Opening Statement of the Hon. Nancy L. Johnson, a Representative in Congress from the State of Connecticut,
and Chairwoman, Subcommittee on Health

Hearing on the Strengthening Medicare:  Modernizing Beneficiary Cost Sharing

May 9, 2001

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 usefulness of the current definition of Medicare solvency, we brought forth new information to lay the ground work for a prescription drug benefit, and we heard about the importance of the Medicare+Choice program to beneficiaries and evaluated ideas to strengthen that program. Today, we turn to modernizing the fee-for-service 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 which does not reflect the current delivery of health care.

For example, the program has two different deductibles - a $792 deductible for Part A and a $100 deductible for Part B. This means that when a beneficiary is hospitalized for an in-patient 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 two months, the beneficiary must then pay $198 coinsurance per day for days 61 through 90. This simply makes no sense. At the same time, the $100 Part B deductible for out-patient 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. 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 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, eight 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 37.2 percent for those with drug coverage. Modernizing beneficiary cost-sharing must include appropriate changes to Medigap.

A critical element of strengthening Medicare is modernizing the fee-for-service program's byzantine cost-sharing structure. No one designing a seniors' 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 for our experience and work to ensure a more consistent and understandable system for the future.