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Testimony on Medicare Veterans Affairs Subvention by Robert A. Berenson, M.D.
Director, Center for Health Plans & Providers
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Ways and Means Committee, Subcommitte on Health
July 1, 1999

Good morning, Chairman Thomas, Congressman Stark and members of the Committee, thank you for inviting us to discuss our demonstration for Medicare subvention involving our nation's veterans. I would also like to thank the General Accounting Office (GAO) for its valuable evaluation of the Department of Defense (DoD) subvention demonstration project, which provided information that is helping us to better plan for the Veterans Affairs (VA) subvention demonstration.

In recent weeks we have been reminded once again of the contributions America's veterans have made to our country. We are committed to working with the VA to see if there is a way to improve their access to care while protecting the Medicare Trust Funds. The Clinton Administration strongly supports this demonstration. I want to update you on the status of these demonstrations and to explain the need to limit the Veterans Affairs demonstration project to coordinated care.

The term "subvention" refers to Medicare paying for care provided at military, veterans or other federal facilities to Medicare beneficiaries. Medicare is precluded by statute from doing this. The Balanced Budget Act of 1997 authorized a 3-year, demonstration for military retirees and an implementation plan for a similar veterans demonstration. Enrollment in the DoD demonstration began in August 1998, and we signed a Memorandum of Agreement with the Department of Veterans Affairs on the VA demonstration in May 1999. These demonstrations provide the opportunity to assess how a coordinated approach to subvention might improve efficiency, access, and quality of care for Medicare-eligible military retirees and veterans. In implementing the DoD demonstration and drafting the memorandum of agreement with the VA, we focused on two imperatives: protecting beneficiaries and protecting the Medicare Trust Funds.


The DoD demonstration has valuable lessons to offer for the VA project. It creates a DoD-run HMO, TRICARE Senior Prime, in six sites for military retirees and their dependents who are eligible for Medicare. The TRICARE Senior Prime Option provides a full range of Medicare benefits to enrollees. Covered services include the standard Medicare benefits plus other TRICARE benefits such as pharmaceutical coverage. Enrollees agree to receive all covered services through TRICARE. DoD must spend as much for the care of those in the demonstration areas as it already spends on them, known as its Alevel of effort.@ Prior to this, dually-eligible beneficiaries could only be treated at DoD facilities on a Aspace available@ basis. After the DoD has met its level of effort, Medicare pays 95 percent of the rate it pays for Medicare+Choice plan enrollees, minus medical education, disproportionate share payments, and a portion of hospital capital payment costs. Medicare payments are capped at $50 million in the first year, $60 million in the second year, and $65 million in the third year.

The GAO has raised two important concerns about the DoD subvention demonstration:

  • DoD's estimates of its level of effort may be over or underestimated; and
  • Data problems and payment issues could make the demonstration difficult to manage at both the national and local levels.

We are working with the DoD to address these concerns, and hiring an outside contractor to help review DoD data and methodology.

We have contracted with RAND, Inc., to evaluate the DoD demonstration, including the:

  • impact on the costs to both the Medicare Trust Funds and DoD;
  • whether there is improved access to care;
  • any change in quality of care provided to the demonstration population; and
  • any impact on providers and other Medicare beneficiaries in the surrounding community.

We expect the first interim report on this evaluation this month, with a final report in December of 2001. The GAO will also conduct an evaluation for the HHS Inspector General.


We are working toward implementation of a similar Veterans Affairs subvention demonstration, in preparation for enactment of legislation that would be required to authorize implementation. As with the DoD project, Medicare will pay for care in the VA health care system for Medicare beneficiaries who are also eligible for VA health care benefits. We believe this could provide more access to VA services for veterans, savings to the Medicare Trust Funds, and administrative efficiencies to both programs.

The memorandum of agreement between HCFA and the VA is modeled on the DoD demonstration and, like the DoD demonstration, relies upon a coordinated care model. Medicare will reimburse the VA for health services provided by VA in a coordinated care model to Medicare beneficiaries who are Priority 7 veterans (generally those without a service-connected disability who are above the VA income threshold). Beneficiaries who enroll in the demonstration will be able to use their Medicare benefits to obtain Medicare coordinated care services at VA facilities and other sites under contract to the VA. The VA organization will provide the complete range of Medicare benefits, and adhere to the conditions of participation and quality standards required of Medicare+Choice plans. As with the DoD, the VA will receive Medicare payments only after it surpasses its current level of effort for dual-eligible beneficiaries in demonstration site facilities. After the VA meets its level of effort, Medicare will reimburse the VA at the rate of 95 percent of county-based Medicare+Choice capitation rates, excluding medical education, disproportionate share payment, and a portion of hospital capital payment costs. As we are able, we will risk adjust payments to take into account enrollee health status.

We have taken care in designing this demonstration to protect the Medicare Trust Funds. If Medicare costs are more than they would have been without the demonstration, Medicare and the VA have agreed to take any necessary corrective action. For example, the VA may refund Medicare payments, we may suspend or terminate the demonstration, or we may adjust payments. To further insulate Medicare from financial risk, a Acap@ of $50 million a year will be placed on the total Medicare reimbursement to VA. Furthermore, the VA has agreed to open its facilities to audits by HCFA and the HHS Inspector General.

We have addressed issues the GAO identified in its evaluation of the DoD demonstration in our planning of the VA demonstration. For example, as with the DoD subvention demonstration we plan to base the level of effort calculation on actual expenditures the VA made during a specified base period. We are working with the VA to make sure we have the information we need to make accurate and reliable payments based upon a valid baseline.

Thus, we strongly believe that we have taken all possible steps to protect beneficiaries, the Trust Funds, and the VA from any potential adverse outcomes. And, as with the DoD demonstration, we will solicit a rigorous evaluation by an independent evaluator. Over the 3 years of the demonstration, the independent evaluator will monitor performance and collect data on:

  • impact on the costs to either the Medicare Trust Funds or VA;
  • whether there is improved access to health care;
  • any change in quality of care provided to the demonstration population; and
  • any effect on local health care providers and other Medicare beneficiaries in the surrounding community.

Focusing on Coordinated Care

The DoD demonstration is limited to coordinated care by statute and, for good reasons, we have limited the proposed VA demonstration to coordinated care. This will:

  • promote higher quality through better coordinated care;
  • protect the Medicare Trust Funds;
  • limit the administrative burden; and
  • provide consistency between the two demonstrations.

Under a coordinated care model, enrollees would obtain all services from or through the VA. This will ensure that all needed care is received from the appropriate providers who have access to patient records and other needed patient information. We believe it will help ensure that beneficiaries receive high quality, coordinated care. It will help the VA better anticipate costs and payment amounts, resulting in better planning and improved access to care. It also means the demonstration will more likely remain within the spending caps established in the memorandum of agreement, thereby minimizing the likelihood that participation will be curtailed later in the demonstration. And a coordinated care model also will better protect the Medicare Trust Funds by removing many of the unknowns and risks inherent in a fee-for-service model. Focusing on one model will also minimize the administrative burden. Our memorandum of agreement with the VA is similar to the one with the DoD and, our role is similar in both. Therefore, we can leverage the staff, resources, and lessons learned between the two projects. But that can only be achieved with some level of consistency between the two programs.

I would like to alert the Committee that it does take a long time to implement a demonstration of this complexity. With the DoD demonstration receiving high-priority implementation treatment from both HCFA and DoD, it took between 13 and 17 months to deliver services in sites after passage of authorizing legislation.


Subvention has the potential to benefit all parties involved -- the VA, Medicare and, most importantly, beneficiaries eligible for both Medicare and veterans= health care benefits. They should enjoy enhanced choice and improved service, which is the true "bottom line@ in this effort. The President strongly supports this demonstration, and we are committed to meeting the challenges it presents and learning as much as we can about what would be necessary to expand such a program. We look forward to working with this Committee and the VA as we continue to seek to improve health care services available to our nation's Medicare-eligible veterans. It is critical that we limit the risk to VA and the Trust Funds, and ensure top quality care to veterans. In this regard, we recommend limiting the demonstration to coordinated care only, and stress the importance of allowing for about a 1-year implementation period.

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