breaux.

STATEMENT OF HON. JOHN B. BREAUX, A UNITED STATES SENATOR FROM THE STATE OF LOUISIANA

Senator BREAUX. Thank you, Madam Chair and Congressman Stark and members of the Committee on both sides of the aisle. Jim, I am sorry I suggested that was enough. I thank you for the fine introduction. I appreciate the comments and thank the members of the Committee.

Number one, congratulations to the Chair and the Ranking Member and to all of you for beginning this process very early. Too many times we spend too much time delaying and talking about how we are going to go about the process, and we never get involved in the process. So with something as complicated as Medicare, Madam Chair, thank you for starting early. We have not yet reached that point in the Senate, and it is incredibly important we start as early as we possibly can. So congratulations for beginning the process of finding a solution.

The first point I would like to make is one that I think is becoming more and more accepted as a policy matter by more and more Members of Congress and by more and more people in the American public, and that is that while Medicare has been a wonderful program for a very long time, since 1965, that it is no longer a 21st century health care program for modern Americans because it is inadequate in what it does and noted for what it does not do. No one of you behind this desk has a health program that is insufficient as much as Medicare is for the 40 million seniors in this country. Nobody sitting behind us has a health care plan that is as inadequate as Medicare is for the 40 million American seniors.

Almost everybody in America that has health insurance has a better plan than people who are on Medicare have today. Why do I say that? Because of what it doesn't cover. Time after time we have heard evidence that it only covers about 53 percent of the average senior's health costs. That means 47 percent of their costs must come from somewhere else. We don't cover it. They have to buy an additional Medigap policy. They have to become so poor, they have to get on Medicaid, or their family has to take care of them when they become destitute for the things that Medicare does not cover. It doesn't cover long-term care, it doesn't cover assisted living, it doesn't cover vision and eye care, and, most importantly, it doesn't cover probably the most important medical innovation that we have in the market today, and that is prescription drugs.

None of us have a policy that is that inadequate. So I think that there is a growing admission, if you will, that there is an absolute necessity that we do something about this program. That is almost now a given. We have crossed that hurdle. No longer can someone say with any total degree of honesty that I like Medicare just like it is; don't do anything to change it. That argument doesn't hold water in the 21st century any longer.

So what is the solution? The solution is not to have a totally government-run program with 133,000 pages of regulations that we micromanage to the nth degree in every detail. Nor is it to just abandon what the government does and to say all of a sudden we are going to have the private sector do everything for the health of seniors in this country, and we are not going to have government involvement at all. Neither one of those suggestions, which we have all heard of far too many times, is the correct decision.

I would suggest that the correct decision is combining the best of what government does with the best of what the private sector does, and I would submit that Breaux-Frist I and Breaux-Frist II takes that approach.

Now, what do I mean by that? Number one, the best of what government can do is help pay for it. There is no question that it is going to cost more money, as Congressman Stark talked about. We are not going to save money by reforming Medicare, but in the long term we will make it a better program with more cost efficiency. The best of what government can do is help finance it and help pay for it. The best of what government can do is help make sure that it is being run properly as opposed to micromanage it in detail. And that is what Breaux-Frist I and II does. It combines the best of what government can do with the best of what the private sector can do.

And what do I mean by that? The best of what the private sector can do is to bring about innovation and new technology so that the Congress doesn't have to sit in our back rooms and decide that for the first time Pap smears will be covered under Medicare when private plans have done it for decades. We did that last year. When the private sector can help say that when you have a drug that can be orally administered for the same efficiency as it being intravenously administered, it will be done through the private sector and not take an act of Congress, which we had to do in past years. And the second thing that the private sector can do best is to help bring about competition, which will help lower prices.

So the idea is to combine the best of what government can do with the best of what the private sector can do and create a program that fits the 21st century, and that is why we have tried to model what we have recommended after the same program that every one of you up here, and myself included, and all of our employees behind us have, and that is a Federal employees health benefit plan.

I mean, every year we get a choice of a large number of plans that we pick from, and some have said, well, Breaux, you are proposing a voucher system, and that is not going to be realistic for seniors. Of course it wouldn't be, but our plan is no more a voucher than what you have and what I have and what all of our employees have. We don't have a voucher. We have an absolute government guarantee that they, in our case, are going to pay about 75 percent of the premiums that are the cost of the plans that we are offered. That is an absolute guarantee. There is an absolute guarantee of what the policy has to cover, although they can cover much more, and most of them do. And there is a Federal involvement through the Office of Management and Budget to guarantee that there is not going to be scamming of the system, there is not going to be programs that have adverse risk selection that are going to be offered.

That is what government can do best. It pays for our premium. It guarantees that the program is run properly, but it also brings about competition because of the various plans that want to compete for the right to serve 10 million Americans.

We have vision. We have prescription drugs. We have competition. We have guaranteed government payment for a large portion of the cost of our policies, and the prescription drug plan works in a way that I think should be available to all seniors as well. So, I mean, that is the concept.

Why did we introduce Breaux-Frist I and Breaux-Frist II? Put the charts up if you can, Sarah. Breaux-Frist I was the result of really what the Commission attempted to report. We got a majority. We got more than a majority, but we didn't get the super, supermajority that was required. The concept in Breaux-Frist I was to really have competition among fee-for-service as well as these private plans that will be offering these benefits. We wanted to do it outside of the current micromanaged system, so we created this Medicare Board. It you wanted to compare it to OPM, that would be a good comparison.

The Medicare Board would ensure the quality standards. We said they would have to have the same benefits that would be available on the current fee-for-service. They could do more, but they couldn't do less. They would negotiate the premiums to make sure that people get the best premiums, that they would have the best possible price. They would have to approve the benefits package, which means they would not let plans be offered that attempt to scam the system by only adversely risk-selecting healthier seniors, which would be a terrible mistake. They would say, you can't do that. You can't play. You can't offer if you are going to do that. And that is the safeguarding against adverse risk selection.

It would also, like we get every year, provide to every Medicare beneficiary a book on what is available to them. And some people say, well, you can't give them choice because they are too old, they are not going to be able to make the right choice. And yet on the fee-for-service they make choices every day. They pick the doctor they want to go to, the hospital they want to go to. If they are not capable of doing that, their children help them or senior organizations help them and find the right place to go.

You would have the same system under the Breaux-Frist I. And what you would have is have -- HCFA would continue to offer their standard plan. They could offer a high option plan which, would provide prescription drugs, and it would be competing again in the same market with other private plans who could come in and offer the plans, and they would hope to get the business as well.

But if you want to stay in fee-for-service, I guarantee you some of our older citizens will stay there. They are not ready to change. But 77 million baby boomers getting ready to hit this market, who are going to be more accustomed to coming into this new system, will be looking for new choices and move into the new plans, but if they don't want to, they could still stay in the fee-for-service system.

Put up the second chart, if you would, which is Breaux-Frist II. You might say, well, why don't you just offer I. We offered II because we want to give you and all of our colleagues an array of options that are out there. Breaux-Frist II is competition, but it is probably less competition than Breaux-Frist I. For those would feel we have to take it more gradually, we offered a Breaux-Frist II option, which again maintains the Health and Human Services and HCFA, which would continue to run the fee-for-service program and the Medicaid program and the SCHIP program for children. But we would have a competitive Medicare agency for the first time outside of HCFA running Medicare+Choice and the prescription drug plan.

The reason I would offer Medicare+Choice has not worked is not because it is inherently not possible to work, but because of the way it has been run. What we set up was that Medicare+Choice was going to be competition for fee-for-service, but guess who was going to run it? Fee-for-service.

HCFA sets the rates on an arcane formula. They put in risk adjusters and all kind of problems to make Medicare+Choice not work. In some areas, as you know, they get paid too much, and some areas they get paid far too little, and they move out and leave the people without any Medicare+Choice managed care options at all.

So you have to -- if you are going to have them have a chance to compete, you ought to have it with an agency that is based on competition and that is their purpose, not on trying to fix the prices to make sure one side wins and one side loses. The Medicare Prescription Plus plan is the prescription drug plan that would be provided under the Medicare+Choice. And if you want to stay in the fee-for-service, you would be over there to get in the Medicare Prescription Drug Plus plan.

I think Pete sort of indicated a lot of Democrats are saying, yeah, we believe in prescription drugs if it can be delivered in a competitive mode as opposed to being micromanaged by HCFA. This would do that.

I don't think any of us want to add prescription drugs to a 1965 model and have to sit in our back offices and try and figure out what the proper reimbursement rate is going to be for thousands and thousands of drugs, and which one should be approved and which one should not be offered. We can't do that. We shouldn't do that. We only have got one doctor and a couple of veterinarians over in the Senate side that you all sent us from over here. Glad to have them, but we ain't got a lot of people with a lot of medical expertise over there trying to decide which prescription drug should be available; should it be orally administered, or can it be intravenously injected; which one do we pay for; which one we don't pay for. We can't micromanage another prescription drug plan. So that is what that would do, and that is the way it would work.

Anything else? Okay. That is basically why we have both plans out there. I thank you for your attention. I am more than happy to try and answer any questions. Thank you.

[The prepared statement of Mr. Breaux follows:]

Chairman JOHNSON. Thank you very much, Senator Breaux, for your presentation and for your many years of thoughtful evaluation of the options that we have in terms of managing the transition of Medicare to a more modern and responsive and affordable plan.

Actually we have so many Members here that I think I am going to forego my right to question so that we get through everybody, because I have had chances to talk with you, and I will.

Mr. Stark.

Mr. STARK. Well, again, I question whether managed care or Medicare+Choice is any good. I happen to disagree, John. I think Medicare is the finest system we have in this country. We have starved it by wasting money on managed care, and we may not be paying as generous benefits as we, in fact, should. I think that last month it was announced came out that the National Academy of Social Insurance is going to issue a report warning that relying on the marketplace to solve Medicare's problems will make matters worse, not better--largely because of the quality of care problems, especially for those who are poor or minorities, that will be generated by a premium support system.

I would like, Madam Chair, to enter the Medicine and Health article in the record that outlines the National Academy of Social Insurance's forthcoming action. I think our colleagues will find it of some interest.

Mr. STARK. The private market has its problems. Aetna, for example, the largest, most prestigious insurance company in America that runs more managed care than anybody else is now being sued by the Connecticut Medical Society for not paying claims promptly. Too often, there are inappropriate personnel making coverage determinations; there are inappropriate incentives for the reviewers to deny care.

Only approximately 15 percent of the seniors have chosen managed care, many because they have been inundated by advertisements from the managed care companies.

The Chair rightly indicates that many people were concerned about the managed care companies closing up. I submit to you that is only because many beneficiaries in those plans have drug coverage not available in Medicare. If we had a drug benefit in Medicare, we would, in fact, find that few would want to give up the right to the absolute open choice that the fee-for-service system now provides, and we would have happier doctors, hospitals.

Chairman JOHNSON. Mr. Stark, if you could direct your questions more directly to Mr. Breaux, I would appreciate it, because we have so many people who want to ask questions.

Mr. STARK. I understand that. I will get to the question.

Managed care does not help pay for graduate medical education and it does not provide benefits to those in rural areas, which the fee-for-service does now, to the tune of about $10-$12 billion a year. What possible benefit is there to the Medicare beneficiaries to be encouraged to go into managed care? That is my question. What evidence do you have that managed care is any good?

Senator BREAUX. I think there is a good question in there, and I hope I can find a good answer for you.

Mr. STARK. I don't think there is any evidence.

Senator BREAUX. Let me try.

Mr. STARK. All right.

Senator BREAUX. If you only took half of what we are suggesting, and that is to let the private sector take over all of the operations of the Medicare, I think Congressman Stark would be right, because there would be no guarantees of benefits. There would be no guarantees against adverse risk selection, and all of the problems that he talks about would probably be potentially existing. But what we have designed, as I have said, to combine the best of what government can do and what the best of what the private markets can do.

And when you have a Medicare Board or you have a competitive Medicare agency, their role would be the same type of role that we have with OMB that guarantees against adverse risk selection, guarantees it is legitimate and fair competition, and also allows the private sector to bring about innovation and technology advancements. So you have the protection for the beneficiaries that I would argue is not there today, and you have real competition, which is clearly not there today.

But the bottom line is that people who do not want to go into the new system, they have the right to stay in fee-for-service if they think that serves their needs better. They have a choice, and I think that is the right way to go.

Mr. STARK. Well, I would just suggest, Senator, that managed care has an abysmal record and their popularity is plummeting among Medicare and non-Medicare beneficiaries alike- including corporate America, which is getting sick and tired of it. Going to the managed care industry for help with reform is sort of like going to Saddam Hussein to find out how to teach democracy.

Senator BREAUX. The model we are going to is the model that you have as a Member of Congress, I have as a Member of the Senate, is the Federal Employees Health Benefit Plan. I would suggest the reason that Medicare+Choice has not been doing well is because of the way it has been micromanaged by HCFA.

Mr. STARK. Senator, I will bet you a nickel that there aren't two people in this room that belong to a managed care plan.

Chairman JOHNSON. Oh, everyone. There are no Federal employee benefit plans in my district that aren't HMOs.

Mr. STARK. Those are PPOs. I am talking about managed care.

Chairman JOHNSON. They are all managed care.

Mr. STARK. Come on.

Senator BREAUX. He is talking about bad managed care.

Chairman JOHNSON. You are talking about bad managed care.

Mr. STARK. Thank you.

Chairman JOHNSON. Mr. McCrery.

Mr. MCCRERY. Thank you, Madam Chair.

Since my good friend and colleague from California brought up the seminar that we had yesterday, let me refresh the memory of those who were there, and for those who weren't let you know that we are also told yesterday that in the year 2040, based on current projections, if the government is still spending around 18 percent of GDP, Social Security, Medicare and Medicaid will consume 80 percent of the Federal budget. That leaves 20 percent of 18 percent of GDP for national defense, for roads and bridges and highways, for environmental protection, court system, you name it; 20 percent. We all know that is untenable. Can't do that.

We must do something to at least try to curb the rate of growth in Medicare and to curb the rate of expenditures for Social Security. So at least Senator Breaux and his Commission brought forward a plan that gives us some hope of doing that in the Medicare system.

I think Senator Breaux would be the first to tell you, Mr. Stark, that he is not sure this will work. Nobody is. But we are going to do something. And I would certainly urge you and others who don't like the premium support model to come forward with something else that will control costs. So far I haven't heard much. But we are anxious to hear other views, and certainly that is going to be the job of this Subcommittee to look at any alternatives and try to decide what is in the best interest of -- the best long-term interest of this program and the country.

Senator Breaux, you have discussed adding a prescription drug benefit, and certainly I don't think there is any argument that Medicare is deficient in that regard. We do need to provide a prescription drug benefit to senior citizens in this country, but I have seen in print you quoted as saying that you don't think a prescription drug benefit should simply be added to the current Medicare program, that it ought to be done in the context of overall Medicare reform. If that is correct, would you expound on that just a minute?

Senator BREAUX. Congressman, that is correct, and I think it is important. I mean, I have used the analogy, I thought it was kind of good when I said it, I think it is still pretty good, that just adding prescription drugs to the existing program is like adding more gas to a 1965 automobile. It is still going to run like a 1965 car. Therefore, just adding more benefits to a 1965 Medicare system is still going to have the same problems. It is going to cost a lot more. It is still going to be micromanaged. There still will be no competition.

So I think that what we have to do in assuring that Medicare does cover prescription drugs, which I feel very strongly it should, that it is part of a reform system that allows the prescription drugs to be delivered in a 21st century model that guarantees the protections, guarantees quality, but also brings about competition which will help on the prices as far as having competition so we don't have to micromanage it or price regulate it, which I think would be a serious mistake.

Mr. MCCRERY. In the work of the Commission, the projections that were developed by the Commission showed that in the first 10 years of Medicare reform under the premium support model, the system would save about $100 billion over current projections for the current program, but then in the outyears, after the first 10 years, it showed considerably more savings for the program. Is that correct? And how did the Commission explain-.

Senator BREAUX. Congressman, the Commission, as I know  -- Jim McDermott was there and others behind me that were on the Commission with me know one of the recommendations that did not get the super, supermajority was an increase in the eligibility age, which would have caused substantial savings. That is not part of our plan. Neither Breaux-Frist I or Breaux-Frist II touches the eligibility age. But I do think going to a more competitive system you will still have the savings. I think we were scored in Breaux-Frist II as $163 billion over 10 years. We have resubmitted that request to be updated, and it is going to be more than that under Breaux-Frist II. And that is going -- will be made available as soon as we have it.

You know, I thought in the beginning, quite frankly, you could devise a new system to come up with a lot of savings in a program. I think the best we are going to be able to do is to improve it and to keep the increase in costs down. I don't know -- we are going to have to spend more money in this program, and that is it.

Mr. MCCRERY. Sure. I am referring to a savings from the baseline, not a-.

Senator BREAUX. Okay. Yeah. It would be that. I mean, the projections we have, CBO is now estimating that Medicare will grow by an average of 7.5 percent over the next 10 years, doubling spending from 216 billion to 456 billion by the year 2011, and that does not cover the cost of adding prescription drugs. So when you add that, then you are looking a some huge amounts, which Jim just pointed out.

Mr. MCCRERY. Thank you very much.

Chairman JOHNSON. I would just mention, to keep things in perspective, that that 7.5 percent growth leading up to very big spending is current law. And just since last year, the House-passed prescription drug bill, which was very modest, I think, by anyone's standards, has increased in its cost 23 percent in 1  year. So we do have to really understand the implications of what we are doing.

Mr. Crane.

Mr. CRANE. Thank you. I don't have a question. I just want to commend you, Senator Breaux, and your colleague Senator Frist for the work you have done, working toward fundamental reform of the problems that we are experiencing with the Medicare program. And I think that approach is infinitely superior to what we have been doing through the years, and that is piecemeal or patchwork. And so keep up the good work, and we are looking forward to continuing to work with you both on the Senate side.

Senator BREAUX. Thanks, Phil.

Chairman JOHNSON. Mr. Kleczka.

Mr. KLECZKA. Thank you, Madam Chair. I might have a question somewhere along the line, but I would like to make a couple of observations.

Senator, thank you for your presentation today. I think the debate that we are having and the discussion we are having is proper, and it is probably healthy, but in the bottom -- or at the end of the day, my conclusion will be that it just ain't going to work.

And one can only look back to about 35 years ago at this old Chevy that you are talking about that needs a lot of gas, and the reason that the government bought that automobile was because the private market wasn't providing the seniors in this country with health care. Over 50 percent of the seniors had nothing. So the government stepped in, which is the government's role.

Now, when it comes to making cars, private industry does that, and it does it quite well. When it comes to building our homes, private industry does it, does it quite well. Governments should not get involved in that enterprise. But where there is a gap, where the public is not being served and is in need of a service, that is what we are here for. That is why the Founding Fathers created a Congress to look after the welfare of the citizens of this country.

Well, now we are saying, well, things have changed dramatically in 35 years, and the insurance industry is now clamoring; they are clamoring to insure these seniors.

Well, a couple of responses to that. First of all, we have had a pilot program. We have had a pilot Breaux-Frist program operating the last couple years called Medicare Choice. What has been the experience? Seniors have gotten more care cheaper, and insurance companies are beating each other to death to insure them. Wrong. What is happening in the city of Milwaukee, which I represent and come from, we had three carriers at one point. Now we are down to one, who is going bankrupt and will probably file with HCFA that they are going to get out of the business, too.

And the problem is you are insuring the sickest of our population, those who are going to be exposed to great medical costs in a short period of time. Well, you say, let's give them the same plan offerings like the Federal employees. Well, in that market the insurance system works because you are insuring the young, healthy and the 58-year-old somewhat healthy members like myself. When you put them all into a big bin and mix it up, you can make a buck doing that.

Okay. So you know it is like rolling averages, but with the senior population, 65 to 100, you don't have that good exposure, all right, because as time goes on, it is going to be more health care, more drugs, more hospitalization, et  cetera, so the private insurance market doesn't want them, all right? They ain't going to make any money on them.

Another case in point, let's talk about the great drug bill, Madam Chairman, we passed last year. Well, here is a drug subsidy program to be run by our favorite friends again, the insurance industry. What we are going to do is have them go out and sell drug policies to seniors, and the government, taxpayers, will subsidize their costs or losses or whatever you want to call it. Well, we had a hearing, Pete, didn't we, before the Committee, and half of the insurance industry came before us and said, nice program, girls and boys, but we ain't buying into that, because the people who are going to sign up for that program need drugs.

So here is the Republican response to a decent drug benefit that we produced, and the major actors came forward and said, nice program, but we are not buying into it because we are not going to make any money on it. So there are things, Madam Chair, that the government should rightfully do, and this is one of them, but now if we pass the Breaux plan, and, John, we could be getting to a question pretty soon --

Senator BREAUX. I am taking notes.

Chairman JOHNSON. Remember you only have 5 minutes for question and answer. I would like our witness to have a chance to answer.

Mr. KLECZKA. Now I lost my train of thought. That was probably great. I have to start all over again. I am sorry.

Chairman JOHNSON. Since the yellow light is on, why don't you let the Senator comment on-.

Mr. KLECZKA. What has changed now? What do you see in the marketplace that is going to offer all the benefits that are not being offered in Medicare today plus the current base benefits that are going to be more affordable than they are today, and we are going to have more players, more private insurers coming forward to say, gosh, I like your grandma, I would really like help her out. Okay.

Senator BREAUX. Let me take a crack at it and make a couple of points. Number one, we cannot defend the status quo.

Mr. KLECZKA. As I like to say in the South where I come from, it is better than nothing. You know what? It is pretty good.

Senator BREAUX. I will give you an alternative, which I think is better than the status quo, number one.

Number two, let me take the analogy on the cars. You said Detroit makes cars; government doesn't. That is true. The private sector makes the cars, where the government is involved in ensuring safety standards, fuel efficiencies, and so they don't roll over, to make sure that the cars run according to certain national standards. Private sector makes them, and they bring about efficiency, and there is competition, but the government has a major role in ensuring that they are safe and they meet certain standards and fuel efficiency.

The same type of concept is what we are talking about with health care. Let the government do what the government can do best: help pay for it, help guarantee that it is being run properly and meets certain standards, but allow the private sector to bring about innovation and competition and new technology.

The final point: It is true that agencies that came up and talked about prescription drugs being available would not ensure it only because it is not a good insurance risk. Obviously we all understand that if you are only going to cover prescription drugs, the only people to buy those policies are those who will need prescription drugs. Like in the Medigap insurance, the premiums become so expensive that it is not a good investment.

But this proposal is different, I would suggest, in a major, major way. Number one, the plans would be able to offer more than just drugs only, which is one of their complaints previously. They would be able to offer vision. They would be able to offer dental. They would be able to have coverage for cost-sharing. In addition to that, there would be a one-time enrollment to make sure that more people become involved in the process to give them a larger insurance pool than they had before.

And the final and probably the most important thing is the reason why it would work is there would be substantial risk-sharing by the government agency as well as the insurance companies to help with regard to the risk-sharing in selling this type of policy. So I think that when you look at what we are suggesting, that it --

Mr. KLECZKA. Are you talking subsidy just like the drug program we had?

Senator BREAUX. Yeah. Absolutely.

Chairman JOHNSON. I thank the gentleman.

My friend Mr. Johnson from Texas.

Mr. JOHNSON OF TEXAS. Thank you, Madam Chairman. Let me correct the record, if I might.

Mr. Stark, I have been getting complaints on the Medicare system as it is envisioned. I have been getting complaints about HCFA, and I haven't been getting complaints about HMOs.

Now, I think that what we have to consider is that HCFA, as Senator Breaux has said, is obsolete and inefficient and doesn't work. And can you imagine us adding prescription drugs to this thing, Senator, and every year coming up here and saying, we got to add this one and this one and this one because of new innovations in medicine.

Medicine is moving faster than we can do that. That is what is wrong with HCFA. It hasn't been able to keep up with it. Inadequate benefits, and insufficient choices, and Medicare's administrative inefficiency and structural obsolescence have to be overcome. I like what you are doing.

Would you care to comment on any of that?

Senator BREAUX. You are right on.

Mr. JOHNSON OF TEXAS. God bless you. Thank you.

Mr. MCCRERY. Would the gentleman yield?

Just to correct the record, another time there were, in fact, PBMs that came forward last year and said they would participate in the prescription drug program that we offered. And I think the main industry sector that was saying loudest they wouldn't participate is that sector that already participates in the Medigap policies that are so profitable. So I would urge you to question those sources.

Senator BREAUX. Medco said they would write a drug only plan.

Mr. JOHNSON OF TEXAS. Thank you, Madam Chairman.

Chairman JOHNSON. Thank you.

Mr. Camp.

Mr. CAMP. Senator, thank you for all your good work. I would agree with you that the addition of prescription drugs really is an opportunity to modernize Medicare. And for example, this 1965 model when you get the drugs if you are in the hospital, but you don't if you are out of the hospital, it just cries out for some change.

You said in your written statement and I think in some of your comments that the premium support model in Breaux-Frist I would give HCFA the tools to modernize itself. Could you elaborate on that, please?

Senator BREAUX. Okay. What do we have on that Sarah? Basically we are giving them more of an ability to write the regs this away that would encourage more competition within the system, giving them the flexibility to offer some of their benefits through a more competitive system than they do now, and basically giving them greater flexibility in order to be more competitive, because under this they are going to have to compete now with the private plans. So we give them more flexibility on how they would be able to utilize what they do now in a more competitive fashion in order to be able to compete.

Mr. CAMP. Okay. Thank you very much.

Thank you, Madam Chair.

Chairman JOHNSON. Thank you.

Mr. McDermott.

Mr. MCDERMOTT. Thank you, Madam Chairman.

Sam, if you can sell the idea that Medicare has been a failure to the people who are on Medicare, you are a real good salesman. I think that anybody who looks at the program can see there is problems, but to say it is a failure or we ought to throw it out and bring in this new, has simply not looked at the problem.

I would comment everybody looking at the GAO report that says, plans withdrawals indicate difficulty providing choice while achieving savings -- this is September last year -- and there has been a roughly 50 percent decline of members in the Federal Employees Health Benefit Program covered by managed care operations.

Now, if this is such a good option, why are all the Federal employees leaving it? And yet, what we are seeing here is a proposal that is designed to push us  -- push seniors, I am not quite there  -- to push seniors into that program. And they are dangling this little benefit of drugs out there, and come on, folks, follow the drug, and we will get you in there.

And the fact is that what has happened to Jerry has happened all over this country, that people have had -- every one of us sits in our office and tries to deal with it, as I did in the State of Washington, almost 500,000 who were dumped by HMOs because they couldn't make money. And we started out with the premise that when we put the HMOs in, they should get 95 percent of what we spent on the average beneficiary in the Medicare program, and they say, we can't make it on 95 percent.

Well, where is the savings? That is what I want to ask you. Because we say we can get competition, and with competition we will get savings. And yet the technology of medicine has gotten more and more complicated, and for us to say that, well, we can do it, I guess we will just let the managed care operations do the rationing.

And the question I have for you, John, is would you rather have the insurance companies do the rationing, or do you want to do it?

Senator BREAUX. Neither one. I think --

Mr. MCDERMOTT. Well, you are going to have to do it one way or the other, or you are going to have to cut back on services. You cannot provide the level of services to an increasingly aging population with the technology that is going on in this country and not cut somewhere.

Senator BREAUX. Let us remember, every one of us, that 47  percent of the average senior who is on Medicare's cost for health care every day is not covered by Medicare today. Forty-seven percent of their illnesses and their ills that need to be treated, they have to go and buy another policy, they have to go on Medicaid, or they have to go to their children. Those facts are factual. It only covers about 53  percent. So you already have a system that is woefully inadequate.

Now, we have to understand  -- the final thing we have to understand, I think all of us, myself included, that -- I remember when Stuart Altman was on the Commission and who is here behind us, I think in the beginning we argued about this as a means of saving a great deal of money. It is not going to save a great deal of money, but it is going to help reduce the increases that are projected. We are still going to be spending more money.

The feature that we have here is that we try to combine the best of what government can do with the best of what the private sector can do. I am not arguing that it is only the private sector making the decisions in terms of risk selection, in terms of making sure the policies offer everything that is needed and necessary to be offered. The government is involved both with that and with paying for it. And the final note is that people have a choice. If they like the old program, they stay there; if they prefer the new one, they have the opportunity to choose it.

Mr. MCDERMOTT. I think that that is admirable, and I like that part of what you are doing. What I don't like is the slanting of the incentives to say, if you stay over on this old fee-for-service 1965 Chevy, you are not going to get that nice, big Cadillac that we got for you.

Senator BREAUX. You do if you pick this Breaux-Frist I.

Mr. MCDERMOTT. It has got a drug in the front seat.

Senator BREAUX. That is the argument for Breaux-Frist I. Because with Breaux-Frist I, HCFA would offer their high-option plan and prescription drug plan as well, so you could stay in fee-for-service and get drugs under Breaux-Frist I; and under Breaux-Frist II, you would go to the competitive Medicare.

Mr. MCDERMOTT. Why do you even bring Breaux-Frist I here when it is so patently designed to drive seniors into HMOs?

Senator BREAUX. I don't think it does that. You can still stay --

Mr. MCDERMOTT. You mean if I offer my mother, who is 91 years old, a drug benefit if she goes into an HMO if she doesn't have it now?

Senator BREAUX. For Breaux-Frist I, under HCFA's high-option plan, they offer not only all of the current benefits but also prescription drugs; and the prescription drug plan would be available under fee-for-service and HCFA. If my father wanted to stay in HCFA and get prescription drugs under the high-option plan, they would have prescription drugs under the high-option plan.

Mr. STARK. A $50 benefit for 1,200 bucks? That is a heck of a benefit.

Senator BREAUX. We can design it. We can pick the number. That is an actuarial value. That is not $800 worth of drugs. It is an actuarial value.

The average senior in this country spends approximately -.

Mr. MCDERMOTT. Would you say, in closing -.

Senator BREAUX. -- between $600 and $700 a year on drugs. That is the average cost. An actuarial value policy of $800 is a pretty good deal.

Mr. MCDERMOTT. Let me just say, in closing, that what you have to keep in mind here is that you are designing a program that presently has something like 9  million widows in it living on $8,000 a year. Now, if that is the program we are trying to design  -- we are not worried about Bill Gates when he goes into Medicare. He is going to be able to afford a few extras. But it is the people at the bottom who you give this miserable benefit to at a time in their life when $800 may turn out to be a pittance of what they spend. When the average out-of-pocket cost is $3,500, according to our seminar yesterday, an $800 benefit doesn't cover it.

Senator BREAUX. Let me suggest that an $8,000 income is probably covered by Medicaid which covers 100  percent of their drugs and 100  percent of their health costs.

Mr. MCDERMOTT. Do you make an automatic entry into Medicare -- Medicaid? Because nobody on this Committee will automatically default people into Medicaid. They make them go down to the welfare office and beg to get in. And that is why this deceptive.

Chairman JOHNSON. I would like to exercise the prerogative of the Chair to make two comments.

First of all, Medicare is currently a fee-for-service plan and a plan that offers managed care choices. It has offered them for many years. It has offered the HMO risk plans. Now it offers some other variants. In 40 years, Medicare is going to be there, and it is going to be offering fee-for-service coverage and other choices.

So no one here is for a moment suggesting that we do away with Medicare, and it concerns me when we allow an opportunity to educate ourselves to become in a sense a political debate. You know, neither party, the administration, nor anyone else  --

Mr. STARK. No, no politics here.

Chairman JOHNSON. I find that disrespectful, Mr. Stark.

Mr. KLECZKA. Madam Chair, I  --

Mr. STARK. I am just bringing some humor into the subject.

Chairman JOHNSON. I understand what you are saying, but hear me out.

No political party and no administration has come up with a plan that meets your criteria, nor that we have costed out, nor that we have figured out how we are going to fund.

Now, this Committee is going to try to do that, going to try to get into more depth on why is it that the choice plans haven't met the needs of either the recipients or the taxpayers or the plans. But I think it is very important to remember that nobody is talking about doing harm to Medicare.

What people are talking about is Medicare's inability to offer state-of-the-art benefits to the recipients, and how are we going to do that in the context of extraordinary expenditure estimates, and how are we going to do it in a way that we don't force people into choices to get benefits but do honestly give them a choice. And how are we going to deal with some of the problems of the low-income seniors who are just above the Medicaid level, and can we really afford to continue a program that doesn't take into account the very minimal needs of someone -- just minimal abilities of someone just above the Medicare level or just above 150  percent of poverty to pay even premiums whether they are in -- whatever bill they are in.

So I think we have very big challenges before us, and I don't think that we have understood clearly on the congressional side -- and I think you would agree with me on this, Senator Breaux -- that we really haven't understood clearly why is it Medicare didn't work as well and what is the complexity of the system that it found itself facing. What are some of the things that it did that were good, and what are some of the things that it did that were bad? Because, clearly, if we are going to do this, we are not going to try to re-create the experiences of the last few years. We are going to try to strengthen Medicare fee-for-service with prescription drugs; and we are going to try to provide stable, predictable, funded alternatives; and it is going to cost money.

So if we can focus on our questions about Mr. Breaux's answer as precisely as we possibly can, I think we arm ourselves to go forward and work through some of the problems that have been brought up that are real.

Mr. Ramstad.

Mr. RAMSTAD. Thank you, Madam Chair.

Senator Breaux, let me just first say that this is one member who appreciates the fact that you have approached Medicare reform in a bipartisan, pragmatic, common-sense way; and it is just a crying shame that the final vote necessary to constitute a supermajority wasn't there on the Commission. Because to the degree possible -- and I realize it is not fully possible to depoliticize this debate and the subject we are working here on, but to the degree possible that, more than anything, would have depoliticized and that Commission report would have sailed through in a bipartisan way certainly the Congress, both bodies, I believe.

But let me focus in on this. In his opening remarks, Mr. Stark acknowledged the incredible inequities of the Medicare+Choice program and the reimbursement formula. In fact, I think he mentioned the difference between Minneapolis and Miami, and everyone knows that a Medicare beneficiary can receive 2-1/2 Medicare surgeries at the Mayo Clinic in Minnesota for every one in Miami, Florida. That is absolutely unconscionable and unfair. We did take a baby step forward in increasing the minimum payments or the floor last year to $525 in urban counties and $475 in rural counties, but we still have incredible disparities, and seniors and providers are being cheated in States like Minnesota who are penalized for their history of prudent health care spending. Minnesota, for example, over the last decade has kept its costs three percent under the national average. As a result, our reimbursement formula is less.

How, in your judgment, should Congress address the unfair equities in the Medicare+Choice reimbursement system?

Senator BREAUX. Well, I mean, you have to I think get rid of the arcane methodology in which Medicare+Choice plans are being paid for. It is a political formula. It is a somewhat cost-oriented formula, but that is not the premise of it. They ought to be paid based on competition. They ought to be asked to compete in the marketplace, and they would be paid accordingly, and we would be looking at who can do it for the best price, providing the best services.

Right now, as you point out, some areas are getting paid more than they need; other areas are getting paid far less than they need. I mean, they get hit with risk adjusters and user fees and payment recalculations. It is no wonder Medicare+Choice has not been able to be working out there as it was intended to work, because it is managed by the organization that is in competition with it. It was not in their interests to help make it work.

Therefore, we get out of the concept of having it paid based on an arcane national formula, rather than being paid based on the competition that they would have to compete with; and the ones who would do it for the best price with the best services would get the business and others would not.

Mr. RAMSTAD. Well, I thank you for that response; and on behalf of all Minnesota seniors, Medicare seniors, I truly hope we can get that done this year, because it is simply not fair. I have every  -- every town meeting I attend, every senior center I visit I am barraged with complaints and questions about the inequities, so I appreciate your approach to that problem.

The second question I have, I represent 300 of the best medical technology, medical device companies in the world, comprising Minnesota's Medical Alley, and they are developing new technologies all the time -- Medtronic, for example, the first pacemaker  -- technologies that save lives and improve the quality of life for people all over the world. These technologies, as we all know, are available in the private sector years before they are approved by HCFA for Medicare beneficiaries.

I saw in your other chart the fourth item listed was  -- maybe it was yet another chart. Anyway, it was medical  --

Senator BREAUX. It is in one of our charts.

Mr. RAMSTAD. Exactly, one of the charts. But, anyway, we have to get more access to seniors to medical technology, and how in your judgment should we address this in a comprehensive Medicare reform bill?

Senator BREAUX. Well, first, Congressman, the Commission had the privilege of going to your home area for one of our Commission hearings.

Mr. RAMSTAD. I know. In fact, I was there; and I appreciate that.

Senator BREAUX. It was fascinating what we were able to learn.

The whole question of innovative technology is part of what the private sector can do best, as opposed to what government can do. We now make technological decisions that we have not the competence to make in the Senate Finance Committee, and I would say also in your Ways and Means Committee as well, about what we are going to pay for and what we are not going to pay for. Is this the best procedure to pay for, or are we not going to pay for this, but we will we pay for this procedure over there.

We all have, probably, examples of industries that have come to us and said, we want you to introduce a bill to get Medicare to cover this, and the other side who is selling the other product will say, no, we don't want you to do that because they are paying for our product.

That is not the best way to bring about innovative health care technology. The best way is to allow the marketplace as it is developed to be able to offer it, and then through choice we pick the thing that best fits our particular needs, as competition among the technologies, both on price and on efficiency and quality. The government in this role guarantees that no one is scamming it, that no one is offering quack type of proposals. That would be what government can do best, to see that it is not being run incorrectly but not micromanaging it.

Mr. RAMSTAD. Thank you very much, Senator.

Thank you, Madam Chairman.

Chairman JOHNSON. Thank you.

Congresswoman Thurman.

Mrs. THURMAN. Senator, I am sorry I missed your opening remarks. We have been in hearings for the last couple of days and my constituents were beginning to wonder if I was missing in action some place when they came by to see me, so I apologize for that.

Senator, I guess the thing that I am most concerned about and am trying to understand, try to explain to me what is really the difference between what is going on today-I mean, we have a fee-for-service, we have Medicare+Choice programs. For those, in those regions that they can have them, I mean, most of them are pulling out, some of them are losing their prescription drugs. And I am kind of having a hard time understanding exact what exactly, if I were to go home and trying to explain this to a constituent, why they would buy into this after what they have seen over the last couple of years.

To just tell you what has happened in one of my counties, yes, I am from Florida, but I am not from Miami, so we don't get the big numbers, I kind of have some rural areas. But what do I say to them when they say, well, you know, our Medicare programs pulled out last year, our choice programs. I mean, only by the fact that we were able to put an incentive back in did they come back in, and we are only hoping they stay there for as long as we can keep them.

Are we still going to have, or do you still see the volatility within these markets? I mean, are they still going to have to go back to fee-for-service? I mean, what is going to guarantee in this plan different from what we are seeing happening already? Because you are still depending on the private market to do this, and they are only going to do it based on whether or not they can get a profit, you know, what their profit might be at the end.

Then let me ask this: Show me the relationship on the price premium as compared to what happens today with how government controls what we pay in and what potentially could happen , because I know in Breaux I, I think there was actually an idea that we could have to come back if it got over 40  percent, what was going to happen, and we would have to come back and have the debate on the floor.

Senator BREAUX. Well, Congresswoman Thurman, there are a lot of good questions in your comments.

Number one, to make a general comment, any change is very difficult, particularly for senior citizens, because change is scary to all of us, and it is certainly probably even more scary to seniors, and especially when you are talking about something that is as important as their health. I would say that that group of seniors, number one, that the current plan you have does not cover about 47  percent of your health costs. It is not adequate, it is not as good as it should be, and it is not as good as it can be made to be.

The second thing I would say to them is that I would like to give you the opportunity to have the same type of system that I have as your Congresswoman, or that the two senators from Florida have as members of the Federal Employees Health Benefit Plan. They have always said that if it is good enough for the Members of Congress, it must be a pretty decent plan; and they are right on that, because it is.

Now, how it would work is that-.

Mrs. THURMAN. But they have choices.

Senator BREAUX. That is exactly right. And we would absolutely guarantee the choices and give them, in fact, a lot more choices than they have today, because it is very, very limited and it is inadequate in its coverage. The concept would be that they would have all of these plans on Breaux-Frist I that would have to come to the Medicare Board which is like our OPM.

Mrs. THURMAN. And you guarantee it how?

Senator BREAUX. That would be the government role. I said to combine the best of what government can do with the best that what the private sector can do. The best that government can do is help pay for it, and we would guarantee to pay for it by exactly the same percentage that they would be paying under fee -for-service. It is 88 percent paid for today totally, and it is probably going up higher than that, and it would go up higher than that in our plan, too. So the government guarantees that they pay for it, and they guarantee that they are going to supervise it. It is not going to be adverse risk selected, it is not going to be a bunch of scam operators, because the Medicare Board, which is an agency of the Federal Government, would guarantee that that would not be allowed.

Then, from a choice standpoint, when you have five or six or more plans being offered, they would be able to look at them and all of them would have to meet a certain standard, all of them would be basically paid for by the Federal Government, and they would pick and choose. If they still do not like any of those new choices, then they would be able to stay in a traditional fee-for-service.

I think that you can tell your constituents that what you are giving them is the opportunity to have something that is a lot better than they have today.

Chairman JOHNSON. Mr. Cardin, would you like to question?

Mr. CARDIN. Just very briefly, Madam Chair. Thank you for the courtesy.

First, Senator Breaux, I share the comments; and we thank you very much for your service to our country. I think you will find that on our side of the aisle the Breaux-Frist II is what we are going to feel more comfortable with, that model.

I just have one question. As I understand it, you use as the benchmark for the payment for private insurance 100 percent of what it costs for Medicare fee-for-service, and you don't put a risk adjuster in until I think the year 2014.

I guess my question to you, and you need not fully answer it today because I guess we will have the answer when we get the fiscal costs of Breaux-Frist II, it seems to me that those changes will add dramatically to the cost of the program, that there is a good chance that the payments made for private insurance will actually exceed what it would otherwise do, and we might just be adding to the cost of Medicare without providing an additional choice or benefits to our constituents.

Senator BREAUX. Well, that is a real good question. It is a very technical question, but it is also a very important question.

The risk adjuster is something that is going to be needed. If you have a group of people who are sicker and older and cost more, you are clearly going to have to have a risk adjuster in that program which would allow them to be compensated for the extra costs that they have. In fact, I think the risk adjuster that we suggested was the one that the Clinton administration was actually talking about and proposing. That can be refined and it can be updated and it can be modified, but that is where we got the concept of the risk adjuster from, and you would have to have that.

But then you also remember, you also have the role of the Federal Government insuring against adverse risk selection. If someone submits a plan to be offered that is tailored to meet only healthier seniors, thereby throwing sicker seniors into traditional fee-for-service, that plan would not be allowed to be offered, and that would be the strong role of the Federal Government. This Medicare Board in that case is a very strong Federal agency and is part of our government, but they would be also able to have a competition which we can't handle through HCFA, but they would guard against adverse risk selection. But also recognize that if there is a preponderance or a greater percentage of sicker seniors, then there would have to be a risk adjuster, and we are very open on how we craft a risk adjuster to take care of the extra cost.

Mr. CARDIN. Thank you, Madam Chair.

Chairman JOHNSON. Thank you.

In concluding, Senator Breaux, it is also true that when you talk about setting premiums, the Board setting premiums, those would take into account that these insurance policies are covering older people with higher health care needs.

Senator BREAUX. Oh, yes. The point is that, yes, they are going to be covering probably people that are obviously older and obviously sicker than we have in the Federal Employees Health Benefit Plan, so that answer is yes; and that is going to have to be accounted for in the pool of people that they are going to be insuring. They are going to be older and less healthy.

Chairman JOHNSON. That ties in with our opening comment about the Federal Government's role is to help pay for the benefits that we have guaranteed the seniors.

Senator BREAUX. The final point on that -- I mean, all of this is so incredibly complicated. I am not in the insurance business and don't pretend to understand it. But the average premium that we pay under Medicare combined A and B is -- about 88 percent of the cost is Federal Government and 12  percent is the beneficiary through Part B premiums.

If -- our first bill, it was interesting, we had pegged the reimbursement rate under the new plan to 88  percent; and some said, well, suppose it goes up, isn't that going to make fee-for-service go rocket high? We have changed that now. We are saying that whatever the government percentage is that they would pay under our bill is what they would pay. Whatever the government contribution, if it goes up to 90  percent, under our bill, that would be the premium contribution under the new plan.

So there is some flexibility there. It is not tied. We picked 88  percent because that is what it was at that time, but we know it is going to be higher than that, and, therefore, the new legislation says that whatever the government calculation is as a percentage would be what they would pay under our proposal as well.

Chairman JOHNSON. So the cost would not be shifted from the government to the consumers.

Senator BREAUX. Yes. They would not have an increase in their participation.

Chairman JOHNSON. Thank you very much for your time and attention.

Senator BREAUX. It is always a pleasure to come to this side of the Capitol.

Chairman JOHNSON. Thank you.

I would like to call forward the panel. Stuart Altman, it is a pleasure to have you back, Stewart; Judith Feder, who has also come before us on other occasions; Walter Francis, the independent healthcare consultant from Virginia; and Jeff Lemieux, who is the senior economist at the Progressive Policy Institute.

We thank you all for joining us, and we will move through each of you making your opening statement and then we will open the whole panel for questions. Dr. Altman.

STATEMENT OF STUART H. ALTMAN, PH.D., PROFESSOR, SCHNEIDER INSTITUTE FOR HEALTH POLICY, HELLER GRADUATE SCHOOL FOR SOCIAL POLICY, BRANDEIS UNIVERSITY, WALTHAM, MASSACHUSETTS

Dr. ALTMAN. Thank you, Madam Chairman.

I am Stuart Altman, and I am a professor of National Health Policy at Brandeis University. I really wanted to congratulate you on taking over the Chair.

I also would like to say hello to Congressman Stark who just left, but I did have the privilege of working under him for almost 12 years when I chaired the Prospective Payment Assessment Commission. So it is really good to be back before this Committee again.

You have my complete testimony, so what I would like to do is take my 5 minutes to focus on what I consider to be some of the major components of the debate.

As Mr. McDermott knows, he and I were members of the bipartisan Commission along with Senator Breaux, I was one of those members that ultimately voted no in terms of the plan. But I want to focus on why I voted no and why I think things have changed.

I voted no because I thought our Medicare program was in serious financial shape, and while I can't say that Medicare is not going to have financial difficulties in the future, it is in much better shape today and, therefore, solvency is much less of an issue.

Second, I really do believe, and still believe, that we should have a very important and very comprehensive prescription drug benefit; and I think Breaux-Frist II goes part way towards there, although there are a number of suggestions I would like to make to make it better.

What I would really like to focus on is what this discussion has been about: Why has Medicare+Choice not worked? I would like to offer my opinion. I came into government in 1971, actually in what was then HEW; and after being there a month I was asked by the President to be responsible for controlling health care costs. I used to be 6 foot 4, Mr. McDermott.

Mr. MCDERMOTT. Great job.

Dr. ALTMAN. My boss at that time was the current Vice President, and I became one of the most hated people in America. The AMA had a special issue of their publication that made me, you know, Big Brother, Public Enemy Number One.

What the essence of this is, is that whoever tries to constrain the system is not going to be liked by the system. Managed care has been beaten up because it was responsible for constraining the system. I will tell you, if we didn't have managed care after BBA, I don't think you would find a doctor, a hospital, or a home health agency that wasn't ready to kill the Federal Government. So, yes, this is a game in which whoever is taking the food away from their kids is going to be the one that is going to get yelled at.

Now, let's look at Medicare+Choice. Mr. Stark, you and I have had very good times together; and I hope you will listen a little to what I have to say. I have been looking hard at Medicare+Choice, why it doesn't work, and I would like to offer to this Committee a little different perspective. We must create a true level playing field between the Federal Government and the running of its fee-for-service system and the Medicare+Choice program.

Now, I have heard the arguments about the administrative costs of Medicare+Choice plans, and complaints that too much profits are being made, and I am not here to defend them. However, I would submit to you that we have created a very unlevel playing field where it is impossible, over the long run for a private market to work. I am in the category, of those who believe that it is good for this country to have true competition between the private market and the public sector, and I think Breaux-Frist II goes a long way to do that.

But in answer to your question, Mrs. Thurman, the current situation is such a lopsided event that it is hard to see how it can work. Why is it lopsided? It is lopsided in the following ways: First of all, Medicare, through the government, can pick and choose the prices it wants to pay. It doesn't have to negotiate with a hospital or a doctor. It tells the hospital or doctor, or home health agency what it is going to pay. The Congress is the vehicle for that choice.

Ultimately, providers could say that they are not going to provide Medicare services, but it is very difficult for a hospital that has 50 percent of its patients in Medicare to say, I am not playing because you are not paying me enough. History suggests that when Medicare has been quite generous, as it has been in several periods like in the middle 1990s, it turns out that the private insurance market can come in under that generosity and get better discounts as they have done, and they wind up saving money and a lot of people joined their plan. That was the period of time when Medicare+Choice prospered.

When you introduced BBA -- and I am not arguing against BBA, but why did you introduce BBA? Because you looked at the growth rates in Medicare spending and you said Medicare is paying more than the private sector and the country can't sustain that. Well, Congress thought it was going to cut $115 billion over 5 years. As it turned out, some estimates suggest that the savings amount is going to be closer to $230 billion. Of course, what happened? What happened is that Medicare spending went way down. Then you asked the managed care industry to compete with Medicare. But the premiums they received were related to Medicare paid for services. But, they don't have the same power to reduce payments Medicare has. So they are now at a disadvantage.

If you want to make competition work, and I put it if--I happen to believe it is good for our country to have competition work, you have to level the playing field.

Several other things have happened as well. Medicare can decide what a cost is and what a cost isn't. Medicare goes into a hospital or doctor's office and says, this we will pay for and this cost we won't. Again, I am not arguing that you are not making the right decisions, but the private sector can't go in and say that. It can't say to a hospital administrator, we will only cover your salary up to $150,000. If you receive $200, it doesn't count. Can't do that. Can't refuse to want all of your depreciation. You can go on and on.

The point I want to make here is that if you want competition to work -- and the reason why Medicare+Choice did not work, yes, maybe managed care oversold itself -- estimates of savings of 25 or 30  percent proved to be too ambitious. Maybe the savings are closer to15 percent. But, then when you add higher administrative costs and the fact that Medicare is paying in many parts of the country 90 or 85 cents on the dollar, it becomes impossible for a private managed care plan to compete.

I provided a chart in the last part of my testimony that shows the relationship between what Medicare pays and what the private sector pays. When Medicare margins go down, private sector margins go up. In 1992, Medicare paid 90 cents on the dollar (payment to cost ratio). Private insurance paid 131  percent. As Medicare began to pay better during the 1990s, private margins came down. You watch what happens over the next couple of years. You are going to see private payment rates go way up. Again, you can't compete if you don't level the playing field.

One last piece of that puzzle. Recently, Congress passed legislation that will create a 50-50 national-regional blend so that every area gets closer to the same amount of money. Now, I happen to be very sympathetic to Seattle and Minneapolis and Portland, Oregon, which have very good health care delivery systems. I also am very sympathetic to Boston and Miami and New York. What happens when you go to 50-50? How can a managed care company in a high cost area survive?

Let's say you are right, that, in fact, in certain parts of this country like Florida, there is just too much care being provided. The providers are getting too much money. People in Seattle complain all the time. So what are you going to do? You are not going to touch the fee-for-service system. You are going to continue to pay the higher amount. But the legislation will cut back what the managed care industry in high cost areas receive. How are these groups going to be able to purchase the needed medical care? Can they change the practice of medicine? That is not possible. If you want to change the practice of medicine in this country, start with the fee-for-service system. Don't start with the managed care companies who are only 15  percent of the market. Again, I believe in competition, level the playing field.

Now, with my remaining 2 minutes, I want to talk about prescription drugs. There is nothing more important. I think everyone on this Committee has said this thing. We need to cover prescription drugs.

My sense is, my preference is that prescription drugs be covered under both plans. I think it makes much more sense both economically and for health care that a health care delivery system provide prescription drugs and that it be provided under managed care and it be provided under fee-for-service. My preference is that it not be provided by private insurance separate from coverage for other medical care. However, I would make a couple of suggestions.

First of all, my preference is that the Federal Government provide more than a 25 percent subsidy as suggested by Senator Breaux. I think the subsidy rate needs to be closer to 50 percent. Why? The actuaries tell us that such a subsidy rate will eliminate adverse selection.

My other preference is that we go to more catastrophic. We should use a $500 deductible and a 50  percent coinsurance. Our plans protect low income seniors, but not through Medicare.

I believe in a Social insurance model. I think if we are going to cover low income seniors we need to do it through either a Medicaid program or some State-run program. So my preference is that all of the subsidies for people under 135 percent of poverty -- and, yes, they should not pay anything -- should be through a State program with mandates on the States to provide coverage according to Federal rules supported by an enhanced federal match as in SCHIP.

Finally, this program is the most important thing we can do. I would hate to see -- and, unfortunately, we have done it all too often, whether it is with the uninsured or with parts of Medicare -- We go only for each of our view of the optimum type of plan. I have given you my optimum, but if the only way we are going to pass a prescription drug benefit, given the differences in the Congress, is to have it covered by a fee-for-service run by private insurance, I say go for it. But I would recommend two caveats:

First of all, give it a five year trial period and see if it works. And, second, guarantee that in those areas where there is no private market the Medicare program run it so that no American, regardless of what part of the country they live in, would be denied prescription drug benefits.

Chairman JOHNSON. Thank you very much, Dr. Altman.

[The prepared statement of Dr. Altman follows:]

Chairman JOHNSON. Dr. Feder.

STATEMENT OF JUDITH FEDER, PROFESSOR AND DEAN OF POLICY STUDIES, GEORGETOWN UNIVERSITY

Dr. FEDER. Thank you, Chairman Johnson, for your gracious welcome. Congressman Stark, members of the Committee, it is a pleasure to be with you this morning.

I want to begin by defining what I see as Medicare reform. That is that the goal should be to meet the health care needs of elderly and disabled Americans in a way that effectively manages taxpayer resources. The pursuit of reform in Medicare does not mean that Medicare is broken; it is not. Can we make it better? Absolutely. I want to pursue some of the areas in which we can improve it.

First and most clearly from your comments this morning, we all recognize that the primary challenge is to improve Medicare's benefits. Today, the question is not whether but how to cover prescription drugs for Medicare beneficiaries. Some proposals simply won't work. We can't just provide drug coverage for beneficiaries with low or modest incomes. That would ignore the fact that beneficiaries across the income scale experience chronic illness that requires substantial prescription drugs beyond what they are able to afford.

We can't just rely on HMOs and the private market. That would ignore our painful experience with Medicare+Choice, which I will come back to in a moment, a marketplace in which private plans and their benefits come and go. That is what competition is and it can leave beneficiaries in the lurch.

And we can't rely on a private, stand-alone drug insurance plan for beneficiaries in fee-for-service. That would not only be confusing to beneficiaries, but it would ignore the insurance industry's explicit warning about the inevitable risk selection. That will make it unworkable and ultimately unofferable.

A Medicare prescription drug benefit that works must satisfy three principles. First, the benefit must be a universal entitlement that is integral to the Medicare program in fee-for-service and in private plans. Essentially, beneficiaries ought to be able to get prescription drugs just the way they get hospital and physician care.

Second, the benefit must be affordable to all beneficiaries. And, as Stuart argued, that means significant subsidies across the income scale to make sure that we have universal participation along with universal entitlement, as well as full subsidies for those with low and modest incomes.

Third, the benefit must be specified and meaningful; perhaps not as extensive as some would like, but a defined minimum benefit that makes clear what Medicare will pay for in private plans and in fee-for-service, and that includes protection against catastrophic costs.

The second area needing improvement is in managing resources. Like all insurers, Medicare, the Nation's largest is struggling with the complexity of delivering today's health care. Some have proposed that Medicare approach that struggle by pressuring beneficiaries to move from fee-for-service into private HMOs, either by providing them extra benefits in those plans, as in Breaux-Frist II, or by requiring them essentially to pay more for the fee-for-service they now have, as in Breaux-Frist I. The strategy is pursued on grounds that HMOs can manage resources more effectively than Medicare fee-for-service. But it is by no means clear that they can, as Stuart's comments indicated. The fact is that fee-for-service is pretty good at controlling its costs and at balancing the needs of beneficiaries, providers and taxpayers.

HMOs do far more to manage costs than to manage care. That is what we have heard from some of HMO's strongest proponents. They may limit access to needed providers and needed services, and the structure of the market is to encourage them to enroll the healthy and disenroll the sick. That kind of risk selection and competition around it are very hard for any agency to control and have been a consistent problem in the Federal Employees Health Benefit Plan.

Lower costs, then, don't mean greater efficiency. They mean reduced access to quality care. HMOs' continued demands for more resources in Medicare+Choice reflect, I believe, and I believe the evidence shows, the plans' belief that they can only attract beneficiaries when they have resources to provide extra benefits. They are finding it very difficult to compete with Medicare or to be more efficient than the Medicare program. We also have evidence of quality problems for Medicare beneficiaries in HMOs, challenging claims regarding these plans' ability to manage care efficiently and effectively.

Rather than promote HMOs, reform must address fee-for-service management, while managing HMO options for beneficiaries who want them. As you indicated, Mrs. Johnson, we need to do both.

On benefits and provider payment, that means that Congress must continue to balance the competing interests of beneficiaries, providers and plans, and taxpayers. There is essentially no way out of this responsibility. It means assuring the Medicare administrators greater investment in staff and systems and greater flexibility to use new tools like competitive pricing for equipment and care management for high-cost chronic illnesses. For HMO options, it means empowering the Medicare administrator to pay plans fairly, but not excessively, for Medicare benefits. Excess payments for extra benefits are wasteful, unfair, and unstable. The goal is to protect beneficiaries, not to protect plans.

Good management also means empowering the administrator to manage the whole program, to serve beneficiaries and taxpayers. Employers with self-funded plans and HMO options don't believe they have a conflict of interest in management. -- Their job is to manage the whole program, and Medicare would not be improved in its administration by creating new arrangements that make plans or pharmaceutical companies more comfortable with program administration. The responsibility is to beneficiaries and taxpayers.

The third and final area of improvement is to assure adequate financing. As we have indicated this morning, Medicare's financing problem is pretty straightforward. As the population ages and as health care costs rise, we will need more revenues to sustain and improve insurance protection for the Nation's elderly and disabled citizens. No magic, competitive or otherwise, can change this reality. But our economy can generate these revenues. The challenge is to secure them.

However, some proposals would weaken, not strengthen, revenues available to Medicare. For example, a proposal to claim the current Part A surplus that you have worked hard to achieve to finance Part B expenses, or new prescription drug benefits, would take resources away from future beneficiaries. And the proposal for new accounting that would only serve to cap Part B's access to general revenues would create a crisis atmosphere promoting an overreaction, because a crisis simply does not exist.

What is needed instead is that we take advantage of our current prosperity to pay down the debt, thereby reducing interest costs, and begin to finance prescription drugs and other social needs. That way, baby boomers contribute now to the Nation's ability to finance their needs in the future. It would be ironic indeed to take the baby boom generation, my generation, off the hook with a tax cut, rather than expecting us to pay our share to make it easier to finance our needs in the future.

In sum, as we look to Medicare's future, it is critical that any action we take in the name of reform actually secure rather than undermine Medicare's strengths. The Medicare program has assured affordable access to mainstream medical care for elderly and a substantial number of disabled people, regardless of the severity of their health care needs, and with help for Medicaid, regardless of their income. It is very easy to underestimate that accomplishment. It is easy to propose so-called solutions that actually undermine that accomplishment. Instead, the job of reform should be to sustain Medicare's enormous achievement, both now and in the future.

Thank you, Madam Chairman.

Chairman JOHNSON. Thank you very much, Dr. Feder.

[The prepared statement of Dr. Feder follows:]

Chairman JOHNSON. The Committee may have noticed that I have let each of the first two witnesses go beyond their 5 minutes. You each ended up taking 10 minutes, and I will allow the same latitude to the following witnesses. I do think it is important that when you put preparation in to come to talk to us about such a big and important issue that you have time to speak, even if it reduces our time for questioning. So I did it intentionally.

Mr. Francis.

STATEMENT OF WALTON J. FRANCIS, AUTHOR AND INDEPENDENT HEALTHCARE CONSULTANT, FAIRFAX, VIRGINIA

Mr. FRANCIS. I will try to do better.

Congratulations, Madam Chair, on your assumption of the leadership of this Committee. I think it is in very good hands.

I also want to mention that at a conservative think tank conference on Medicare reform a couple of months ago I mentioned that, in the new Congress, it looked to me pretty clearly that nothing was going to happen on Medicare reform that Mr. Stark and Mr. McDermott, for example -- I named them -- did not buy into. That was met with groans and moans but, you know, you are going to have to craft something that is going to work, that is going to make the Members on both sides of the aisle not hold their nose.

Chairman JOHNSON. I may not be able to satisfy all Members on both sides of the aisle.

Mr. FRANCIS. Perhaps not all.

Chairman JOHNSON. You may have noticed the range of opinion on this Committee is 180 degrees.

Mr. FRANCIS. But I think you will find there is some middle ground here that will work.

To summarize a few key points from my testimony, writing hurriedly last weekend I lost two very important points I think in the details towards the end that I want to emphasize. First, what we are embarked on here is improving a vital program, and I think that is the way this needs to be perceived. Whether you do go to something very close to Breaux-Frist I or II or you do something a little different, I think that is what it is all about. We can improve Medicare and include making the program actuarially sound in the long run to the extent possible. But we should not be kidding ourselves about how much we can do in one set of reforms. In any event, I think the whole debate and discussion ought to be starting from that premise.

Secondly, I have said a fair number of harsh words about the Health Care Financing Administration, and I am going to say some more in just a second, but I do want to emphasize that I worked with people in that agency for many years. Many of them are good friends of mine. It is full of able and dedicated civil servants. I think, unfortunately, the whole is much less than the sum of its parts; and it is a big problem in what is going on. I would add to that, I think the Congress is a big problem in a whole raft of ways, several of which have been mentioned, I think quite eloquently, by Senator Breaux.

I think that perhaps the single most important thing to achieve -- and I will assume we are going to be fiscally sound and so on -- is to establish the Federal Government as a reliable business partner with private health insurance plans; and that is a tall order. Harry Cain wrote a wonderful article in Health Affairs 2  years ago called "How to Make an Elephant Fly" in discussing and adopting the FEHBP model for Medicare, and he didn't think it could be done. I am not at all sure it can be done, but this means less micromanagement; less frequent changes in the annual OBRA, COBRA, et  cetera; less endless tinkering; fewer surprises that turn out to make it impossible to do business; and fewer executive decisions, many of which are on their own terms reasonable but which could have the cumulative effect of virtually wiping out Medicare+Choice in half the country.

In this regard, when I wrote my testimony last weekend I noted that Secretary Thompson had not acted on the midnight regulations. He now has, and I congratulate him for putting the midnight regulation that imposed Medicare HMO rules on Medicaid HMOs on the table for in-depth scrutiny. I am delighted. I just hope he also adds to that the underlying Medicare+Choice rules which are an abomination, in my view.

I think it is obvious that adding a prescription drug benefit available to every senior, which means adding it to traditional Medicare as well as in the context of a reform program, is vital for any number of reasons, one of which, though, is to provide the lubricating oil to make reform work. I hope you can construct-and you had several suggestions and there will be others-a drug package that will make some otherwise unpalatable changes go down a little easier.

In this regard, I cannot overemphasize how important I think it is to preserve, in a general way, the pricing and reimbursement of drugs in this country and not move towards a system of administered prices similar to that used in Medicaid. I studied that in some depth a dozen years ago and was appalled at the system they used. It was clearly inefficient, unworkable and kind of silly; and it hasn't gotten any better in recent years.

Two final points. I testified before this Subcommittee almost exactly two years ago on the subject of consumer information on health plans in Medicare. I castigated HCFA for its dismal performance, both in its printed materials and its electronic materials on the Internet.

Speaking as someone who is a very successful purveyor of information comparing health plans, and in my perspective also as the previous co-webmaster at HHS, I know a lot about what can be done and how it can be done. And they were doing an awful job, including making a website available that most people on most computers couldn't even read the information or download it. HCFA was requiring equipment that most people didn't have and software that most people didn't have.

Well, I revisited their website and their print materials before coming here today and I want to tell you that, though they have greatly improved the website in many respects, it still fundamentally fails in its most central purpose, which is to make it easy for consumers to get important, comparative plan information.

This clock says I have lots of time left. That is going the other way now.

Chairman JOHNSON. In comparison to the other speakers, you have about three, four minutes left.

Mr. FRANCIS. I will not belabor you with the details, but it may take three dozen or more mouse clicks to get the information on one health plan off that website, and that is just unacceptable. It is absolutely unacceptable.

Like Senator Breaux, I brought the FEHBP Consumer "Guide". It is 55 pages in 2001. It includes detailed but summary benefit information on 300 health plans across the country. I brought with me "Medicare & You," 2001 version. It is about 85 pages, 17 of which appear to give details on health plans, but the format is so verbose, if you will, that there is hardly any actual information included. It is unbelievable, but true, that you cannot in this 85-page book find out what the prescription drug benefits are for any of the dozen local HMOs in the four States that it covers. This particular one covers Delaware, Maryland, D.C. and Virginia. The one set of facts seniors most want to know, what is the drug maximum, what are the drug copays, are left out of this book.

Let me stop there, and I will be glad to answer any questions.

Chairman JOHNSON. Thank you very much. We do have five consecutive votes, so we are going to give Mr. Lemieux equal time. Frankly, I think our time was better spent listening to your thoughts, since you have long had very good experience, than a long question period. We will have maybe a couple of minutes for questions.

[The prepared statement of Mr. Francis follows:]

Chairman JOHNSON. Mr. Lemieux.

STATEMENT OF JEFF LEMIEUX, SENIOR ECONOMIST, PROGRESSIVE POLICY INSTITUTE

Mr. LEMIEUX. Thank you very much, Madam Chairman, Mr. Stark and Committee members.

I may be a little naive, but I think that, working on the technical details of some of these proposals and thinking them through, there may be a lot more movement toward political compromise and technical compromise and accommodation than you would have known from the rest of this hearing. I think that both sides are moving toward a stable, competitive approach that would fix the deep flaws in Medicare+Choice that we have heard so much about; and there seems to be a burgeoning political agreement to really do a good job in improving Medicare's benefits, mostly for prescription drugs but also for the other gaps in its benefits, especially the financial gaps, the biggest concern to me.

Let me talk about my ideas for solutions in the context of Medicare's problems.

We have heard the fee-for-service benefits are out of date and inflexible, and that is virtually a consensus opinion. Four out of five beneficiaries are in that program, and they face large out-of-pocket costs which they often try to insure by purchasing gap coverage, sometimes at great expense.

We have also heard correctly that Medicare's system of HMO is a total mess, and I agree with that assessment 100 percent. Right now, what we fundamentally ask HMOs to do is to compete on the level of benefits they are going to offer and whether or not they are just going to play ball, whether or not they are going to enter a market or withdraw from a market. When they face competitive pressures, their response under the rules of Medicare+Choice is to adjust their benefits, which is very inconvenient to seniors or, even more problematic, to just leave the market altogether or come back if it looks like the profits will be there.

It would make so much more sense to have them competing mostly on price instead of benefits, and staying in the market more permanently. That is the great beauty of a Federal employee's plan: there has been a trust built up between many of the plans and the agency running it. Sure, people have a choice. They can disenroll from a plan they do not like, but they have an even better choice, and that is they can stay with a plan that they like, because the plans can adjust to market competition through changes in their prices rather than just withdrawing from the market.

I think that both of these two problems, Medicare's fee-for-service benefit inadequacy and the problems with the HMO program, are fundamentally caused by the superstructure of Medicare: the fact that Congress dictates exactly how Medicare is to run and HCFA perceives its role as administering the law, often with very detailed regulations. HCFA does its best, but it is very difficult to keep up with the health sector and all of the laws being passed in Congress.

As a result, fee-for-service benefits are really not very well integrated. I learned that firsthand when my grandmother was sick last fall. It is a hodgepodge of benefits that have been crafted over the years, and you would never have done it that way if you set out to remake it from scratch today. The same thing is true of the Medicare+Choice program. You would never have such a program if you sat down this year and decided, here is how we are going to try to encourage private plans to offer a choice to Medicare beneficiaries.

Of course, the fourth problem is the cost problem. I have worked in the past at the bipartisan Medicare Commission at the Congressional Budget Office and at HCFA; and I have been involved, either directly or indirectly, with a great many of the erroneous forecasts that have been used over the years regarding the BBA, regarding health care spending, regarding the Medicare Commission's decision that the average government contribution was going to be 88 percent, and so on and so forth. All of those forecasts, I assure you, were extremely reasonable, highly sophisticated and well-thought through; and they were vetted with the greatest minds in Washington and around the country; and most of them were wrong. So I encourage you to be very careful about the potential costs of this. It looks to me like the costs of all of these plans -- Breaux-Frist II are going to go up, the House Republican plan are going to go up, so that will be an important consideration.

Let me just run down very quickly how I view the progress on Medicare reform. First, there was the bipartisan Medicare Commission. The Commission set up a full "level playing field" competition between the fee-for-service plan and managed care plans. It offered subsidies for drugs only for the poor and near poor, and it would have saved a fair amount of money, I think. I think that some of the commentators who suggested that it was going to put fee-for-service out of business were exaggerating a little bit -- I think the probability of that was very slight, but it was a true level playing field competition that would have probably saved a lot of money.

President Clinton came back with a proposal that was a partial competition. In a sense, rather than having the taxpayers save money from competition in Medicare, the beneficiaries were going to essentially have the opportunity to save money by reducing their premiums. So it didn't save the taxpayers much.

Then the President's plan had a pretty large subsidy for drugs. It was 50 percent of the package, and the overall cost over 10 years, rather than saving $100 billion like the Medicare Commission's plan, it probably would have cost about $300 billion.

The Breaux-Frist I plan was full competition like the Medicare Commission proposed, but it took out some of the cost-saving features like raising the eligibility age, and it also added subsidies for drug and other supplemental benefits to about 25  percent, even if you weren't poor or in that near poor range. I think that the cost of Breaux-Frist I -- I thought at that time it would probably be about budget neutral. Now, it might be a little more than that.

As the Senator said, the cost of Breaux-Frist II is about $200  billion now with the updated estimates. It raised the subsidies from 25  percent to approximately 35, a little closer to what the President had proposed last year; and it includes a partial competition or a beneficiary competition like the Clinton plan as an interim step, rather than the full level playing field envisioned by the Commission.

Now, my take on where you go from here is that I think that getting the formulas for competition, coming to agreement on that, ought to be pretty easy. It seems to me like both sides have agreed to protect the fee-for-service program for a considerable period of time, and that means the taxpayers are not going to save much money, but it seems like we have reached an agreement on that sort of Breaux-Frist II approach to this. Regarding the amount of subsidies, whether it is 25 or 35 or 50, it seems like there is a range there that Members of Congress can probably get together on reasonably quickly. The harder issues are issues of governance and issues of how to structure the drug benefit in fee-for-service. So let me just make a couple of quick comments about that.

On governance, I think that it is very important to create a new agency of some sort to oversee the competition and to create a new market for supplemental benefits for fee-for-service beneficiaries. I think that we have had a political situation where many Democrats have said that we really want a drug benefit in Medicare; and many other people, Senator Breaux and many Republicans and others, have said what we really want is to work with market forces to the best of our ability and not have Congress dictate how the drug benefit is going to work. I think there is a way to bridge those two approaches.

I think the only way to guarantee that drug benefits and other supplemental benefits are available to everybody is to empower the government in a very strong way to make that happen, but I think the way to get political agreement to do that is to create a new agency that is fundamentally knowledgeable about and experienced with competition, rather than the way that HCFA operates with regulations and fee-setting.

So, just to sum up, I think the right mix of Medicare benefit expansions and competitive reforms requires both strong government and flexible private markets. I think that conservatives have to agree to protect fee-for-service for a while and allow the Medicare agency or whatever this new administrator is going to be called a great deal of latitude in creating supplemental benefits. I think that the conservatives need to support pretty high subsidies and make room in budgets for such things to make the system work. Liberals, on the other hand, have to acknowledge, I believe, that HCFA isn't suited for competitive systems -- it really never has been -- that market approaches really should be the goal for drug benefits, that we ought to try to make that work, and that costs cannot get out of hand.

One final comment. I think that, last year, the House-passed plan was a little too narrow in the sense that it envisioned a drug-only benefit. I think it is really important and more convenient for seniors and more practical for health plans if we link a supplemental drug benefit with other benefits that seniors need like these financial protections against cost-sharing that they would otherwise have to face in fee-for-service. I think, by linking those two markets and subsidizing that, you create a much more viable market and give seniors a one-stop shop for their supplemental coverage if they are in fee-for-service.

[The prepared statement of Mr. Lemieux follows:]

Chairman JOHNSON. Thank you very much, panel. I welcome your ideas; and I would urge you, as we move through this, to try to be as tough with yourself as we are going to have to be. We all know this going to cost more money, I do not care what anybody is saying. We all know fee-for-service is going to have to be there, because there are just lots of parts of the country where that may always be the only form.

But we do have to find a much better way of doing a lot of things. If you read through Mr. Francis' testimony, it is just simply awesome what a bad job of just some very simple things that HCFA has done. Now, we are loading them up with things to do. If you had to do as many new things as they have had to do, you might not do such a good job either.

So this is not about blame, but it is about reality, and it is about where we spend our new money. I want you all to think about the fact that neither the plan of the Republicans nor the plan of the Democrats delivered prescription drugs as an integral part of Medicare. It was a Part D. It had another premium. It was just like Part B. It was an entitlement, but it was an additional plan with an additional premium. A lot of the people, that one-third of seniors who have no prescription drugs, folks, they are the people, a lot of them, that are not going to be able to pay the premium in the Democrats' plan or to pay the premium in the Republicans' plan.

So you have to be a little tougher now with us; you got to be little tougher with yourselves. Where do we put the premium? Is it fair to pass a prescription drug bill with a $4,000 or a $6,000 catastrophic provision for people who will never spend $4,000 because they can't? Should we be putting our money into a more variable catastrophic level and relying on our market power to create discounts in the market, rather than a government-paid benefit for all those others? Remember how many of which are already getting prescription drugs, at least 50 percent of whom have pretty good plans. So we are going to have to be more realistic, because this plan is going to carry extraordinary financial weight into the future, no matter what we do.

Senator Breaux said his plan just simply slows the rate of growth in spending. That is all BBA did, remember? All BBA 97 did was control the rate of growth for the future 6 years, so it would be the same as the rate of growth in the preceding 6 years --

And anyone who wants to go vote can. You got three minutes left. I am going to quit in just a second.

I think we have to be serious about BBA 97 did. What it did in fact and what it was intended to do are two different things, and that is what caused the havoc. But we do have a very important responsibility to fulfill, and it will not help if you are not tough on yourselves.

Dr. Feder, I want to know exactly what you think ought to be in that benefit plan. I want you to be part of costing it out, and I want you to be a part of taking responsibility. I do not want to hear we have a little problem of solvency. You know we have a big problem of solvency. So I would really appreciate your continued thoughts.

All of you had excellent comments in your testimony, and I thank you for working with the Committee today.

The hearing is adjourned.

[Whereupon, at 12:05 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

Advanced Medical Technology Association, statement

Alliance to Improve Medicare, statement

Citizens Against Government Waste, statement

Healthcare Leadership Council, statement

National Association of Chain Drug Stores, Alexandria, VA, statement

TREA Senior Citizens League, Alexandria, VA, statement