Mr. Chairman, thank you for your invitation to the
Administration to testify at this hearing
today. We very much appreciate the opportunity to follow up to
the President's statement on
Tuesday regarding the Medicare savings in his balanced budget
We win, of course give you and your staff a full
briefing on the details of the budget after it
is transmitted to the Congress on February 6. In the meantime, I
hope you will understand that we
may have to defer answering some of your more detailed questions
until that time.
The President believes we have a unique opportunity to
balance the budget if we work
together on a bipartisan basis. He announced the broad outlines
of his Medicare policy a few days
ago because he wanted to seize the moment to work together.
The President articulated three principles underlying
the Medicare policy that will be
presented in his budget. First, it will include structural
reforms that will make the program work
more efficiently and take advantage of changes in the health care
marketplace. Second, it will
meet his goal of extending the solvency of the Medicare Part A
Trust Fund for ten years. Third,
because the Medicare policy will save $138 billion over six
years, it will meet the Congress
halfway and bring us closer to bipartisan agreement on a balanced
Today I would like to provide an overview of the
policies in the Administration's Medicare
package. Because both the President and the Congress have
committed to balancing the budget by
2002 -- five years from now -- I will describe the budget
policies in terms of their five-year
savings. Since most observers are familiar with the six-year
savings numbers from the budget
debate last year, I will present six-year savings figures as
As I said earlier, the President's plan saves $138
billion from the Medicare program over
six years; the equivalent five-year estimate is $ 1 00 billion.
The savings total is net of proposed
benefit increases and does not reflect the reallocation of
certain home health care expenditures
from Part A to Part B.
The 1998 budget preserves and improves Medicare,
extending the solvency of the Part A
Hospital Insurance Trust Fund into 2007. This budget, like the
President's previous two budgets,
gives beneficiaries more choices among private health plans,
makes Medicare more efficient and
responsive to beneficiary needs, and reduces provider payments.
The President's 1998 budget builds on his 1997 budget:
Last year, we wanted to extend the solvency of the Part A Trust
Fund by 10 years.
According to the Chief Actuary at the Health Care Financing
Medicare policy in the budget will extend the solvency of the
Trust Fund to 2007.
Last year, we wanted to restrain provider payments at a level
that would continue to ensure the
quality of and access to care. This year, we believe that we can
restrict provider payments --
particularly in the areas of managed care and hospitals -- more
than we did last year, without
harming quality and access.
Last year, we wanted to protect beneficiaries from major new
out-of-pocket expenditures and
allow them to take advantage of advances in preventive care.
This year, we continue to adhere to
this principle by keeping the Part B premium at 25 percent of
program costs and by proposing new
preventive health benefits.
The Medicare policy in our 1998 budget is similar in
many ways to our policy last year.
However, based on our most current analysis, there are several
policy changes of note, in
particular with regard to payment rates for managed care,
outpatient prospective payment, and
competitive bidding for laboratory services and durable medical
There is substantial evidence that Medicare pays too
much for managed care plans and, in
fact, loses money for every beneficiary who opts for managed
care. The new policy proposals will
reduce reimbursements to managed care plans by about $34 billion
over five years ($46 .billion
over six years). Savings will come from three sources:
- The 1998 budget will propose to reduce Medicare
reimbursement to managed care plans
from its current rate of 95 percent of fee-for-service rates to
90 percent. The reduction does not
start until 2000, and it accounts for $6 billion in savings over
five years (about $8 billion over six
- There will be indirect savings of $18 billion over five
years (and $25 billion over six years)
attributable to cuts in the traditional fee-for-service side of
the program. Because HMO payments
are based on a percentage of fee-for-service payments, HMO
payments are reduced as a function
of our proposed cuts in the fee-for-service side of the program.
- Finally, the policy carves out the medical education and
uncompensated care payments
from the HMO reimbursement formula. These funds will be paid
directly to academic health
centers and to HMOs that run their own residency programs. This
aspect of the plan would reduce
direct managed care payments by $10 billion over five years (and
$13 billion over six years).
The proposals in the 1998 budget relating to hospitals
will reduce the annual inflation
increase, or "update," for hospitals; reduce payments for
hospital capital; reform payments for
graduate medical education; and implement prospective payment for
outpatient departments while
protecting beneficiaries from increasing charges for those
services. The budget will propose to
achieve $33 billion in net savings over five years ($46 billion
over six years).
The budget will also propose to establish new provider
service networks (PSNs), which
will allow hospitals and other providers to establish their own
health care plans to compete with
cur-rent Medicare HMOs.
As I mentioned earlier, the budget will establish a new
pool of funding, about $1 0 billion
over five years, for direct payment to academic health centers
and eligible HMOs. These
payments will compensate academic health centers for the costs of
medical education and care for
indigent patients. We propose establishing this new pool at the
same time we remove medical
education and uncompensated care costs from the formula we use to
pay HMOs. The net hospital
savings of $33 billion reflect these payments to teaching
With regard to physicians, the budget will propose to
save about $7 billion over five years
(about $ 1 0 billion over six years) through a reduction in
physician updates. This reduction is
relatively small because Medicare has been fairly effective in
constraining growth in
reimbursement to physicians.
Skilled Nursing Facilities
With regard to skilled nursing facilities, the budget
will propose to save about $7 billion
over five years ($9 billion over six years) through the
establishment of a prospective payment
system. This benefit has been growing at double-digit rates, and
there is a consensus that moving
to capitated rates will help contain costs.
Fraud and Abuse
The budget proposes strong fraud and abuse provisions,
including measures to eliminate
fraud in home health care -- such as by ensuring that home health
agencies are reimbursed based
on the location of the service, not the billing office. The
budget also would repeal several
provisions in last year's health reform law that weakened
anti-fraud enforcement (e.g., we propose
repealing the advisory opinions). The anti-fraud initiatives in
the budget would save $9 billion
over five years ($12 billion over six years).
The 1998 budget will propose a number of changes in law
that affect beneficiaries,
including new benefits, Medigap protections, and proposals to
increase beneficiary choice.
First, the 1998 budget will propose extending current
law that sets the Part B premium at
25 percent of program costs. This policy achieves $10 billion in
savings over five years ($18
billion over six years). Without this policy, the Part B premium
would drop below 25 percent after
Second, the budget will propose new preventive health
care benefits to improve the health
of senior citizens and reduce the incidence of disease. The plan
covers colorectal screening,
diabetes management, and annual mammograms without copayments.
It also increases
reimbursement rates for certain immunizations to ensure that
seniors are protected from
pneumonia, influenza, and hepatitis. The budget will also
propose a new Alzheimer's respite
benefit starting in 1998 to assist families of Medicare
beneficiaries with Alzheimer's diseases.
Total beneficiary investments in the budget will cost $13 billion
over five years ($22 billion over
Third, because of a flaw in reimbursement methodology,
beneficiaries now in effect
contribute a 50 percent copayment for outpatient visits. The
1998 budget will propose to prevent
further increases in copayments and reduce the copayment to 20
percent over the next decade.
Fourth, the budget will propose new Medigap protections
(such as new open enrollment
requirements and prohibitions against the use of pre-existing
condition exclusions) to increase the
security of Medicare beneficiaries who wish to opt for managed
care but fear they will be unable
to obtain Medigap insurance if they decide to return to
fee-for-service plans. I understand that this
provision is consistent with bipartisan legislation pending
Last, the budget will propose new private plan choices
-- through new PPO and Provider
Service Network choices -- for beneficiaries.
The 1998 budget will propose a number of structural
reforms to bring the Medicare
program into the 21st century:
- We will propose establishing new private health Plan
options (such as PPOs and
Provider Service Networks) for the program.
- We will propose annual open enrollment for all
Medicare plans -- with an
independent third-party responsible for informing beneficiaries
of their options and enrolling those
interested in the managed care plan of their choice.
- We will propose market-oriented purchasing for
Medicare, including the new
prospective payment systems for home health care, nursing home
care, and outpatient
hospital services. We will also propose competitive bidding
authority and the use of
centers of excellence to improve quality and cut back on costs.
- We will propose adding new Medigap protections,
such as prohibiting pre-existing
condition exclusions and requiring annual open enrollments that
make it possible for beneficiaries
to switch back from a managed care plan to traditional Medicare
without the fear that they will be
unable to obtain affordable Medigap insurance.
Home health care has become one of the fastest growing
components of the Medicare
program, growing at double digit rates. The home health program
was originally designed as an
acute care service for beneficiaries who had been hospitalized.
However, over time, home health
care has increasingly become a chronic care benefit not linked to
The budget will propose to establish a new prospective
payment system for home health
and a number of program integrity initiatives. Together, these
proposals will save $14 billion over
five years ($18 billion over six years), and are included in our
total Medicare savings estimate of
$100 billion over five years (and $138 billion over six years).
The President's proposal will also restore the original
split of home health care payments
between Parts A and B of Medicare. The first 100 home health
visits following a 3-day
hospitalization would be reimbursed by Part A. All other visits -
including those not following
hospitalization -- would be reimbursed by Part B. This is the
same policy in the President's 1997
budget. It is also similar to a provision in a Medicare reform
bill the House passed last year.
There has been a great deal of public discussion about
the home health reallocation
recently, so I want to be very clear that this proposal is not
scored as yielding budget
The $100 billion of five-year savings and the $138 billion of
six-year savings includes no
contribution from the home health reallocation. In addition,
beneficiaries will not be affected by
this restoration of the original policy. This policy avoids the
need for excessive reductions in
payments to hospitals, physicians, and other health care
providers while helping to extend the
solvency of the Part A Trust Fund.
Part A Trust Fund Solvency
If we do not make any changes to the Part A program, the
Part A Trust Fund will become
insolvent by early in calendar year 2001. Clearly, we cannot
allow this to happen. Therefore, the
1998 budget has real Part A savings, as well as structural
reforms, that extend the solvency of the
Trust Fund to 2007:
We reduce the growth of payments to hospitals.
We reform the payment system for home health agencies and skilled
nursing facilities to increase
incentives for these providers to contain costs.
We also reduce payments to HMOs from 95 percent to 90 percent of
fee-for-service costs and
reduce the growth in HMO payment rates.
The Medicare policies in the 1998 budget are consistent
with our principles last year: to
extend the solvency of the trust fund, to reduce provider
payments without damaging quality and
access, and to protect beneficiaries. The savings we have added
to this budget -- in managed care,
outpatient payments, and competitive bidding -- bridge the gap
between the Congress and the
Administration that remained at the end of the balanced budget
negotiations last year.
We believe these Medicare proposals are the most
appropriate ones to extend the solvency
of the trust fund, protect Medicare, and reduce the deficit. We
look forward to working with the
Congress in the spirit of bipartisanship to make sure that we can
keep Medicare's promise to
current and future generations and to balance the budget by 2002.