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Testimony on Medicare Subvention Demonstration by Kathleen A. Buto
Associate Administrator for Policy
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Veterans Affairs, Subcommittee on Health
May 8, 1997

Good morning, Mr. Chairman and members of the Subcommittee on Health. I am pleased to appear before you to discuss the President's legislative proposal to demonstrate Medicare subvention involving our nation's veterans. This project will be conducted by the Health Care Financing Administration (HCFA) within the Department of Health and Human Services (DHHS) and the Department of Veterans' Affairs (VA). Under this demonstration, Medicare will pay for certain dual-eligible Medicare/VA beneficiaries in the VA system. In developing this program, we believe that we can test a project which will provide quality service to these dual-eligible beneficiaries and, at the same time, preserve and protect the Medicare Trust Fund for all Americans.

President Clinton has Indicated his strong support c I a demonstration which will provide needed information regarding the effects of the subvention. The term "subvention" refers to Medicare paying for care provided at federal facilities to Medicare beneficiaries. Currently, Medicare is precluded by statute from doing this. However, the proposed demonstration will provide HCFA with the opportunity to assess the effects of coordination on improving efficiency, access, and quality of care for dual-eligible beneficiaries in a selected number of sites.

HCFA has been working with the VA for the past two years to design a VA/Medicare subvention demonstration program. Under this demonstration, the Medicare program would reimburse the VA for health services provided at selected VA facilities to certain Medicare-eligible veterans. There would be both fee-for-service and managed care (HMO) model sites in the demonstration.

Currently, there are approximately three million veterans over age 65 who meet Category C requirements. This category applies to veterans who have neither a service-connected disability nor sufficiently low-income status but are dually-eligible to receive health care through the Department of Veterans' Affairs and the Medicare program. Over the years, the VA and Medicare have separately provided access to care for these dual-eligible beneficiaries. It is our hope that a Medicare/VA subvention model could allow for increased access to quality care, with administrative efficiencies to both programs.

As HCFA and the VA collaborated to design this demonstration, we at HCFA kept our eyes on two imperatives: we must protect beneficiaries and we must protect the Medicare Trust Fund. As you know, the Medicare trustees have just reported that, absent legislation, Medicare's Hospital Insurance Trust Fund, which pays for hospital, skilled nursing facility, and hospice services, is scheduled to become insolvent in 2001. The Administration has expressed its concern about the solvency of the Trust Fund, and has proposed measures to strengthen it each year since coming into office. The Administration is committed to a balanced budget, extending Medicare's solvency, and working to ensure that Medicare benefits are available for all beneficiaries. As we work on the design of this program, we are developing strategies to prevent further depletion of the Trust Fund.

HCFA and the VA have agreed to incorporate a number of provisions in the demonstration design in order to assure that beneficiaries receive quality care, while protecting the two Federal programs from any unexpected cost impacts. In order to meet this objective, we are currently working with the VA to achieve a Memorandum of Agreement which will spell out the operational details of the demonstration.

The Medicare Trust Funds will be protected aga' t the risks of cost-shifting, First and foremost, VA will receive Medicare payments only after it surpasses its current level of effort, which refers to the dollar amount VA now spends rendering health care services to dual-eligible beneficiaries in VA facilities participating in the demonstration sites. This level of effort will be updated for each year of the demonstration.

In the HMO sites, after the VA meets its level of effort in the area covered by the demonstration, Medicare will reimburse the VA on a capitated basis equal to a percentage of the Adjusted Average Per Capita Cost (AAPCC) applicable to the beneficiaries enrolled in the demonstration. The AAPCC is defined as the estimated amount that Medicare would have paid in a geographic area if HMO enrollees had received services in the fee-for-service sector, We have agreed to adjust the applicable AAPCC to exclude some of the costs associated with capital, indirect and direct graduate medical education (GME), and the disproportionate share hospitals (DSH). DSH refers to additional Medicare payments to hospitals treating a disproportionately large share of low-income patients. These payments are believed to be outside the purview of the demonstration because these activities are already covered by VA's appropriations. After making these adjustments, the reimbursement rate will be set at 95 percent of what Medicare pays risk HMOs. At this time, this would be 90.25 percent of the AAPCC.

In the fee-for-service sites. Medicare would pay 95 percent of the current fee-for-service rates, after removing some of the costs associated with the four factors mentioned above At the end of each year, the Department of Health and Human Services (DHHS) and the VA will reconcile any payment discrepancies and correct for any mistaken overpayments.

We have designed this demonstration so that there will not be an Increase in the total costs of Medicare. If it is found that Medicare costs are more than costs would have been without the demonstration, the two departments have agreed to take any necessary corrective action. For example, the VA may reimburse HCFA- we may suspend or terminate the demonstration; or, we may adjust payment rates. These are some of the most significant steps that we have taken to limit the payment risk to the Medicare Trust Funds To further insulate Medicare from cost growth due to the demonstration, a "cap" be placed on the total Medicare reimbursement to VA for each demonstration year. We are working to develop a cap which accounts for estimated demand and facility capacity. Furthermore, the VA has agreed to open its facilities to audits by HCFA and the DHHS' Inspector General.

This demonstration will protect, indeed expand, beneficiaries' freedom of choice --they can use their Medicare benefits to obtain care from the VA, or they can obtain care from civilian providers. Beneficiaries' quality of care will be protected because VA will adhere to Medicare's conditions of participation and quality standards, and provide the complete range of Medicare benefits in the HMO model.

Thus, we strongly believe that we have taken all possible steps to protect beneficiaries. the Trust Funds, and the VA from harm. Will we succeed' The answer will lie In the rigorous evaluation of this demonstration by an independent evaluator. Over the demonstration's three years, the independent evaluator will monitor performance and collect data to answer these crucial questions:

  • Is there an impact on the costs to either the Medicare Trust Funds or VA?

  • Do beneficiaries experience improved access to health care?

  • Is there any change in quality of care provided to the demonstration population?

  • Is there any effect on local health care providers and other Medicare beneficiaries in the surrounding community?

At the end of three years, we will see how coordination between our two programs improves efficiency, access, and quality of care for dual-eligible beneficiaries. If Congress should decide on a GAO study of the demonstration, both VA and DHHS have agreed to jointly assist GAO with that review and report. In the meantime, we have put the necessary safeguards in place to protect beneficiaries and protect the Medicare Trust Funds, and the VA.

Mr. Chairman, the bill which you have introduced, H.R. 1362, the "Veterans Medicare Reimbursement Demonstration Act of 1997," is very similar to the Administration's Medicare/VA subvention bill submitted to Congress on February 7, 1997. While both bills would authorize a demonstration of Medicare/VA subvention with common goals. there are a number of significant differences. First, H.R. 1362 authorizes a fee-for-service model demonstration with three sites. The Administration proposes to conduct both a fee-,'or-service model (four sites) and a managed care model (four sites or one VA region). Second. H R. l')62 sets Medicare payments at 95 percent of amounts paid to the private sector. The Administration bill sets the payment at 95 percent of the private sector, after excluding some of the costs associated with direct and indirect graduate medical education, capital, and disproportionate share hospitals. Third, H.R. 1362 reduces the level of effort in future demonstration years to account for changes in the VA eligibility resulting from the Veterans' Health Care Eligibility Reform Act of 1996. The Administration bill does not include any adjustments to the level of effort based on eligibility reform. Lastly, your bill calls for a report on a managed care demonstration by March 1, 1999. In keeping with our goal of moving toward managed care options for all, Americans, the Administration has included a managed care option in the original demonstration. While differences exist between these two bills, we believe there are enough similarities, and mutual interests, to allow for an agreement that would benefit the dual eligible population.

The President strongly supports this demonstration. We are hopeful that this demonstration will succeed, and that through it the beneficiaries we share in common with VA will receive enhanced choices and improved services -- the true "bottom line" in this effort. We look forward to working with the Subcommittee and other interested members of Congress as we seek to improve health care services available to our nation's veterans.

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