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Testimony on Strengthening the Medicare Trust Fund by The Honorable Donna E. Shalala
U.S. Department of Health and Human Services

Before the House Ways and Means Committee
February 12, 1997

Mr. Chairman and members of the committee: Thank you for giving me the opportunity to testify today, about the President's Fiscal Year 1998 Budget proposal. We in the Administration look forward to working closely with you as we move toward our shared goals of strengthening the Medicare trust fund and balancing the budget.

Someone once described America as "the only country deliberately founded on a good idea."

That good idea is "We the people," and it has emboldened our nation to face -- and overcome --great challenges with courage and unity.

In the 1940s, we faced a broken Europe, but we summoned the will to fight and win -- and saved the world from tyranny.

In the 50s, we faced the terrible scourge of polio. But children contributed their dimes, and America's best scientists dedicated their lives to finding a vaccine. And we found one.

And, in the 1960s, we faced a Soviet Union that had taken the lead in the race for space. But, President Kennedy issued a challenge to land an American on the moon by the end of the decade. We did, and no country has done it since.

What do all of these triumphs have in common? They came during times of great social and political change. But with a deep sense of urgency, Americans put aside partisan differences, answered the call to unity, and achieved a critical national goal. Today, we must do the same.

Because today, we face another great challenge: At a time when we have fewer resources, a population that is rapidly aging, and a deficit that while much improved, still plagues us, we must come together again: This time to balance the budget and truly reform Medicare, Medicaid, and welfare, while still keeping our promises to the citizens we serve.


For more than thirty years, Medicare has provided a blanket of health security for older Americans and people with disabilities. It has helped lift a generation of senior citizens out of poverty and into the middle class. It has helped change what it means to be old in America; what it means to be sick in America; what it means to be disabled in America. And it has often served as a fault line between a life of comfort and good health and a life of struggle and illness.

The gift that Medicare has given to those who came before us must be preserved for those who come after us -- for our children and our grandchildren, for every generation. That is our moral responsibility.

But you and I know that Medicare now faces several short-term and a long-term financing challenges that demand action. For nearly four years, we have been unable to come to a consensus on the best way to preserve Medicare and improve it for the future. The President has made it clear that he wants to work with the Congress to make this the year of bipartisan agreement on this vital program.

In this budget, the President has reached out to the congressional majority by offering a plan to meet them halfway. His Medicare proposals will extend the life of the Hospital Insurance Trust Fund into 2007, ten years from today. I have with me today a letter from the independent chief actuary of the Medicare program that verifies that fact. I will be happy to submit it for the record.

The President's plan contributes $100 billion to the five-year balanced budget, which corresponds to $138 billion over six years.

And we do that by maintaining a system that guarantees access to a defined set of services rather than creating a defined contribution per beneficiary.

These proposals are made in good faith and are based on sound policy. They make sense for both the Medicare program and its beneficiaries. Our savings are scoreable. I ask for your careful consideration of our proposals, and for your partnership in enacting them.

But Medicare reform is not and cannot be simply an exercise in number crunching. The actions we take this year to preserve the Medicare trust fund also must prepare Medicare for the future. Not many of us would drive cross country in a car that's more than 30 years old. Likewise, we can't move into the next century with a health insurance program built in 1965. That's why to preserve Medicare, we must modernize it. This modernization requires us to do six things:

  • First, we must make Medicare a more prudent purchaser of health care services.

  • Second, we must add new choices to compete with today's private market.

  • Third, we must strengthen our rural health care system.

  • Fourth, we must protect beneficiaries, by ensuring that beneficiaries receive higher quality health care.

  • Fifth, we must continue to root out waste, fraud, and abuse so that we spend our hard-earned tax dollars wisely and effectively.

  • And sixth, we must add new cost effective benefits to reflect development in today's science.
Prudent Purchasing

Mr. Chairman, it is imperative that Medicare -- which is the largest purchaser of health care services in our nation -- be a more prudent purchaser. Unfortunately, in too many cases, because of limitations in the law, Medicare is now paying the highest price in the market for certain drugs, lab services and durable medical equipment when, given the volume of beneficiaries, we should be paying one of the lowest. From managed care premiums to medical devices, the reforms we propose will make sure that Medicare isn't 'I while everyone else is paying wholesale.

These proposals are sound health policy and they require a shared burden. They will result in a slower rate of growth in Medicare spending and ensure that Medicare is paying a competitive price for the services it buys. The savings that these proposals generate are spread across all providers of health care and are focused, as they should be, on those areas where growth is the greatest.

Managed Care. Experts agree that Medicare's payment methodology for managed care, which was created in 1982, results in serious overpayments for services. For example, under contract to HCFA, Mathematica Policy Research, came to such a conclusion with its 1993 review of the Medicare Risk Program. Both the Physician Payment Review Commission and HCFA studies indicate that Medicare should be paying managed care plans at a rate between 88 and 90 percent of fee-for-service costs. At the same time, however, payments to many smaller, rural plans are too low and are failing to attract much market interest.

The President's budget includes reforms to move us to a better, more competitive system of paying for managed care. Through our Medicare Choices demonstration, we are working on risk adjusters to HMO payments to counter selection bias. We expect to have a proposal for a new risk adjusted payment methodology as early as 1999, with phase-in of new payments beginning as early as 2001.

We recommend three interim and important changes in Medicare payments for managed care plans. First, we propose to carve out from the payment those funds that are intended to cover the cost of direct and indirect graduate medical education and payments to disproportionate share hospitals. We will pay these funds directly to hospitals on behalf of managed care enrollees.

Second, we will gradually reduce the regional variation in payments to managed care plans and create a payment floor for plans in rural counties to encourage enrollment in managed care plans.

And, third , we will reduce the Medicare payment from 95 percent of the average adjusted per capita cost or AAPCC to 90 percent. However, to give plans a sufficient amount of time to adjust to these new payment levels, we would not begin this policy until 2000.

Hospital payments. We propose a series of Medicare hospital payment changes to safeguard the program and to reflect market changes. Under the President's budget, the hospital payment update will be reduced by one percentage point every year from fiscal year 1998 through 2002 to reflect increases in hospital productivity and efficiency.

The Prospective Payment Assessment Commission (ProPAC), created by Congress to offer advice on policies affecting Medicare payments to hospitals and other facilities, recently announced preliminary data showing that the majority of the nation's hospitals have record-setting Medicare margins. ProPAC believes that these margins are evidence that hospitals have become more efficient. Accordingly, ProPAC recommends that hospitals receive no update in their Medicare payments in FY 1998; this would be equivalent to "market basket - 2.8 percent."

In light of its other hospital savings provisions, the Administration does not propose the deeper update reduction as recommended by ProPAC. Instead, the Administration spreads the hospital reductions across a number of different areas of hospital payment. When viewed as a whole, the Administration's hospital proposals balance the need to contain Medicare costs with ensuring access to quality care.

Home health care. Home health care is one of the fastest growing components of Medicare, with a projected average annual growth rate of 10.6 percent over the period FY 1997-2002. The average number of home health visits per user increased over 40 percent between FY 1992 and FY 1997. The average payment per visit also has increased, rising from $57 per visit in FY 1992 to an estimated $68 per visit by FY 1997.

We know that this growth has its roots in changes in medical practices and technology, in the expansion of the benefit, and in our current reimbursement system, which can contribute to overpayment and abusive practices. And we know that we must reduce the rate of growth in Medicare home health spending and keep it under control. And, that's what our reforms will help us do.

We will immediately revise our cost limits to establish a set of interim limits that will curb excessive spending and institute a new per-beneficiary payment limit for each home health agency.

We will implement a new prospective payment system for home health services in 1999. This system, which has been recommended by experts to control spending, will reduce incentives for overutilization.

We will eliminate periodic interim payments for home health agencies, which were originally established as an incentive for new agencies to serve Medicare patients. With 100 new agencies joining Medicare each month, this incentive clearly is no longer necessary.

In addition, we will pay for home health services based on where the service is delivered. Frankly, many agencies are taking advantage of a loophole by locating their billing offices in expensive urban areas to take advantage of higher prevailing payments, regardless of where services are actually rendered. We will close that loophole.

Along with our strategy to control home health spending, we propose to reassign payment for home health services that are not associated with post-hospital recovery from Part A to Part B. This reallocation is not counted in the overall $100 billion Medicare savings number that we submitted to the Congress. We would limit Part A home health coverage to the first I 00 visits following a 3-day hospital stay, just as this part of the program covers 100 days of skilled nursing care following hospitalization. But, visits beyond 100, and those not following a 3-day hospital stay, would be paid under Part B, along with other outpatient services.

This return of non-post-hospital visits to Part B -- Medicare policy prior to 1980 -- makes the home health benefit consistent with the original intent of the Medicare statute and its division of services between Part A and Part B. It relieves the Part A trust fund of the responsibility for financing care that doesn't belong there, thereby significantly extending the life of the trust fund. And it achieves these goals without subjecting beneficiaries to increases in premiums and cost-sharing.

Beneficiary Centered Purchasing. To become a more prudent purchaser of other health services, our plan gives the Secretary payment authorities to secure better deals for Medicare and the citizens it serves. From setting payments based on competitive bidding to selectively paying centers of excellence a single rate for all services associated with a specific diagnosis, these -- and our other purchasing reforms -will help us economize, modernize, and create a Medicare program that will not only survive, but thrive, to serve every generation.

New Choices

When it comes to health care for older Americans -- or any Americans for that matter -- there should be no conflicts between choice and quality. We need both. We are proud of our record of increasing choice for Medicare beneficiaries while continuing to protect the quality of care. Since 1993 the number of beneficiaries in managed care has increased by 108 percent and is rising at a rate of 80,000 per month. Today, approximately 13 percent of our Medicare beneficiaries -- about 5 million -- are enrolled in managed care plans.

The President's budget continues this process by adding new choices to Medicare plans. We will include preferred provider organizations or PPOS, which offer patients a greater ability to choose their doctors and other providers. And we will offer beneficiaries the chance to enroll in provider sponsored organizations or PSOS, offered by hospitals and physicians under integrated arrangements that we hope will improve care and reduce cost.

At the same time, to promote real and informed choice among health plans, Medicare will establish coordinated annual open enrollment periods as well as additional enrollment opportunities to subscribe to managed care and Medigap plans.

To make sure that choice is real and that beneficiaries who choose managed care have an open door to go back to fee-for-service, if they so choose, we will prohibit Medigap insurers from imposing pre-existing condition waiting periods when beneficiaries initially enroll or any time they switch plans. In addition, Medicare will establish continuous Part B enrollment opportunities for beneficiaries.

Rural Health

The Administration continues to promote Medicare reforms that strengthen health care in rural America.

For example, our plan would expand the Rural Primary Care Hospital Program to all 50 states. It would update the payment for sole community hospitals, improve the rural referral center program, and reinstate the Medicare Dependent Hospital program to provide resources to those rural hospitals that need it most.

The reforms will create a national floor to better assure that managed care products can be offered in low payment areas, which are predominantly rural communities. In addition, the proposal includes a blended payment methodology, which combined with the national minimum floor, will dramatically reduce geographical variations in current payment rates.

Protect Beneficiaries

We believe we can balance the budget, preserve the Medicare Trust Fund and modernize Medicare for the 21st century, while still protecting our beneficiaries.

The fact is, more than three-fourths of seniors have incomes of $25.000 or less. We believe that balance billing limits must protect all beneficiaries, regardless of which Medicare coverage option they choose.

Our plan proposes Medigap reforms to assure portability, protect against preexisting condition limits, and provide equitable and affordable premium rates.

It keeps Part B premiums at 25 percent of program costs. This division of costs, first enacted in the Tax Equity and Fiscal Responsibility Act of 1982, has protected beneficiaries while ensuring that the cost of Part B is shared by those who use it. As noted, the plan creates an opportunity for continuous Medicare Part B enrollment.

For hospital outpatient services, it brings the patient co-insurance rate down from about 50 percent to the 20 percent charged for most other Part B services by 2007.

And, it ensures that managed care plans pay for emergency services when a "prudent layperson" would have reasonably believed they were necessary.

Quality Protection

We must also ensure that beneficiaries receive higher quality health care. We will institute a series of reforms to further improve the quality of care provided to all citizens who rely upon Medicare. We will adopt a new, integrated quality management system for Medicare and Medicaid. This will replace quality related requirements focusing on each provider entity individually. We will also collect and disclose more of our survey data on safety, quality of care, and program integrity so that citizens can have better comparative information on plans and providers. And we will replace the so-called 50-50 rule for managed care plans with more modem quality measures. Protecting and improving health, and increasing satisfaction with the care received are the goals of then program.

Fighting Fraud and Abuse

Modernizing Medicare for the 21st century also requires eliminating the fraud and abuse that robs our health care system and our taxpayers. Since I took office a little more than four years ago. I have made this a top priority by setting a policy of "zero tolerance" for health care fraud and abuse.

Just two years ago, the President and I unveiled a pilot project called "Operation Restore Trust" to target our antifraud efforts to fight fraud and abuse in 5 key states. We have significantly increased the resources of our Inspector General and have strengthened our payment reviews using technology to prevent fraud, and to detect it when it occurs.

And, it's paid off. We estimate that every dollars we invest in our anti-fraud effort yields $10 dollars in savings for the American people. In fact, just last month, Inspector General June Brown reported that "Labscam," her investigation of payment fraud by independent clinical labs, could net the Medicare program millions in recoveries and penalties.

We intend to maintain and intensify these efforts. I will be submitting to Congress a fraud and abuse bill that will enable us to strengthen the identification and enrollment procedure to ensure that only legitimate providers bill Medicare. The President's Budget includes provisions to prevent home health agencies from using a loophole in the current reimbursement system to bill a higher urban rate for service provided in rural areas. We will require insurers to reject insurance coverage so that Medicare does not pay inappropriately for beneficiaries covered by private insurance. We would repeal the anti-kickback exemption for managed care plans, and the requirement that we provide advisory opinions on the anti-kickback statutes enacted last year and scored by the Congressional Budget Office as a considerable cost to the Medicare program. And we propose to reinstate the requirement that providers use reasonable diligence when submitting accurate claims to Medicare. Finally, we will strengthen our ombudsman function in the States. building a cadre of elderly volunteers.

New Benefits

The Medicare benefit package has remained relatively unchanged since 1965. But our science has not. From decades of research, we know that preventive services not only can save money, but also can save lives. Now we're putting our money where our science is. I am very pleased by the bipartisan support for expansion of the Medicare benefit package. The President's plan will cover the following:

We expand the availability of annual mammograms for Medicare beneficiaries to eliminate economic barriers to mammography. We also will waive the Part B deductible and coinsurance for both screening and diagnostic mammograms.

To save lives, we want to provide annual screening to detect signs of colon cancer.

Because better management of diabetes leads to better health, we include monitoring of blood glucose levels and outpatient self-management training for diabetes.

To improve access to adult vaccinations and help seniors avoid serious and sometimes deadly illnesses, we would increase provider payments for vaccines against pneumonia, influenza, and hepatitis B and waive patient cost-sharing for the hepatitis B vaccine.

And, finally, to offer some relief for the families who are primary caregivers of a relative with Alzheimer's disease and other dementias, we would provide a new respite care benefit of 32 hours per beneficiary per year.


Now let me turn to welfare reform. When the President signed the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, he made it clear that this was the beginning -- not the end -- of welfare reform. He made it clear that we all have a responsibility to come together and make this law work -- especially for our children. And, he made it clear that this was an opportunity for us to create a welfare system that requires work, promotes parental responsibility, and protects children.

I'm proud of the progress we've made together. Before welfare reform became law, we gave 43 states the flexibility they need to test innovative welfare strategies. Paternity establishments have gone up 50 percent since 1992. In 1996, we collected a record of over $12 billion in child support payments. And the tough new provisions in the welfare law are projected to increase child support collections by an additional $24 billion over 10 years.

The result? Because of the intensity of our efforts and because of the strength of our economy, welfare rolls have gone down by 2.5 million since the beginning of President Clinton's first term -- the largest drop in history. Moving people from welfare to work, enabling them to support their families and maintain their independence -- that's the goal upon which all of us have always agreed.

We are committed to combining all of the leadership, talent and resources possible to implement the new welfare law. The effort to make welfare reform a success is one in which many departments and agencies -- SSA, the Departments of Treasury, Labor, Transportation, HUD, and others -- have joined together.

Let me briefly give you a progress report on our implementation of the new Temporary Assistance for Needy Families (TANF) program. Although states have until July 1997 to implement the TANF program, we have already given the green light to 35 states (as of 2/10/97) to begin their reforms. HHS has provided guidance indicating that States have flexibility in designing their TANF programs, but at the same time emphasizing the importance of moving families from welfare to work and ensuring that Federal costs do not increase due to the potential loss of child support collections.

At the Federal level, we are challenging States to transform the very culture of the system from a welfare program to a work program. We must launch a national effort in every State and every community to make sure there are jobs for people making the transition from welfare to work. So they can leave the welfare rolls, they must have opportunities not only to find jobs, but to keep them.

As I indicated earlier, the hallmark of this welfare law is the broad flexibility it gives states to design innovative reforms that address their unique challenges. We are confident that States will use this considerable new flexibility and the President's new initiatives to strengthen their focus on work as well.

We will be monitoring state performance and, pursuant to the statute, ranking them accordingly. We will be identifying and studying the high performers and the low performers. tracking child poverty, and providing an overall assessment of the legislation's impact on children and families.

We will look closely at how states comply with some key statutory requirements, including child support enforcement, work participation rates, maintenance of effort, and data reporting.

We also will assume major new responsibilities for compiling and disseminating information. As the number of options continues to grow, states will need better information about these options, and the Congress will need better information to assess how effectively federal funds are used.

I know that several members of Congress have suggested a wait-and-see approach to the new welfare system. They advise that state implementation should be carefully reviewed before undertaking major policy changes to the TANF program. Our Department has proposed a number of technical and conforming changes to the TANF program that I believe maintain the spirit and intent of its policies.

Our Administration believes that welfare reform has always been -- and must always remain -- a bipartisan issue. But, just as we came together to make work and responsibility the law of the land, we believe it is time to come together again to ensure that the centerpiece of welfare reform remains a real effort designed to find work for everyone who is able to work.

Creating these opportunities will take a commitment from business and labor, from religious organizations and communities, from officials at the federal, state, and local levels. And, it will take the bipartisan Congressional spirit that brought us this far -- and must continue to carry us down the road to success.

That is why the President's FY 98 budget contains funds to help States and cities create new jobs prepare individuals for them, and provide employers with incentives to create new job opportunities for long-term welfare recipients.

To help welfare recipients move from welfare to work, and to supplement TANF funds, the President proposes two new initiatives: A Welfare-to-Work Jobs Initiative to help States and cities create 'ob opportunities for the hardest-to-employ welfare recipients and a greatly enhanced Work Opportunities Tax Credit to provide powerful new private sector financial incentives to create jobs for long-term welfare recipients.

The Welfare-to-Work Jobs Initiative, which would be administered by the Department of Labor, would provide $3 billion in mandatory funding over three years for job placement and 'ob creation to move a million recipients off the welfare rolls by the year 2000. We will encourage States and cities to use voucher-like arrangements as they deploy these funds to empower individuals with the tools and choices to help them get jobs and keep them.

Under the enriched Work Opportunities Tax Credit for hiring long-term welfare recipients, employers could claim a tax credit of 50 percent of the first $10,000 in wages paid to these hires.

Another major focus for the Administration is to change parts of the welfare reform law that have nothing to do with welfare reform. When the President signed the welfare reform bill he made clear his disappointment with the harsh provisions in the bill relating to benefits to immigrants. The President stated:

"My Administration supports holding sponsors who bring immigrants into this country more responsible for their well-being. Legal immigrants and their children however, should not be penalized if they become disabled and require medical assistance through no fault of their own."

The President's FY 1998 budget makes good on his promise to correct provisions that were included to save money, and which burden States and punish children and the disabled who cannot work. Legal immigrants should have the same opportunities, and bear the same responsibilities, as other members of society. The welfare law denies most legal immigrants access to fundamental safety net program unless they become citizens -- even though they are in the U.S. legally, are working and paying taxes and are responsible members of our communities.

The Administration has always supported making individuals who encourage their relatives to emigrate to the United States more responsible for the immigrant's well being. However, as a nation, we should not turn our backs on anyone who has lost their ability to earn a living to earn a living due to injury, disease or illness. The Nation should protect legal immigrants and their families -- people admitted as permanent members of the American community -- when they suffer accidents or illnesses that prevent them from earning a living.

Consequently, the budget proposes to make legal immigrants who become disabled after entering the United States eligible for SSI and Medicaid. This proposal would allow 320,000 legal immigrants who experienced an accident or illness which resulted in disability after entering the U.S. to receive SSI and Medicaid benefits. We are pleased that the governors, in an NGA resolution last week, agreed- we must not balance the budget on the backs of States or legal immigrants.

The budget would lengthen the five year exemption from the ban for refugees to seven years in order to give them a more appropriate amount of time to naturalize. The United States admits refugees and asylees into this country on a humanitarian basis. Assistance for this population while they adjust to their new circumstances is a matter of simple decency. The budget also would delay the Food Stamp ban on legal immigrants until the end of FY 1997 in order to give immigrants more time to naturalize.

The budget would also provide poor children of legal immigrants the same Medicaid health care coverage low income citizen children receive. In addition, under our budget, disabled children who are currently eligible for Medicaid because they are receiving SSI benefits will be able to retain their Medicaid coverage -- even if they lose their SSI benefits as a result of the tightened definition of childhood disability. Under this proposal, the families of these needy disabled children will be assured that medical assistance will continue to be provided. Finally, the Administration is proposing to restore some of the overly deep benefit cuts to the Food Stamp program. The proposal includes replacing the 3 month time limit for childless workers with a real work requirement which would not punish those looking for but unable to find work. Also changes would be made to help families with high housing costs and to ensure that families' ability to purchase an adequate diet keeps up with inflation.

Overall, our proposals strengthen our commitment to a new welfare system focused on work and responsibility while addressing the concerns of State and local officials and restoring, benefits to those who can't, work - particularly children and the disabled. We must give all Americans a hand-up and get on with the real business before us; reforming our welfare system together.

Mr. Chairman, the budget I have discussed today discards tired old solutions and meets our challenges creatively and cooperatively. It balances the budget, without abandoning values and commitments.

It makes tough choices and shows tough management.

Now we must act upon it.

Because, just like the past when we faced down diseases and tyranny, future generations will look back on today.

The question is, whether they will see a nation that put aside politics and came together to protect the health of its citizens in the 21st century.

The answer is up to us. Thank you.

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