Chairman Roth, Senator Moynihan, distinguished Committee Members, thank you for
inviting me to discuss the Health Care Financing Administration's (HCFA) progress in implementing Medicare payment
reforms enacted under the Balanced Budget Act of 1997 (BBA). I would like to also thank
the Medicare Payment Advisory Commission for its advice for ensuring that Medicare
continues to make appropriate payments and protects beneficiary access to care.
Medicare is the nation's largest insurer,
covering some 38 million of our nation's elderly
and disabled. Medicare processes about 900 million fee-for-service claims each year, is
the nation's largest purchaser of managed care,
and accounts for 11 percent of the federal budget.
We have implemented more than half of the 335 BBA provisions affecting HCFA programs,
and many more are partially implemented. In the past year, we published 92 regulations and
Federal Register notices implementing important Congressional directives,
beneficiary protections, the Medicare+Choice program, and savings in the BBA that are
critical to extending the life of the Medicare Trust Fund. We have made major strides in
fighting fraud, waste and abuse, and cut our payment error rate in half in just two years.
We also have converted the vast majority of Medicare HMOs to the new Medicare+Choice
program and implemented a carefully planned National Medicare Education Program to help
beneficiaries make informed health care decisions.
At the same time, we are tackling one of the most difficult Year 2000 computer
challenges in government. This must be our highest priority. Unfortunately, meeting the
Year 2000 challenge has forced us to make difficult decisions involving some BBA
provisions. The vast majority of BBA provisions do not have to be delayed. However, on the
advice of independent computer experts, we made the difficult decision last year to delay
projects that could interfere with Year 2000 work. This included BBA provisions such as
the hospital outpatient prospective payment system that we very much want to implement. We
will make every effort to implement these provisions as quickly as our Year 2000
I have brought a new team of leaders to HCFA to help us meet our BBA and Year 2000
- Gary Christoph, Ph.D., a computer scientist and security expert from the Los Alamos
National Laboratory, serves as our first-ever Chief Information Officer and heads our
information technology team and Year 2000 efforts.
- Robert Berenson, MD, an internist who helped establish a private sector preferred
provider organization Health
plan, now leads our Center for Health Plans and Providers.
- Jeffrey Kang, MD, a geriatrician who was a private sector managed care plan medical
Director, is our Chief Clinical Officer and heads our Office of Clinical Standards and
- Carol Cronin, Ph.D., a gerontologist who ran a private sector firm devoted to helping
corporations educate their workers on Health
care, is leading our Medicare beneficiary
- Marjorie Kanof, MD, a physician who has worked as a Medicare contractor medical
Director, is in charge of implementing much stronger oversight of Medicare claims
FEE-FOR-SERVICE BENEFITS AND PAYMENT REFORMS
The BBA includes important new Medicare fee-for-service preventive benefits, as well as
payment system reforms that are critical to extending the solvency of the Medicare Trust
Fund. We are making good progress in implementing these changes.
For the new preventive benefits, we have:
- expanded coverage for test strips and education programs to help diabetics control their
- begun covering bone density measurement for beneficiaries at risk of osteoporosis;
- begun covering several colorectal cancer screening tests;
- expanded preventive benefits for women so Medicare now covers a screening pap smear,
pelvic exam and clinical breast exam every three years for most women, and every year for
women at high risk for cervical or vaginal cancer; and,
- begun covering annual screening mammograms for all women age 40 and over, and a one-time
initial, or baseline, mammogram for women ages 35-39, paying for these tests whether or
not beneficiaries have met their annual deductibles.
We have made solid progress in implementing fee-for-service payment reforms. For
example, we have:
- modified inpatient hospital payment rules;
- established a prospective payment system for skilled nursing facilities to encourage
facilities to provide care that is both efficient and appropriate;
- refined the physician payment system, as called for in the BBA, to more accurately
reflect practice expenses for primary and specialty care physicians; and
- initiated the development of prospective payment systems for home health agencies,
outpatient hospital care, and rehabilitation hospitals that will be implemented once the
Year 2000 computer challenge has been addressed; and,
- begun implementing an important test of whether market forces can help Medicare and its
beneficiaries save money on durable medical equipment. We are prepared to begin a test in
Polk County, Florida of competitive bidding as a way to get the best quality and price for
durable medical equipment and supplies. A toll-free hotline (888-289-0710) is available to
answer beneficiary and provider questions about the project.
Inpatient Hospital Payment
We have implemented 74 percent of the inpatient hospital-related changes included in
the BBA in updated regulations. These include substantial refinements to hospital Graduate
Medical Education payments and policy to encourage training of primary care physicians,
promote training in ambulatory and managed care where beneficiaries are receiving more and
more services, curtail increases in the number of residents, and slow the rate of increase
We also froze inpatient hospital payments in fiscal year 1998, as required under the
BBA, resulting in substantial savings to taxpayers and the Medicare Trust Fund. We
notified Congress last year that we may need to postpone the payment update scheduled for
October 1999 because of the Year 2000 challenge. However, if we sustain our current rate
of progress in meeting that challenge, we may be able to implement the October 1999 update
As directed by the BBA, we have taken concrete action to refine and implement the
resource-based system for practice expenses under the physician fee schedule. We published
the final regulation in November 1998, and began implementing the new system in January
1999, with a transition to full implementation by 2002. We were required by the BBA to
implement the new system in a budget-neutral fashion. This will inevitably cause some
physicians to see payment increases while others see decreases.
The methodology we used addresses many of the concerns raised by physicians and meets
the BBA requirements. We used the American Medical Association's actual cost data to reflect all of a specialty's practice expenses, not just those linked with
specific procedures. Our expert accounting contractor, KPMG Peat Marwick, attests that our
methodology followed reasonable cost accounting principles. The General Accounting Office
also is largely supportive of our methodology. We fully expect to update and refine
the practice expense relative value units in our annual regulations revising the Medicare
fee schedule. We welcome and encourage the ongoing contributions of the medical community
to this process, and we will continue to monitor beneficiary access to care and
utilization of services as the new system is fully implemented.
The Balanced Budget Act also requires that we implement a resource-based system for
malpractice relative value units. We currently are in the process of developing the system
and plan to include it in this year's proposed
We notified Congress last year that, in order to ensure that all Year 2000 work is done
correctly we may need to freeze our computer systems during a critical period of Y2K work,
and would therefore have to delay the January 1, 2000, physician updates. We will know
more about whether we may be able to do these updates on schedule after we have reached
the government's March 31, 1999, Year 2000
compliance deadline. We share physicians'
concern about these possible delays, and we want to work with physicians and Congress to
evaluate our options and ensure that any necessary delays do not create a hardship and
that any interim measures fairly reimburse physicians.
Skilled Nursing Facilities
We have made substantial progress in implementing the new skilled nursing facility
prospective payment system. The old payment system was based on actual costs. The new
system uses mean-based prices adjusted for each patient's
clinical condition and care needs, as well as geographic variation in wages. It creates
incentives to provide care more efficiently by relating payments to patient need, and
enables Medicare to be a more prudent purchaser of these services. The BBA mandated the
implementation of a per diem prospective payment system for skilled nursing facilities
covering all routine, ancillary, and capital costs related to covered services provided to
beneficiaries under Medicare Part A. In accordance with the BBA, we implemented the new
payment system July 1, 1998.
We fully understand the concerns raised by providers about this new system,
particularly those related to outlier and non-therapy ancillary services. The new payment
system is complex, and we are working with providers to address these concerns. We know
that this is not a static system and that it will require ongoing refinements.
We strongly believe the Resource Utilization Groups (RUGs), which are a key component
of the system, must be periodically evaluated to ensure they appropriately reflect changes
in care practice and the Medicare population. We are working closely with an expert
research contractor to examine potential refinements to the RUGs model, particularly those
associated with medically complex patients and non-therapy ancillary services, such as
medications. We expect to have the results of this research by January 1, 2000, and to be
able to make refinements shortly thereafter.
In addition to this research effort, we plan to host a Town Hall meeting next month
with interested industry and consumer stakeholders to seek their first-hand advice on
refining the current RUGs model. We will take the suggestions of the industry and the
results of our contractor's research into
consideration as we make necessary refinements. I want to assure beneficiaries, providers,
and Congress that we appreciate the importance of this task and are committed to fairness
and ensuring continued access to care.
The BBA mandated a number of changes in the way Medicare pays for home health services
to curtail unsustainable spending growth and fight what was widespread fraud, waste, and
abuse. These changes are vitally important and have been a long-standing priority for HCFA
and this Administration. Medicare spending on home health more than tripled in the 1990s,
while the number of beneficiaries receiving home health services doubled. The new payment
systems create incentives to provide home health care efficiently as well as control
Congress wisely postponed the final implementation date for the home health prospective
payment system because of our need to address the Year 2000 computer problem. We are
working hard to develop the prospective payment system and believe that we are on track to
meet the October 1, 2000 implementation deadline. This October, we expect to publish a
proposed regulation for the prospective payment system so we can begin receiving and
evaluating public comments. We anticipate that the final rule will be issued in July 2000.
We know some providers continue to have concerns about the home health interim payment
system. Last year, Congress made important changes to the interim system to address some
of these concerns. However, given the magnitude of the changes in home health payment, it
is understandable that other concerns remain. We are committed to working with providers
and Congress to ensure fairness and protect access to appropriate home care services
covered by Medicare as we proceed toward prospective payment. We are monitoring the impact
of these changes on beneficiary access to care and, thus far, do not have evidence on
whether access to care has been compromised.
Hospital Outpatient Departments
The Balanced Budget Act empowers us to move away from charge-based hospital outpatient
coinsurance, which has long been a priority for the Clinton Administration. The increased
costs the current system imposes on beneficiaries are unfair. Regrettably, implementation
of the prospective payment system as originally scheduled would have required numerous
complex systems changes that could substantially jeopardize our Year 2000 efforts.
Therefore, we have postponed implementation and are working to implement this system as
quickly as the Year 2000 challenge allows. In the meantime, we are willing to work with
the Congress to see if an alternative solution can be developed that might more quickly
move us toward our shared goal of reducing beneficiaries'
out-of-pocket costs for these services.
We issued a Notice of Proposed Rule Making in September 1998 outlining plans for the
new system so that hospitals and others can begin providing comments and suggestions. We
are making data files available to the industry, and we have extended the comment period
until June 30, 1999 so the industry and other interested parties will have sufficient time
and information to comment.
We have also implemented a BBA provision that eliminates an anomaly in the law, known
as the formula-driven overpayment, which caused taxpayers to pay too much for certain
surgical, radiological, and other hospital outpatient services. We implemented this change
just two months after the BBA was enacted.
We are in the process of developing a prospective payment system for rehabilitation
hospitals as required under the BBA. We have contracted with Muse and Associates, Dr.
Brant Fries at the University of Michigan, and Dr. John Morris at Hebrew University to
conduct research and aid in development of a case mix classification system for
rehabilitation hospitals. This new system is scheduled for implementation over a two year
period beginning October 1, 2000. We are currently analyzing the positive and negative
aspects of both a per-episode and a per-diem payment system based on a comprehensive
assessment of each patient's condition and
resource requirements. We have not ruled out either approach at this time. Our primary
concern is to ensure that the system we adopt allows our beneficiaries to get the care
they need and treats providers fairly. We appreciate the technical suggestions we have
received from the industry in this regard, as well as the evaluation and advice provided
by the Medicare Payment Advisory Commission and the General Accounting Office, and we will
continue to work closely with them and Congress as this system is developed and
Medicare+Choice allows private plans to offer beneficiaries a wide range of options,
similar to those available in the private sector. Medicare+Choice and other changes
enacted in the BBA require a massive and important new beneficiary education campaign.
Medicare+Choice includes important new protections for patients and providers, as well as
quality assessment and improvement requirements. And it initiates a fairer and more
accurate payment system.
We are very committed to successful implementation of Medicare+Choice. We believe that
managed care and other private plans are important voluntary options next to original
Medicare. Medicare managed care enrollment has nearly tripled under the Clinton
Administration, from 2.3 million when the President took office to 6.8 million now. We now
meet regularly with beneficiary and industry representatives to discuss ways to improve
Medicare+Choice, and have begun making refinements based on these comments and
We have converted the vast majority of former Medicare HMOs to the Medicare+Choice
program and published all BBA-mandated Medicare+Choice regulations. Last month we
published initial refinements to these regulations which improve beneficiary protections
and access to information while reducing plans'
We launched a national education campaign and participated in more than 1,000 events
around the country to help beneficiaries understand Medicare+Choice and other important
changes to Medicare. And we are establishing a federal advisory Committee to help us
better inform beneficiaries.
As mentioned above, we have launched the National Medicare Education Program to make
sure beneficiaries receive accurate and unbiased information about benefits, rights, and
options. The campaign includes:
- mailing a Medicare and You handbook to explain new benefits and health plan
- a toll-free "1-800-Medicare" call center with live operators to answer questions
and provide additional print information on request;
- a consumer-friendly Internet site, www.Medicare.gov, which includes comparisons
of benefits, costs, quality, and satisfaction ratings for plans available in each zip
- an alliance with more than 100 national aging, consumer, provider, employer, union, and
other organizations who help disseminate Medicare+Choice information to their
- enhanced beneficiary counseling from State Health Insurance Assistance Programs;
- a national media publicity campaign;
- more than a thousand individual state and local outreach events around the country in
senior centers and town halls, on radio call-in shows and other venues, and in languages
ranging from Vietnamese to Creole; and,
- a comprehensive assessment of these efforts.
In 1998, we tested the whole system in five states -- Arizona, Florida, Ohio, Oregon
and Washington. Unfortunately, the decisions by some plans to withdraw from the program or
reduce their service area significantly complicated our task. We learned a great deal in
this "dry run,"
and focus groups indicated that a majority of beneficiaries found the information in the Medicare
& You handbook to be informative and useful. We are also conducting cases studies
to evaluate the education campaign in five communities in the five pilot States and one
community outside the pilot States. Preliminary results from our assessment efforts are
already suggesting ways to make Medicare & You easier to use, and links we can
add to help users find key information faster on our website. These and other findings
will help us to refine efforts for a full-scale, national campaign before the November
1999 open enrollment period.
As mentioned above, we are establishing the Citizens Advisory Panel on Medicare
Education, in accordance with the Federal Advisory Committee Act, as a formal mechanism to
obtain public input for improving our education efforts. The Panel will meet quarterly to
- enhance our effectiveness in informing beneficiaries;
- expand outreach to vulnerable and underserved communities; and
- assemble an information base of "best
practices" for helping beneficiaries evaluate
plan options and strengthening a community infrastructure for information and counseling.
Panel members will include representatives from the general public, older Americans,
specific diseases and disabilities, minority communities, plans and insurers, providers,
and other groups.
We are also working to standardize plan marketing materials that summarize benefits so
beneficiaries can make apples-to-apples comparisons. Our goal is to complete this work
before the first annual coordinated open enrollment period in November 1999.
Reaching Out to Plans
We have taken several steps to encourage health plan participation in Medicare+Choice.
In addition to converting the vast majority of Medicare HMOs to the new program, we
have added 12 new plans and expanded service areas for another 11 plans since last
November, including the first provider sponsored organization with a Federal waiver from
State licensure requirements. We are reviewing 24 new plan applications and 18 service
area expansion applications.
Last summer we held outreach sessions attended by more than 1,500 plan representatives,
and we continue to strengthen lines of communication with plans. We have named a senior
official within HCFA, Tom Gustafson, whom plans can call directly if they have trouble
resolving issues through normal HCFA channels.
As mentioned above, last month we published initial refinements to the Medicare+Choice
regulation. The new rule:
- clarifies that beneficiaries enrolled in an M+C plan that withdraws or is terminated
from Medicare are entitled to enroll in other remaining locally available M+C plans;
- specifies that changes in plan rules must be made by October 15 to ensure beneficiaries
can make informed choices during the November annual open enrollment period;
- waives the requirement for an initial health assessment within 90 days of enrollment for
enrollees who stay in the same plan when they age into Medicare and for enrollees who
switch plans but remain under the care of the same primary care provider;
- allows plans to choose the form of the initial health assessment;
- allows coordination of care to be performed by a range of qualified professionals;
- limits the applicability of provider participation requirements to physicians; and
- aligns requirements for terminating specialists with the process for other providers.
We intend to publish a comprehensive final rule with further refinements this fall.
To further facilitate plans participation, the President's budget includes a proposal to give plans two
additional months to file the information used to approve benefit and premium structures.
This "Adjusted Community Rate"data would not be due until July 1, rather than may
1. July 1 is the latest we can accept, process, and approve premium and benefit package
data, have the data validated, and still mail beneficiaries plan information in time for
the November open enrollment period. Given legislative schedules and the need to act
immediately, we informed plans that the required filing date this year will be July 1. We
look forward to working with you to enact legislation necessary to support this change
that is so important to Medicare+Choice success.
The BBA requires Medicare to "risk adjust"Medicare+Choice payments starting January 1, 2000.
That means we must base payment to plans on the health status of individual plan
enrollees. Data on individual beneficiary use of health care services in a given year will
be used to adjust payment for each beneficiary in a Medicare+Choice plan the following
year. Risk adjustment represents a vast improvement over current payment methodology. It
helps assure more appropriate payments and curtails the disincentive in the current
payment system for plans to enroll sicker beneficiaries.
Risk adjustment will help beneficiaries feel more confident in their Medicare+Choice
options. It assures beneficiaries that Medicare pays plans the right amount to provide all
necessary care because payments take each enrollee's
health status into account. That will help people with serious illnesses, such as cancer
or cardiovascular disease, who can benefit most from the coordination of care health plans
Risk adjustment will help taxpayers by addressing the main reason Medicare has lost
rather than saved money on managed care. Many studies show that health plans enroll
beneficiaries who, on average, are much healthier and less costly than those who remain in
Risk adjustment will also help level the playing field among Medicare+Choice plans. It
tempers the risk of significant financial loss when plans enroll beneficiaries who have
expensive care needs. And it focuses competition more on managing care than on avoiding
risk. It also will help plans by alleviating concerns among beneficiaries that plans have
financial incentives to deny care.
The law requires us to proceed with risk adjustment starting January 1, 2000, and does
not specifically call for a transition. However, we believe we must implement these
changes in an incremental and prudent fashion, and are, therefore phasing in risk
adjustment over five years to prevent disruptions to beneficiaries or the Medicare+Choice
It is essential to stress that risk adjustment will not and cannot be budget neutral.
Risk adjustment was required in the BBA because of substantial evidence that Medicare has
historically overpaid plans because managed care enrollees tend to be healthier than
beneficiaries who remain in fee-for-service Medicare.
If risk adjustment were budget neutral, Medicare and the taxpayers who fund it would
continue to lose billions of dollars each year on Medicare+Choice. Budget neutral risk
adjustment would cost taxpayers an estimated $200 million in the first year of the
phase-in, and $11.2 billion over five years if health plans maintained their current, more
healthy mix of beneficiaries. Actual savings to taxpayers will depend on the extent to
which less healthy beneficiaries enroll in plans. Total payment may be higher for some
plans than it would be under the current system if their enrollment becomes more
representative of the entire Medicare population. Overall, we project plan payment to
change on average by less than 1 percent the first year. The phase-in substantially
buffers the impact. The federal government is forgoing an estimated $1.4 billion in
savings in the first year and as much as $4.5 billion over the full five years because of
the phase in. Impact on plans will be further buffered by an annual payment update for
2000 of 5 percent, and by blended payment rates that we estimate will be paid to 63
percent of counties in 2000 and in many cases will be greater than 5 percent.
Competitive Pricing Demonstration
We will soon begin a test of competitive pricing for managed care, as called for in the
BBA. This test will provide objective data and actual experience that is needed to
evaluate Medicare reform proposals that assume savings from competition among plans.
Managed care plans will compete to offer benefits at the most reasonable cost. A bidding
process, similar to what most employers and unions use to decide how much to pay plans,
will be used to set Medicare+Choice rates.
To ensure broad community involvement, a Medicare Competitive Pricing Advisory
Committee, chaired by General Motors Health Care Initiative Executive
Cubbin, has made recommendations regarding key design features. It also has selected the
markets of Phoenix, Arizona and Kansas City, Kansas and Missouri, as initial demonstration
sites. We are establishing local advisory Committees in these communities, and they will
hold public meetings to ensure that local beneficiaries have a voice in how the test
program will operate.
The BBA raises the quality bar by requiring most plans to monitor and improve quality
so beneficiaries can compare plans based on quality and we can use Medicare's substantial market leverage to be a prudent
purchaser. We are working to incorporate quality assessment and improvement into original
fee-for-service Medicare, as well. And we are committed to making measurable quality
improvements throughout the Medicare program as part of our Government Performance and
Review Act objectives for fiscal 2000.
All Medicare+Choice plans must report objective, standardized measurements of how well
they provide care and services. They have been using HEDIS, the Health Plan Employer Data
and Information Set, for reporting purposes since 1997. We also are using CAHPS, the
Consumer Assessment of Health Plans Study, to objectively measure beneficiary
satisfaction. We began requiring Medicare HMOs to conduct CAHPS surveys last year. This
fall, we will conduct a CAHPS survey of beneficiaries who disenroll from plans, asking
about the beneficiary's experience and why they
left their plan, to give beneficiaries the perspectives of both those who left and those
who stayed. And next year we will conduct a fee-for-service survey to provide
beneficiaries with data on all options.
HEDIS and CAHPS results are being formatted so beneficiaries can make direct,
apples-to-apples comparisons among their plan options, and are posted on our Website at www.Medicare.gov.
Beneficiaries may also request HEDIS and CAHPS information through our 1-800-Medicare call
center, and we will include this information in the 2000 edition of Medicare & You.
We recognize that it takes time for plans to adapt to the quality improvement
requirements, and that a learning curve is involved. Therefore, we made several changes
from our draft proposal to help plans comply. For example, we are:
- requiring plans to conduct two performance improvement projects per year, which is
comparable to standards of private sector accrediting organizations;
- giving plans three years to achieve demonstrable quality improvements; and,
- giving plans discretion as to where they conduct site visits for provider credentialing.
Appropriate flexibility will be provided so plans with networks that are less
structured than traditional HMOs, such as PPOs, can meet these requirements. Our quality
improvement systems will be sensitive to different plan structures and their different
abilities to affect provider behavior.
We are extremely impressed with the quality improvement project outlines submitted by
plans. Most are very thorough and thoughtful. Many include detailed benchmarks and
timetables. They make clear that plans are very capable of achieving what Congress
envisioned in the BBA.
As you know, some Medicare HMOs did not convert to the Medicare+Choice program, and
others reduced their service areas last year. While we are concerned about the impact on
beneficiaries who were left with no other managed care options, it is important to put
those business decisions in context. Some of the plans that withdrew had market positions
or internal management issues that made it hard for them to compete. And they faced rising
prescription drug prices and other commercial pressures. Many of the disrupted
beneficiaries had several other plans to choose from, and all but 50,000 had at least one
other plan option.
It is our understanding that the Federal Employees Health Benefits Program experienced
a similar rate of plan pullouts, often affecting the very same counties. The vast majority
of Medicare HMOs converted to Medicare+Choice, and we have approved several new plan and
service area expansions. This suggests that plan withdrawal decisions have more to do with
internal plan and larger marketplace issues than with Medicare rates or regulations. In
fact, a certain amount of market volatility must be expected when relying on the private
To buffer against such market volatility, the President's budget includes proposals to protect beneficiaries
from such disruption by broadening access to supplemental Medigap polices if beneficiaries
lose their plan option and allowing enrollees with end stage renal disease to move to
another plan. We also provided for earlier notification of plan withdrawals in our recent
refinement to Medicare+Choice regulations.
We are making substantial progress in implementing the many Medicare changes in the
BBA. They expand options and improve services to our beneficiaries, create better payment
systems, and extend the life of the Medicare Trust Fund. Clearly, more work remains. We
are committed to continuing to work to ensure that we are fair and prudent as we implement
payment systems, and above all do not compromise beneficiary access to care. I am grateful
for the advice and assistance this Committee and the Medicare Payment Advisory Commission
have provided. I thank you again for holding this hearing, and I am happy to answer your