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Testimony on the President’s Plan to Strengthen and Modernize Medicare by The Honorable Donna E. Shalala
U.S. Department of Health and Human Services

Before the Senate Finance Committee
July 22, 1999

Chairman Roth, Senator Moynihan, distinguished Committee members, thank you for this opportunity to testify before the Committee today. I am pleased to discuss President Clinton's plan to modernize and strengthen the Medicare program to prepare it for the health, demographic, and financing challenges that we face in the 21st century.

As we near the end of the 20th century, we can all point with great pride to the legacy of the Medicare program. Since it was enacted in 1965, Medicare has helped to lift and keep a generation of Americans out of poverty, while extending and improving the quality of their lives. During this time, the average life expectancy of Americans at age 65 has increased by 20 percent. Poverty among the elderly has dropped by nearly two-thirds, and access to care has increased by one-third.

But if we are to keep the promise of Medicare for future generations, then a program designed for the 1960's must be modernized and strengthened to meet the challenges of the 21st century.

President Clinton has a passionate commitment to strengthening Medicare for the future. When he took office six years ago, Medicare actually was projected to go bankrupt by this year. Working with the Congress, he has supported administrative and legislative changes that, along with a strong economy, have resulted in projected trust fund solvency through 2015. The Administration is gratified by this good news. The Congress should be too.

These projections represent a substantial improvement from 1997 and, based on current projections, they indicate that we have extended the life of the HI trust fund by a full 16 years and cut the 75-year actuarial deficit by 66 percent.

According to the Medicare Trustees and our independent actuaries, several factors have contributed to the economic good news for Medicare.

First, the robust national economy with its combination of low unemployment and low inflation has helped to increase payroll tax revenue into the trust fund and hold the line on health care costs.

Second, the Department's rigorous management of the Medicare trust fund and our historic attack on waste, fraud and abuse in the Medicare program have yielded some remarkable results. Over the last two years alone, our efforts to halt these practices have returned more than $1.2 billion to the Medicare trust fund. This is the first time in the history of the program that an Administration's efforts to end waste, fraud and abuse have been identified as having a positive impact on the life of the trust fund.

Third, is the bipartisan Balanced Budget Act of 1997 (BBA), which is an important legacy of this Committee and the Congress. We share the concerns that many members of Congress have expressed about the unintended effects of the BBA on beneficiary access to certain services, and have included in the President's plan a specific reserve fund to deal with demonstrated access and quality problems. At the same time, I think we all agree that the BBA made necessary and overdue changes in the way Medicare pays doctors, hospitals, nursing homes, home health agencies, and other health care providers. These new systems, while challenging to develop, will help to make Medicare a more prudent purchaser of health care services.

While we modernized our payment systems, we also modernized the Medicare benefit package to include important new prevention services, including annual screening mammograms for women over 40, prostate cancer screening, colorectal cancer screening and diabetes management. These changes made Medicare more like the benefit packages offered to working-age Americans.

These are great accomplishments--accomplishments of which we can all be proud. But, as the President has repeatedly said, there is a pressing need to take additional bipartisan steps to strengthen and modernize the program for the future. Over the next 35 years, the size of the Medicare population will double from 39 to 80 million beneficiaries. Too many Medicare beneficiaries today are being forced to choose between food and medicine, and too few have access to affordable prescription drug coverage, the therapy of choice for tomorrow. And too often, Medicare cannot make use of private sector tools that can enhance market competition and efficiency in the program.

The President's Medicare plan builds on the hard work of the Bipartisan Commission on the Future of Medicare. I want to recognize, in particular, the leadership of Senator Breaux in bringing into focus for Congress and the American people the challenges facing Medicare in the 21st century. I also want to thank the other members of this Committee who served on the Commission--Senators Rockefeller, Kerrey and Gramm--for their work and notable contributions.

The President's historic initiative would: (1) make Medicare more competitive and efficient; (2) modernize and reform Medicare's benefits, including the provision of a long-overdue prescription drug benefit and cost sharing protections for preventive benefits; and (3) make an unprecedented long-term financing commitment to the program that would extend the life of the Medicare trust fund until 2027.

Mr. Chairman, let me discuss these three areas in more detail.


First, the President's proposal recognizes that if we really want to prepare Medicare to face the challenges of a new century, then we must first make the program more competitive and efficient.

As I mentioned earlier, President Clinton has worked to enact several Medicare reforms that, along with the strong economy and highly successful efforts to fight fraud, waste and abuse, have saved hundreds of billions of dollars and extended Medicare solvency from 1999 to 2015. The President's new plan builds on this success in several ways.

Competition in Fee-for-Service: The President's plan uses competition and negotiation to pay providers in the traditional Medicare fee-for-service program. Unfortunately, Medicare generally has been barred from engaging in competitive bidding and other "prudent purchasing" practices that the private sector has used to improve patient care quality and costs. In the current system, fee-for-service rates for some goods and services are above payments made by other purchasers, because they are determined by formulas set in law. These rates are the same for all providers, with no incentive for improved quality and efficiency. We believe Medicare should have access to the same proven strategies that private sector health care purchasers use so that we can get the highest quality care while spending the fewest taxpayer dollars.

One of the most exciting aspects of the President's proposals is that Medicare will be able to both recognize and reward high-quality providers while maintaining beneficiary choice. Under the President's plan, traditional Medicare will be able to establish preferred provider arrangements, with special rates and discounted beneficiary copayments for the highest quality and most efficient health care providers. We have had some experience with these types of purchasing techniques including the "Centers of Excellence" demonstration project for coronary artery bypass graft surgery in which we recognize exceptional quality providers while at the same time reducing costs. Medicare will be able to make a single payment for certain procedures or conditions, provide incentives for qualified integrated delivery arrangements, and develop innovative pricing arrangements to promote quality and savings, as is commonly done in the private sector.

In addition, Medicare beneficiaries with multiple chronic health conditions will be able to select primary care case managers to help make sure they get the care they need while avoiding unnecessary procedures. We also will use disease management firms to truly manage a patient's condition and health care needs.

Competition among Contractors: The President's proposal also will increase competition among contractors who process fee-for-service claims. Current law severely restricts our ability to select fiscal intermediaries and carriers, and does not provide for competition in the selection process. This limits the types of companies with which we are able to contract and can create conflicts of interest with their private insurance business. Current law also requires us to pay contractors based on costs, which limits our ability to use market competition to get a better deal for taxpayers, and it includes special provisions that strictly limit our ability to terminate contracts.

The President's proposal will allow Medicare to contract with any company qualified to process claims. Payment to these contractors will be set through competition and will no longer rely on cost-based reimbursement that has no incentives for efficiency. And these contracts could be terminated on the same basis as any other government contract without regard to existing procedural requirements unique to the Medicare program that slow our efforts to obtain high quality, responsive contractor services.

Competition in Managed Care: The President's plan also uses competition to determine payment for HMOs and other private plans in the Medicare+Choice program, rather than the current system of government administered prices. Such payments now are based on complicated formulas set in law that result in excessive payment rates in many parts of the country and lower rates in others.

Many studies have shown that, because most plans operate where payments are excessive, actual Medicare payment for beneficiaries in managed care exceeds the true cost of the Medicare benefits delivered in these plans by billions of dollars each year. The Balanced Budget Act of 1997 made important adjustments to these formulas, but payments still vary widely and, according to the General Accounting Office, they are still excessive. A June 1999 GAO report says that, even with BBA reforms, plans received excess payments of $1.3 billion in 1998 and the amount of excess payments to plans will increase each year under BBA payment rules.

The President's proposal would extend competition to Medicare managed care plans by establishing a "Competitive Defined Benefit" program while maintaining a viable traditional program. The Competitive Defined Benefit (CDB) proposal would, for the first time, inject true price competition among managed care plans in Medicare. Plans would be paid for covering Medicare's defined benefits, including a new subsidized drug benefit, and would compete over price and quality. Price competition would make it easier for beneficiaries to make informed choices about their plan options and would, over time, save money for both beneficiaries and the program. The CDB would produce savings by providing beneficiaries with 75 cents of every dollar of savings that result from choosing health plans whose premiums are less than the traditional program. Beneficiaries choosing lower cost plans could reduce their Part B premium while beneficiaries opting to stay in the traditional fee-for-service program would be able to do so without an increase in current law premiums. This is important, because beneficiaries will be joining private plans by choice, and not through financial coercion.

Smoothing and Extending BBA Discipline: The President's plan also promotes efficiency by building on the fiscal discipline in the BBA and ensuring that its payment reforms are implemented prudently and effectively.

The President's plan sets aside $7.5 billion over 10 years for adjustments to the BBA that may be necessary to smooth out payment reforms that are affecting beneficiary access to high quality care. The Administration will continue to work with Congress, outside groups, and experts to identify real access problems and the appropriate legislative policy solution. In cases where there is credible evidence that adjustments are necessary to protect access to care, we have identified reserves to fund those adjustments.

While the BBA greatly constrained our administrative flexibility, the President's plan does include several administrative adjustments designed to moderate the impact of BBA on the ability of some health care providers to deliver quality services to beneficiaries. For example, we are considering budget-neutral adjustments during a three-year transition to the new outpatient prospective payment system to increase payments to low-volume rural hospitals, low-volume urban hospitals, teaching hospitals, and cancer hospitals that otherwise will be disproportionately affected by the new system. To help all hospitals adjust to outpatient prospective payment, we are considering postponing implementation of the "volume control mechanism" specified by the BBA for the new system.

To ensure that program growth does not significantly increase after most of the Medicare provisions of the BBA expire in 2002, the proposal includes out-year policies that protect against a return to unsustainable growth rates, but have been developed to be more modest than those included in the BBA. The plan will reduce projected average spending growth from 4.9 percent to 4.3 percent per beneficiary between 2002 and 2009 through several prudent steps. For example, it limits rate increases for inpatient care payments over this period, but it varies these limits to recognize the distinct circumstances facing many rural hospitals. Similar prudent limits on rate increases are included for hospital outpatient care, laboratories, durable medical equipment, ambulances, ambulatory surgical centers, and other providers and suppliers.

Improving Medicare Management: The President's plan includes important provisions to improve Medicare management. Chief among these is establishment of a Management Advisory Council. Private and public sector experts will help the Health Care Financing Administration identify, adapt, and adopt innovations in customer service, purchasing, and management. The Council will improve service and strengthen accountability by creating a conduit to private sector savvy and by holding public meetings to air Medicare management issues. Similar advisory councils already are being developed to improve management in specific areas. A Citizens Advisory Panel on Medicare Education, with experts in medicine, health policy, and consumer education, will help make sure beneficiaries have timely, understandable and useful information about their rights and options in Medicare. And a Medicare Coverage Advisory Committee, with experts in medicine and science, along with consumer and industry representatives, will help to guide a new open, understandable, and predictable process for determining when new treatments and devices should be covered. This will serve to make Medicare more competitive and efficient.

The President's plan also includes structural reforms to improve communication and coordination with HCFA's regional offices and HHS, as well as provisions for increasing HCFA's management and personnel flexibilities.


The steps I have just outlined to make Medicare more competitive and efficient simply aren't enough. To fully prepare the program to face the challenges of the next century, we also must modernize the benefit package to include those services that have become essential elements of high-quality medicine. In particular, we must include an affordable prescription drug benefit that is available to all beneficiaries.

As this Committee well knows, when Medicare was created, no one could have imagined the role that prescription drugs eventually would play in modern medicine. Today, they are just as important as hospital care was at Medicare's inception. In fact, many argued in 1965 that Medicare was not necessary because a majority of seniors already had basic hospital and doctor coverage. Many make the same argument today against an affordable drug benefit available to all beneficiaries.

The prudent use of prescription medication can help older and disabled Americans minimize lengthy hospital and nursing home stays. Coverage of medications is absolutely essential to preventing, treating, and curing diseases. But despite the proven value of prescription drugs in keeping people healthy, many older and disabled Americans simply cannot afford them. In the wealthiest nation on earth, too many of our citizens are forced to choose between putting food on the table or filling their prescriptions. A drug benefit is not an option--it is an obligation.

This is why the President's plan provides all Medicare beneficiaries with access to affordable, comprehensive, optional coverage for prescription drugs. This retains the essential compact between our government and America's senior citizens; a lifetime of contributions during their working lives entitles them to equal access to the full range of Medicare benefits when they age into the program. A universal benefit also helps to ensure a true insurance product with a healthier risk pool and less adverse selection. But the new drug benefit is also completely voluntary. If individuals have better prescription drug coverage, they can stay with it.

It is important to remember, however, that at least thirteen million Medicare beneficiaries -- one in three -- have no coverage at all. They are forced to pay excessively high costs for necessary medications because they do not get the deep discounts offered only to insurers.

Fifty-four percent of beneficiaries without drug coverage have incomes above 150 percent of the poverty level -- about $12,750 for a single individual, $17,000 for a couple. And nearly half of all rural beneficiaries have no drug coverage -- a much higher proportion than for all beneficiaries.

Moreover, millions of those who now have coverage find it expensive and unstable, with benefits eroding over time through deductibles and premiums. Only about one-quarter of beneficiaries have solid private insurance. Employer-based retiree health insurance covers about 25 percent of beneficiaries and is declining. Between 1994 and 1998, the number of large firms offering retiree health benefits for Medicare eligibles dropped 25 percent.

In addition, Medigap, which is an individually purchased supplemental policy, provides drug coverage for less than 10 percent of beneficiaries. Medigap premiums have been rising rapidly due in part to increasingly poor risk pools, and the additional costs for drug coverage are typically at least twice as much as the premium in the President's plan. Medigap premiums tend to go up as beneficiaries age, which makes maintaining coverage more difficult as beneficiaries get older. Finally, 12 million beneficiaries live in areas without access to Medicare managed care plans, but even for those with access to plans, the coverage is typically limited -- nearly 60 percent of plans cover less than $1,000 in costs. Many plans are raising premiums and limiting coverage.

For beneficiaries who choose to participate in the new drug plan, Medicare will pay half the program costs and beneficiaries will pay monthly premiums to cover the other half. Beneficiaries will pay half the discounted cost of each prescription they fill, with no deductible. The benefit will cover up to $2,000 of prescription drugs when coverage begins in 2002, rising to $5,000 by 2008. After that, the dollar amount of the benefit cap will increase each year by the increase in the Consumer Price Index. For low-income beneficiaries, State Medicaid programs will pay premiums and cost sharing. And we will extend assistance to more low-income beneficiaries -- up to 150 percent of the federal poverty level. Financing will be handled through a new "Part D," and premiums will be collected the same way that Medicare Part B premiums are collected, as a deduction from Social Security checks for most beneficiaries who choose to participate.

Private pharmacy benefit management firms will administer prescription drug coverage for beneficiaries in original fee-for-service Medicare. These firms will bid competitively for regional contracts to provide the service. They -- not the government -- will continue to negotiate discounted rates with drug manufacturers, and beneficiaries will receive these discounted rates even after they exhaust the Medicare benefit coverage. These private sector firms will be required to meet access and quality standards. For example, they will have to use programs designed to prevent adverse drug interactions. And their contracts will include incentives to keep costs and utilization low. However, the government will bear most of the financial risk.

Our plan also includes incentives for employers who currently offer retiree coverage to maintain that coverage. After all, we want beneficiaries to be able to maintain their current employer-sponsored drug benefit if it is at least as good as the Medicare benefit. These incentives will discourage employers from substituting the new Medicare benefit for existing private sector coverage and minimize disruptions in parts of the market that are working effectively. This incentive plan is a good deal for employers, beneficiaries, and the Medicare program.

Beneficiaries enrolled in Medicare managed care will receive this Part D coverage through their health plans. These plans will be allowed to offer supplemental drug coverage in addition to the Part D benefits as they can do with any benefit under our proposal.

Each pharmacy benefit firm may establish a formulary, or list of preferred drugs, in accordance with basic requirements that every therapeutic class covered under Medicaid be covered, and they will have to cover off-formulary drugs when a physician has reason to request the dispensing of a specific off-formulary drug. Coverage for the handful of drugs that are now covered by Medicare will continue under current rules and will not be included as part of the new drug benefit package.

To ensure that the benefit remains affordable, beneficiaries will not have the option to wait until they have significant pharmaceutical needs before they enroll. Enrollment will be allowed only in the first year the benefit is offered, the first year in which a beneficiary is eligible for Medicare, the first year after retirement if a beneficiary continued working after age 65 and kept employer-sponsored drug coverage after becoming a Medicare beneficiary, or the first year after an employer-sponsored plan drops drug coverage for all retirees.

About 60 percent of the total cost of the drug benefit will be offset through savings from increased competition and efficiency. The remaining cost would be offset by dedicating less then one-eighth of the amount of the surplus dedicated for Medicare under the President's plan. The amount of surplus funds dedicated for the drug benefit is less than the reduction in Medicare baseline spending between January and June of 1999.

Other Benefit Improvements: The President's plan makes several other necessary improvements to the Medicare benefits package. These will promote prevention, rationalize cost sharing, allow access for the near-elderly, and improve coordination of care for beneficiaries also enrolled in Medicaid. The President's plan builds on proposals to promote disease prevention and health promotion put forth by Senator Bob Graham and others, and we are grateful for their leadership in this area.

To promote prevention, no cost sharing will be required for any preventive benefits. Existing copayments and deductibles for every preventive service covered by Medicare, including colorectal cancer screening, bone mass measurement, pelvic exams, prostate cancer screening, diabetes self management benefits, and mammograms, will be eliminated.

The President's plan will rationalize cost sharing by extending the Medicare Part B standard 20 percent coinsurance requirement to clinical laboratory services, except those that are preventive services, and indexing the Part B deductible to inflation. The modest lab copayment will help prevent overuse and fight fraud. Indexing the deductible will guard against revenue losses in real terms over time due to inflation.

The President's plan also calls for updating all supplemental Medigap plans to be consistent with our changes to Medicare. We propose creating a new Medigap option that will feature nominal, rather than no, cost sharing. We will work with the National Association of Insurance Commissioners to develop a policy that will be less costly, and therefore more affordable for many beneficiaries, relative to the first dollar coverage of current policies. The plan also will strengthen access to Medigap for beneficiaries with disabilities and end stage renal disease and for those in a Medicare+Choice plan that withdraws from the program. Also, we plan to examine the feasibility and advisability of allowing beneficiaries to purchase catastrophic coverage through Medicare.

The plan includes the President's proposal to offer Americans between the ages of 62-65, without access to employer-sponsored insurance, the choice to buy into the Medicare program for approximately $300 per month, if they agree to pay a small payment to cover cost of risk-selection once they become eligible for traditional Medicare at age 65. Displaced workers between 55-62 who involuntarily lose their jobs and insurance could buy in at a slightly higher premium (approximately $400). And retirees over age 55, who were promised health care in their retirement years, would be provided access to "COBRA" continuation coverage if their old firm reneged on their commitment.

To improve coordination of care for beneficiaries also enrolled in Medicaid, an issue that I know members of this Committee consider very important, Medicare will conduct a demonstration project for those with significant care needs. These beneficiaries will qualify for special case management from a team of providers, receive a geriatric assessment and obtain advice on the best type of care. Medicare also will offer a special "Welcome to Medicare & Medicaid" package when beneficiaries become dually eligible that will explain the unique benefits available to them and how these services can be coordinated.


All of our efforts to modernize Medicare will result in enhanced efficiency and competition--and that means substantial savings. But no responsible savings policy would be sufficient to address the fact that the elderly population will double within the next 30 years. Every respected expert in the nation recognizes that additional financing will be necessary to maintain basic services and quality for any length of time. Because of this and his strong belief that the baby boom generation should not pass along its inevitable Medicare financing crisis to its children, the President has proposed that a significant portion of the surplus be dedicated to strengthening the program.

The President's plan dedicates 15 percent of the budget surplus to the program for the next 15 years. This will assure the financial health of the trust fund through at least 2027, and will eliminate the need for excessive cuts and radical restructuring that would be inevitable in the absence of these resources. The surplus was largely created by the baby boom generation, and it makes sense to use the surplus as a one-time funding source to help Medicare meet baby boom needs. It does not create an unlimited tap on general revenues, but instead invests a fixed portion of the surplus in Medicare to cover the temporary yet overwhelming influx of retirees.


Medicare's improved financial outlook has in no way diminished the pressing need to strengthen and modernize the program. For many older and disabled Americans, Medicare is not just a support system--it is a lifeline. We must ensure that the lifeline--and the promise of Medicare--is never broken. We must ensure that elderly and disabled Americans continue to enjoy the very best health care in the world. And we must ensure that Medicare will be able to meet the health, financial and demographic challenges of the 21st century.

We have the hard work of the Bipartisan Commission to build on. We have the President's thoughtful, clear, and detailed plan before us. And we have a responsibility to seize this opportunity to act, now, while there is no climate of crisis to distort our vision.

By working together, I have no doubt that we will be able to preserve the promise of Medicare for the baby boom generation--as well as for generation "X," nd every generation.

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