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Testimony on Balanced Budget Act Implementation by Nancy-Ann Min DeParle
Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Ways & Means, Subcommittee on Health
July 16, 1998

Chairman Thomas, Congressman Stark, distinguished Subcommittee members, thank you for inviting me here today to discuss challenges in implementing the Balanced Budget Act. Your leadership was critical in passing this landmark legislation. It makes sweeping changes to Medicare, and is an essential step forward. It expands health plan options for beneficiaries through the Medicare+Choice program, and extends the life of the Medicare Trust Fund for 10 years.

But with big changes come big challenges. We are making solid, steady progress in implementing the more than 300 individual Balanced Budget Act provisions affecting our programs. We now have completed 189 of these provisions. Since I became administrator last November, we have published 64 regulations, including major Balanced Budget Act provisions such as the Medicare+Choice regulation. We have approved Children's Health Insurance Plans to cover a projected two million additional children for nearly half the states. We have issued 65 program guidance letters to state Medicaid and child health officials, 49 of which are related to the Balanced Budget Act. We have been working closely with state insurance regulators in monitoring enforcement of important Health Insurance Portability and Accountability Act provisions. We delivered 10 official Reports to Congress. We have made major strides in improving program integrity. And we made important strides in aggressively addressing the Year 2000 issue for Medicare and Medicaid information systems.

Balanced Budget Act implementation is an enormous effort which requires balancing of many competing priorities. One of the greatest challenges is informing beneficiaries about the many changes in the Medicare program. We are strongly committed to providing beneficiaries all the information they need to make the best possible decisions about health care.

The Balanced Budget Act directs us to embark on a broad effort, which we have named the National Medicare Education Campaign. This five-year strategy is designed to ensure that beneficiaries receive accurate and unbiased information about their benefits, rights, and options. This is the largest, most complex, and ambitious educational effort in the history of Medicare. We want to work with beneficiaries and their families, Congress, aging advocacy organizations, providers, and other experts to ensure that our education program is the best that it can be.

On top of our Balanced Budget Act efforts is the enormous and difficult task of ensuring that Medicare will be there to provide coverage for beneficiaries and payments for providers on January 1, 2000, just as it has for the past 33 years. This must be our top priority. It involves renovating all computer and information systems, and a deadline that nothing and no one, not even Congress, can change. We must and we will take remedial action to ensure that beneficiaries continue to receive care, that enrollment systems function, that providers are able to confirm beneficiary eligibility, and that payments to providers are not delayed.

We are making substantial progress in addressing the Year 2000 problem. Since I became HCFA Administrator in November we have:

  • conducted at least one site visit to every claims processing contractor, and at least two site visits to every systems maintainer for independent verification and validation;
  • provided clear instructions to contractors on everything they must do to be Year 2000 compliant, and made sure they assessed their status based on those instructions;
  • negotiated a contract that makes clear the responsibility Medicare claims processing contractors have in ensuring that their systems are Year 2000 compliant;
  • developed more realistic cost estimates for Year 2000 work after contractors reassessed their workload based on the instructions we provided;
  • completed renovation of five of our six standard systems;
  • completed renovation of 24 of our 37 most critical internal systems;
  • initiated testing of renovated systems;
  • conducted outreach to states, providers, and other health care entities; and
  • gathered data from states on Medicaid system Year 2000 status.

The Year 2000 especially affects Medicare because of our extensive reliance on multiple computer systems. More than 183 systems are used in administering the Medicare and Medicaid programs, and 98 of these are considered "mission critical" for establishing beneficiary eligibility and making payments to providers, plans, and states. Medicare is the most automated health care payer in the country. We process nearly one billion claims each year, or about 17 million transactions each week. Fully 98 percent of inpatient hospital and other Medicare Part A claims are processed electronically, as are 85 percent of physician and other Medicare Part B claims.

The renovation process is complicated because each piece in the systems used by Medicare, its 60-plus claims processing contractors, interfaces with state Medicaid programs, and some 1.6 million providers must be thoroughly reviewed and renovated by those responsible for each particular system. They must be tested, both alone and for the complicated interfaces among them. To fix only the Medicare systems, we must renovate 49 million lines of code. We must renovate all Medicare-specific software, and work with new versions of vendor-supplied software, including operating systems that drive the hardware we use. Some hardware must be upgraded, and our telecommunications equipment and software must be compliant. We must assure that all data exchanges with thousands of partners are compliant. Testing of Year 2000 changes presents a far greater burden than testing of routine system changes because we must test multiple times on a range of different dates. For example, we must test February 29, 2000 and March 1, 2000 because 2000 is a leap year. Normally we would never consider so much change and testing at one time, but we have no choice.

Because of this imperative, Year 2000 work must take precedence over other projects that require systems changes, including unfortunately some Balanced Budget Act provisions. Many other private and public organizations, including most major insurance companies, have reached the same conclusion and are halting other projects involving information technology changes to clear the decks for the Year 2000. Our independent Year 2000 verification and validation contractor, Intermetrics, advises that we must clear the decks of projects that could interfere with Year 2000 work. Intermetrics specifically advised us to "seek necessary relief from Congressional mandates, system transitions and version releases to allow near-term, focused attention to achieving Y2K compliant systems." This includes projects that are complex, or which would occur during a critical window between October 1999 and March 2000. Otherwise, they warned, "many of your most critical system renovations have risk of significant schedule slippage."

If Year 2000 system renovations are completed ahead of schedule, we will make every effort to put these provisions back on the original schedule. But at this time it appears that postponing some projects is necessary to focus resources and freeze systems so essential Year 2000 work can be done, and thereby avoid complicating factors in the critical months right before and after the new year.


I want to emphasize that the vast majority of Balanced Budget Act provisions are already implemented or will be unaffected by the Year 2000 issue. Many others can be completed before systems must be frozen for the critical Year 2000 transition period. These include:

  • the Medicare+Choice program, including beneficiary and plan enrollment, new payment systems, new grievances and appeals procedures, new quality assurance mechanisms, collection of hospital encounter data for risk adjustment, review of adjusted community rate data submission that determines plan payment rates, and a test of competitive pricing;
  • coverage for new diabetes and osteoporosis prevention benefits;
  • a new prospective payment system that will help control skilled nursing facility costs;
  • limits on hospital pay for diagnoses associated with frequent transfer to post-acute care;
  • new fee schedules for outpatient therapies and durable medical equipment; and
  • a competitive bidding demonstration for durable medical equipment.
Necessary Postponements

Projects affected by the Year 2000 include both Balanced Budget Act provisions and other agency priorities. For example, in April, we made the difficult decision to postpone final transitions to uniform systems for Part A and Part B contractors. Over the past two years we have whittled the number of different computer systems used by our contractors down to six from nine. Uniform systems will go a long way in helping us to streamline agency operations and provide better access to program data. But the delay is essential if our contractors are to renovate and test systems before our December 31, 1998 deadline. Postponing this activity allowed us to redirect both valuable programmer time and $20 million in FY 1998 appropriated funds to Year 2000 work.

At present, Balanced Budget Act provisions whose implementation we believe must be postponed include:

  • prospective payment systems for outpatient hospital care and home health services;
  • consolidated billing for physician and other Medicare Part B services in nursing homes;
  • a new fee schedule for ambulance services.

These activities are being postponed because they involve complex systems changes and interactions with other systems at the very time such activity would interfere with critical Year 2000 work. Our claims processing contractors concur with the decision to postpone these activities; a July 7, 1998 letter expressing their support is attached to my testimony. Our actuaries project that the cost, if any, of these delays will be minimal.

We may also need to delay some activities that are not complicated but which involve changes that could create an unstable environment during a critical window of Year 2000 activity, such as provider payment updates. We will work with Congress and providers to evaluate our options and ensure that any necessary delays in provider updates do not create a hardship. And we will work with this Committee to evaluate whether legislative changes will be needed.


The implementation of the Medicare+Choice program is not being delayed by Year 2000 activities. However, we have changed our initial plans for the Medicare+Choice information campaign in order to improve our approach.

Instead of going nationwide this fall with new Medicare handbooks to all 39 million beneficiaries, we are taking a phased approach to teaching beneficiaries about this complex program. We have an eight-point plan that includes:

  • beneficiary mailings;
  • toll-free telephone services;
  • internet activities;
  • a national train-the-trainer program;
  • a national publicity campaign;
  • state and community-based publicity and outreach campaigns;
  • enhanced beneficiary counseling from State Health Insurance Advisory Programs; and
  • targeted and comprehensive assessment of our education efforts.

We will first test the whole system -- including the handbooks, the toll free call center, the Internet site, and other local beneficiary information activities -- in five states encompassing some 5 million beneficiaries. We will also send the other 33 million beneficiaries a bulletin outlining the basic Medicare+Choice options and other useful Medicare information.

As we begin our education effort this year, we will be making a special effort to learn from beneficiaries. Through their comments, questions and focus groups, they will help us tailor our information so it is most useful to them. The HCFA actuary projects that one in four Medicare beneficiaries will opt out of original Medicare and be enrolled in one of the Medicare+Choice plans by the Year 2000. It is essential that we educate beneficiaries about all these options so that they understand what they need to know to make informed decisions.

The statute and regulations governing Medicare+Choice are extensive and include important beneficiary rights, protections, and plan requirements. Policies concerning when beneficiaries can join or leave plans change over time. Some types of plans are open only to certain groups of beneficiaries. And there are substantial differences among the various types of plans and among plans of each type in their own rules about choice of providers, access to specialists, cost sharing, and other issues.


Helping 39 million beneficiaries understand the largest changes in Medicare history is an unprecedented task. The National Medicare Education Program may well be the largest education effort ever undertaken by a government agency. We must build beneficiaries' knowledge, step by step, starting with a foundation of basic facts on what Medicare covers and beneficiary rights and responsibilities.

Initially, our goals are modest. We have to make beneficiaries aware that they have a range of options, including original fee-for-service Medicare, HMOs, and new managed care options. And, of course, we need to make clear that if they are happy with their current coverage they do not have to make any change. Learning how to help beneficiaries understand the many details they need to know to make truly informed decisions is a more difficult task that will take more time. We need to be able to make information clear to both well-educated audiences and those with limited reading ability or other impairments.

That is why we are adopting a phased education strategy to use scarce resources wisely, learn as we go, and incorporate what we learn into continuously improving education services. We must start with basic information, and build on it so beneficiaries understand the options, details, and consequences and can evaluate plan-specific data to make truly informed choices before 2002, when beneficiaries will be able to change plans just once in the first six months of the year.

Our phased approach is consistent with advice from the Institute of Medicine, which hosted a meeting of experts in January to evaluate this task and develop recommendations. The IOM strongly recommended that we stagger mailings to allow for market testing and emphasize that beneficiaries do not have to make any change. I have attached the IOM recommendations to my testimony. IOM emphasizes that "Efforts to build trust and a level of comfort with [Medicare+Choice] are particularly important given the ongoing negative public perception and attitude about managed care in general." The American Association of Retired Persons also endorses our phased education strategy. A July 2, 1998 letter to me from AARP Executive Director Horace Deets calls the decision "the right course of action under the circumstances." I have attached this letter to my testimony as well.

Our own work with some 30 beneficiary focus group sessions, conducted by an outside contractor, Barents Group/Westat/Project HOPE/Sutton Social Marketing, also counsels against a nationwide mailing of all Medicare+Choice information to all beneficiaries before we have taken the time to test the entire education system, including the handbook, call center, and internet site.

For all these reasons, this fall we will mail Medicare beneficiaries who are not in the five pilot states basic Medicare+Choice information in a short, plain English bulletin. It will outline the basic Medicare+Choice options, and stress that beneficiaries do not have to make any change. It will discuss assistance for low-income beneficiaries, newly available preventive benefits, beneficiary rights, and other changes in Medicare. And it will tell beneficiaries how to obtain more information via phone, Internet, and other community resources about specific health plans available where the beneficiary resides.

We will pilot test comprehensive Medicare+Choice handbooks in five states -- Arizona, Florida, Ohio, Oregon and Washington -- with high, medium, and low levels of Medicare+Choice options and a total of 5.5 million beneficiaries. The handbooks will include more detailed information on Medicare+Choice options. They also will be tailored to each market, with side-by-side comparisons of costs and benefits for plans in that area.

We will pilot test our toll-free call center in the same five states. Call center personnel will answer questions about Medicare+Choice options. Special accommodations will be available for Spanish speaking and hearing impaired callers. We need to test the call center on this scale at first, both because of limited resources and to make sure we can handle all calls in a timely and user-friendly manner. We plan to phase in call center access to another 25 percent of beneficiaries every three months, with full nationwide service by August 1999.

We are making full use of the Internet to communicate with beneficiaries and those acting on their behalf. A consumer-friendly Internet site, Medicare.gov, is already in place with side-by-side comparisons of plan benefits and out-of-pocket costs.

We have almost 100 public and private partners assisting us in our Medicare+Choice education campaign, including the Administration on Aging and area Agency on Aging offices. Starting this week we began providing comprehensive training across the country to about 700 individuals with these organizations. These 700 individuals will in turn serve as trainers in their own organizations and communities

We will carefully evaluate how beneficiaries in the five test states use these materials and services, and identify areas that need to be refined or revamped. This is a critical opportunity to learn. We have time to refine materials and services before the nationwide mailing of education and plan comparison materials that the statute requires before the first coordinated annual enrollment period in November 1999.

We will continually work to improve education materials and services. We want to approach this task in partnership with Congress, providers, beneficiaries and their families, and beneficiary groups around the country. We have worked extensively with Congress and interested beneficiary groups to review our efforts, and believe that we can improve them further by continuing this process.


Our phased education campaign allows us to make wise use of scarce resources. As you know, $200 million was authorized for the first year of this education campaign, but only $95 million was appropriated by Congress. We are supplementing those funds with $19.2 million in funds from HCFA's program management and peer review organization budgets.

For FY 1998, the first year of the education campaign, we expect to spend:

  • $30.2 million on printing and mailing materials to beneficiaries and outreach partners; $20.5 million from user fees assessed on participating health plans, and $9.7 from other program funds. Of the $30.2 million, $9.3 million will go to producing and mailing the comprehensive booklet with localized plan comparison charts in the five test states, $13 million will go to mailing the Medicare bulletin to beneficiaries in other states, $4 million will go to providing an initial enrollment package to new beneficiaries, and $3.9 million will go to materials for training outreach partners who will also help beneficiaries understand their options.
  • $50.2 million on the toll-free call center, $46.2 million from user fees and $4 million from other program funds. The call center itself will cost $38.2 million, and mailing printed comparison information on Medicare+Choice options available in local markets to beneficiaries who request them as the call center is phased into other states will cost $12 million.
  • $22.3 million on program development, $16.8 million from user fees and $5.5 from other program funds. Evaluation of the education program will cost $2 million, fielding the Consumer Assessment of Health Plans survey will total $6.8 million, grants to state health insurance advisory programs will total $5 million, training outreach partners will cost $2.75 million. The rest will cover such activities as project integration and management and business requirements analysis.
  • $9.9 million on community-based outreach activities, including health fairs, all from user fees; and
  • $1.5 million on the Internet site, all from user fees.

For the second year, FY 1999, we believe an effective education campaign will cost $173 million. We propose to finance it by a combination of the full $150 million in user fees authorized in the Balanced Budget Act, plus $23 million from other agency accounts. We project spending:]

  • $50 million for printing and mailing the handbook and other materials;
  • $68 million for the toll-free Call Center;
  • $39 million for program evaluation, development and technology investments;
  • $2 million for the Internet site,
  • $14 million for health fairs and other community-based outreach.

The costs of beneficiary education are ongoing. The BBA authorizes $100 million in user fees for consumer education and information activities in fiscal years 2000 and beyond. From our experience so far, it is clear that this funding will be necessary if we are to educate and inform Medicare beneficiaries about the dramatic changes to the Medicare program.


We are making steady progress on Balanced Budget Act implementation. We are eager to help beneficiaries understand Medicare+Choice, and to implement the remaining Balanced Budget Act provisions in a careful and responsible manner. Clearly, we have no choice but to make Year 2000 management necessities our top priority. We look forward to working with this Committee as we continue efforts to implement the Balanced Budget Act and address the Year 2000 challenge, and I am happy to answer any questions you may have.

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