C O N T E N T S

Advisory of May 2, 2001, announcing the hearing

WITNESS

Library of Congress, Jennifer O'Sullivan, Specialist in Social Legislation, Congressional Research Service

U.S. General Accounting Office, William J. Scanlon, Ph.D., Director, Health Care Issues

FIFTH IN SERIES ON MEDICARE REFORM:
STRENGTHENING MEDICARE: MODERNIZING
BENEFICIARY COST SHARING

Wednesday, May 9, 2001

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

The Subcommittee met, pursuant to notice, at 2:11 p.m., in room 1100 Longworth House Office Building, Hon. Nancy Johnson (Chairwoman of the Subcommittee) presiding.

Chairwoman JOHNSON. The hearing will come to order.

Today will be the fifth Subcommittee hearing on modernizing the Medicare program. In earlier hearings, we examined new ideas on Medicare reform. We solicited proposals to reduce the regulatory burden on providers and beneficiaries. We examined the adequacy and the usefulness of the current definition of Medicare solvency. We brought forth new information to lay the groundwork for a prescription drug benefit, and we heard about the importance of the Medicare Plus Choice program to beneficiaries and evaluated ideas to strengthen that program.

Today, we turn to modernizing the fee-for-service Medicare program's beneficiary cost sharing. The structure of Medicare beneficiary cost sharing in the fee-for-service program reflects the insurance practices at the inception of the Medicare program in 1965. As such, more than 35 years later, beneficiaries are confronted with irrational and confusing cost-sharing requirements which do not reflect the current delivery of health care.

For example, the program has two different deductibles, a $792 deductible for Part A and $100 deductible for Part B. This means that when a beneficiary is hospitalized for an inpatient procedure and least likely to be sensitive to pricing issues, the beneficiary is faced with a significant deductible.

In addition, after a beneficiary has been hospitalized for 2 months, the beneficiary must then pay $198 coinsurance per day for day 61 through 90. This simply makes no sense.

At the same time, the $100 Part B deductible for outpatient procedures, which are arguably more discretionary, has never been indexed to inflation. Unlike 97 percent of private health policies, the Medicare fee-for-service program still lacks catastrophic insurance protection for those with serious health conditions. Medicare Part B has unlimited beneficiary cost sharing. Part B has different coinsurance depending on the service, none for lab or home health, 20 percent for physician services and supplies, and close to 50 percent for hospital outpatient services and mental health services.

This Committee has made progress in three consecutive Medicare bills to substantially reduce beneficiary cost sharing for outpatient hospital services, but more needs to be done. In total, due to cost-sharing obligations and Medicare's limited benefit package, nearly half of seniors health care costs are not covered by Medicare. As a result, 90 percent of beneficiaries have some type of supplemental coverage. Those with retiree coverage from their former employers generally receive generous benefits, including catastrophic protection and good prescription drug coverage. The poorest beneficiaries receive wrap-around coverage through Medicaid. Medicare's confusing and irrational cost sharing has also induced 29 percent of beneficiaries to purchase Medigap insurance.

In 1990, Congress created 10 standardized Medigap policies. Nine out of the 10 of those policies, which comprise more than 90 percent of the Medigap market, are required to cover the Part A deductible, and the most popular Medigap policy covers both deductibles. Numerous studies have demonstrated that covering the deductibles has led to markedly higher Medicare spending because beneficiaries become insensitive to costs.

In addition, only the three most expensive Medigap plans cover prescription drugs, and that coverage is limited. Yet, 8 of the 10 plans are required to cover foreign travel insurance while most beneficiaries never leave the country. Between 1998 and 2000, Medigap premiums have escalated by 15.5 percent for plans without drug coverage and 37 percent for those with drug coverage. Modernizing beneficiary cost sharing must include appropriate changes in Medigap.

A critical element of strengthening Medicare is modernizing the fee-for-service programs' byzantine cost-sharing structure. No one designing a senior's health program today would construct such a convoluted and irrational cost-sharing structure for beneficiaries. The system is a patchwork of outdated policies that fail to protect beneficiaries or taxpayers. We must learn from our experience and work to ensure a more consistent, understandable, and affordable system for the future.

Mr. Stark?

[The opening statement of Chairwoman Johnson follows:]

Mr. STARK. Thank you, Madam Chair.

I agree that Medicare cost sharing can benefit from a fresh look. The fact is that Medicare currently covers only about half of the beneficiary health costs, and the beneficiaries spend a disproportionate share of their income on health expenses.

Now, much of the gap is due to the lack of coverage of prescription drugs, but it is also clear that the current cost-sharing arrangement continues to force too many beneficiaries to pay too much.

We have made some modest progress to correct the coinsurance quirk that forces beneficiaries to pay far more than we intended for hospital outpatient services, but we have got a long way to go on that one. Beneficiaries do shoulder an unfair percentage of the cost for mental health services, and we have not corrected that.

I do not oppose efforts to develop or examine options in this area, but I think we must keep foremost in our mind the effects that these changes have on all Medicare beneficiaries.

For example, there are good reasons to slower the hospital deductible, but that is often considered in the context of raising the Part B deductible. Given only that 90 percent of the beneficiaries use Part B and only about less than 20 percent use the hospital benefit, we could end up reducing expenses for a few, the 20 percent that use hospitals, and then kick all the Part B costs up, and I am not sure if that is what we want to do.

While cost sharing can increase the cost awareness of beneficiaries, I see it as a sickness tax, and I have never been convinced that beyond the nuisance value of a minimal $5, $10 copay that people will over utilize medical care.

I think, mostly, we do not like going. We like doctors. Some of us are married to them. Some of us have them as colleagues.

Chairwoman JOHNSON. Some of us lucky folks are married to them.

Mr. STARK. Professionally, we do not like to visit them so much.

I have often said if I arranged with the George Washington Hospital for each one of these Subcommittee members this afternoon to go over to George Washington Hospital and for $10, you could have a Pap smear or a proctoscopic examination, I do not think any of you would go. This is not the kind of thing that we want to do on a nice, sunny afternoon, and I do not think the Medicare beneficiaries are much different. I do not think they are out there saying, "Gosh, I do not have anything else to do. There is no ball game. There is nothing on television. I think I will go and have an examination."

Yes, I can see that there are some hypochondriac types that abuse it, but you have got to make the case to me that we will not prevent people from getting needed medical care if we raise that barrier too high.

I think that it is tempting to look at CBO's (Congressional Budget Office) projected savings from various options in this area, but the dollars come from increasing or changing beneficiary cost-sharing responsibilities that might have unintended consequences. As I say, we assume that utilization is bad, and maybe it is not.

I find it hard to believe that Medicare beneficiaries, as I said, go out of their way to just get extra cost. That may not be true of the providers or their advisors, but it certainly, I think, is true to the beneficiaries.

Benefit packages under the OBRA '90 rules could be tweaked, but I would say we should be careful not to upset a precarious market, unless you choose to eliminate Medigap. Given the strong desire of beneficiaries to purchase this insurance, my personal belief is that that would be politically unwise or, if you wanted to replace it with a HCFA-sponsored (Health Care Financing Administration) Medigap, I think politically unsellable at this time.

So I am just saying right now Medigap is the best we have got, and unless we are ready to step up to the plate and think about making it part of the Federal program, we should be very careful that we do not destroy the private providers who are in the business.

I agree that regardless of what we do with first-dollar coverage, Medigap needs improvements, and we have got beneficiaries who missed the open enrollment and they are locked out forever. We have got a problem with Medicare Plus Choice cancels. They are limited in their options to go back into Medigap. None of them have drug coverage. Maybe that will change if we have a drug benefit.

Disabled younger beneficiaries cannot get into the initial open enrollment until they are 65. I think we should look at that.

Why? I guess the insurance industry basically does not want to insure these folks, and I think we have to keep in mind their aversion to risk when we consider changes that we would ask the private insurance industry to take up.

So, while I am anxious to review what we are doing and improve it, I hope we can be cautious because we could perhaps do more harm. It is a program that is tenuous. We see people dropping out of the Medigap. I mean we see insurers dropping out of the Medigap market every year. We see it becoming more expensive, and I hope this hearing will lead us toward some of the answers that we might do to improve the Medicare program for all of the beneficiaries.

Thank you very much.

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

Chairwoman JOHNSON. Thank you, Mr. Stark.

The panel that we are going to hear from today will start with Jennifer O'Sullivan who is the specialist in Social Legislation, Domestic Social Policy Division of the Congressional Research Service; Dr. William Scanlon who is the director of Health Care Issues at the United States General Accounting Office; Dr. Christopher Hogan, president of Direct Research of Vienna, Virginia; and Dr. Karen Davis, president of The Commonwealth Fund of New York, New York.

Ms. O'Sullivan, if you would start, please.

STATEMENT OF JENNIFER O'SULLIVAN, SPECIALIST IN SOCIAL LEGISLATION, CONGRESSIONAL RESEARCH SERVICE, LIBRARY OF CONGRESS

Ms. O'SULLIVAN. Thank you, Madam Chairman and members of the Subcommittee. My name is Jennifer O'Sullivan.

Today, you have asked me to outline Medicare's cost-sharing structure, specifically what out-of-pocket expenses beneficiaries are liable for when they use covered services. My testimony will highlight three points: first, Medicare's cost-sharing requirements are complex; second, the cost-sharing requirements differ in significant ways from those applicable in the private market; and, third, Medicare's requirements remain relatively unchanged since 1966.

There are very significant differences between the cost-sharing requirements under Medicare Part A and Medicare Part B. Medicare Part A uses a spell-of-illness concept. A spell of illness, also known as a benefit period, starts when a beneficiary enters a hospital and ends when he or she has not been in a hospital or skilled nursing facility for 60 days. In each benefit period, the beneficiary pays a $792 deductible for hospital stays up to 60 days. Longer stays are subject to coinsurance charges. Days 60 to 90 are subject to a daily charge of $198, and persons in the hospital over 90 days may draw on 60 lifetime reserve days subject to a daily coinsurance charge of $396. There is no coverage after 150 days.

The spell-of-illness concept gets even more complex when you consider that an individual can have more than one benefit period in a calendar year and, therefore, have to pay more than one deductible in a calendar year.

A person requiring post-hospital skilled nursing facility services may get up to 100 days of care in a benefit period. There is a daily coinsurance charge of $99 for days 21 to 100.

In general, cost sharing under Medicare Part B is somewhat simpler. In each calendar year, beneficiaries must first meet the $100 Part B deductible. Beneficiaries then generally pay 20 percent in coinsurance. However, certain Part B services such as home health services, lab services, and some preventive services are exempt from either the deductible and/or coinsurance requirements. On the other hand, mental health services are subject to 50-percent cost sharing.  Beneficiaries using hospital outpatient services pay a fixed amount which varies by the service category, and this amount is often considerably above 20 percent of the approved Medicare payment amount.

There are significant differences between Medicare's cost-sharing structure and that available to the under-age-65 population under employer-based plans. Perhaps the most significant difference is that private plans typically have an annual limit on out-of-pocket expenses, sometimes referred to as a catastrophic cap. In contrast, Medicare has on upper limit on cost-sharing charges.

Another key feature of the private insurance market is that over 95 percent of the under-65 population is enrolled in a managed-care arrangement compared to only about 15 percent of the Medicare population. These managed-care arrangements typically have simpler cost-sharing structures. Many of the under-65 population are enrolled in preferred provider plans. Individuals in these plans have lower cost sharing when they use in-network providers and somewhat higher cost sharing when they use out-of-network providers. These preferred provider arrangements are not available to the Medicare fee-for-service population.

Several other observations can be made about Medicare's cost sharing. While the dollar amounts have changed, the structure is virtually unchanged from that which was in effect when the program started in 1966. The Congress did enact legislation in 1988, the Medicare Catastrophic Act, which would have significantly modified the requirements, and one of the key features of that legislation was an annual out-of-pocket limit on Part B cost-sharing. However, as you know, Congress repealed that legislation in the following year.

I should note that the preceding discussion has focused on beneficiary liability in connection with their use of Medicare services. Unlike the under-age-65 population, most beneficiaries have a second source of health insurance coverage. This supplementary coverage typically covers some or all of Medicare's cost-sharing charges. As a result, beneficiaries may not actually incur out-of-pocket costs at the time they use covered services.

This discussion only focuses on cost sharing for Medicare-covered services. It does not address expenses beneficiaries may have for non-covered services. As you know, Medicare does not cover certain items such as hearing aids and dentures. It also provides very limited coverage for some other services such as outpatient prescription drugs and long-term care. As a result, Medicare only covers about half of the beneficiary's total health care bill.

Thank you.

[The prepared statement of Ms. O'Sullivan follows:]

Chairwoman JOHNSON. Thank you. Dr. Scanlon?

STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR, HEALTH CARE ISSUES, U.S. GENERAL ACCOUNTING OFFICE

Dr. SCANLON. Thank you very much, Madam Chairwoman and Mr. Stark and Subcommittee members.

I am very pleased to be here today as you continue to consider the need to modernize and strengthen Medicare and particularly as you look into the area of beneficiary cost sharing.

Medicare provides valuable and extensive coverage, but it has not kept pace with the changing health care needs and private insurance practices of today. Essentially, there are two issues with cost sharing for Medicare beneficiaries. First, Medicare does not provide genuine insurance; that is, protection from catastrophe. Gaps in Medicare's benefit package, such as the lack of prescription drug coverage as well as required co-payments for covered services, can contribute to substantial financial burdens for beneficiaries.

Secondly, how that deficiency has been addressed, namely through most beneficiaries having some form of supplemental insurance, creates additional issues. Of particular concern are Medigap policies which can be expensive, not offer comprehensive protection, and increase use of potentially discretionary services.

I would like to summarize some of the information on those two points from my written statement before you today. Health insurers commonly include cost-sharing provisions in their policies to make beneficiaries aware of cost. The goal is to encourage prudent use of services that may be discretionary and at the same time avoid creating financial barriers to necessary care.

Medicare cost-sharing rules diverge from these practices in important ways. While Medicare's cost-sharing requirements can be substantial, they are not designed well to discourage unnecessary use of services. Given the example that you gave, Madam Chairman, Medicare imposes a relatively high deductible for hospital stays and no coverage for extremely long stays, which are rarely optional. In contrast, it requires no cost sharing for home health care where utilization has been seen to vary widely raising concerns about the appropriateness of use.

Meanwhile, the lack of a cost-sharing limit on Medicare-covered services can leave beneficiaries with extensive health care needs liable for very large expenses. Employer-sponsored plans, as Ms. O'Sullivan indicated, typically limit out-of-pocket costs to less than $2,000 per year, but many Medicare beneficiaries pay much more than that. In 1997, more than 3.4 million were liable for more than $2,000 on covered services, and approximately 750,000 were liable for more than $5,000.

In addition, uncovered services like prescription drugs add to Medicare's beneficiaries' financial risk. On average, beneficiaries were estimated to spend about $3,100, or 22 percent of their incomes, on total out-of-pocket expenses, and this is excluding long-term care in the year 2000. Those in poor health without Medicaid or supplemental coverage spent 44 percent of their incomes.

Most beneficiaries do have supplemental coverage, however. Some get it from former employers, Medicare Plus Choice plans, or State Medicaid programs. However, Medigap is the only supplemental coverage available to all elderly Medicare beneficiaries, and more than one-fourth have purchased a Medigap policy.

Medigap itself, though, is problematic. These policies can be expensive. Annual premiums average more than $1,300. Premiums for plans offering drug coverage are about $400 more and are rising rapidly.

In the last year alone, these premiums increased 17 to 34 percent for the three types of plan that offer drug coverage. Premiums vary widely also across geographic areas and insurers. For example, in Massachusetts, premiums average 45 percent more than the national average.

Many policies have premiums that rise with the purchaser's age. In addition, individuals in poor health can find policies difficult to obtain or expensive as many insurers screen purchasers' for poor health status. Guaranteed access is only assured for that short period that generally follows initial enrollment into Part B.

Despite their high costs, Medigap policies do not fully protect beneficiaries. Medigap prescription drug coverage, in particular, can be inadequate because policies have relatively low caps on how much is covered and require beneficiaries to pay most of the cost of their drugs.

In addition, there is concern about Medigap's so-called first dollar coverage that eliminates beneficiary liability for deductibles, co-payments, and coinsurance. Employer-sponsored supplemental policies in Medicare Plus Choice plans typically reduce such liabilities, but do not offer first dollar coverage. First dollar coverage undermines the objective of Medicare's cost-sharing requirements to promote prudent use of services. As a result, some services may be overused, ultimately increasing cost for both the beneficiary and the program.

I would end by saying as you continue to consider how to modernize and to reform Medicare, focusing on beneficiaries' financial liabilities and risks is very important. Reconsideration of coverage in cost-sharing policies, while difficult, both within the Medicare program and with any supplemental options that may be available could improve coverage for beneficiaries and the financial health of the program.

Thank you very much, Madam Chairwoman. I would be happy to answer any questions you or members of the Subcommittee may have.

[The prepared statement of Dr. Scanlon follows:]

Chairwoman JOHNSON. Thank you very much, Dr. Scanlon. Dr. Hogan?

STATEMENT OF CHRISTOPHER HOGAN, PH.D., PRESIDENT, DIRECT RESEARCH, LLC, VIENNA, VIRGINIA

DR. HOGAN. Madam Chairwoman, members of the Subcommittee, I am Christopher Hogan. I am an economist. I am an independent consultant in the area of health services research.

I was invited here to deliver this message: Secondary insurance raises Medicare's cost substantially. For Medicare--and I mean the tax-funded portion of Medicare--I estimate that the beneficiaries who have secondary insurance, such as Medigap or employer-sponsored insurance, cost the taxpayers about $1,000 a year more than those who do not, and that is after adjusting for their age and their income and their health status. That is my estimate. It is clearly a round number, but it is consistent with many other estimates of that impact, including estimates by the staff of your own Congressional Budget Office.

In addition to raising the cost of the program, secondary insurance has another impact that is often overlooked in discussions of reforming the Medicare program. Coinsurance and deductibles no longer matter for determining service use for the 90 percent of beneficiaries who have secondary insurance. Let me say that again. Medicare's co-payment and deductible structure is essentially irrelevant from an economic standpoint. It helps to determine beneficiaries' Medigap premiums, but it does not really affect them in any other way.

From the beneficiary standpoint, you have to keep three things in mind. First, the people who do not have secondary coverage are poor. Second, those without secondary coverage use less of everything, including preventive care. Third, beneficiaries who have the money and have the opportunity seem to express a strong desire for first dollar coverage. At least that is my reading of the Medigap market. If you look at what they buy, there is little demand for catastrophic-only policies substantial willingness to pay top dollar for that first dollar coverage and strong evidence of little price-shopping on the part of beneficiaries.

Let me sum it up. Secondary insurance costs the program a lot of money, but beneficiaries like it an awful lot. What are you going to do?

Let me give you two thoughts that you may not hear from other sources. First, it would be completely actuarially fair to charge a lower Part B premium to the beneficiaries who do not have secondary coverage. They cost you $1,000 a head less. You charge them the same amount of money. That is kind of regressive considering these are poor people. It would be actuarially fair. It is probably a little bit difficult to administer, but it would be fair, as I say.

Second, I wanted to bring an idea in front of you that was floated by, of all people, the American Medical Association back in the 1990's, as a way of reintroducing economically effective copays and deductibles in the Medicare program, if you wanted to do that.

What the AMA had suggested was essentially a prepaid refundable deductible for the Medicare program. It is not insurance. It is not a subsidy. I will just give you the bare bones of it.

You could ask beneficiaries to pay an additional amount every month. For the purposes of illustration, I have put forth a rather hefty amount, $80 a month; 80 times 12 is 960 bucks, you would be asking beneficiaries to pay to HCFA. Medicare would then pay the first $960 of copays and deductibles, no muss, no fuss, no secondary insurers, no paperwork. They would simply pay them. If a beneficiary did not use 960 bucks, Medicare would give them their money back, maybe with a nice note thanking them for the use of money over the year. Beneficiaries that used more than 960 bucks, those costs would be covered by the secondary insurers or not, as they are now. This was the only feasible way that I saw to introduce economically rational coinsurance in the Medicare program, but not put the secondary insurers out of business. In effect, it would work like a little miniature medical savings account, not for all health care, not even for all the copays and deductibles, but for whatever portion of the copays and deductibles that you thought might be reasonable to ask beneficiaries to prepay.

Let me summarize. Secondary insurance raises the program's costs substantially. It disconnects those financial levers that you call copay and deductible and makes them absolutely irrelevant to the typical beneficiary, but beneficiaries like to be fully insured and they will pay top dollar to become fully insured if they have the money to do it. Those who cannot afford to pay, well, they are poor, they are disadvantaged, and they use less of everything, including good services like preventive care.

If you wanted to reintroduce economically important copays and deductibles, economically active copays and deductibles back into Medicare, the only thing I saw that would do that was this prepaid deductible notion. It is very difficult otherwise because whatever you do, secondary insurers fill in the copays and deductibles and make care free.

If you want to consider this, that is great. If you do not and you want to have copays and deductibles that matter, you are going to have to restructure the secondary insurance market because your co-payments and deductibles do not matter. They control that now.

Thank you very much.

[The prepared statement of Dr. Hogan follows:]

Chairwoman JOHNSON. Thank you, Dr. Hogan. Dr. Davis?

Dr. DAVIS. Thank you, Madam Chairman, Mr. Stark, members of the Subcommittee for this invitation to testify on Medicare's cost sharing.

I think it is important to remember that Medicare was created in 1965 to ensure financial protection for older Americans against the cost of medical expenses and to ensure access to quality health care. Modernizing Medicare's benefit should involve adding prescription drugs and reducing the burdensome deductibles and cost sharing that we have heard about this afternoon.

Remember that Medicare beneficiaries already spend a high proportion of their income on health care. Last year, the average elderly Medicare beneficiary spent over $3,000 per person on health care expenses, or 22 percent of income. By 2025, that figure will increase to 30 percent of income.

We should also remember that Medicare beneficiaries are sick or poor. Two out of three either have serious health problems or incomes below twice the poverty level. In fact, one-third of Medicare beneficiaries are cognitively impaired or have serious physical limitations, and those third account for 60 percent of all Medicare outlays.

Cost sharing has risen more rapidly than both inflation and the incomes of beneficiaries, eroding the protection that the program was designed to provide. If Medicare's 1966 cost sharing had only risen with general inflation, today's Part A deductible would be $218, not almost $800, and the Part B annual premium would be $196, not $600.

The sickest beneficiaries or those without good supplemental insurance bear the heaviest brunt of out-of-pocket spending. Medicare cost sharing contributes to beneficiary access and bill problems, especially for lower-income beneficiaries. Two out of five beneficiaries who are most at risk report either problems obtaining needed services or problems paying their medical bills. Cost sharing and the absence of supplemental insurance contribute significantly to failure to obtain preventive services and proper management of chronic conditions.

Medicare cost sharing is higher than typical employer plans. Non-elderly Americans spend 9 percent of their incomes on health care, compared with 22 percent for elderly beneficiaries. Deductibles and premiums under employer plans are lower than they are in Medicare, and as we have heard today, they typically include catastrophic ceilings. They also cover physical exams and prescription drugs, which Medicare does not.

Despite this, in fact, Medicare beneficiaries report higher satisfaction with Medicare than working families do with employer coverage.

Medicare beneficiaries need supplemental insurance coverage, but it is increasingly unaffordable or unavailable. As we have heard, 9 out of 10 have supplemental coverage, but Medigap premiums are expensive, over $100 a month, and for some plans in some geographic areas as high as $3,000 a year. Employers are cutting back on retiree coverage, and Medicare Plus Choice enrollment is dropping.

There are a number of options for improving Medicare benefits and reducing cost sharing. In a report being released today by my organization, The Commonwealth Fund, Marilyn Moon and colleagues and the Urban Institute simulate the impact on beneficiaries of improving Medicare benefits and cost sharing. Under all four of the options simulated, both the elderly and the disabled would experience a reduction in total out-of-pocket expenses, including private insurance premiums. Savings would be greatest for beneficiaries with serious health problems. It would reduce the percent of income from 22 percent to 20 percent or, in one option, down to 16 percent. By eliminating or reducing the need for private supplemental insurance, efficiency and coverage would be improved.  State Medicaid programs would also be expected to benefit because they now pick up many of these costs for low-income beneficiaries.

Finally, Medicare beneficiaries have a claim on a portion of the budget surplus. As you know well, the Balanced Budget Act achieved major savings largely from the Medicare program. Together, the slowdown in Medicare and Medicaid outlays in the late 1990's account for $1 trillion out of the $5.6-trillion 10-year budget surplus. More than $50 billion of the 10-year budget surplus is attributable to the higher premiums that were part of the 1997 Balanced Budget Act. Returning this contribution to beneficiaries in the form of the improved benefits and reduced cost sharing is worthy of consideration.

Thank you.

[The prepared statement of Dr. Davis follows:]

Chairwoman JOHNSON. I thank the panel for their contribution.

Dr. Davis, you make the point that Medicare needs to be modernized both in terms of benefits, and you point to prescription drug benefits, and in terms of cost sharing. While I appreciate your comments about what we have saved from Medicare, it is true that Medicare costs will double in 10 years. It is a very big program, and it is growing very rapidly. That is without prescription drugs or annual physicals or any of the other things that we ought to be doing to modernize the benefit package.

If this is your recommendation, how would you control costs? In the private sector, we just heard that 90 percent are in some form of managed care, but in Medicare, only 15 percent. What would you do to control costs if you are going to expand the benefit package and reduce cost sharing?

Dr. DAVIS. You are certainly correct, Madam Chairman, that Medicare outlays will increase as costs go up and as there are more baby-boomers retiring, but costs will also go up for beneficiaries so that the average amount beneficiaries will pay will go up from $3,000 to over $5,000 a person, and that is holding constant for inflation.

Chairwoman JOHNSON. Right. That is holding constant for inflation and no new benefits. So that has got to be of concern to us, but if that is a concern to us under the current program, what is it that you propose that might control costs so that this would be affordable, so that beneficiaries would not be harmed?

Dr. DAVIS. Right. The first thing I am saying is that we do not want to just shift more costs onto beneficiaries to protect the Federal budget. That will make the beneficiary situation worse.

We are all looking for the magic bullet that would achieve savings.

Chairwoman JOHNSON. We did use a few good ones.

Dr. DAVIS. The one that is proposed in this testimony is eliminating dual coverage by integrating that into one source of coverage.

Certainly, right now, Medicare's administrative costs run 2 percent a year. As we have heard from the General Accounting Office, Medigap administrative costs run 20 percent a year. One way to achieve savings is to cover those benefits under Medicare at a 2-percent administrative cost instead of a 20-percent administrative cost add-on. That would mean beneficiaries would be paying a premium, an additional premium to Medicare, but they would achieve savings by having no or lower Medigap coverage premiums.

So one source of efficiency is instead of having two plans covering the same benefits, having one plan integrated, under Medicare, a single premium being paid to Medicare, and realizing those administrative savings.

Chairwoman JOHNSON. All of that would actually increase costs significantly since Medigap covers new benefits. So, if you were going to merge those premiums, you would have to also merge the benefits.

So you really are obliged to give us some ways to control costs. The private sector has controlled costs by adopting a managed care protocol that, while it has some failings, has both better integrated care and, in many instances, responsibly controlled costs.

So I hear what you are saying about improving benefits and reducing the beneficiary burden, but without better research and recommendations in terms of overall cost control, we cannot be blind by the fact that the program is growing by leaps and bounds. In only 10 years--that is before the baby-boomers will retire--the program will double, with no improvements.

Dr. Scanlon and anyone else who wants to pitch in on this, what is the research that demonstrates that deductibles have an impact on usage, utilization, and, therefore, cost? How much does that research tell us about that personal discipline over utilization? Does it eliminate needed care as well as unneeded care? What do we know about deductibles and cost control? Dr. Scanlon?

Dr. SCANLON. Madam Chairwoman, what we do know is that the absence of cost sharing does lead to a significant increase in cost. I think as Dr. Hogan's testimony points out in detail, studies have indicated that costs may increase as much as 25 percent when there is first dollar coverage because one has a Medigap plan.

When one has employer-based insurance, which still has reduced deductible, there is an increase in utilization compared to those without any supplement coverage at all, but it is less than having first dollar coverage. So we do know that there is a very positive increase in terms of utilization.

Being able to sort what are necessary services that are being used because there is no longer a financial barrier versus those which are discretionary or unneeded, is not something that has been possible to do.

We have done work in looking at other aspects of Medicare, in particular, looking at laboratory services under the End Stage Renal Disease (ESRD) program. We find where there is no cost sharing a totally inexplicable pattern of service use: extensive overuse as well as underuse. We had a panel of nephrologists review the tests that were being provided. In some instances, tests were being provided every week, and the nephrologist panel said they never understood why you would ever provide this kind of a test.

So the absence of cost sharing creates lack of discipline. Having cost sharing potentially creates some barriers. Finding the balance between those two is the challenge that we face.

Chairwoman JOHNSON. Thank you. Does anyone else wish to comment on that point? Is that what you mean, Dr. Hogan, by Medigap costing us $1,000 per beneficiary?

DR. HOGAN. That is right. Once all of the copays and deductibles are paid, when care is free, beneficiaries will use more.

Chairwoman JOHNSON. You say that, but Mr. Stark in his opening statement did not agree with you. So you need to document that if you believe that is true.

DR. HOGAN. Yes. If I wanted to point to some particular pieces of research, the Congressional Budget Office has their own studies. Joe Newhouse at RAND had the National Health Insurance Experiment in the 1980's. It was an under-65 population, but it was a true experiment. They literally assigned people to different plans and looked at their expenditures and that found the same result.

I can guarantee you that every cost estimate you see for the cost of a drug benefit will have such an effect embedded in it, and every cost estimate comes out of the actuary's office and HCFA will have such a cost estimate.

I am kind of an agnostic on the whole concept of necessary care. I do not think that is the way decisions are actually made. It is not healthy beneficiaries who are using services frivolously. Most beneficiaries have something wrong with them, and if you look at the services where Medicare pays the most money, Part B--Part B is what I know. I worked for the Physician Payment Review Commission for a number of years. Cataract surgery is the number-one service for which Medicare pays physicians. What is the indication for cataract surgery? Well, you have to have some loss of visual acuity. It is not a necessary or unnecessary decision. If you say to a beneficiary, "Now with current technology, cataract surgery is quick, painless, and has almost no complications," you say to a beneficiary, "We can fix your visual deficit and it is free" versus "We can fix your visual deficit and it will cost you $600 or $700," I think that is enough to deter enough people to at least think about it a while. So I just want to say I am an agnostic on the concept of necessary care.

You definitely find that people will use fewer preventive services when they have to have copays and deductibles, but they use fewer services right across the board.

Chairwoman JOHNSON. Thank you. Mr. Stark?

Mr. STARK. Madam Chair, I would like to follow on that.

In your chart, Dr. Hogan, you suggest that you are using $5,000 per beneficiary per year, and then you are comparing and you are saying that with employer-based Medicare plus some kind of an employer base-sponsored supplement, you save 100 bucks, it is $4,900. With Medicare and a Medigap policy, you are suggesting the cost is $5,400. So that is $400 more. What you further say to get to that $1,000 savings is that those people with Medicare only, only costs $4,000, right? But you further said that that is only 10 percent of the Medicare beneficiaries, right? I think it follows that they are the very poorest of the Medicare beneficiaries, right, and least apt to have medical services available and, and, and, and. So that, I think that the idea of suggesting that these copays cost us 1,000 bucks may not be entirely based in the supplemental payments is what I am getting at. We are talking about 10 percent who arguably are the most challenged of our beneficiaries.

Further, we did not get into this. Dr. Scanlon, what is the average per-capita Medicare cost for the 40 million beneficiaries? Do you have a number off the top of your hat?

Dr. SCANLON. I think it is approximately $6,000 per year.

Mr. STARK. Okay, it is 6,000 bucks. So Dr. Hogan used $5,000 just as an estimate here.

But if you take the $6,000 figure and take the Medicare Plus Choice, we have been told that if we risk the Plus Choice, we would be paying 7-percent less, so there is a $420 overpayment in Plus Choice. It certainly does not have any deductibles, I do not think, any Plus Choice. It may have some modest copays. But I am not sure that we can just capriciously suggest that a variety of charges tacked on hither and yon will save money that we want to save because, in none of these purely numeric calculations, I do not believe, any of our witnesses have talked about whether the savings came from unnecessary medical procedures.

You did not take that into account, did you, Dr. Hogan? You do not make a judgment here as to whether the difference in the $4,000 for Medicare only was a savings of 1,000 bucks on services that were unnecessary.

DR. HOGAN. In my written testimony, I point out it is, more or less, across the board. In fact, all of the five preventive services that can easily be identified in the current beneficiary survey are used less by the beneficiaries who have to pay their own copays and deductibles.

Mr. STARK. I guess you could get a fight in any bar in town as to whether or not preventive services are worthwhile and which ones we ought to be paying for, but this Subcommittee has added preventive services. We may all have a different list of priorities, but I think many of us have some we still do not pay for that we would like to add.

So all I would like my colleagues to consider in this is that while there can be some savings in ratcheting up copays or certainly in deductibles in going to the hospital for a day where it is $600 or $700, is that what we want to do? There are ways to save money, and we have got a whole litany of those, but I just want to urge us to be cautious that we do not eliminate necessary medical procedures and overlook unnecessary ones. I am not sure that just dealing with broad copays or Medigap does that.

I do not have any answer, but I just want to remind us that we could do some real harm here to people who need services.

Chairwoman JOHNSON. I certainly appreciate the barrier that co-payments can cause, but that is why I asked Dr. Scanlon and Dr. Hogan and they did name off a number of research projects that have been done that demonstrate that deductibles do lead people to think about whether they need the service or not. In the employer sector or even actually in Medicare, there does not seem to be any evidence that deductibles have been a barrier to care.

Now, in Medicare, there are a lot of other barriers to care. So it is a little hard to make the comparison.

Why don't I recognize Mr. McCrery and see if others pursue this topic and can come back to it. I think the point is we really have to have better documentation on this issue of deductibles because it does seem to be a factor, and we need to understand what kind of factor it could be for us as we face governing a program whose costs are exploding. Mr. McCrery?

Mr. MCCRERY. I appreciate the testimony and especially the references to other studies that have been done on the effectiveness of copays and deductibles in discouraging over utilization.

My own sense is, though, that discouragement is probably greater in the under-65 population than it is the over-65 population. The over-65 population, generally speaking, probably has more need to go for services than the under-65 population.

Having said that, though, I do believe that there ought to be some requirement on the part of beneficiaries to pay some co-payment or some deductible. The question to me is finding the right balance between discouraging over utilization and discouraging proper utilization, and I have not heard any of you give us that magic formula today.

I was intrigued, though, Dr. Hogan, by your proposal or, I think it was, the AMA's proposal that you mentioned for a prepaid deductible that they could get back at the end of the year if they did not use. Have you thought about what effect that proposal would have on the secondary insurance market?

DR. HOGAN. Really, the point of that proposal is twofold. For better or worse, it works like a small medical savings account.

Mr. MCCRERY. Right.

DR. HOGAN. But, mostly, it creates a little space where Medicare says for the amount that we are comfortable with, it might be a few hundred dollars, copays and deductibles shall apply, and the secondary insurers will not touch that. So the main point of it is to assert a small amount of money over which Medicare controls the copays and deductibles, not the secondary insurers.

Their Medigap premiums would fall because they would not pay that first few hundred dollars of copays and deductibles, but would not fall a whole lot because you have to realize there is an awful lot of money out there on the far tail of spending. There is a few catastrophic cases that account for most of the costs, but other than that, if they would make their packages conform to Medicare's new structure, they would simply take it in stride. They would have a new set of plans, A through whatever, and they would charge somewhat lower premiums to cover the amounts beyond that prepaid deductible.

Mr. MCCRERY. So, in other words, you would not allow secondary insurance to cover that prepaid deductible?

DR. HOGAN. No. The whole point is you would not allow secondary insurance to cover the prepaid deductible.

Mr. MCCRERY. That is a very interesting proposal, Madam Chair, and I hope that we will explore that further. It might be that we could even encourage it by making it like an MSA (medical savings account) and making it pre-tax dollars to be put into the account, and it could be rolled over from year to year if they so desired.

Dr. Davis, you encouraged us to look at providing more services, prescription drugs, lower deductibles, and so forth, and it rang familiar. Isn't what you are describing very much like the catastrophic plan that Congress adopted back in 1988, I believe it was?

Dr. DAVIS. Obviously, the catastrophic plan was designed to improve benefits. It was designed to put a ceiling on total spending that the elderly would have to pay, and it did have a prescription drug benefit.

There are some significant differences. That particular proposal was financed by an income-related premium. That was a very sharp increase for beneficiaries that currently have employer supplemental coverage. So they saw themselves as getting no new benefits and, yet, paying a higher premium.

What is laid out in this report that we have released today are four options, one with prescription drugs, three to change the cost sharing. All of them actually would increase the Part B deductible slightly, up to $200 from $100. That is the one deductible that has not increased in real terms, but they would markedly reduce the Part A deductible.

One of the effects of that, for example, one of the options reduces the Part A deductible to $200. More people would be willing to do without supplemental coverage if they knew the most they had to pay for Part B was $200, the most they had to pay for Part A was $200, and there was a total ceiling of $2,000 on any cost sharing and deductibles overall.

So, in fact, it is restructuring it, but the basic effect is to lower the average amount that beneficiaries pay as a percent of income across all services.

Mr. MCCRERY. Did your study estimate a cost of the proposal?

Dr. DAVIS. Yes.

Mr. MCCRERY. What was that?

Dr. DAVIS. There are cost estimates attached to those. If you think about, say, the year 2000 as a typical base, the first option increases Medicare outlays by about 2 percent, option two by about 7 percent, option three is budget-neutral. Obviously, if you were to do that, you would want to do participation rates, and you would want to do estimates over time and behavioral shifts, but there are estimates in percentage terms and in dollar terms. Option one is $3.2 billion in the year 2000; option two, 16.4. Option three is financed by increasing the Part B premium to $105 a month. So there is actually budget neutrality in that particular option, but there are cost estimates provided, to give you a sense of what these would entail.

Mr. MCCRERY. Thank you.

Chairwoman JOHNSON. Mr. Kleczka?

Mr. KLECZKA. Thank you, Madam Chair.

Dr. Hogan, in your testimony, you indicated those folks with supplemental insurance or Medigap actually cost the Medicare program on average about $1,000 more.

Can you point out specifically what services are being over utilized or where we are being taken advantage of or where the Federal Government is paying more?

DR. HOGAN. I keep telling you folks necessary care is a fiction that physicians created. I do not think there is any such thing.

There are some clear-cut cases. There are some cases that are not clear-cut. Most medical care is kind of gray, and I do not think it is particularly profitable to talk about necessary and unnecessary care. Maybe "value" is the better word, whether the value of the services that you get with zero copay is--

Mr. KLECZKA. But if, in fact, you are going to contend that on average, we are spending for the program $1,000 more, I would think that at least you could pinpoint where. Is it just doctor's visits?

DR. HOGAN. Oh, no, no. If you look at the research, the research shows that the impact is much higher on the B side than on the A side. So it is not the hospitalization. That is the typical research.

Mr. KLECZKA. So with physician's visits, okay.

DR. HOGAN. Right. So it is physician visits and tests and procedures and images. That is where the largest dollar impact is.

If you go back to the national health insurance experiment, which is the under-65 and it is old, Joe Newhouse found that when you charge copays and deductibles, their utilization fell mostly, again, for physician services, but it did not seem to affect their health status as far as he could tell with some important exceptions, and the exceptions were pretty obvious once you saw them.

Poor people with mental health problems: If you charge them copays and deductibles, their health deteriorates. So there is a bit of research to tell you where you should not charge copays and deductibles, and poor people with mental health problems is one of them.

Beyond that, doctors cannot tell you what is necessary and unnecessary. You certainly would not want to ask an economist to tell you that.

Mr. KLECZKA. But if I were a doctor, I would want to do more versus less because medicine is an imprecise science, and so, if I am trying to do a decent analysis of a patient, I am going to have to maybe do another test which you say if it was not for this Medigap policy, this doctor would have done it, anyway. It gets kind of murky and cloudy.

This is an interesting discussion, and I guess it is a rhetorical question. However, what I am wondering about is what is the actual purpose of copays. Is the purpose of copays and deductibles to have the patients share in the cost, or is it to try to restrict utilization, or is it a combination of both? If it is an effort to restrict utilization, then the answer for this Committee and the Congress is raise those copays and people just will not go. So, in your view, Ms. O'Sullivan, what are we trying to accomplish with copays and deductibles?

Ms. O'SULLIVAN. It is essentially a combination of the two.

Mr. KLECZKA. That is what I was afraid of.

Ms. O'SULLIVAN. You are trying to make beneficiaries cost-conscious at the point when they use services, but not make the cost sharing so high that they will forego needed services and then perhaps incur larger expenditures down the road.

Mr. KLECZKA. Do you agree with Dr. Hogan's contention that because of supplementals and Medigaps that we are under a Medicare program paying about $1,000 more?

Ms. O'SULLIVAN. There is research that shows that Medicare beneficiaries that also had Medigap policies do cost the Medicare program more.

I think you should remember that people who buy Medigap policies are buying a policy that they know is going to cover most, if not all, of their cost sharing, and they probably purchased a policy based on the expectation that they are actually going to need covered services. So there is some of that entering the picture, also.

We know that people that have employer-based policies cost Medicare more. They cost about 10 percent more than people that have no coverage. Arguably, people that have no coverage are the people that are low income, but above the Medicaid line. So any cost sharing could seem fairly burdensome to them. For them, cost sharing has a fairly big implication for them, and they may well be foregoing services that they actually need.

The other comment I would make is when you are talking about impact of change in cost sharing, we do not have one supplementary market out there. We have Medigap. We have the Qualified Medicare Beneficiaries and the Specified Low-Income Beneficiaries (QMB/SLMB) populations for whom Medicaid is paying Medicare's cost-sharing charges. We have employer-based policies which have various ways of wrapping around Medicare, and we also have Medigap and there are 10 of those. So any tweaking of Medicare will have differential impacts.

Mr. KLECZKA. Fine. Thank you.

Chairwoman JOHNSON. Mr. Ramstad?

Mr. RAMSTAD. Thank you, Madam Chairwoman, and thank you for calling this important hearing on Medicare beneficiary cost sharing.

I am concerned like you, Madam Chair, about the costs that beneficiaries must pay when they get sick, the plans they must purchase to cover their needs because of Medicare's copays and the lack of catastrophic coverage, and, of course, I am also concerned about the fact that this problem is really exacerbated because Medicare lacks catastrophic protection. That is contrasted with 97 percent of private health policies which have such protection.

So I think in total, when you look at Medicare's limited benefits package, it is high copays, and the complete absence of catastrophic, that means that nearly half of our seniors' health care costs are not covered by Medicare. That practically means that Medicare seniors must bear the cost themselves. This fact of lack of coverage is unacceptable and needs to be addressed through our comprehensive reform.

In that vein, I would like to ask you, Dr. Scanlon, first, does the status quo in Medicare cost saving make sense to you when compared to private-sector health insurance plans which structure, of course, are out-of-pocket obligations?

Dr. SCANLON. No, sir, they do not.

Clearly, as you indicated, the lack of catastrophic protection is something that private insurance does not have, and it is sorely lacking in Medicare. It creates a situation where we do not really have a true insurance policy. You can be catastrophically harmed by your medical expenses, and that is something that we would hope for as the first thing to accomplish in a Medicare reform.

Secondly, what has happened is over time, the cost sharing that was put into place in 1966 and has been modified, as Ms. O'Sullivan indicated, only slightly since then has evolved in ways that distort it even further than what it was before.

We did not expect in 1966 hospital costs to be growing so much so that the deductible would be close to $800 today, so that a single hospitalization alone creates a large expense for individuals.

We have not seen the Part B deductible keep pace with inflation. So it is withering in terms of the share of real income that it represents.

These are not the kinds of things you would see in most private insurance plans because they have been adjusted over time to try and reflect the changes in medicine as well as the changes in the cost of medicine.

Mr. RAMSTAD. Dr. Scanlon, I think your summary statement says it all when you said that Medicare beneficiaries do not really have a true insurance policy. That should concern all of us on this panel, as I know it concerns so many people in the Medicare system.

Let me ask you, Dr. Hogan, if you will, please. In your testimony, you stated that the current Medicare supplemental system is, to use your words, regressive and disproportionately affects the poor. Could you just expand on those comments?

DR. HOGAN. I will not say it is the worst of all possible worlds, but beneficiaries who can most afford to pay the co-payments do not. They buy Medigap. The beneficiaries who cannot afford to pay the co-payments cannot afford Medigap, and those who can afford Medigap drive up costs for everyone, including the Part B premiums that poor people have to pay.

So I could think of two reasonable approaches. Either make it free for everybody or make everybody pay, but allowing the working stiffs who do not have a decent job and do not have decent employer-sponsored coverage have to pay those co-payments, those irrational co-payments out of pocket, and everybody else has enough money to buy Medigap. That is not sensible.

Mr. RAMSTAD. I thank you for that very honest and, I think, accurate response.

I think oftentimes a statement made earlier this year by our colleague working on Medicare reform on the Senate side, Senator Breaux, who said right now what we are doing with respect to the Medicare system is analogous to putting gasoline into a 1965 Chevy when, in fact, we need a new car, and I think all of you would agree to that statement as to the need for overall comprehensive Medicare reform.

I thank you for your testimony here before the Subcommittee, and your continuing counsel is definitely appreciated. Thank you, and I yield back the balance of my time.

Chairwoman JOHNSON. Congresswoman Thurman.

Mrs. THURMAN. Thank you, Madam Chairman.

I want to thank the witnesses for being here today and giving us some information here.

I go through this every time we have a group before us. So you guys kind of need to help me here. If a Medicare beneficiary chooses to enroll in a Medicare Plus program, he or she then does not have to have a Medigap coverage. We all know that because they have no deductibles. They have maybe some co-payments.

Then, in an article--and I just kind of would like your all's opinion about this--published in Health Affairs in January of 1999, Gail Wilensky and Joe Newhouse suggested--and I will quote them here--that, "In an informed program, additional benefits should be provided through the Medicare program and not through a Medigap plan." In other words, my understanding of this is to create a level playing field between traditional Medicare and Medicare Plus Choice plans, Medigap should be merged into traditional Medicare fee-for-service plans so that the Medicare beneficiaries would not have to purchase separate Medigap insurance.

So the question is do you agree or not agree with that summary, and if so, why, and if not, why. I will ask all four of you that question.

Dr. DAVIS. I certainly have a lot of agreement with the idea that Medicare benefits ought to be improved to the extent that people would not need to buy Medigap. So that means covering prescription drugs, which is covered in most Medicare Plus Choice plans. It means getting the deductibles down to modest amounts that people can afford to pay without filling in, and to really have a modern benefit package.

We talked a lot about employer plans. The typical employer conventional fee-for-service plan has a $239 deductible across all services. Medicare has far more than that. It has a $1,500 ceiling on a lot of out-of-pocket expenses, and that is for conventional fee-for-service. For their preferred provider plans, their point-of-service plans, those amounts are lower. So I think modernizing Medicare's benefits means you do not have to buy supplemental.

People with employer coverage do not go buy supplemental coverage. The fact that 90 percent of Medicare beneficiaries have to go buy something else means that what they have, they certainly perceive as inadequate. I think there are, as I have mentioned, efficiencies to be gained by simply consolidating that benefit within the Medicare program.

Mrs. THURMAN. And just to add to that, I would further think that it puts everybody then on that level playing field. Right now, we have so many things going on in Medicare, quite frankly, that just because of where your geographical location is does not give you the same benefit even though the payment is coming still directly from the Government. Dr. Hogan?

DR. HOGAN. While I agree with the sentiment of that, there are a few little details. I only say this because I used to work for Joe and Gail. I was on the staff of one of their commissions, and there are a few little details you have to keep in mind. How much are you going to charge for the Medicare-sponsored Medigap policy, and are you going to pay less if you do not have it? If you add the Medigap premium to my $1,000 cost estimate, there would be almost $2,000 difference between what you would want to have, a beneficiary with no supplemental insurance pay and a beneficiary who has the federally sponsored Medigap pay. So there may be a premium attached to that, that might be kind of unpleasant to look at.

The second issue is what about the people who have employer-sponsored coverage now. How are you going to make their employers continue to pay for that coverage, or are you just going to let them skate and have the taxpayers pay for it? So it is not as easy as you might think.

Nevertheless, what Karen said is exactly right. You would certainly get some efficiencies just from the overhead alone rolling Medigap into the Medicare program because their overhead charges are lower, and it is a lot easier for Medicare to run the individual purchase policy than it is for the private sector to do it.

Having said that, this sentiment is correct, but there is a devil in the details that you really have to pay attention to.

Dr. SCANLON. I agree, and I think there is a rationality to improving Medicare so that the need for a Medigap policy declines.

There is a reality today that there is a rational need to buy catastrophic protection. It is somewhat irrational to be buying first dollar coverage. Essentially, what you are doing is for that first $100 of medical care that you are going to use, you are paying someone $120 to write that check. That does not make a lot of sense.

So the idea of incorporating these types of protections into a better Medicare program and offering it to beneficiaries, I think, would reduce the need for Medigap.

Mr. Stark indicated, also, we have a very complex system that has developed here in terms of the different participants and that we would be creating some very significant disruption in terms of making a change like that.

Mrs. THURMAN. But aren't we creating some problems out there with the Medicare population, anyway, because their benefits are so different depending, again, whether they can have prescription drugs, whether they can have eyeglasses, whatever other procedures, and in Medicare Choice, really catastrophic? I mean, they have a catastrophic payment, and that is us.

Dr. SCANLON. We definitely are.

Our problem is we sometimes have trouble making the transition to a new system. If you look at the statistics on Medigap policies fully, a third today are policies that existed before 1992, many of which have much poorer coverage than the policies that are available today.

There may be issues of people not being able to get access to these benefits because of health status, but a full third are those are in older policies which have relatively limited coverage.

Ms. O'SULLIVAN. Certainly, one advantage of expanding Medicare's benefits would presumably make it more in line with the coverage people are used to up through age 65. Now, when they transition to Medicare, they are faced with a whole new set of requirements. So, from that perspective, it could potentially be easier for the population. Obviously, of course, this is a much more expensive population group than the under-65 population, and also, as has been mentioned here, you have to think of what the implications are for people with employer-based policies, would they just wrap around to the new Medicare coverage. Presumably, it could potentially be cheaper for some of the employers, though we also know a lot of employers who are getting out of the business of retiree coverage, anyway. So whether this would speed it or slow it down is a question you could ask.

But, yes, there are certainly some advantages. So, obviously, it has many implications when you flesh out the details.

Chairwoman JOHNSON. Mr. McCrery?

Mr. MCCRERY. Thank you, Madam Chair.

Since we have such a distinguished panel--I read a news report just a couple of days ago or maybe yesterday about a study that was done recently that indicated that seniors are in better health than they used to be, basically, and that because they are in better health, they are costing less and that that might have fairly significant, positive consequences for Medicare spending in the out years. Did you all see that report, and do you have any comment on it?

DR. HOGAN. May I be the first to jump in here?

Mr. MCCRERY. Sure.

DR. HOGAN. Ken Manton, who did that report, is a well-respected demographer, and if he says it, I imagine it so. I certainly have not seen that come through in any statistics that I look at, but I do not look at a long-time series.

The only point I really want to make is this.

Mr. MCCRERY. I am from Louisiana. If you would talk just a little slower.

DR. HOGAN. I am sorry, and I need less caffeine.

Jim Lubitz, years ago, did a study. Jim Lubitz is a researcher at the Health Care Financing Administration and did a study of beneficiaries' lifetime spending. What you find is the longer you live, the more you cost Medicare, period.

Mr. MCCRERY. All right.

DR. HOGAN. You will spend less in the last couple of years of life, but extending life span or coming in a little bit healthier and living a little bit longer, it is arguable that that will reduce. Even if it is true, it is arguable that that will reduce costs.

Dr. DAVIS. I do think it is a very important study that the National Academy of Sciences has published showing that disability rates of the elderly have dropped markedly from 1982 to 1997. If you really break it down by the kinds of conditions, you do see that we have had a major reduction in strokes over that period and much better control of hypertension over that period, breakthroughs in treatment for heart disease over that period. There is another major study supported by the Lasker Foundation that really looks at the benefits to the economy of that improved health, particularly in the last half of the 20th century that comes from these kinds of improvements, both in preventive care and breakthroughs like beta blocker treatment for heart attack victims.

They argue that the gains to the economy in the last half of the 20th century from these advances in health care equal the gains that have come from increased productivity over that period. So they really are quite significant. It is not just a matter of looking at how they affect Medicare spending. The longer we live, certainly there are going to be more years that we are on the Medicare program. That is, in part, the goal. The fact that we are improving life expectancy, we are reducing disability, I think it is quite significant.

I think it plays in today's discussion in the following way. When you talk about cost sharing, we have emphasized preventive services like getting mammograms or Pap smears or colonoscopies, but it is also important to have chronic conditions well maintained.

If you have got hypertension, if you have got diabetes, if you have got high cholesterol or arthritis, you need to be making regular visits to physicians. Many times, you need to be on a prescription medication to control that condition to avoid these adverse consequences of strokes and mortality from heart disease or disability from heart disease.

So, if you deter people from getting proper maintenance of chronic conditions--we supported, for example, a study that showed that people without supplemental drug coverage are much less likely to get hypertensive medication for people with hypertension than those that have supplemental drug coverage. So these issues of cost sharing and supplemental coverage and the quality of the benefits do affect these issues of life expectancy, disability, and quality of life.

Mr. MCCRERY. Dr. Scanlon?

Dr. SCANLON. Yes. I think the studies indicate some of the very positive things that have happened with medicine over the last 30 years, and that is part of why we are so concerned about getting people access to health care.

Dr. Hogan's comment about the lifetime expenditures, we do not know how that is going to work out yet because we have a new cohort of people who are aging with a very different life history than the cohorts of the past--better nutrition, better medical care, different lifestyles--and we will wait to see how that happens. That is the positive side.

In terms of your question of how much relief this provides us, it may provide some relief in terms of per-capita spending, but as I have heard others say, it is not the per capita that is our problem. It is the capitas. It is when those baby-boomers come and they multiply whatever per-capita amount we are going to spend. That is the challenge, I think, that we are overwhelmed by.

Mr. MCCRERY. Ms. O'Sullivan?

Ms. O'SULLIVAN. I would agree with Dr. Scanlon.

Mr. MCCRERY. Madam Chair, it was a very interesting summary of the study that I read, and it might be that ina future hearing, we would like to bring in the authors of that study and others on the panel that might want to comment on the study. It would be very interesting for this Subcommittee to investigate.

Chairwoman JOHNSON. Thank you.

Let me ask the panel one final question. If you added the deductibles and the premiums under Part B or I guess you would probably want to exclude the deductibles since Medigap covers that--I mean, I am impressed that so many of my seniors are paying Part B and also Medigap premium. The Medigap premiums right now are pretty steep. They have gone up considerably.

So, if you just took the two of those and made them the deductible, then the out-of-pocket expenditure--I mean, I am not really proposing this. I just want to get your opinion. This is what seniors are spending now, a big chunk of them. If they spend it in a different pattern and if instead of spending it for premiums, it was a deductible or it was some kind of prepare bank account like Dr. Hogan proposes, then what would be the impact? Would you get the benefits of first dollar expenditure thinking? On the other hand, the exposure would not be any greater? See, if you do that, there are some advantages for low-income people, just above the levels that we now subsidize. You could subsidize those premiums, but that is, in fact, what seniors are spending now. If we are going to merge these and rationalize the program and broaden its coverage, then what would be wrong with broadening the deductible to cover, in a sense, what they are already paying and turn it in from a premium to a deductible and subsidize the premium for people in that group that now cannot afford either? That is one way. Would that have any impact on cost, Ms. O'Sullivan?

Ms. O'SULLIVAN. I believe your proposal is saying basically you take the Part B premium which is $600 a year and you would be adding to that an average Medigap premium which is $1,300, $1,500 a year. So you would be talking something--

Chairwoman JOHNSON. Except the Medigap premium usually pays the Part B premium.

Ms. O'SULLIVAN. No. No, it does not. It is separate.

Chairwoman JOHNSON. Or, just the deductible?

Ms. O'SULLIVAN. It is separate. So you would be talking something close to $2,000 as a deductible.

We know that beneficiaries, regardless of how you present something to them, are very risk-averse, and they do not want to be liable for even that first dollar coverage. Many of them might view the $2,000 as a very large gap before the program--

Chairwoman JOHNSON. They might, and I understand the fear issue, but they would not have any monthly payments.

Ms. O'SULLIVAN. Correct.  The issue would be it would have to be presented, I believe, in a very simple form to be understood by everybody and people would have to understand what the tradeoffs are and you would probably also have to think about the implications of the people on the lower end of the income scale.

Chairwoman JOHNSON. Oh, you certainly would have to think about that, no question about that, but it is sort of interesting to contemplate. You have got a lot of people out there putting a lot of money out and not getting much for it, frankly, except peace of mind. Peace of mind is worth a lot, but it is not buying medical care. Dr. Scanlon?

Dr. SCANLON. You do need to look at all of the sources of cost to the elderly, but you do need to break up these, the Medicare beneficiary population into the different groups because they are having very different experiences right now.

Those that are paying the Medigap premium are about a quarter of all beneficiaries. We have got more than a third who have employer coverage, and they are paying more in premiums today than they used to in the past, but they may be paying much lower premiums.

We have the people in Medicare Plus Choice plans. They are paying more today than they used to, but they still may be paying a lot less.

Then, finally, we have those who are Medicaid-eligible. That is a key part of this equation that you are thinking about in terms of how do you balance a restructured cost-sharing framework with affordability while avoiding negative impacts. The Medicaid dual eligibles and the QMB program provide you one of the mechanisms that you have already in place to think about how to protect people with lower income.

Chairwoman JOHNSON. Yes. The reason this is very important is that, as you say, there are different populations with different coverage. There is a third that has pretty good coverage, not just for prescription drugs, but for a lot of things that Medicare does not cover. Then there is this other third with Medigap who are paying an awful lot of money and, for the most part, not getting much in terms of prescription drugs. Then you have the ones that are Medicaid-eligible, as we say in our slang down here, SLMBs and QMBs, but they get everything for the most part. Some of them pay a little premium, but they are pretty well cared for and covered.

So you have then the group just above 100 percent of poverty income, and people in that level of income that can afford Medigap insurance, in a sense, they are the worst off. They have the Medicare-only plan. They have the Medicare premium of about $50 every month, and they have all the co-payments under Medicare. If you look at all of the prescription drug plans, regardless of which party they originated from, they provide the least help to that very group because the other groups would have plans that would wrap around the help that is provided. So they will all do better under a prescription drug program, but the group that has the least will pay an additional premium which they can ill afford, and then they will get 50 percent of their cost of drugs up to $2,000. This is not a big benefit in today's world of drug prices.

So I hear, Dr. Davis, your concern for the beneficiary cost issue, but I do not see the solutions directing themselves to the beneficiaries who right now have the highest costs with the least means, and I do not see how you can, frankly, in good faith deal with their concerns fairly and honestly and provide retirees with comfortable incomes the same benefits.

I do not think it is outright fair that my husband and I would have the same catastrophic level of coverage that I think many of these seniors need, which I think is about $1,000. I do not even know where some of them would get $1,000 to meet the catastrophic coverage, but many seniors we are most concerned about will never meet the threshold, the $4,000 catastrophic coverage. So I am very concerned that we talked blithely about helping the beneficiary, but the group that is least helped by any of these plans is the group that is least helped by any of the reform proposals unless you take Dr. Davis' that is very much richer in every, every case, but, frankly, I think would be unaffordable.

I will look at your cost estimates, but I cannot imagine without some means testing that you could do all the things you want to do and have no disincentive to buy because there is too much evidence in every market, employer-provided market, every market that people buy more health care than they actually need.

I will look more closely, and I will help the Committee look more closely at the evidence of the discipline of first dollar coverage. I think we absolutely are obliged to look at that and any other proposals you can think of to help us look at cost discipline because the more we rationally govern costs, the more we can help those who need it most to have the resources to get a fair and reasonable health plan.

If you have any closing comments, you may comments. Otherwise, we will close the hearing.

Dr. DAVIS. Just to stress that all of the options I laid out are not first dollar. They all have at least a $200 Part B deductible.

Chairwoman JOHNSON. Oh, yes. I am sorry. I forgot that. I was glad to hear that.

Dr. DAVIS. A Part B deductible of $200, which is the typical employer plan, but I think the idea of charging a $2,000 deductible for beneficiaries, two-thirds of whom are either very sick and paying an awful lot of money already or have very modest incomes below--

Chairwoman JOHNSON. But you could not do it outright.

Dr. DAVIS. Twenty thousand dollars is just not an affordable kind of benefit package.

Chairwoman JOHNSON. What I guess I am suggesting is if you think of what are currently paid as "premiums," as instead a kind of savings account, that if you did not use it all, you could roll it over for future expenses, we need some creative thinking, and that would functionally be a higher deductible, but it would be paid out like a premium into a savings account.

Anyway, we will talk about these ideas, and I hope you will all think about them because we do not really have the ideas that we need yet, and I hope you will be a part of generating them. I think the old way of linear thinking, sort of using the old employer model, is for this population not very useful because the costs are so extraordinarily variable and we are insuring people now, so very many years, with varying different means and capacities to participate in the costs themselves, and also with an urgency to keep in the market a variety of solutions, the employer solution, the choice solution, as well as a decent fee-for-service plan.

I hope you will draw from this hearing that we are really at the beginning of the road, and we are really not toward the end.

Thank you.

[Whereupon, at 3:37 p.m., the hearing was adjourned.]
[Submission for the record follows:]