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Statement of
the Hon. Bobby P. Jindal,
Assistant Secretary for Planning and Evaluation,
Department of Health and Human Services
Testimony before the Subcommittee on Health
of the House Committee on Energy and Commerce
Hearing on
Medicare Modernization: Examining the Federal Employees
Health Benefit Program as a Model for Seniors
March 20, 2002

Chairman Bilirakis, Representative Brown, distinguished Subcommittee members, thank you for inviting me to appear before the Committee today. I am delighted to have the opportunity to discuss the Administration’s goal of giving Medicare beneficiaries reliable and attractive health plan options – and the lessons that can be drawn from the Federal Employees Health Benefits Program (FEHBP) about how to do so. We believe it is critical for seniors to have these options, in addition to the option of staying in today’s fee-for-service Medicare plan or choosing a fee-for-service plan with an improved benefit package. About 5 million seniors, including many with serious health problems, choose to enroll in a private plan today – and for good reasons. Through these plans Medicare beneficiaries can obtain drug coverage, better preventive care, innovative disease management programs and other benefits even as they lower their out-of-pocket costs.

As the members of this committee know all too well, however, millions of Medicare beneficiaries have only one health plan available to them – the traditional fee-for-service plan – and most seniors are given only one or two other options. And in recent years, flaws in the payment system for Medicare’s private plans have forced many of these plans to reduce their benefits or service areas or withdraw from the program entirely. While the benefits offered by the plans that remain still provide a better deal for many seniors than fee-for-service Medicare plus an increasingly costly Medigap policy, millions of seniors who prefer private plans have been made worse off as a result of these recent changes. And without corrective legislation this situation will only get worse – just at the time when rapid advances in care will make it even more important for seniors to have these options.

By contrast, Members of Congress, Administration officials, and all other Federal employees have long been able to choose from a wide variety of health plans, including not just HMOs but more flexible Preferred Provider Organizations and Point-of-Service plans as well. This system allows each participant to choose the plan that best meets their health needs and has given them access to innovative benefits as well as options for reducing their premiums and health costs. To quote the President, "Medicare beneficiaries should have the same kind of reliable coverage options available to all Federal employees throughout the country – a system that has been proven to provide one of the highest levels of satisfaction of any health care program." Of course, Medicare’s failure to provide America’s seniors with reliable health care options is just one of the ways in which the program has lagged behind. That is why the Administration developed a framework for strengthening Medicare to address the many threats to its ability to give seniors the health security they need, now and into the future.

At the same time, the President’s budget recognizes that it will take several years to implement the comprehensive improvements that Medicare needs, including a prescription drug benefit and a more equitable payment system for private plans. Therefore the Budget also proposes urgently needed steps that should be incorporated into Medicare legislation in order to stabilize the Medicare+Choice program. These proposals would modify the Medicare+Choice payment formula to better reflect actual healthcare cost increases, allocate additional resources in 2003 to counties that have received only minimum updates, and provide incentive payments for new types of plans to participate in Medicare+Choice, including PPOs. Together these augmented payments would address the problem of persistently low payment updates to most Medicare+Choice plans, making more plan choices available and improving benefits for millions of seniors. Because these proposals would allow many plans to provide or at least maintain drug coverage in their benefit package, they also provide another means of giving seniors prompt help with their drug costs – so that they do not have to wait for the full implementation of a drug benefit. But before I provide additional details about these short-term proposals I would like to explain how the Administration sees FEHBP as a useful example for Medicare in providing reliable access to the kind of innovative health benefits that so many seniors want and deserve.

Providing Reliable Health Insurance Options for Seniors

For more than 36 years, Medicare has been immensely successful in helping America’s seniors achieve the promise of secure access to needed health care. During that time, medical practice has improved dramatically, but the Medicare benefit package and delivery system have not kept pace. Medicare’s lack of prescription drug coverage is only one example of the ways in which the program has become outdated. Medicare has also lagged behind the private sector in providing reliable health insurance benefit options for beneficiaries that best meet the beneficiaries’ own circumstances and preferences. Like the Federal government, many state governments and most large private employers help their employees get the care that is best suited to their needs by offering them several health care plans, along with unbiased and useful information that helps them choose the best one. But Medicare has failed to provide America’s seniors with the same kind of reliable health care options that every Federal employee has received for decades. For many beneficiaries, particularly those in rural areas, Medicare offers only one insurance plan – it is strictly one-size-fits-all. Previous legislation to address this problem, including the establishment of the Medicare+Choice program, has not had the intended effect of providing more reliable health insurance options for Medicare beneficiaries.

The effects of Medicare’s current shortcomings can be seen very clearly here in our Nation’s capital (and in the figure below). Those of us who are Federal employees living in Washington, DC, have eleven different health plans to choose from, including a variety of fee-for-service plans and health maintenance organizations (HMOs). But our neighbors with Medicare coverage have only two choices – the traditional fee-for-service plan and a single HMO.


(The following is a text description of the above chart: The title of the figure is "FEDERAL EMPLOYEE PROGRAM PROVIDES MORE OPTIONS" The sub-heading is "NUMBER OF HEALTH PLAN OPTIONS IN WASHIGTON, DC" The figure shows the number of health plans available in Medicare and in the Federal Employee Health Benefits Program (FEHBP) for an eligible individual living in Washington, DC. A bar chart shows the number of plans available in each program that are (1) Fee-for-Service plans or Preferred Provider Organizations (PPOs) and (2) Health Maintenance Organizations (HMOs).
In Medicare there are a total of two health plans available in Washington, DC: 1 fee-for-service plan (the traditional Medicare program) and one HMO.
In FEHBP there are a total of eleven health plans available: 7 fee-for-service plans and 4 HMOs.)

This pattern occurs throughout the country, in urban and rural areas alike. Park Rangers living in the most remote national forests, and postal workers in every neighborhood, have at least seven plan choices. Overall, FEHBP provides health insurance coverage to 9 million workers and their families through contracts with almost 180 insurers and health plans.

Private plans like those offered to Federal employees have long been the choice of millions of Medicare beneficiaries because these plans allow beneficiaries to receive more up-to-date benefits than those available under traditional Medicare. Private plans will be the preferred option for many seniors for several reasons:

  • Private plans often have provided innovative new health benefits – including preventive care, prescription drug coverage, and dental services – without having to wait for an act of Congress. Private plans also invented state-of-the-art coordinated care for the many Medicare beneficiaries who have multiple or chronic health problems.
  • Private plan options allow seniors to reduce or eliminate their co-payments and deductibles so that their out-of-pocket payments are manageable – without having to purchase a supplemental insurance policy that provide expensive "first dollar" coverage.
  • Private plan options give seniors more power. If they are not happy with the service they are receiving, they can switch to a different plan. Competition is the best way to make bureaucracies and health plans responsive – by giving customers the freedom to choose. Medicare beneficiaries should have the same options as working Americans.

For these reasons the President’s framework for strengthening Medicare includes the principle that Medicare’s coverage should be improved to give beneficiaries the same kind of reliable health care options and access to innovative benefits that all Federal employees and many other Americans enjoy. As in the Federal employees’ program and other successful programs:

  • Plans should be allowed to bid to provide Medicare’s required benefits at a competitive price, and beneficiaries who elect a less costly option should be able to keep most of the savings – so that a beneficiary may pay no premium at all.
  • Medicare’s payment system should create a level playing field for all plans in areas where private plans are paid less today and should continue to encourage private plans to participate in areas where Medicare provides few choices.
  • The improved choice system should give beneficiaries useful and timely comparative information on the quality and total cost of all of their health care coverage options. Administrative burdens on private plans should be reduced while protecting patients’ rights to allow good insurance plans to focus on providing reliable, high-quality service for Medicare beneficiaries.
  • In areas where a significant share of seniors choose to get their benefits through private plans, the government’s share of Medicare costs should eventually reflect the average cost of providing Medicare’s required benefits in the private plans as well as the government plan. Low-income seniors should continue to receive more comprehensive support for their premiums and health care costs.

At the same time, many Medicare beneficiaries will prefer to stay in the government-run, fee-for-service Medicare plan. The President’s framework preserves the option of staying in the existing plan, with no changes, for seniors who prefer what they have now. It also provides an improved government plan option with better preventive coverage, better protection against the high costs of serious illnesses, and more affordable Medigap coverage.

Strengthening Medicare+Choice Now

Clearly, a comprehensive set of improvements to Medicare will take time to implement. Such improvements must include giving all seniors the option of subsidized prescription drug coverage. They must include giving all beneficiaries better options to reduce their costs and obtain better benefits in a private plan. But because so many beneficiaries value the benefits they obtain through Medicare+Choice – and because it is so important to retain these options for the future so that seniors have access to the valuable and innovative new benefits that private plans can provide – we need to take steps now to encourage private plans to remain in Medicare until the new payment system is phased in.

Medicare+Choice has enabled us to take advantage of private sector expertise to give Medicare beneficiaries more services for their premiums, often with lower cost sharing and more benefits than are available under traditional Medicare. It is important to recognize that these plans provide many benefits that are valuable to seniors with serious and chronic health conditions. For example:

  • A Medicare+Choice plan in Boston instituted a comprehensive disease management program for its enrollees with diabetes. The result has been significant increases in the share of enrollees who received annual retinal eye exams and are monitored for diabetic nephropathy and substantial improvements in the management of their Hemoglobin and cholesterol levels.
  • A Medicare+Choice plan in Florida instituted a comprehensive disease management program to monitor, facilitate, and coordinate care for enrollees stricken with cancer. As a result, the number of acute hospital days per cancer case dropped by about 15% over two years and the share of inpatient admissions for complications with cancer has declined by 10 percent.
  • Research has shown that individuals who receive after-care following hospital stays for mental illness are more likely to be compliant with their treatment regimens and less likely to be readmitted to the hospital. One Medicare+Choice plan in New York instituted a case management program for those hospitalized for mental health disorders and nearly doubled the share of its enrollees who received follow-up care within 7 days of their hospital discharge.
  • A Medicare+Choice plan in California established a successful outreach program to increase influenza vaccination rates among their elderly and chronically ill beneficiaries in order to reduce mortality and morbidity among these at-risk populations.

As you know, the Medicare+Choice program has changed significantly in the last several years. Hundreds of plans have left the program or reduced their service areas affecting hundreds of thousands of beneficiaries. In 2002, about 60 percent of all Medicare beneficiaries have access to a Medicare+Choice option, compared to 74 percent in 1998. This year, more than 500,000 beneficiaries were impacted by organizations either withdrawing from the program or reducing their service areas. Plans with both zero premiums and no significant beneficiary cost sharing have largely disappeared. In addition, plans are less likely to offer drug coverage in their basic plan and even when they do that coverage has become less generous. As a result, the share of enrollees with drug coverage in their basic plan declined from 84 percent in 1999 to 69 percent in 2001. This is because the annual increases in Medicare+Choice payments in the counties where most enrollees live have failed to reflect rising health care costs. Unfortunately, as a result, plans that wish to stay in the program are left with two options: reducing supplemental benefits or increasing beneficiary cost sharing.

In 2001, the Administration took a number of actions to reduce administrative burden on Medicare+Choice plans so that they could focus on providing care to their enrollees. Secretary Thompson and Administrator Scully have testified about these administrative actions before this committee and the other committees of jurisdiction. The Secretary’s regulatory reform initiative will also address the regulatory burden on Medicare+Choice plans. As the Secretary asked when announcing this initiative, "At the very time when we are trying to attract more managed care plans to offer their services to Medicare beneficiaries, do we really need 854 pages of regulations standing in the middle of the front door to the program?" Here the contrast with FEHBP – where high levels of enrollee satisfaction have been achieved by contracting with health plans to provide good options and using regulations only to the extent necessary – is also striking.

But more must be done and that will require legislation. Despite our best efforts to slow the number of plan withdrawals through administrative actions, it is apparent that additional improvements need to be made to the Medicare+Choice program to encourage more plan participation and greater beneficiary access to Medicare options. Simply put, the Medicare+Choice payment system must be more responsive to the health care marketplace, so that the program can meet beneficiary needs. We support a fairer payment system for private plans in Medicare because the current payment system is causing many seniors to lose access to valuable benefits – and if left uncorrected this problem will only get worse just as the need to keep up with rapid advances in medical benefits is growing.

Congress has acted to increase funding for Medicare+Choice through legislation in recent years, but much of the increase was targeted to so-called "floor" counties. As a result, these counties have experienced cumulative average payment increases of 50 percent over the last five years. Specifically, the floor payment amount, which is the payment received in many rural areas, increased from $415 to $475 in 2001 and $500 in 2002.

However, payment increases for private plans have failed to stay anywhere close to medical cost increases in many parts of the country – the so-called "non-floor" counties that have accounted for the vast majority of Medicare+Choice enrollment. Between 1998 and 2002, private plan payments in many of these areas increased by just 11.5 percent while Medicare fee-for-service payments (government plan costs) went up by about 17 percent nationwide – about 50 percent faster. This is the reason many plans cite for having to cut benefits, raise copayments, and even pull out of the program-creating serious problems for the beneficiaries who depend on them.

This year, the President’s budget focuses on increasing payments in these "non-floor" counties. Under the budget proposal:

  • For 2003, M+C payments would be increased by 6.5 percent in counties that received the minimum update in 2002 and by overall Medicare growth minus 0.5 percent in "floor" counties.
  • For 2004 and 2005, the minimum update and floor rates would be increased by overall Medicare growth minus 0.5 percent. The payment would be the greater of these rates or a blended rate.
  • Reforms to payments for private plans for 2006 and beyond would be part of the comprehensive improvements in Medicare envisioned in the President’s framework.

The budget also proposes to give bonus payments to coordinated care plans that are the first of their type (i.e. HMO or PPO) to enter a service area. During their first year in a new service area, eligible plans would receive a 5 percent bonus on top of their M+C per member per month payment. The bonus would phase out 1 percent per year over the plan’s first five years of operation. This proposal would expand the number of health plan options available to Medicare+Choice enrollees by broadening the variety of plans that participate in the Medicare+Choice program to include the types that beneficiaries want, and are available to Federal employees. For example, this proposal would give preferred provider organizations (PPOs) an incentive to enter service areas that already have a Medicare+Choice HMO.

We believe that the investments proposed in this budget will encourage new plans to enter Medicare+Choice and will improve the coverage options available to millions of beneficiaries. Even with all the problems caused in recent years by the current payment system, there are still over 5 million Medicare beneficiaries enrolled in private plans – so for many seniors, private plans are the best option. Indicators of care quality and enrollee satisfaction in these plans are high. And even after the recent cutbacks in benefits, they can still be a better deal for seniors than enrolling in traditional Medicare and buying an expensive supplemental policy to cover the large benefit gaps.


The President remains fully committed to working with Congress to pass legislation this year that reflects his framework for strengthening Medicare. He also believes that legislation should include several immediate steps to help seniors while longer-term improvements are being implemented – so that Medicare legislation can provide help to seniors who need help now, not just a few years down the road. I look forward to answering your questions and to working with you to put into place these important enhancements for Medicare beneficiaries.

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Last revised: March 21, 2002