Copyright 1999 Federal Document Clearing House, Inc.
FDCH Political Transcripts
July 22, 1999, Thursday
TYPE: COMMITTEE HEARING
LENGTH: 29597 words
SENATE FINANCE COMMITTEE
U.S. SENATOR WILLIAM ROTH HOLDS HEARING ON MEDICARE PROPOSALS
LOCATION: WASHINGTON, D.C.
U.S. SENATE COMMITTEE ON FINANCE HOLDS
HEARING ON MEDICARE
JULY 22, 1999
SPEAKERS: U.S. SENATOR
WILLIAM V. ROTH, JR. (R-DE),
U.S. SENATOR JOHN CHAFEE
U.S. SENATOR CHARLES E. GRASSLEY (R-IA)
ORRIN G. HATCH (R-UT)
U.S. SENATOR FRANK H. MURKOWSKI (R-AK)
U.S. SENATOR DON NICKLES (R-OK)
U.S. SENATOR PHIL GRAMM (R-TX)
U.S. SENATOR TRENT LOTT (R-MS)
U.S. SENATOR JAMES M. JEFFORDS
U.S. SENATOR CONNIE MACK (R-FL)
U.S. SENATOR FRED
U.S. SENATOR DANIEL PATRICK MOYNIHAN (D-NY),
U.S. SENATOR MAX BAUCUS (D-MT)
SENATOR JOHN D. ROCKEFELLER IV (D-WV)
U.S. SENATOR JOHN B. BREAUX (D-LA)
U.S. SENATOR KENT CONRAD (D-ND)
U.S. SENATOR BOB GRAHAM (D-FL)
U.S. SENATOR RICHARD BRYAN (D-NV)
U.S. SENATOR J. ROBERT KERREY
U.S. SENATOR CHARLES S. ROBB (D-VA)
SECRETARY, DEPARTMENT OF HEALTH
AND HUMAN SERVICES
DIRECTOR, CONGRESSIONAL BUDGET OFFICE
DAVID WALKER, COMPTROLLER GENERAL,
MOYNIHAN: Mr. Chairman,
before we proceed to the serious matters at hand, may I join my colleagues in
wishing you a very happy birthday?
Thank you. That's OK, it was yesterday, with the tax bill. But, needless to say,
it's nice to be 39 again.
So, there are some
things I'd rather forget, but the alternative is no better.
In any event,
today represents an important milestone in our series of hearings on Medicare
reform. And for the past four months, we have been tracing the evolution of the
Medicare program, examining its current status and identifying aspects of the
program in need of reform. And we've identified various options for modernizing
Medicare and strengthening it to meet the long term challenges associated with
the aging of the baby boomer generation.
Today the administration
will join our ongoing association. We are indeed honored to have with us,
Secretary Donna Shalala of the Department of Health and Human Services. And I
know that the panel looks forward, very much, to your testimony. And I also want
to thank Mr. Walker and Dr. Crippen for joining us. We also look forward to
their analysis and observations.
Medicare reform is an incredibly
complex undertaking. It demands careful navigation of programmatic fiscal and
political challenges. And as our committee continues to develop a reform
package, the administration's views and technical will be an important
consideration. I sincerely hope the administration will rise to the challenge,
and work constructively with us to make responsible Medicare reform a reality
We're familiar with the broad themes the president has
set forth. With regard to Medicare reform, the administration goals are ones
that we all share. For example, no one can deny that making Medicare more
competitive and efficient should be a priority. And similarly, it's entirely
appropriate to modernize Medicare's benefit package.
rightfully, a great deal of attention focused on adding prescription drug
coverage, which, if done properly, I support. However, we have heard from
numerous witnesses this year that more than this is required to truly put
Medicare benefits on par with what is typical in private health insurance. These
and other benefit improvements need to be coupled with improved incentives for
efficiency, with respect to deductible, to co-insurance for various services.
The administration's final goal, extending the life of the Part A
Trust Fund is more than a goal. It's a shared basic responsibility. And I'd
simply note that our stewardship over the Medicare program's fiscal stability
goes significantly beyond just adding revenues. Our responsibilities are both
deeper and broader. They encompass Part B as well, and include creating an
effective, sustainable program design, coupled with effective federal
administration and oversight.
Despite our general agreement on
principles, it goes without saying that the levels and the details, whether
they're talking about systematic reform or the structure of a new benefit --
these details are what I'm interested in today.
Secretary Shalala, I
trust you'll walk us through the specifics of the administration's proposal,
related to program reforms. Because in earlier hearings, we have taken the
administration's testimony on broader budgetary and fiscal questions related to
Medicare reform, I would hope today that we would focus specifically on Medicare
With that, I would like to recognize Senator
Moynihan, for any comments he may care to make.
Chairman, might I yield my time to Senator Rockefeller?
ROCKEFELLER: Thank you, Mr. Chairman, and thank
you, particularly, the senior Senator from New York. Welcome, Secretary Shalala,
and I'm very happy that we are here, at last, to talk about the president's
proposal for Medicare reform.
I spent a year -- probably not the
happiest year of my life -- on the Medicare commission. I learned even more
about the demographic problems that face Medicare. While Medicare has done a
good job in keeping pace with private sector costs -- something not realized by
most people -- in fact, as it's outperformed the private sector -- the fact is
that the population covered by Medicare will double in the next 30 years. In
order to cover this increase in population, and maintain our promise to American
seniors, we have no choice but to either dedicate more revenue to Medicare, or
drastically cut benefits. There is no in-between position.
One of my
main objections to the proposal for the Medicare Commission came out of the
Medicare Commission's decision to completely ignore the possibility of spending
any new revenue on Medicare, and thus doom it. Under that plan, Medicare
benefits would have surely been slashed over time. It is an unacceptable
The president's package of reforms responsibly address the
demographic problem to dedicating a part of the surplus to shoring up Medicare.
In stark contrast, the majority of this committee voted yesterday for a nearly
$800 billion tax cut package that would soak up all of that surplus, and make it
impossible to sustain, let alone strengthen Medicare. If the Republican tax
package would become law, it would have -- let me say as clearly as I can -- a
devastating effect on Medicare beneficiaries, and the millions of Americans who
rely on that program.
Medicare is a social insurance program. It
always has been. When the program first began, as we all know, 50 percent of
seniors were not covered by health insurance in this country. They were -- the
market decided that they were too risky and did not cover them. That's why
Medicare was created. Even today, the private sector is highly unstable for
Medicare beneficiaries. Medicare plus choice withdrawals, we have seen recently,
are evidence of that. Another 250,000, I believe, within the last several days
Elderly and disabled people need to have a safety net
that does not go away when they get sick. The president is right to propose a
prescription drug benefit for all Medicare beneficiaries. We all know insurance
pools need to have both healthy and sick people in them, the way it originally
was with Blue Cross, before there was a Blue Shield. You made money on some, you
lost on others, but everybody was in the pot.
prescription drug coverage to all beneficiaries, the president is helping to
reduce costs for beneficiaries while maintaining Medicare as a universal
benefit. Currently, because Medicare fails to cover prescription drugs, far too
many seniors -- and I would obviously first think of the ones I represent in
West Virginia, but his would be true in Texas, Louisiana, North Dakota, New
York, Delaware, everywhere else -- are paying for the medication themselves. Or
they're not taking it. Or they're not eating and are taking it. But it's out of
their pocket. A universal prescription drug benefit would be of great
significance to tens of millions of these people.
I would say,
respectfully, that Senator Kennedy and I have also struggled with how best to
provide Medicare drugs for beneficiaries. Our plan, like the one before us
today, uses competition, not the government, through pharmaceutical benefit
managers to gain volume discounts in the marketplace. However, our plan also
went one step farther by offering a cap on out-of-pocket spending. This is one
area that -- where I think the President's plan could use improving.
ROCKEFELLER: Over the past year, I've spoken strongly and --
sometimes too strongly perhaps -- in my arguments against risky Medicare
proposals. My main concern has always been focused on how these changes would
impact the people, that we have, as a nation, committed ourselves to protect --
The president has taken the best of our work
from the Medicare Commission in the past year, while rejecting more risky
approaches to reform. I commend the president for his efforts, and look forward
to working with my colleagues on this legislation. And I thank my chairman of
the full committee, and chairman of my side of the committee.
Thank you, Senator Rockefeller. Now, Secretary Shalala, you obviously need no
introduction. Again, let me welcome you. We are pleased to have you. I look
forward to your remarks. Please proceed.
SHALALA: Thank you very
much, Mr. Chairman, and again, happy birthday. Senator Moynihan, distinguished
committee members -- Mr. Chairman you actually share a birthday. You'll notice
that HCFA Administrator Nancy Ann Minh DeParle (ph) is not here. She and her
husband Jason had their first child at 12:30 a.m. this morning -- a baby boy, 7
pounds 12 ounces, and 21 inches long.
ROTH: Yay! I'm both older, and
SHALALA: As I said to my
colleagues, NASA hasn't been able to get their shuttle off yet, but HCFA was
able to (OFF-MIKE) a bouncing baby boy this morning.
are very pleased to be here. And my testimony requires considerable detail to
explain the plan. But I'll do it as briefly as I can. I submitted a longer
testimony to the committee.
ROTH: It will be included as a part of
SHALALA: Thank you very much.
pleased to be here to discuss President Clinton's plan to modernize and
strengthen the Medicare program and to prepare it for the challenges ahead. As
Americans, we can all point with great pride to the legacy of the Medicare
program. But if we're to keep the promise of Medicare to future generations,
then a program designed in the 1960s must be modernized and strengthened to meet
the challenges of the 21st century. That's what we've tried to achieve in this
When the president took office in 1993, Medicare was
actually predicted to go bankrupt this year -- 1999. But working with the
Congress, the president has supported reforms that, along with the strong
economy, have resulted in a projected trust fund solvency through the year 2015.
We are all gratified by the good news, and Congress should be too. It indicates
that together, we've extended the life of the H.I. trust fund by a full 16
years, and cut the 75 year actuarial deficit by 66 percent.
factors, of course, contributed to Medicare's good news. First, of course, our
robust economy has helped increase payroll tax revenues into the trust, and held
the line on health care cost increases. Second, the Departments rigorous
management of the trust fund, and our bipartisan work together to attack waste,
fraud and abuse in the program, have returned more than $1.2 billion to Medicare
in the last two years alone.
Third, the bipartisan Balanced Budget
Act of 1997 -- we share the concerns that many members have expressed that
B.B.A. may have had unintended effects. The president's plan incorporates a
substantial reserve fund to address some of those effects. But at the same time,
I think we all agree that the B.B.A. made necessary and long-overdue changes in
the way Medicare pays health care providers, and in the incentives we provide
for important prevention services.
But if we are to strengthen and
modernize Medicare for the future, we'll have to do a lot more. The fact is that
over the next 35 years, the size of the Medicare population will double. The
fact is that too few beneficiaries have access to affordable prescription drug
coverage. And the fact is, that in far too many instances, Medicare is
prohibited by law from using market forces that could clearly make it more
By building on the work of the bipartisan commission on
the future of Medicare, the president's plan responds to each of these issues.
And in that regard, I want to recognize the leadership of Senator Breaux and
thank the other members of the committee who served on the commission --
Senators Rockefeller, Kerrey, and Senator Phil Gramm.
president's plan has three specific goals -- to make Medicare more competitive
and efficient, to modernize the benefit package -- including a long overdue
prescription drug benefit , to extend the life of the Medicare trust fund until
2027. I mentioned earlier that we've already implemented several reforms that
will help to save hundreds of millions of dollars, and extended Medicare
solvency to 2015.
The president's plan builds on this achievement.
As you know, Medicare has too often been barred from engaging in competitive
practices that the private sector routinely uses to improve patient care, to
improve quality, and to cut costs. We believe that its time that Medicare had
access to the same strategies, to provide the highest quality care using the
fewest taxpayer dollars.
In short, we need to be able to finally
recognize and reward high quality health providers. In addition, by increasing
competition among contractors, and fostering prudent purchasing, the president's
plan would dramatically improve the current payment system, a system which too
often has led to excessive payment rates in many parts of the country, and lower
rates in others.
The president's proposal would also extend
competition to Medicare managed care plans, while maintaining a viable
traditional program. Plans would be paid for covering Medicare's defined
benefits, including the new drug benefit, and would compete over cost and
quality. This would save money, both for the beneficiaries and for the program.
The president's plan also sets aside $7.5 billion for adjustments to
the B.B.A. that may be necessary to smooth out payment reforms affecting
beneficiaries' access to high-quality care. We will work with Congress and
others to identify real access problems and to craft appropriate solutions.
Even though the B.B.A. severely constrained our administrative
flexibility, the president's plan includes several adjustments to moderate its
impact on the ability of providers to deliver quality care. And these
adjustments will help hospitals -- particularly rural and teaching hospitals,
and home health care agencies. The president's plan also includes important
provisions to improve Medicare management. And chief among these is the
establishment of a management advisory council to help identify and implement
innovations and customer service in purchasing and in management.
But these steps to make Medicare more competitive and efficient
simply aren't enough to fully prepare the program to face the challenges ahead.
We must also modernize benefits to include 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.
this committee knows, when Medicare was created, no one could have imagined the
role of prescription drugs eventually would play in modern medicine. In fact,
Senator Moynihan has showed the MERC (ph) books from 1965 and to the present
day. But despite their proven value, too many older and disabled Americans
simply cannot afford the prescription medicines that they need.
me be very clear, in the wealthiest nation on earth, a prescription drug benefit
is not an option but an obligation. And that's why the president's plan provides
all Medicare beneficiaries with access to affordable, comprehensive coverage for
prescription drugs. The new drug benefit is also completely voluntary. If
individuals have better prescription drug coverage, they can stay with it.
It's important to remember, however, that at least 13 million
Medicare beneficiaries -- one in three -- have no coverage at all. Fifty-four
percent of those without coverage are above 150 percent of the poverty line.
Millions of others who now have coverage are finding it expensive and unstable,
with benefits eroding over time through deductibles and premiums. And that's why
our plan includes incentives for employers that currently offer retiree
coverage, to maintain it.
About 60 percent of the total cost of this
new drug benefit will be offset through savings. The remaining costs will be
offset by dedicating less than one eighth of the amount of the surplus dedicated
for Medicare under the president's plan. The plan makes several other necessary
benefit improvements to promote prevention, to rationalize cost sharing, to
allow access for people over 55, to improve coordination of care for
beneficiaries also enrolled in Medicaid.
As you may notice, the plan
also builds on proposals to promote disease prevention and health promotion, put
forth by Senator Bob Graham and others. The president's plan also takes steps to
offer coverage to older Americans who now lack any health insurance. All of our
efforts to modernize Medicare will result in new efficiencies and competition
that mean substantial savings.
But no responsible savings policy can
address the fact that America's elderly population will double within the next
30 years. Because of this, and his strong belief that the baby boom generation
should not pass Medicare's financing crisis on 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. 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 but overwhelming influx of retirees.
Let me say again that Medicare's improved financial outlook has in
no way diminished the pressing need to strengthen and modernize the program. For
many older and disable American's, Medicare isn't a support system, it's a
lifeline. And we must ensure that it is never broken. 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 the responsibility to seize the
opportunity and act now, while there is no climate of crisis to distort our
Mr. Chairman, before I conclude my presentation, I'd like to
briefly refer to several charts that help to emphasize the importance of
providing an important prescription drug benefit for all beneficiaries.
In chart one, "The Sources of Drug Coverage for Medicare
Beneficiaries" -- first of all that means that about one third -- 44 percent --
have no coverage at all. Among those with coverage, beneficiaries use a
combination of private insurance and public programs. These sources of coverage
vary widely in quality, and are often subject to change. For example, employers
may discontinue retiree health benefits, managed care plans may withdraw from
service areas, and Medigap premiums may rise to unaffordable levels.
For public coverage, about half of those with coverage, get that
coverage through public programs, including Medicaid, Medicare Managed Care and
state pharmacy assistance plans. While Medicaid drug benefits are generous, only
about 12 percent of Medicare beneficiaries receive drug coverage through
Medicaid, and eligible criteria vary by the state, so that not all beneficiaries
have the same opportunity for coverage.
In fact, that's the story of
public pharmaceutical benefit coverage. I don't know how Senators Gramm (ph) and
Senators Mack explain to Senator Conrad and Senator Nickles why the government
of the United States provides pharmaceutical benefits in their states, if people
join managed care plans, but if you're in a state that has no managed care
plans, or very few of them, there's no chance of getting a pharmaceutical
benefit through government programs, specifically through the Medicare program.
The unevenness of how the public programs work, and of the Medicare program in
particular, and the fairness of it, ought to be of great concern to us.
For private coverage, 32 percent of Medicare beneficiaries have
private insurance for drug coverage. That's really the employer- sponsored
retiree health benefit plans and Medigap policies that include drug coverage.
And in 2000, about one fourth -- 24 percent -- of all beneficiaries will get
drug coverage through plans of their former employers.
On chart two,
you see a lack of coverage for prescription drugs is a problem for Medicare
beneficiaries at every income level. In fact, here's the point of why we can't
just take care of the poor. In the year 2000, 54 percent of beneficiaries
without drug coverage have over 150 percent of poverty.
three, it tells you something about where they live. In the year 2000, 48
percent of beneficiaries living in rural areas will not have any prescription
drug coverage. Rural beneficiaries generally have more trouble paying
out-of-pocket costs for drugs, because they are somewhat more likely to have
incomes that are pretty low, and lower than their urban counterparts.
So this is not a problem just of the poor. It's a problem of the
middle class. It's a problem of where you live.
It's a problem of whether you get to participate in a managed care plan, or not.
It's a problem of how we pay, now, for managed care. If we overpay, so that a
plan can provide extra benefits, as we do in places in Florida, people get into
managed care and are attracted to it because of the pharmaceutical budget --
because of the pharmaceutical benefits. But if you live in rural America, or in
a place where there aren't many managed care plans, you don't have a chance to
get a chance at a pharmaceutical benefit.
So, this is an issue of
fairness. Should geography determine the quality of your health care? Is justice
to be determined by geography in this program, or are we going to provide
fairness and a critical health benefit? The first justification for
pharmaceutical is because it's important for health. But second, if we're going
to provide it, we must provide it fairly.
Thank you very much, Mr.
ROTH: Thank you, Madame Secretary. Madame Secretary, the
Progressive Policy Institute, which, of course, is the centralist Democratic
think tank, has suggested four changes they say would greatly strengthen the
First, set up a Medicare board to run the
competitive system for health plans that would eventually encompass the
traditional fee for service program.
Second, to ask HCFA to develop
a comprehensive business plan for the traditional fee for service program, in
order to modernize its benefits, to improve its service and quality, and to set
up a premium so that it can be competitive with private plans.
three, limit prescription drug coverage to low-income beneficiaries.
Four, set a fair limit on the amount of general revenue to be used
Would you please comment on these suggestions, and how
SHALALA: Well, if I might do it quickly. I think I've
responded to the pharmaceutical drug coverage. If we focus it just on low-
income beneficiaries, then we have a number of choices. We will leave out large
numbers of people. We will continue the benefit to people, who are high income,
just because they live in an area where there's managed care, and it's provided
through a managed care company. It seems to me that for us to focus now, just on
low-income beneficiaries, we've got a large number of people who don't have
access to pharmaceutical benefits, and who are, in fact, middle class. And I
responded to that.
On the issue of setting up a medical board to run
the competitive system for health plan, that would eventually encompass the
traditional fee for service plans, I would suggest that the competitive system
that we recommend does not separate fee-for-service from managed care. In fact,
managed care competes against fee-for- service, and competes on the basis of
price and quality. And you shouldn't want to split up that responsibility. Nor
should we want to create a new bureaucracy, and this -- what the bureaucracy --
and create an independent new bureaucracy.
And I would think that
all of us would be very concerned about transferring essential government
functions that millions of seniors depend on, to any kind of a private sector
entity. Maintaining eligibility, and enrollment and records go to the heart of
the entitlement of the health care system. And turning that over to a private
sector board, I think we ought to be very wary about.
ROTH: May I...
SHALALA: And the final point about...
ROTH: Let me interrupt if I might.
ROTH: Two points -- as I understand it, the recommendation is not
that medical board be necessarily private. It could still be government, but it
would be independent...
SHALALA: But it would be a...
ROTH: And the other point is on the competitiveness. As I understand
that, the reason they raise a question there is that there's no limit of costs
as far as fee-for-service is concerned, which is contrasted, of course, with the
home HMO programs.
SHALALA: Well, let me say a couple of points
about that, because one of the things they recommend is a comprehensive business
plan for the traditional fee-for-service program, to both modernize its
benefits, to improve its service and quality. Within the president's plan, we,
in fact, modernize fee-for-service.
And with the introduction, both
of prudent purchasing, of reducing fee-for-service costs by introducing
competition throughout the fee-for-service program, through the introduction of
centers of excellence, to actually reward beneficiaries that go to places for
treatment and for surgery, for example, that provide lower price and quality,
and in the introduction of PPOs (ph), which is another private sector approach
to reducing costs.
So, there are substantial reforms, in the first time
for fee-for- service -- in the fee-for-service program that, I think, reflect
both private sector business practices and will hold down fee-for-service costs.
Again, going back to my testimony, we have been quite successful in
holding down fee-for-service costs, through a variety of different steps that we
have taken. Fee-for-service costs have grown below that of the private sector.
And, as you know, a combination of things have been done to get there, including
extensive efforts to go after waste and fraud.
The next steps are to
allow us to use private sector business practices in fee-for-service, as well as
economic incentives to reduce -- to keep fee-for-service costs down, and to let
managed care compete against fee-for-service, so that managed care, bidding on
the same benefit package, can reduce the actual premium that an individual pays,
as a way of enticing them into managed care, because it will be less expensive
for theme to go into managed care, which over time, of course, will reduce the
government's overall costs.
ROTH: Do you want to comment on the
limit on the amount of general revenue?
SHALALA: Well, we do have a
limit on the amount of general revenue. I mean, in fact, the Congress of the
United States is our limit on the amount of general revenue and what we're
willing to spend. And, I think that we keep the amount of general revenue in
this program down, for the Part B premium in particular, through a combination
of these efforts. Plus we have here, indexed the Part B premium, so as the cost
of living goes up, the contribution from individuals will simultaneously be
I think that we've done a good job keeping down Medicare
costs. We have a couple of problems ahead of us. Unless we're prepared to
continue the fiscal discipline, costs will start going up on us after 2003. And
number two, unless we're prepared to put in new money into the system we cannot
take care of the doubling of the population.
ROTH: I'd like to go
back to a point I raised earlier for further comment. Now, the president has
proposed a new competitive pricing system for Medicare private managed care
plans, that does not include a requirement, as we said earlier, for the original
Medicare fee-for-service program to compete as well.
I'm not clear,
how would you ensure that plans, will would be receiving competitive capitated
(ph) payments will not be disadvantaged, compared to the traditional program,
which will continue to have an open-ended benefit with no budget constraints?
SHALALA: Here's how it works. The managed care plans -- first of
all, they're competing for the -- they're setting the price themselves. This is
true price competition. They're setting the price themselves. And we're
comparing apples with apples. So everybody is competing on the basic benefit
package, which is the comprehensive benefit package of Medicare, plus the
prescription drugs. They compete against the average fee for service cost in
And for every dollar they bid below, beneficiaries keep
75 percent, and the government gets 25 percent. The beneficiary then, can use
the savings to buy back benefits they want to add. But the important point here
is, the managed care plans themselves, set what they want -- set the bids
themselves. We don't dictate the bids. But they are bidding against the average
fee-for-service cost in their area.
The advantage of this is, what
you're doing is offering positive economic incentives for people to move into
managed care. And what's the incentive? Their premium comes down. We have less
spending -- out of pocket spending, because they have a lower premium -- and a
lower premium than they would have under fee-for-service. And they get that
lower premium because they choose a managed care plan. They can -- the managed
care plans can bid with zero premium. And that means that they would attract,
probably, large numbers of people in their community. But they get their market
share through a bidding process that we don't rig, that they determine. They
determine what their bid is. And they all can participate. Each of them will
have different bids.
ROTH: Well, I just have say...
SHALALA: True price competition.
ROTH: I just have to
say I find it hard. I see competition among the managed care programs, but I
find it very difficult to see how there's genuine competition with a
fee-for-service. With that I'll turn it over to Senator Moynihan.
MOYNIHAN: Mr. Chairman, just two general points. On the baby boom
and it's effects, and so forth, there was, indeed a period there -- post World
War II. In 1950 the fertility rate was at 3.03. By 1975 it had dropped to -- it
halved, to 1.77. And it's never got back more than to 2.4. We have a bulge which
is obviously not going to continue, right?
SHALALA: That's correct,
and that's precisely what we're proposing to finance -- the bulge.
MOYNIHAN: The bulge, all right.
SHALALA: By using the
surplus to finance the bulge, which is the doubling of Medicare beneficiaries
between now and 2035. And this proposal gets us to 2027.
That does not go on indefinitely.
Yes, that's a point to be made. Two -- just to comment -- not to rouse Senator
Gramm's enthusiasms too much, but you speak of private-sector business
principles that you're putting in place. It seems to me that an increasing
problem of public administration, is you might want private sector business
principles, but you can't pay private sector salaries. The rewards aren't there.
And it seems to me, it would put a limit on just what large organizations can do
in government, that don't have other particular military rewards, as it were. I
leave you that thought.
But the president yesterday, speaking of the
1977 (sic) Balanced Budget Act, said this is the reason all these teaching
hospitals are in trouble today. All these teaching hospitals are in trouble
Just a moment's anecdote -- in 1974, as the Senate Finance
Committee began to deal with health care, I realized I didn't know anything
about the subject. And I asked the head of Sloane (ph) Kettering, Paul Marx (ph)
if he'd put on a little seminar for me. We met at 10:00. And at about 10:15, the
dean of Johns Hopkins said, "You know, Minnesota may have to close it's medical
Well, then I realized I'd heard something. This was where
all the Swedes went. And they don't close medical schools, they open medical
Now, how could this be? And he could then explain that
managed care was moving from the West Coast to the East Coast. It reached the
high plains. All the good citizens had signed in. And managed care doesn't send
patients to teaching hospitals. Absent a teaching hospital, you can't have a
medical school. And that seems to me, a crisis of huge proportions -- I mean a
real crisis -- a change in the whole structure. And it created these schools and
maintained them -- the best in the world.
They were hit by the 1997
proposals as if we didn't notice this was happening. We'd already heard, in this
committee, the phrase "the commodification of medicine" -- the arrival of
markets in medicine. And these particular institutions are what economists call
public goods. A public good is something everybody shares, so nobody will pay
for. And that's really what government's all about. Right Phil?
that's why you have the Army...
GRAMM: Speak close to the mike, Pat,
this is good stuff people need to hear.
MOYNIHAN: Oh God, I must be -- oh oh.
But what are you going -- you don't seem to have a concentrated
concern about the most important institutions in the whole medical system. And
they keep -- and the president is now talking about it. And can you help us
SHALALA: I hope so, Senator. They are not only public goods,
they are magnificent public goods. And they are absolutely critical, both to the
success this country has had in this particularly golden age of biomedical
SHALALA: ... because they are
the infrastructure, that of course these investments in the National Institutes
of Health, as well as the private health care company investments. And so we
need these institutions in particular. And as you indicated, they have no peer.
I mean Germany has Max Planck, Japan has Kyoto, England has Cambridge, but no
other country in the world has the kind of concentration of academic teaching
And as you point out, the changing nature of the health
care system -- in particular the fact that they've had to take the deep
discounts that managed care has negotiated with the private sector, in
particular has created for them an untenable situation. And as the government
moved in to more accurately pay for the patients that it was responsible for, we
did do something to the B.B.A. As you know, we pulled out some of the indirect
and direct medical costs from the managed care, to pay them directly.
SHALALA: In this plan, we take the disproportionate share
payments -- a proposal that you've had over the years -- out, to give it to the
teaching hospitals, and the other disproportionate share. The president has set
aside, as I indicated, $7.5 billion. There are a number of kinds of institutions
that will make proposals. We must look carefully with the Congress at where
there is evidence that there's a lack of access, but also, that we have
institutions that are important to our future, that we'll want to invest in --
nursing homes, home health care, other hospitals. Everybody is going to want to
make a claim.
For these institutions in particular, if I might make
a private point, since I ran one. Concentrating just on Medicare -- a point that
you've made before -- as a way of fixing what is important and significant
institutions, may not be the only thing we need to do.
(OFF-MIKE) something knew has happened...
SHALALA: But if they are
in fact a public good -- if they are, in fact, a public good, then the narrow
base of Medicare may not be sufficient for this country. And we've got to the
seamlessness of both the institutions and the work they do from their -- our
investments in the NIH through the institutions themselves.
would say to you that as we work through this quality amount the president has
set aside, these institutions, obviously, are very high on everyone's list. They
are, for me, the most important institutions for the future of health care.
And I think, frankly -- whether Senator Gramm (ph) would agree or
not -- they may be the most important institutions for the future of our
economy. Because they really -- our investments in biomedical research are very
much responsible for some positive changes in the growth of this economy, that
simply don't exist elsewhere.
So, obviously, the president and this
administration shares your concern. We have done some things already -- some
specific things in this plan. And we have set aside some resources for the
teaching hospitals as well as for some of the other unintended consequences of
the Balance Budget Act that we must, together, go through extremely carefully.
MOYNIHAN: Could I ask that you might send us a paper on teaching
hospitals in the president's plan? Thank you.
SHALALA: I'd be happy
to do that, Senator.
MOYNIHAN: Thank you very much.
I would like to say we'll limit questions to five
minutes. We've got a large number here, and of course, we have a second panel.
Senator Grassley is next.
GRASSLEY: The chairman has
identified two hundred and some billion dollars out of this surplus for Medicare
reform and for prescription drugs. So, I think we're all talking about
supporting some sort of prescription drug program. And we would like to work
with you on that. But we have some questions about your plan. You may have some
questions about some of our ideas as well.
I only say that the
chairman has identified that amount of money, because we voted a tax bill out of
committee yesterday. And the other side of the aisle was giving speeches on the
floor of the Senate this morning denigrating that effort, and saying that there
wasn't any effort to be worried about prescription drugs, and Medicare reform,
and saving any money for that. But we have saved money for that. So I think
that's just plain wrong to be speaking in terms of that, when our chairman has
been very careful about this whole approach of a tax decrease, and still having
money for Medicare.
I've got five questions I want you to listen to
as I give them, with some explanations in between, before you answer any. One of
my concerns with the president's proposal is that it will encourage employers,
who currently offer their retirees prescription drug coverage to drop the
coverage. Can you describe the rationale for paying employers to provide what
they may already be offering, and to give them this subsidy, in addition to the
tax break they already have?
Secondly, does this make sense to spend
tax dollars this way, on a Medicare program that has major financial hurdles
already to overcome? Thirdly, so why not target the benefits to those low-income
seniors who need it -- and who need it most and who are least likely to get an
Now, before I ask my fourth and fifth
one, I want to express concern for individuals who do not currently have the
benefit of receiving prescription drug coverage through their employer. These
plans tend to be more generous than most coverage available to seniors. So,
fourthly, we'll also want to know that employers are -- we also know that
employers are starting to scale back some of this coverage. And do we want to
encourage this scale-back even further by replacing this with a much less
generous federal benefit?
And then, lastly, how did you determine
what employer subsidy would be adequate to ensure that this would not occur?
And, what assurances do you give us that the subsidy, if it's justified, will be
SHALALA: Those are a very good set of questions. Let me see
if I can answer them quickly. First of all, our goal was to minimize the
crowd-out of employer coverage -- exactly what you're talking about. How do we
stop the slide of employers dropping drug coverage for their future retirees?
What can we do to offer some incentive?
So, rather than giving them
the whole amount of money, under our proposal the direct subsidy to an
employer's health plan, that provides a comparable or better drug coverage,
would be one third smaller -- about $16 a month.
So we would provide
a smaller subsidy to try to stabilize that part of the market. And what we're
trying to do here is not introduce a highly centralized program, but to build on
what's out there. So, we directly subsidize retirees' plans, by giving a smaller
amount of money to employers as a way of stopping that slide of their dropping
drug coverage, and a way of getting some basic coverage across the country, so
that everybody has the same basic coverage. And many employers will, of course,
add a better benefit.
GRASSLEY: What about the fact that if we're
spending money for this, wouldn't it be better to spend that money on
strengthening the Medicare program, as opposed to subsidizing a present
SHALALA: Well, I think that what we're trying to do
here is to add a benefit for everyone, and to build on what already exists out
there. In this case, it's not like some people, as my chart demonstrates, don't
already have some coverage through a variety of different means. So, rather than
superimposing a single plan run by the government, we take advantage of
contributions that the private sector is already making in this case.
And in the case of HMOs -- those that are already providing the
benefit -- they will also get a payment that will stabilize them because they're
also dropping coverage. Every health plan in Florida that dropped out of the
Medicare program had a drug benefit.
And so, those people, if they
don't have another HMO to go to -- are forced to go to fee-for-service. And so,
making sure that managed care has a drug benefit, that people who get it through
their retiree plans have a drug benefit, as opposed to simply saying everybody
that gets a drug benefit, and getting private sector money out of the system.
So, it really is an attempt for the government not to have to pay
for everybody who now gets it in another way. Instead, to stabilize access to a
drug benefit out there, because this is a health decision, not a financing
decision. It's a decision that we believe that no one would design a Medicare
benefit today without drug coverage, so we want to make sure that everyone gets
GRASSLEY: Thank you, Mr. Chairman.
ROTH: Thank you.
ROCKEFELLER: Mr. Chairman, I would yield my
time to Senator Graham, who has to be on the floor of the Senate very shortly,
if that's all right with the chairman.
ROTH: Fine. Senator Graham.
GRAHAM: Thank you very much, Mr. Chairman. And thank you, Senator,
for your courtesy.
I'd like to ask, basically, two questions. First,
is injecting competition into the HMO plan -- I personally believe that
competition, through competitive bidding, is a critical new step. It is a key to
bringing some of the efficiencies of the market place into health care. It also
is a key to the fairness of distribution of availability of HMOs. It is, I
think, patently absurd to continue to use, essentially, a price list based on
what fee-for-service medicine within the particular county happens to be, and
make that the essential element in how you reimburse Health Maintenance
And I would just say that Senator Mack and I don't
have to have a conversation with Senator Nickles or Senator Conrad. We can have
a conversation within our own state, because we've had a list of some 20
counties that have seen a dropping of their HMOs. And now four counties are
called orphan counties, in that there's no HMOs that people can sign up with.
So, within a single state there are these problems.
This brings me
to the point that a very serious thing happened last week, when -- and I'd like
to ask my colleagues how many were aware that in an amendment that was a part of
the so-called final wrap-around amendment on the HMO Patients' Bill of
Rights, we've repealed the -- not only the authority of HCFA to
undertake the two demonstration projects in Kansas City and Phoenix, we
prohibited the establishment of any additional demonstration projects. And then
we said any future competitive programs had to be voluntary. Well, these HMOs
aren't going to voluntarily for a plan that is economically -- they consider --
less advantageous than the current price list.
How many of my
colleagues were aware that we did that in the HMO Patients' Bill of
(UNKNOWN): Yes, I was aware of it.
GRAHAM: We have one person aware of it.
ROTH?: I was
aware of it.
GRAHAM: We have two people aware of it.
ROTH?: No, there's a lot of people who knew that.
GRAHAM: Well, you might not want to have your fingerprints too
visible on that. But it was absolutely a counter to everything we say we
profess, in terms of fairness of HMOs, of availability, and in terms of using
I'd like to ask, in light of that, Madam Secretary,
where do you see the future of competitive bidding for HMO reimbursement levels?
SHALALA: Well, from our point of view, we must do it. First of all,
there's just no other substitute, other than the old fashioned way in which
we've been paying for this Medicare program. We've got to have true price
competition. And that competition has to be between fee-for-service and HMOs.
The difference between what we did and Bill Thomas (ph), is that we
actually put positive economic incentives. That is, what the HMOs are able to do
is to actually submit their prices in a way in which they drive down the cost to
the beneficiary. And so, they'll compete and the beneficiary will save their
costs for their premium in particular.
But your point about
competition is really true. As you know, we're having a very successful
competitive program with durable medical equipment in Florida, in which we're
demonstrating that we can save at least ten percent if we go to competitive
You're about to hear from Mr. Crippen. He actually has written
in his testimony -- unless he's changed it -- that he has no confidence in the
political system's willingness to allow the government to go to these kinds of
Prudent purchasing -- he thinks that given the
experience of stopping us every time we wanted to go out to a competitive
reform, that there will always be interference by elected officials, and
lobbying by the providers to prevent us from getting competitive reforms.
I don't share his view. I have to say that. I think that once we go
to these national kinds of reforms, once we agree that this is the way in which
we're going to get better, more accurate pricing, and we're going to introduce
true price competition if we do it across the board, we're going to be able to
do it. But we must do it. We must do it. We have no other way of controlling
costs, other than true price competition in our judgment, as well as giving us
an ability to go in.
I can't -- I have a limited list written into
law, of who can process claims for the Medicare program -- a limited list of
There are lots of businesses in this country
now, that could process those claims. It's very difficult for us to fire anyone,
because our lists are so short, in terms of who we can hire. It's difficult for
us to work with contractors, when we are limited in our ability to work with
We have already demonstrated in the Medicare
program, that we can bring down costs, that we can reduce rates. We have cut our
error rate in half in fee-for-service, which no one ever expected the Medicare
program to do. So, I can only plead with the Congress to give us these reforms
to negotiate with us for competitive reforms, so we can go out and get the best
prices for the taxpayers.
GRAHAM: I just would like to conclude that
I think it's instructive that no member on the Democratic side was aware of this
provision, and only two on the Republican side were aware. And I hope that the
Department does not give any undue weight to a stealth attack such as that, that
was launched against this very important program for the future of Medicare.
GRAMM?: Maybe we should do some of those in Florida because
every state that had them didn't want them.
GRAHAM: We have done one
in Florida, Senator. As the secretary just said, Senator Mack and I didn't cave
in to the providers on a competitive demonstration project for doable medical
equipment in Lackland, Florida and we're getting 15 to 20 percent lower costs
because we're using the market place. Senator, I'd be happy...
GRAMM?: Would the Senator yield...
demonstrating that small businesses can participate in this kind of competition
that it doesn't exclude small businesses. In fact the variety, the major number
of contractors in Florida are actually small businesses.
have a comment you'd like to make on that, Senator?
GRAMM?: I'll be
happy to. Competition, durable medical equipment is just a little bit different
then the mandates that were imposed both in Arizona and I believe in
Pennsylvania, all of which were the city council and those were saying, we want
out of it, or we want to be voluntary. And frankly that's the way we'd like the
amendment to say. It would be voluntary.
GRAHAM: Which means that you'd never have competitiveness because
why would any provider which currently has a price list that guarantees them
essentially a percentage of fee per service ever want to go into competitive
bidding process. They're not that stupid.
GRAMM?: We'll debate this
another a day. I just say, the competition wasn't even between fee per service
and managed care, why it was competition was only in managed care versus managed
GRAHAM: (OFF-MIKE) opinions are currently established is a
percentage of the fee per service. So the question is, do you want to have a
continued price list or market place competition into HMOs?
The time is up. We are going to have to proceed. Let me point out that we also
canceled plans in the past in Maryland and Colorado because of complaints on
their congressional delegation.
GRAMM: Would the senator yield for
20 seconds so I could give a point of information here.
senator from Texas will have time in a few minutes. We will now turn to Senator
NICKLES: Actually the senator from Texas was next. He beat
me here by two minutes.
ROTH: They put the list this way and I would
NICKLES: All right. I'll follow through. Madam Secretary
(OFF- MIKE) I appreciate your coming to us today and trying to explain the
president's proposal. Let me just make a couple comments. President yesterday in
a press conference stated the following and it sounded a lot different then what
you said today. The president said, "tomorrow I will release a report that shows
that a great and going need for prescription drug coverage."
the study shows is that 75 percent of older Americans lack dependable private
sector coverage of prescription drugs. That's three out of every four seniors.
And it goes on. Now, I think I heard you say that two-thirds of seniors do have
some form of prescription drugs. Is that correct to say?
did say that. What the president -- it is true that probably 25 percent have a
stable system that in most of these systems it could pull out at any time as
Medicare managed care has demonstrated, that they can pull out of your area and
if you don't have an option of another managed care plan that has a prescription
drug benefit you can go into -- you go back to fee-for-service and you wouldn't
have a prescription drug benefit.
NICKLES: Well, my point being I
think the president's statement is very misleading. Two-thirds of seniors are
now eligible and now receiving some type of prescription coverage either through
Medicaid or either through their employer or through a Medicare, HMO, managed
care plan or through the Medigap. There's a lot of different things. Some states
have some prescription drug coverage.
If two-thirds of them now have
it, the president makes a statement and makes it sound like three-fourths don't,
I'm bothered by that. I think it's a little misleading. I mention that because I
think we have to be factual. And I haven't been able to totally analyze your
chart but it looks factual and it looks quite contradictory to what the
president said just yesterday.
Let me mention just one thing. Maybe
I'm one of the few that seems to be concerned about it. But you talked about
transferring a percentage of the surplus and I think your statement was that it
was your plan to transfer 15 percent of the surplus over the next 10 years. Is
that correct? Is that 15 percent of surplus excluding Social Security? Is that a
SHALALA: It's 15 percent for Medicare.
Fifteen percent of the surplus excluding the Social Security surplus?
SHALALA: Yes. It's 15 percent of the total surplus would be set
aside for Medicare.
NICKLES: Then you're trying to rob 15 percent of
those -- you're trying to take money away from the social security trust fund
and put it into Medicare?
This is the on-budget surplus.
NICKLES: On-budget excluding Social
Security surplus? Is that correct?
NICKLES: I think it's important. I just looked at (OFF-MIKE)
statement and we'll have Mr. Crippen in here in just a minute but on page 10 of
his statement he says, the on-budget surplus according to the administration's
-- these numbers are confusing but you don't have that much money.
SHALALA: Well, as you noted the numbers are confusing and we've just
got his testimony so I'm sure that a member of the economic council, Mr. Lew
will be happy to comment on that as quickly as possible.
I have not
had a chance to read that testimony. We just did -- and I had a nice
conversation with Mr. Crippen, we'll be going through with testimony including
what he says about Medicare and about the projections.
Well, I just -- question -- also I want to tell you I have really questioned
taking Medicare and saying well, we're going to fix it by adding a transfusion
of money from surpluses, i.e. general revenues. Medicare is financed by payroll
tax currently, is that correct?
2.9 percent on an individuals payroll tax but no cap. Did administration
increase that tax dramatically when they took it off of the social security base
which is $70,000. And now it's 2.9 percent on all income. That was done in '93.
That's a humongous tax increase for people who make over $70,000, three percent
of their payroll. And yet we still have problems.
And so I hear the
administration saying, well, the payroll tax alone is not enough and so we want
to have a significant percentage of general revenue funds and I kind of look at
that -- I referred yesterday to my kids. I look at tax consequences as my kids.
My son is working and he's paying a lot of Social Security and Medicare tax and
we're really saying that's not enough.
We want a lot more of your
income tax to come in and help finance Medicare. It's kind of an open-ended
blank check to finance an entitlement that's growing. And I'm afraid as the CBO
has estimated, I'm afraid you've grossly underestimated the cost of this
program. And I see my time is running short so I want to make this editorial
I don't think that the Medicare prescription drug proposal
that you had, Madam Secretary, is very good. I think a lot of seniors would opt
out. I think your program is voluntary. I hope that it is. And I think a lot of
seniors say, wait a minute, we're not buying that much today. For us to make
money on this deal we have to purchase I think, what, $800 and some odd dollars
worth of drugs.
There's a break even point at some point. And a lot
of people are less then that. And so they're saying, this is not going to work.
Plus your increasing my (OFF-MIKE) premium is $24 this year going to $48 in a
few years on top of the escalations that are already in the system that go to
$96. You add those two together, that's a $140 a month in Part B, just to pay
Part B in prescriptions.
And I just don't think it's a very good
deal. Especially for the two-thirds who already have it. I think a lot of them
would rather say, I'd rather stay with the program we have now. This is not that
good a deal.
SHALALA: Well, Senator, let me make two quick comments.
First on your last point. It is in fact an insurance scheme. I mean the point is
that you invest now so that it's there for you when you need it. So the
pharmaceutical benefit that we have -- this is the concept of insurance. Our
actuary, we actually asked our actuary how much we would have to subsidize the
Medicare pharmaceutical benefit to get most people in.
To get almost
everybody in. And he said 50 percent. So that's where we set it. On your
previous point, I'm not sure we have a choice. If we double the Medicare
population, the effect of not using the surplus would require, without that
transfer that we're talking about, a 20 percent cut in Part A spending. To have
the same effect on the trust fund to get us out to 2027.
think that anyone has a plan to cut Medicare Part A spending by 20 percent. If
we think that we've heard from the providers already for what we've done, a 20
percent cut in Part A -- again back to the fundamental point. If you're going to
double the number of beneficiaries you need to add new money to the system. We
need to get savings at the same time and the Balanced Budget Act, the savings
that we present in this proposal, introducing competition, all of those things
help to slow the growth and in the case of the pharmaceutical benefit, we
actually pay for 60 percent with savings.
NICKLES: Madam Secretary,
I see my time is out. Let me just echo something that Senator Grassley
mentioned. I think it's utterly absurd for us to come up with a program to
subsidize employers that are currently providing for a benefit for us to say,
well we're going to make sure you keep it so we're going to pay for two-thirds
of it. I think that shows a real -- I think there's a serious mistake or flaw in
SHALALA: Well thank you, Senator. As you know, we've
never income tested a benefit in the history of Medicare. The concept of social
insurance would be fundamentally flawed. All beneficiaries get all benefits in
the Medicare program. And what we thought through was a way to do it without
pulling everything out of everyplace they are and reducing the federal
government's cost at the same time by simply subsidizing some places where they
are currently are getting the benefit.
ROTH: Senator Rockefeller.
ROCKEFELLER: Thank you, Mr. Chairman. Madam Secretary, I'd like to
get you to talk a little bit more about what you were talking before about
usefully when Senator Graham was here. And that's the matter of getting more
innovation. And you, in a sense, were saying that you had been handicapped in
terms of medical technology etceteras.
Because Congress sort of says
who you can go to and what you can do. And that is enormously frustrating to you
because there are enormous -- there are other people out there that you could go
to and perhaps get a better price. One, could you explain that again and
secondly could you say how it is that the president's program fixes that?
SHALALA: Well, we are limited in the kind of competitive pricing and
the discounts that we can negotiate on behalf of Medicare. And the example I
gave was claims processing. The Congress of the United States has actually
listed in the law the insurance companies that we can use and my point was there
are other people who can do claims processing in this country and we ought to be
able to have a wider group of people that we can pull from.
addition, everything Medicare purchases, we tend to pay sticker price. We had to
come here last year on the oxygen issue to get a reduction in what we were
paying for oxygen over the objections, obviously, of the providers. There is too
much rigidity on what Medicare purchases and how it prices. And we need as a
large purchaser to be able to get reasonable discounts for what we purchase on
perhaps of, basically, the taxpayers.
They are spending money they
don't need to spend and we need this flexibility. The people that provide these
goods and services will not like it because they would prefer for Congress to
write in that kind of detail. I also will pledge to you, because I know all of
you are interested in small businesses, that I believe that we can do much of
this providing opportunities for small business.
demonstration that we did in Florida on durable medical equipment...
ROCKEFELLER: Madam Secretary?
SHALALA: ... we did
ROCKEFELLER: I just want to be able to use my five
minutes. But you're also saying it's not just claims processing, it's medical
SHALALA: It's medical technology.
To conclude (ph) it from having an opportunity to make professional decisions
ROCKEFELLER: And how is it that
the president's program changes that?
SHALALA: Well, it gives us an
opportunity to go out and get bids on everything that we purchase. And to have
professionals make the decisions. We actually set up a new panel with public
involvement on a number of things that we do in the system including introducing
private sector people that can help us introduce better management and better
ROCKEFELLER: OK. Second question. It was
brought up before that there are those who would argue that a limited
prescription drug benefit for Medicare would be less likely to crowd out as was
mentioned in private health care dollars because it's believed that many seniors
have access to health benefits in the retiree basis and therefore why would you
be paying for them.
There is however among others there's a huge
associate study that found that large employers are eliminating or reducing
retiree health benefits all together. Now the word "all together" I want you to
help me understand. Secondly, there is evidence that the quality and the
comprehensiveness of the supplementary coverage available is inadequate in those
ROCKEFELLER: So, would you contrast the scope in
eligibility requirements of the president's prescription drug benefit plan with
frankly that of the Medicare commissions proposal?
the Medicare commissions proposal we have actually adopted and that is to go to
150 percent of poverty as a way of subsidizing those who are low income. We have
added to that access to little income people, people in rural areas because you
really do not handle a very large percentage of people who are on Medicare.
I think I pointed out that 54 percent of Medicare beneficiaries
without pharmaceuticals have incomes above 150 percent of poverty. So we have
not rejected what the Breaux-Thomas commission did. We have accepted it but
builds on it because we would leave out 54 percent of the people without
benefits. And as I pointed out many of them are in rural areas and access
doesn't have to do as much with income but with geography and that seems to us
ROCKEFELLER: And my follow-up, just to
comment, I want to ask for a response because my time is up. You've indicated
that people come to us -- medical people come to us and, you didn't make the
implication but I'll make it for you, but we give way to their decision to have
stuff fixed into law.
SHALALA: I wish it was medical people.
ROCKEFELLER: And others. It is however, an absolute fact which is at
least universal on our side of the aisle that we have been overwhelmed in our
states and our visits. Not sought out, not programmed by people who feel they
have really been hurt by BBA cuts. Now every government organization says it's
too early to tell because we've still got two years to run, et cetera, et
cetera, et cetera.
You're proposing $7.5 billion. How did the
administration have any idea that $7.5 billion would solve that problem which to
us is very real?
SHALALA: Let me point out that we do more then $7.5
billion. That we in fact don't just stretch out the cuts beyond 2003 that the
BBA did. We smooth out some of the differences. We make some choices where we
think that there had been some unintended consequences. In addition to that,
every bit of flexibility that the Congress gave me in the BBA I have used to try
to smooth out or make appropriate changes where there were unintended
But there are some things that actually need
legislation. The therapeutical caps were put in place for scoring reasons. They
had nothing to do with health care. The health care people objected to them
including us at the time. They clearly are having a serious health care access
effect to appropriate care. Those are the kinds of things where we already have
We are accumulating evidence. While we've put aside $7.5
billion we're obviously making a judgment about what we think and where we think
we're going to have evidence that we're denying people access. For the providers
that will not be enough but we need to reach an agreement in a bipartisan way
about what had been the unintended consequences that have added detrimental
effect on the health care, on access to health care.
And we're in
the middle of analyzing that now and we will be providing it to Congress what we
know at the time. But, as you also know, there are many analysts, including our
own, that think in some areas we shouldn't make changes even the providers are
concerned. And again if you listen to my conversation on what Senator Moynihan
said about academic health center.
They have been profoundly
effected not necessarily by Medicare. We are probably their best payer. But by
the discounts negotiated by private HMOs which have but them in a situation in
which -- and combined with what we did on the BBA they had no place to
cost-shift to. So for some institutions it's a more complex issue.
But we do need to do some things. Some of them will be transitional.
But we cannot unravel the BBA. So it's going to be tricky and tough but we're
going to have to really hard analysis. We did the BBA together. This
administration believes that whatever changes we make we're going to have to do
those together too.
ROTH: Senator Gramm.
Mr. Chairman, let me set the record straight. I mandated the six test where
you're competitive bidding medical equipment. You weren't doing it. When I went
to Houston to announce the program, the White House called and ordered the head
of the VA in Houston not to participate in my program. So you're doing what, as
chairman of the health subcommittee, I mandated and you're taking credit for it.
The reality is that I did it, I mandated it, and the White House
tried to disrupt my announcement of the program. Now, I'd like to make several
points that I think are very important. First of all. I want to set this debate
in the context of the tax cut. Our president for two years talked about save
Social Security first, save Social Security now, but in the final analysis he
adopted a totally phony proposal that was denounced by Democrats and Republicans
When we had a chance to do something about Medicare under the
leadership of Senator Breaux, the same president who in the cabinet room
challenged every member, don't let this fail because of you, it failed because
of the president. Because everyone of his appointees voted against it and it if
one of them had voted for it, it would have become a recommendation to Congress.
Now, having killed Social Security reform, and Bill Clinton killed it.
Having killed Medicare reform, and Bill Clinton killed it. He now says we can't
cut taxes because we needed at least two things. My point is, he is about
disingenuous as you can be on all of these issues.
the senator yield?
GRAMM: No, I won't yield.
secondly, this proposal that when we're looking at Medicare which now is running
into problems with a 2.9 percent payroll tax rising at a minimum to 12 percent
of payroll -- a 12 percent payroll tax in 25 years and that's without
overturning any of BBA and you won't overturn part of it. And that's without any
prescription drugs. It seems to me that under those circumstances to be talking
about providing a drug benefit to everybody instead of the people who really
need it is political. It's not economic.
This proposal of yours
maybe good politics. I'm sure somebody did a poll. I'm sure there have been
focus groups. But it makes no sense at all economically. And you cut all
benefits after the government has provided a $1,000 when people really need it.
You, by covering everybody you're going to produce a cost which is going to
force you ultimately to fixed prices and to ration and to kill off the growth of
medical technology and pharmaceuticals.
And when you set it up you
have no deductible so that when people have choices early on you have little
incentive for them to control costs and then when they reach a $1,000 you cut
off the government payment. Again, it makes absolutely no sense economically to
structure it the way you structured it. So I got to conclude that, (A), you
don't know what you're doing and I reject that.
Because I think
you've got plenty of smart people including the president or (B); which is more
reasonable and fits the facts better. This is totally political. Let me make the
final point I wanted to make, Mr. chairman, and that is we need to go back to
the Breaux proposal. The secretary talks about competition but she's not talking
She's talking about government controls and
regulation. When you're the only buyer, that's not competition, that's monopoly.
What Senator Breaux did in his proposal was to set up a cafeteria type system
like we have for federal employees and let people chose and have competition. I
would be perfectly happy to build into that a system like you're proposing in
one area where people get to keep some of the money they save, I think that's a
But, Mr. Chairman, finally to conclude, I think what
we've got here is a political proposal from beginning to end. I think we've got
to reform Medicare or we'll never be able to pay for it. And the idea of the
administration proposal to bring the non-elderly into Medicare, that same old
chestnut they're still proposing. Talking about adding pharmaceutical benefits
for everybody instead of focusing it on the people who can't pay for it today.
I just think this has become a cruel, political hoax. And we need to put
it out of its misery by throwing it out and by going back to the Breaux
commission and see if we can't put together a bipartisan proposal; that helps
people with pharmaceuticals that need it; that sets up real competition, but it
is not competition when the federal government through HCFA dictates price and
engages in rationing.
That's not competition. I think your problem,
Madam Secretary, is that your administration has no real concept of what
competition is. Competition is private producers competing against each other.
(UNKNOWN): Can you say that again so I can write it down. I don't
want to miss a word of that.
GRAMM: All right, let me say it again.
The competition is private producers competing against each other on the basis
of price. It is not a monopoly by dictating price and ultimately dictating
technology. Competition is not rationing and price controls, it's competition
among private sellers.
ROTH: Thank you, Senator Gramm. Let me --
your time is up -- say to our distinguished secretary, we want to give you the
opportunity to answer if you feel it is appropriate. But really the purpose of
the hearing today is to try to discuss specifics with regard to Medicare. And
there have been some on both sides who have talked policy. We did a lot of that
yesterday and I think we'll do a lot of it next week.
But I would
urge, in the time we have remaining, that we try to keep discussions on the
specific proposal. And with that, Madam Secretary...
Thanks, Senator. Let me respond to Senator Gramm very quickly first by saying
that I obviously Senator Gramm disagree with your characterization of the
president but also your interpretation of what we're trying to do here. In fact
the Breaux-Thomas plan had the same fee for service competitive reforms, the
plan that you signed on to that we're introducing here.
our managed care proposal is competition but achieves the savings through a
voluntary incentives and that is people move to managed care because it's going
to save them money as opposed to being forced to move to managed care because
fee for service costs go way beyond what they could possibly afford.
So we're trying to introduce what I thought most economists thought
was the best way to do it and that is positive economic incentives as opposed to
negative economic incentives. And third, let me say about the pharmaceutical
benefit. The reason for it is a solid health care reason. The reason that
there's no deductible is because we're trying to save money in the long run for
the health care system by getting people to use their pharmaceutical benefits
from the beginning and use them accurately.
And people do save money
in the long run when everybody has it because they can continue to buy
discounted drugs as part of the plan. So, I'd be happy to come to your office
and explain this at some level of detail. I think I can give you enough of an
economic argument for what we're trying to do here and at least soften you up
for the open debate that we're going to have.
GRAMM: I don't think
ROTH: I have to say I'd vote with Gramm
on that one. Senator Jeffords, please.
JEFFORDS: Madam Secretary, a
lot of attention has been focused on the prescription drug coverage included in
the president's plan. I am concerned that the president's drug benefit does
nothing for seniors until the year 2002. And is not fully implemented until
2008. That is why I'm (OFF-MIKE) legislation will provide prescription drug
coverage for those Medicare beneficiaries who can least afford it.
My proposal will build on a drug benefit that was included in the
bipartisan commission's proposal by creating a new drug only Medigap plan which
will be offered to needy seniors at no cost. Does the president have a plan to
help the low income beneficiaries before 2002?
SHALALA: No, we
basically kick into this plan as you know a couple of years down the pike in
part because of the number of transactions that take place, the need to put the
contracting in place. We're obviously are going to administer this through the
private sector through benefit managers. And knowing what we know about what it
takes, the number of transactions that are involved.
We believe it
would be prudent to set it up very carefully and then also to phase it in very
slowly. So this was a question of us knowing our managerial capacity to put this
in place and looking at the complexity of doing that. But I do understand your
proposal and that you would phase in the low income part of the coverage
And I fully understand that. But we were getting prudent
managers in our recommendations.
JEFFORDS: Now, I want to turn to
home health care if I could for a moment. It is clear for the provisions of the
president's plan that he shares my concerns about maintaining high quality home
health care services. The president's plan underscores my position that
sequential billing needs to be eliminated to alleviate cash flow problems
experienced by small cost efficient agencies.
I'm glad that we could
work with you to achieve HCFA's April 19th repeal of sequential billing. Are
there any further steps planned to prevent closure of home health agencies and
to guarantee that beneficiaries will continue to have access to much needed home
SHALALA: Well, as you probably know I have sent teams
to a number of states to look in great detail at what's happening to home health
care. To see what, beyond where we have administrative flexibility, we can do to
make sure we're not denying access. And the GAO is taking a look at this issue
at the same time. So, we may well have some other proposals beyond what we've
But at the moment we've obviously set aside $7.5 billion and
we're exercising our administrative authority here as well as trying to look
very carefully at where we might be creating access problems.
JEFFORDS: Thank you. Thank you, Mr. Chairman.
Senator Chafee, please.
CHAFEE: Thank you very much, Mr. Chairman.
Madam Secretary, I personally am prepared to use part of this surplus to extend
the solvency and to provide for drug benefits if we're serious about making some
structural changes to the program. I believe we need more competition, you've
discussed that. And I believe we need to means test this program.
agree with the president in that Medicare prescription benefit should be
available to all beneficiaries. I'm concerned with the long-term sustainability
of this program. While we're making important benefit like drugs available to
only the lowest income through Medicare, I believe prescription drugs should be
available to everyone. Everyone be eligible.
But there ought to be a
means -- I don't understand why the taxpayer, the woman that comes in here and
vacuums these rugs at night should be paying for Warren Buffett's doctor bills.
What you're going to do is you're going to extend that. And I believe that all
beneficiaries should be available to all benefits. And prescription drug would
fall in that category. But, it's perfectly possible to means test the program.
Why do you balk at that?
SHALALA: Senator, if I could ask a
question. Are you talking about means testing just for pharmaceutical benefits
or means testing the entire Medicare program?
pharmaceutical benefit that would be available for everyone. Just like Part B is
available, and Part A.
SHALALA: We have not means tested any
individual benefit in the Medicare program. As you know...
But that's not a rationale, I've heard you use that before. We haven't done it
therefore we shouldn't do it. You never had prescription drugs in there either
SHALALA: You're asking the Medicare program to set up a
whole bureaucracy to means test a specific benefit. What the president has said
is that he's open to the concept of some means testing of the Medicare program
itself as opposed to individual benefits. Right now...
tried to say that. I tried to say that the prescription drug would be available
to everyone. So you're not means testing the prescription drugs. You're means
testing the eligibility for the program.
SHALALA: I think, Senator,
that we believe that would lead us down the pike. Should we means test the flu
shots that we propose to make free to everyone in Medicare? Should we means test
colorectal screening or mammograms? Should we means test prostate screening
because some people that may use it have incomes over $100,000 a year.
I mean, where do we pick and chose among the benefits that we
provide that we should means test and why drugs versus some other benefit that
we want to provide. The Medicare system was set up in a way in which everyone
would get the same basic benefit package and anything else they wanted to
purchase on top they would have to pay for it.
Secretary, I've tried to say it and it's funny, the lesson last week in church
was throwing the seed on barren ground.
that seed I've thrown has not sprouted.
SHALALA: Now in fact I
honestly have had no effect on either you or Senator Gramm today.
CHAFEE: Well I like the company. Now, let's try again. I'm not
saying that means testing the benefit. You've got prescription drugs nor rectal,
colon cancer, whatever treatment, whatever it is. All I'm saying is that the
eligibility for the program for Medicare should be means tested.
SHALALA: I think what the president has said and what I tried to
respond to is that the president said is that he is open to means testing the
Part B to income testing the Part B premium which I think is not inconsistent
with what you're talking about.
So the president has indicated -- we
do not have it in this proposal. But he has indicated before and he has said
consistently that he is open to proposals to means test the Part B premium.
CHAFEE: OK. We're making some progress. I believe in that and I
think you ought to include it. Because I just -- we're getting into a very, very
expensive program here.
CHAFEE: I mean, you yourself have
said that economically it's going to fine. You've indicated that there are going
to be economic benefits. People are going to take their pills and thus stay out
of the hospital and so dollar wise it's going to be a winner. I don't believe
that. I think everybody...
SHALALA: I have not said that, Senator
Chafee. In fact I've been extremely careful not to make those kinds of claims
for the drug benefit. The one thing I've learned in this business is don't make
those kind of claims for the benefits. The benefit is a critical part of
modernizing the health care program. But we do not know yet, there are
individual studies, but we should not over sell this other than in improvements
in the quality and outcomes but not over sell it in terms of how much money
we're going to save. And this administration is not going to do that.
CHAFEE: Well, I think you're right.
SHALALA: It will
improve health outcomes.
worthwhile to a lot of people. And it's worthwhile doing and they'll be better
off. But I agree with you that the savings of not going to hospitals is not
going to be a winner that way. Thank you, Mr. Chairman.
now, Senator Breaux.
BREAUX: Thank you, Mr. Chairman. Thank you very
much, Madam Secretary. We will continue our discussions I'm sure on this subject
for a long period of time. I have been handed the secret answer to all of these
problems from my colleague, Senator Rockefeller. He suggested that we form a
And study this problem
and report back our findings. And I'm not certain that's the direction we should
go. We spent a lot of time this afternoon, Mr. Chairman, and my colleagues
talking about why the easiest things to do with Medicare. And that is to add
more benefits to it in the forms of prescription drugs.
reforming the system, it's still a 1965 model and we're talking about adding
more prescription drugs. I think the president is right to do that. I disagree
with what he has proposed. It is not nearly as good as it should be. I mean,
it's not means tested. It is first dollar coverage which I think is a mistake.
It does not cover catastrophic drug problems.
I mean, I'll ask the
secretary to comment on these things. Number one, as I understand it the way the
program would work is that half of the drug costs are going to be paid by the
beneficiary. That's a big pretty hit. In addition to that they're going to be
asked to pay a premium. In addition to that after they pay the first $1,000 of
drugs, after that the whole things is a 100 percent on their back.
mean it would seem to me that it would be much better to design the program with
the same amount of money that would have a small deductible up front, that would
have a smaller co-insurance amount and then have some type of a stop gap laws
that says after $3,000 dollars the government pays for all of it. So I
understand your comments on all this. And I agree we should have a prescription
drug program. But I disagree on the design of it. It's not nearly as good as it
should be. Dan Crippen is going to say that 36 percent of the people who have
benefited from it is going to hit the stop gap (OFF-MIKE) $1,000 loss and have
to pay all of it themselves. That's 36 percent of the people according to their
And after the $5,000 figure kicks in they're estimate is
that 25 percent of the people are going to get the maximum they can get then
after that, when they really need the help the most, they have to pay 100
percent of the drug costs. I mean, we differ on that but I think, I mean, the
program should be designed better.
And I think John Chafee is
absolutely right. And we're not talking about means testing who gets the drugs.
We're not talking about who means tests who gets the prostate test. We're
talking about means testing, how much you pay for it. I mean, if that's not a
good democratic document to say that we're not going to subsidize someone in
Ross Perot's financial category the same thing that we -- for drugs -- if we
subsidize a poor woman who is barely outside of the poverty line is just not
good politics and it's not good policy.
So, I commend the
administration for having the drug program. I think it can be designed at the
same price far better and more efficient then it's been designed. And, Madam
Secretary, if you'd like to comment on that.
SHALALA: Yes, just
quickly, Senator. And I appreciate your comments as well as leadership. First of
all, we project that in the year 2000, less then three percent of the
beneficiaries will have costs over $5,000. And 17 percent will have costs over
$2,000. Now that's the HCFA actuary's projections. In addition to that, we do
indeed provide for people after $5,000 in this proposal.
they are able to purchase drugs on whatever the discount is that's been
negotiated on their behalf. So they'll be able to continue to purchase drugs.
Our estimates are at least a 10 percent discount. So they will in the first
instance have that discount up to $5,000 but be able to continue that discount.
And while we did not deal with the major catastrophic issue, we did provide for
that discount right through the process.
On the issue of
deductibility, I'd be happy to show you some of the runs (ph) that we did. It
becomes -- you don't raise a lot of money with some of these other pieces but it
becomes very expensive. We wanted a modest benefit to get started. A benefit we
knew that we could manage. And we, again, this is the concept of insurance for
some people they won't get a benefit immediately, particularly when they sign up
at 65. But they are in fact buying into the program to take of themselves when
they are 70 and 75 and 80.
BREAUX: Well, I appreciate that. And I
just think we can do a much better drug program. Mr. Chairman, I think we ought
to address catastrophic costs. And it shouldn't be first dollar coverage. And it
should be means tested. I mean, that's my feelings on the subject but I think we
both agree that there should be a prescription drug program highly crafted and
what the make-up of it is, is the real test.
The second -- I mean,
that's the easy part. Good Lord, I mean, the real problem is how do we make the
program more functional? We in the commission recommended a premium support
competition where everybody had to compete. The administration I think is faulty
in their recommendation and they said we're going to have competition but only
the managed care people have to compete against each other.
Traditional Medicare is going to have a fence built around it, it
doesn't have to compete. And I think everybody should have to compete. I mean
our savings on the competition is $65 billion over 10 years. The scoring, is it
not correct, that I have from the president's proposal is that you get more
savings, you get more savings out of the president's proposal from your
co-payments for clinical labs than you get through your competition.
For co-payments on clinical labs you get $9 billion in savings. For
all this competition, you get $8 billion. I mean, that's hardly a drop in the
bucket from competition is that you get more savings from co-payments for
clinical labs. So, I think that if we're going to go with a competitive system,
both traditional Medicare has to compete with managed care with a set amount of
benefits that protect the beneficiary but everybody is going to have to compete
if we're going to get any real savings from competition. And you're welcome to
have the last word on that.
SHALALA: Senator, first of all it's
important that we remember that the managed care plans themselves would pick
their prices. So they're going to bid their prices in relationship to the
average premium for the fee-for-service program. The fee-for-service program is
part of that bidding process because they bid against that.
believe that this promotes very fair competition by assuring that the
beneficiaries pick similarly priced private plans and pay the same premium. The
plans will then be competing against traditional Medicare for better price in
market share. Now that's true price competition. We call it competitive defined
benefit proposal and we don't have real price competition on managed care plans
They would be competing with the same benefit package so people
really would understand the difference in terms of what they would save. We
achieve competition in savings through an incentive of beneficiaries to choose a
low cost plan. In your proposal, the difference -- the contrast here is that you
get savings. But you get it by running up the cost of fee-for-service.
That is, if you have one managed care plan in Montana, the fee-
for-service plan costs go way up. What we're doing is trying to make sure that
the managed care plans can run their costs down so they can attract
beneficiaries. So it's a positive economic incentive. It's important to remember
though that we make the fee per service program more competitive through the use
of market-oriented approaches too. But I think the fundamental difference here
is that we have positive incentives to pull people into managed care because
they save money. Their premium goes down if they move into managed care against
The other proposal that we have looked at which
came out of the commission forces them into managed care by running up the
fee-for- service costs. You know, we're both trying to get to the same place,
Senator Breaux, and I think that enticing people in with positive economic
incentives is the way to go.
And in this case the managed care plan
price themselves and the beneficiaries won't be confused because the benefit
package will be the same. They'll have pharmaceuticals in there. If they want to
purchase more benefits in a managed care plan they're going to save money going
into that plan so they'll have the cash to purchase some additional benefits.
But we're comparing apples with apples here and the important thing
I think is that it's a positive incentive as opposed to shoving people in for
fee-for-service -- shoving is too strong a word but you basically using an
economic negative incentive here as opposed to what we believe we're using which
is a positive incentive.
So, and you do get more savings from doing
that because you're run up fee-for-service. It's a particular problem, as you
well know, in rural areas where a new plan may come in but you protect rural
areas where there are no plans and I recognize that. But I think, Senator, with
all due respect, we're both trying to get to the same place to introduce
We've taken all of your fee-for-service
recommendations. We've obviously have gone to 150 percent of poverty and your
recommendations on pharmaceuticals. We honestly believe that we're building on
BREAUX: I think you did that without taking a
Thank you very much.
ROTH: Senator Bryan.
BRYAN: I believe, Mr. Chairman, that
Senator Baucus had proceeded me here.
ROTH: Oh no, you're next.
BRYAN: Am I next? All right, I'll be happy to.
Secretary, I know you've endured a lot of lecture from us today here so let me
continue in that tradition which the Senate does so very well when they have a
captive witness. Let me preface my comments by saying that I do applaud the
efforts of you and the president to come forward with a program to provide a
prescription drug benefit.
You have cited an example of the
disproportionate coverage of rural versus urban America. Each summer I spend
most of August in rural Nevada. And I can tell you that there's no change in the
Medicare program that those people in rural Nevada would like to see better than
to have a prescription drug benefit. So, I think you're on the right track in
terms of where we want to try to reach.
Now, let me make another
couple of observations if I may. We're sitting on a demographic time bomb. In
the year 2011, the first of the baby boomers turn 65. Seventy-six million
Americans will be part of a tidal wave that will flood the system in terms of
eligibility. Now that's going to be true whether Democrats are in the White
House, Republicans in the White House, Wigs in the White House, the vegetarian
party resurges and becomes the dominant political force in America.
That is inevitable. And we know that there are going to be some
medical breakthroughs. Some of which appear to be just over the horizon. And we
as Americans are going to demand that coverage and it will come as a cost. Now,
I guess in terms of the broad alternatives we could reduce the benefits. You and
I know that that is simply not going to happen. Indeed we're talking today about
adding a very important benefit.
We're going to need some additional
revenue and that involves the dreaded "T" word as I understand. But we do want
to talk about some structural reforms and I want to just at least share my view.
I would endorse and associate myself with the comments of the chairman of the
retiree caucus, my good friend the senator from Rhode Island.
committee, in a bipartisan way, overwhelmingly voted to means test Part B in
1997 and it carried on the floor of the United States Senate by overwhelming
margins. I think we need to look at that. And I that would be the part of the
message that I would encourage. The second thing I think needs to be pointed out
and you did so I think very effectively.
What we say and what we do
here in the Congress our profoundly different. We worship at the shrine of
competition. And yet at the very moment that you try to engage in some
competitive strategies we do the "el cavo," the "el-foldo" and you know, try to
plug additional restraints upon you. And that is our fault. And that is to our
discredit. And you need to be provided more flexibility to adopt this program.
I don't know the details of the program in Florida but, Senator Bob
Graham, and you have indicated there's some savings. We need to provide that
I guess my question really is in terms of in providing,
you know, this benefit, what are the implications for those who have collective
bargaining agreements? I mean, how does that factor in? I mean, that has been a
negotiated benefit. If we're going to provide this coverage, what are the
impacts of that?
SHALALA: Well, I think that what we've tried to do
in the pharmaceutical benefit is to stabilize the situation that already exists.
And for people who would get their retiree benefits and that would include a
pharmaceutical benefit. As long as it's as least as good as what we're offering
for people who don't have the benefit, we would give their company, or actually
it would probably go to the health plan that they're in, a subsidy for keeping
it. But it would be less then what we would pay if we were doing it directly.
So it's an incentive for employers who are increasingly dropping
retiree pharmaceutical coverage, 25 percent droppage over the last couple of
years, an incentive to keep that coverage. And so anything that was negotiated,
the employers obviously would gain some resources to keep that benefit.
I should point out that in most of the major companies they are
providing a lot more then this benefit so while this would be of some help in
some subsidy to keep it would at least keep a minimum benefit for everyone
across the country.
BRYAN: Have you given some thought in terms of
devising the formula? Yesterday those of us who served on the Aging Committee
were exposed to some testimony from individuals who are Medicare recipients who
discuss situations that occur with respect to their HMOs changing the formula.
That is whole classes of medication. No notice being given to them with
potential serious adverse health consequences. Clearly there needs to be notice
given and an opportunity to respond to that sort of thing.
anything, do you do with this aspect which is apparently is a major concern out
SHALALA: Well, first of all, anyone currently in a Medicare
plus choice plan ought to be notified appropriately of any formulary changes.
BRYAN: But apparently that's not occurring.
HCFA is taking steps to ensure that the health care plans are adequately doing
that. And at their hearing this week we were present and we heard those
Under the president's plan we would include rules for
establishing changing and notifying beneficiaries and the doctors and the
formularies and any subsequent changes in any kind of contracting rules.
They would be required to provide adequate advance notification and
we would protect the right of a doctor, if he insists that a patient get a drug
that's not on the formulary, we would protect that doctor's right to get that
drug and our plan would pay for it.
BRYAN: Finally, let me just say
a little bit -- certainly enlist your help and guidance -- you correctly pointed
out and I'm persuaded that in doing a Balanced Budget Act of '97 that with
respect of physical therapy caps. That those have had unfortunate consequences
and we need to adjust that. But as you know the entrepreneurial spirit is alive
and well in terms of health care providers in America. And now that that door
has been opened up a little bit and we've heard testimony in this committee from
Ms. Salinsky (ph) that indeed we should make an adjustment.
BRYAN: Are you going to be providing us any data or
information as to what other adjustments we ought to consider? Because, as you
know, right now there is a full scale media blitz in which every provider in
America has suggested -- and perhaps there's merit to it, I do not know -- that
we've cut back too much, that we need to change the reimbursement formula. If we
did that, that's going to have a serious impact upon the solvency of Medicare.
What can you tell us about that?
SHALALA: Well, we will be working
with this committee, and with other committees in the House, on what our --
information we have, and specifically whether there is an unintended health
consequence, particularly denying access to an individual to appropriate health
care because of a change that was made.
I pointed to therapeutical
caps, because it is but one of example where we actually objected at the time
and argued that it would have health consequences. There obviously may be
others, and we've heard in this committee today about the possibility. But we
will show you what analysis we have. The GAO will have analysis. I'm sure CBO
will have some analysis.
I think the important point that we've
made, that the president has made over and over again, is that no one should
expect us to want to participate in any discussion that would unravel the fiscal
discipline that has been introduced through the balanced budget amendment.
But it's very clear that we ought to consider unintended
consequences that are denying access to Medicare beneficiaries, and we ought to
look at that very carefully.
BRYAN: Thank you very much. Thank you,
ROTH: Senator Baucus.
BAUCUS: Thank you,
Mr. Chairman, I want to, first, thank you for trying
to bring this discussion back into a the realm of civility, where it was not at
an earlier point in this debate. A senator characterized the administration as
being disingenuous. Mr. Chairman, I don't think you will agree with me, but
frankly when the Republican tax cut was essentially 792, that interest in that
10-year period would be 179, that adds to 971, out of a on-budget surplus of
less then that, 964. I think any fair person would say that's disingenuous,
because there's nothing left for Medicare for veterans or other priorities.
But put that aside, the question I had for the secretary is really
two. One is: Is -- when are we going to -- is there any way to accelerate the
reimbursement plan for managed care providers, particularly in rural areas. As
you know, Madam Secretary, it's about 7--30 national-local now, and I think the
law accelerates that to 50- 50 in a few years.
But we only have, I
think, one or two managed care companies in my state, and we'd like more, and
there aren't more because of the reimbursement just isn't there. And
particularly when the formula now is, as I mentioned, 70 percent -- I think it
was 70 percent -- local is what it is and 30 percent national. And so, if we
(ph) could give us some indication of, or some hope of perhaps accelerating that
phase-in so that managed care is viable in rural areas.
Well, there are a number of things we're actually doing in the plan that will
help rural hospitals for example. I mean, there's a long list of where I've
exercised administrative flexibility that will actually help some of the
providers, and I won't go into that here. But let me say that I actually think
that a combination of what we're doing on the blend paying managed care to
provide prescription drug benefits and allowing managed care to put the price on
themselves will attract managed care to rural areas, that there actually will be
simply more money in the system. I think the geographical adjustment may help,
and of course we intend to follow through with the BBA requirements that you're
talking about in terms of the blending.
But the problem now is that
we just need to get more money into fee-for-service through the kinds of
adjustment that we did in the BBA, as well as adding the drug benefit to get
that number high enough so that the plans will see rural areas as attractive
places to come in bid. And I think a combination of a number of things that
we're doing will help to attract managed care to rural areas. We actually think
this proposal will help.
BAUCUS: And I have some legislation too,
frankly, that I hope helps. But I must say that it is a major problem, which is
there is no managed care currently for all intents and purposes because it just
SHALALA: Well, Senator, I think we're increasingly
recognizing that both density and sparsity cost more money.
Well, it does, but we're all here to provide service, and rural America's part
of America, and so that's...
SHALALA: Well, I mean, that's that the
point though. That it does take new investments, and we've done a number of
things on the hospital payments, for example using our flexibility, including
delaying the expansion of the hospital transfer policy, which will help
transition to out-patient department prospective payment systems, delaying the
implementation of out-patient department volume control mechanisms. I mean, a
whole list of things.
Using the in-patient wage index to pay out-patient
departments; that will help. Again, all of this is a matter of getting higher
reimbursements into rural areas, which will of course effect directly the future
BAUCUS: Now is it the administration's view that the
changes that you've made and recommend in respect to Medicare are not exceed the
trust funds of Part A as well as Part B (INAUDIBLE) viable? I think you
recommended -- you've estimated that Part A being viable to the year 2027. Do
you think that's enough?
SHALALA: We think...
There's no more structural reform is necessary in your judgment?
SHALALA: Oh, if we could get all these structural reforms...
BAUCUS: That is the administration's structural reforms?
SHALALA: Yes. If we could get all of these structural reforms, we
believe that they would have a major effect on the Medicare program, both in
bringing down costs through the competition, and in strengthening the health
care and introducing, for the first time, real price competition.
BAUCUS: But you don't -- therefore it is the administration's view
that the administration's proposed structural reforms are sufficient. That is,
the additional structural reforms recommended by the Breaux Commission and
others that are not contained in the administration's proposal are not
SHALALA: Well, the fundamental difference is in how we do
price competition. And we have suggested that we should use economic incentives
-- positive economic incentives for people to choose managed care. That is the
effect on the Part B premium, by allowing managed care to bid in a way (ph) in
which they can reduce the Part B premium it would attract people, as opposed to
raising the fee for service cost in an area just because a managed care plan.
We think we've preserved real choice, and that more people will move
into managed care; they'll have more money in their pockets; there'll be good
economic incentives for them to pull into managed care.
to that, there are reforms here we haven't talked about, and they have to do
with managing chronic disease, and introducing for the first time in
fee-for-service, some fees for case management that will -- much of the cost in
Medicare increasingly is people who have chronic diseases who have complex
problems that need some management.
And managed care, hopefully, as
it moves to more integrated systems, will be able to do that and we need that in
fee-per-service, too, because that's a way of driving down the cost of
fee-for-service. But we need to pay the managers, the doctors who are managing
these complex cases, a little bit more money to do that kind of management to
bring these teams together.
Now there's a number of changes here
that have to do with good health practice with quality changes that we think
will make a difference.
BAUCUS: I appreciate that. There's still
though, as you well know, not really a meeting of the minds yet on whether those
proposals are sufficient. I grant you some of the objection is political on both
sides of the aisle probably. But I'm asking you to step back for a moment, in
the spirit of Senator Chafee, hoping some seeds will sprout.
how do we better get a closer agreement, on both ends of Pennsylvania Avenue and
also in the Congress, and I know this is naive, taking some of the politics out
of it to get a more solid solution that as more people in Congress and the White
House agree is more likely to achieve solvency in the trust fund that we want?
It's a little bit in process, and a little bit in...
SHALALA: I think obviously we're prepared to
start working with congressional committees to turn this proposal into
legislation and to work through it with the appropriate congressional
committees. But let me say, first we have to agree on some of the fundamentals:
that the solvency of the trust fund has to be a critical part of whatever we do,
and that we cannot get to solvency by trying to get savings out of the existing
program. It does take an infusion of new money when you double the number. So we
have to go on some of the fundamentals.
Second, we have to agree
that we're going to lock arms and hang tough on the introduction of these more
modern business practices, prudent purchasing, the use of centers of excellence.
There are going to be lots of objections to us trying to get savings by moving
Medicare away from paying sticker price for everything.
going to take those Democrats and Republican deeply committed to turning this
program into a much better purchaser of services and a better manager of
BAUCUS: My time's up. I just wanted, if I might a very
quick question. There just is a sense and I -- that the Medicare program is
still quite inefficient, that there is some waste. And I know you've discussed
this with other senators but -- and I'm not going to ask you to respond unless
you want to, but I just -- it is my feeling that what HCFA has done so far still
does not yet, sort of, pass the smell test. That is, a lot more (OFF-MIKE)
should be done within the administration...
Senator, we're the people that have a very high smell test and we have said very
clearly that there are restraints on us for getting the best prices and
introducing competition into the Medicare program. We have listed, in great
detail, what those restraints are.
BAUCUS: I'm talking not only about
prices, but also just as management and personnel and just delays within HCFA,
and that's not just pricing I'm talking about.
SHALALA: Well, and in
fact we could show you some of the most remarkable improvements in the history
of the program. We've cut error rates in half.
BAUCUS: Good. I was
just telling you my...
SHALALA: And no administration has done more
on waste, fraud and abuse then this administration. If we're not perfect in
terms of the management, no one will concede that faster then me, but what we've
asked for is more management strength as part of this proposal.
BAUCUS: All right, I'm just telling you that, based on what I feel
in talking to people out in the field, my state Montana, we've got a little ways
to go yet. Thank you.
ROTH: Madam Secretary, earlier on you said you
would be speaking with Dr. Crippen about the -- what's that? Oh, I'm sorry --
MACK: It's a long way over to this area. Thank you,
ROTH: I can barely see you.
see what we can do about that.
Anyway, I want to touch on the issue
of cancer clinical trials. Senator Rockefeller and I have introduced legislation
to have Medicare cover routine patient costs with respect to Medicare for
cancer. A majority of this committee has co-sponsored that legislation. The
administration included it in its budget. But it's rather conspicuous by its
absence in your plan that you're presenting. Why is that?
Well, first of all because it was included in our budget and we didn't take
everything from our budget proposal and included it in what we sent up on this
particular Medicare proposal. But let there be no question in your mind of this
administration's support for that proposal. The proposal that we submitted as
part of our original budget submission -- I think it's somewhat more limited
then what you and Senator Rockefeller have proposed. I have to go back and take
a look at it.
Let me also say that we believe that including
Medicare recipients in cancer clinical trials is in fact a quality issue, that
will improve the quality of cancer treatment.
MACK: I still don't
understand why it wouldn't have been included in this modernization of the
SHALALA: Well, because we have other changes in -- Medicare
changes in the president's original submission that affect the Medicare program
MACK: This is not a substitute for the original?
SHALALA: No, it is not a substitute for the original proposal, so
you combine the two.
MACK: All right. We'll take a look at it...
SHALALA: I'm sorry there was some misunderstanding of that, but we
are not substituting for our original proposal -- our original budget proposal
which included a number of different things. I'm testifying only on the latest
proposal from the president that includes the solvency, the pharmaceutical
benefit, and this is in fact is direct response to the Breaux Commission
We said that we would come back with our plan in the
areas that they covered plus dealing with the solvency issue.
I was just surprised with the modernization plan for...
bet you were, so I think we're on the same page.
MACK: All right,
well I'm glad to hear that.
Let me go to the prescription drug area
as well. When I look at the cost estimates of both OMB and CBO I see a rather
significant difference in their projected costs. I believe yours, or at least
OMB's is about $118 billion. CBO's, at least what I've been able to determine,
is about $168 billion. That's a 43 percent difference in the estimated costs.
I suspect that you're probably not the one to ask, but yesterday we
talked about -- at least some members raised the importance of having extended
data available, not just five years. Do you have information as to what this
would cost over the first 10 years? What it would cost for the 15 years? What it
would cost for the first 20 years?
I mean, the numbers I've seen
would indicate to me that this is going to cause an explosion in the cost of the
SHALALA: No, we actually had done some of those
projections and we'll show you what we have. In terms of what CBO has done, as
you know, we saw the first details this morning. Mr. Crippen and I have already
-- that's not a criticism of him, we've just talked.
will be going through their estimates and their assumptions to see what they
As you know, the HCFA actuary and this administration's
economic forecasts have been right on target. And we've been particularly on
target with our health care estimates over the last six years.
I'm pretty confident in what we've done. And we will be reviewing what CBO did
to find out why they came to the conclusions they did. But we stand by our
actuary and by the projections that we have presented to this committee.
MACK: Well, I do know that there's been a pretty interesting
concentration of effort with respect to this committee's focus on the failure to
estimate the cost of what the BBA was. So, I'm not sure that we're all confident
in people's expectations about what these assumptions are.
MACK: Let me just go -- no, let me just go to the...
SHALALA: And Senator, if I might say, we would repeat that we were
accurate on the BBA. The Senate chose to take other projections.
MACK: The other area that -- and I -- this may have been covered
earlier, but as I understand the way this would work out in the out years where
the cap is at $5,000...
MACK: ... is it
unfair or inaccurate to say that, in order to receive this $5,000 benefit, that
an individual would have out-of- pocket expended $2,500? And under your...
MACK: ... and under your estimate, would
have paid $528 in premiums?
means that the person is then getting something less than $2,000?
SHALALA: Well, let me say they are also getting these drugs at a
discount. So, as part of that, they are actually getting a chance to purchase
more as part of that.
MACK: I'm not making a point about that. I'm
trying to -- I mean -- the -- I think the average person who listens to this
thinks that their benefit is $5,000, but in order to get that benefit they're
paying somewhere in the neighborhood of $3,000.
SHALALA: No, it's
very clear. We're going to subsidize 50 percent of $5,000. And to get that, you
pay a premium every month in addition to what you're paying for your 50 percent
for the drugs. This is an insurance scheme which will be helpful, but it's quite
modest, and we shouldn't overstate what this will do. It will help lots of
people reduce their drug costs, but it will not eliminate their drug costs.
MACK: And I guess my last point here would be that, it is a -- the
prescription drug proposal is, in fact, I believe, as it is written, a scheme
that will explode the cost of Medicare. Which says to me -- because I happen to
believe that we ought to include prescription drugs in a Medicare program. But
wouldn't it make more sense to target these benefits in the early years so that
we get a sense about how the whole system is going to work?
others have suggested maybe the idea of even means testing. To go into this at
full bore, seems to me quite risky.
SHALALA: Senator, you know, we
actually do phase it in. I mean we start with $2,000 and we are phasing it in.
And the problem with trying to...
MACK: But you're not -- I must
say, you're not answering my question. Let's not get cute with the semantics.
SHALALA: Well, if you're suggesting that we should start with people
of 150 percent of poverty.
MACK: Well, I think it was suggested 135
would be closest.
SHALALA: Actually, the Breaux Commission, I think,
has changed their position to 150 percent. We include that as part of our
proposal. We also -- I think, a combination of -- you'll have to look at our
projections and our assumptions. If we thought this was going to spin out of
control, that the wedge was going to go like this, we would have never
One of the reasons that there is a large
contribution by the individual, one of the reasons there's a premium here, is a
way of making sure that it doesn't spin out of control. And therefore, we have
described this as a modest benefit. It obviously is an insurance scheme, in
which lots of people participate, that may not get as much back in the early
years as they will later when they get genuinely ill.
But I would
not over-characterize this other than this is a critical element of modern
The other point -- I'd like to go back to the point
that I made about Florida. Large numbers of Medicare recipients and managed care
in Florida get this benefit now, and if you live in a rural area, you don't get
it. So, how we would phase it in so you would continue to get it in Florida and
not get it in Montana, I mean, you're going to have trouble explaining that to
your colleagues on both sides of the aisle, I would think.
current system, in our judgment, is unfair. But more importantly, it -- this is
about good health, and we need to include this benefit if we're going to
modernize the benefit package.
ROTH: Senator Robb.
Thank you, Mr. Chairman.
Madam Secretary, I thank you for coming.
I'm delighted that you're still here. I had to depart for a few minutes. So,
I'll just make an observation and then ask a general question, if I may.
When I left, as I recall, you were being implicitly criticized -- or
the plan at least was being implicitly criticized for not having enough assets
devoted to covering the prescription drug benefit that was available in the
And indeed, given the fact that the cost of
prescription drugs is going up faster than the overall cost of medical services
or health care services generally, and the fact that the population eligible is
going to increase, that is a problem. But I would contrast that to the fact that
there was a tax bill reported out of this committee yesterday that didn't
reserve any dollars for that particular identified need by the committee -- just
an editorial comment, in passing.
Now, let me ask a broader question
though, because what I think that you and the president have proposed clearly is
a good first step, but it's not the full systemic reform of Medicare that we
talked about at one point. I wonder if you could -- if you have not already done
so in the period of time that I had to slip over to Intelligence -- just talk
for just a minute about some of the things that you'd like to see incorporated
in a long-term, systemic reform of Medicare that would sustain its viability and
its ability to both continue and to meet the needs of our aging population in
the next few years.
SHALALA: Well, the fundamental theme that we
need to run through, whether it's a reform of fee-for-service or the new
competitive reforms that we're suggesting that we introduce, is that we need to
move to price and quality, and we need to convince beneficiaries to go to places
where they can get both price and quality.
In the long run, the
system is inefficient unless we can move large numbers of people to integrated
systems of care, to better management of chronic and long-term diseases, and we
can move the management of Medicare to stop paying sticker prices and get better
prices for everything we purchase.
But the concept of centers for
excellence, for example, where Medicare beneficiaries would be enticed,
actually, because they'd save money on co-payments and various fees to go to a
place to have a surgery, for example, or some other kind of treatment that
provided high quality care -- and we will have identified them as providing that
-- and good prices.
So, moving the system towards a quality system
is absolutely key here, and we believe that the way to do that is through
economic incentives, and through the introduction of competition at every stage
in the Medicare program.
ROBB: Let's assume, Madam Secretary, that
this committee -- and that's a rather ambitious assumption -- will approve the
president's plan in its entirety, at this point in the remaining year and a
half. In the administration, would it be your hope that we could incorporate any
additional systemic changes?
Clearly, there's no quarrel with
getting higher quality at lower cost, and to control some of the difficulties
that you just alluded to. But is there anything else that you'd like to see us
consider in terms of putting in place to deal with that challenge over the long
term if we accept your goal as higher quality and lower -- more competitive
SHALALA: Well, I think that actually, if I were to add one
more piece, it would have to do with how we fund the management of these large
health care programs, and whether there actually are incentives in the funding
for building in more efficiencies. We strangle them with the amount of
management. We run these programs at less than three percent of overhead. No
private sector company manages health care at less than, probably, 10 percent.
And if we want to introduce these kinds of changes, we have to
properly fund the managers. And I'm not talking about higher salaries, I'm
talking about the systems we need to put in place; our ability to do contracting
both with private sector managers to manage large parts; and our ability,
frankly, that we are restrained now to fire companies that aren't performing;
and to be able to go to a broader list, whether it's processing claims or the
pharmaceutical benefit managers that we want to use in the private sector.
We just have to have a lot less rigidity in our ability to manage
this program, and that takes a combination of resources and flexibility. And
that will be key as to whether any of this -- no matter what competitive plan
you choose, our ability to manage it will depend on what you do on the
management side at the same time.
ROBB: That sounds a little bit
like a chancellor of a university system might discuss the tenure system from
time to time. But I won't ask you to...
SHALALA: No, I'm actually
deeply committed to tenure. What I don't want to do is to tenure in a limited
list of private sector companies or prices into the system. As opposed to giving
us a better chance at getting better prices and better management that we
contract for in the system.
Remember, we administer Medicare basically
through the private system. Let us loose to actually do that in a fair and
honest way. Whether it's small business or large businesses, I think we can do
that if we have a broader flexibility.
ROBB: Distinction accepted
and I thank you.
Mr. Chairman, my time is complete.
ROTH: Thank you, Senator Robb.
Madam Secretary, earlier
on you said you were going to speak with Dr. Crippen about the CBO estimates of
the cost of the reform. It would be very helpful if the committee received from
you a full statement of how your actuaries developed their estimates. So, I'd
appreciate those being submitted.
And second, the record is open. I
will have a number of questions to submit to you tonight, and it would be very,
very helpful if we could have answers to those questions sometime next week. And
of course the record's open for everybody to submit questions. We are trying --
in the midst of trying to develop a program, so, I would appreciate the answers,
as I say, sometime next week.
We thank you for being here and for
SHALALA: Thank you.
ROTH: And it's been a
long day. We shall continue to look forward to working with you on this most
important piece of legislation.
I would say it is the intent -- my
intent, to move ahead very promptly in September when we return after the August
recess. Thank you very much.
SHALALA: Thank you, Mr. Chairman.
ROTH: Now, I'd like to call our second panel. Both of whom, of
course, are frequent visitors to our committee. We're always pleased to have
David Walker, the comptroller general of the United States; and then, we will
turn to Dan Crippen, who, of course, is the director of the Congressional Budget
Gentlemen, it's always a pleasure to welcome both of you,
and we look forward to your testimony.
We'll start with you, Mr.
WALKER: Thank you, Mr. Chairman, members of the
I'm pleased to be here today to discuss the president's
recent proposal to reform Medicare. According to the president, his proposal is
intended to make Medicare more efficient, modernize the benefit package, and
extend the program's long-term solvency.
I'd like to make a few summary
points before delving into more specifics with regards to the proposal. In that
regards, Mr. Chairman, first let me note that the president's proposal contains
a financing proposal as well as several programmatic reforms that are intended
to advance the Medicare reform debate. It provides a baseline for further debate
and consideration of reforming Medicare.
president's proposal will result in significant reductions in debt held by the
public over the next 15 years, which would be very good. Secondly, it would
extend the solvency of the HI trust fund on paper from 2015 to 2027.
It would not, however, help to assure the long-range sustainability
of the Medicare program.
The president also proposes to include a
voluntary prescription drug benefit in Medicare and to have health plans compete
based upon price. These are two of the programmatic forms that I will discuss in
With regard to prescription drug benefit, the Congress
and the president may ultimately decide to include some form of prescription
drug coverage as part of Medicare reform. Given this expectation and the future
projected growth of the program, some additional revenue sources may in fact be
a necessary component of Medicare reform. However, it is essential that we not
take our eye off the ball.
The most critical issue facing Medicare
is the need to ensure the program's long-range financial integrity and
sustainability. Given the size of Medicare's unfunded liability, it is realistic
to expect that reforms to bring down future costs, will have to proceed in an
incremental fashion. The time to begin the difficult but necessary steps to
engage in comprehensive reform of Medicare is now, when we have budget surpluses
and a demographic holiday where retirees are a far smaller portion of the
population than they will be in the not- too-distant future.
Ideally, the unfunded promises associated with today's program
should be addressed before, or at least concurrent with, proposals to make new
unfunded promises. To do otherwise, might be politically attractive but not
fiscally prudent. If additional benefits are added, policy makers need to
consider targeting strategies and fully off-setting any related costs.
To qualify as meaningful reform, in our view, a proposal should make
a significant down-payment toward ensuring Medicare's long-range financial
integrity and sustainability. Solvency, in and of itself, is not enough.
As we testified before this committee in March, and again in June,
proposals to reform Medicare should be assessed against several criteria, namely
affordability, equity, adequacy, feasibility and acceptance.
Importantly in making these fiscal decisions for our nation, we
believe that policy makers need to consider the fundamental differences between
wants, needs and what both individuals and our nation can afford. This concept
applies to all major aspects of government, from major weapons systems
acquisitions to domestic program issues. It especially applies to the area of
health care, where there is unlimited demand, unlimited wants and yet very
different needs and practical limits as to what individuals and the nation can
It also is important to keep in mind the fiduciary and
stewardship responsibility that we all share to ensure the sustainability of
Medicare for current and future generations, within a broader context of
providing for other important national needs and continued economic growth.
WALKER: The president's latest proposal is projected to
virtually eliminate publicly-held debt by 2015. This indeed will be a
significant accomplishment. However, based upon our latest budget long-term
simulation model, even if all future surpluses are saved and the current
discretionary spending caps are complied with, we would nonetheless be saddled
with a budget over the longer term that at current tax rates could find little
else but entitlement programs for the -- could fund little else but entitlement
programs for the elderly population.
Reforms reducing the future
growth of Medicare, as well as Social Security and Medicaid, are vital under any
fiscal and economic scenario to restoring fiscal flexibility for future
generations of taxpayers.
Mr. Chairman, let me just show you a few
quick charts that are in my testimony, if I can.
The first chart
talks about -- the solid line represents the HI trust fund. The bars underneath
represent annual deficits. You will see that the HI, part A, has been in a
deficit position since 1992. We started the descent to trust fund insolvency by
2014. We face rapidly escalating deficits going into future years.
The next chart, please.
The solvency issue, Mr.
Chairman, only deals with the trust fund, the solid line. What's important is to
focus on sustainability. Is this program sustainable?
To look at a
few charts that are relevant there, this chart demonstrates the projected
increase in the composition of Medicare funding as a percentage of the gross
domestic product, scheduled to more than double over the 75-year projection
The next chart shows what the budget outlook looks like in
the year 2030 if we don't save the surplus. But even if we do assume that we
stick with the discretionary spending caps, in the year 2030 you'll see that
discretionary spending has all but been eliminated. Unfortunately, discretionary
spending, in our current vernacular, includes things like national defense, the
infrastructure, the judicial system, et cetera.
The reason that this
happens is because of the explosive growth -- projected growth in Social
Security, Medicare and other entitlement programs that we must begin to get
And the last chart, Mr. Chairman, represents a projected
increase in the payroll taxes associated with the Medicare program if the
program continued to be funded based upon a payroll tax structure for part A.
Social Security -- in part A, you can see there will be a dramatic escalation of
the tax burden on future generations.
Mr. Chairman, I've got a
significant amount of information contained within my statement which I would
ask that be -- that it would be included for the record.
full statement will be included.
WALKER: Thank you, Mr. Chairman.
What I would like to do is to -- if I can, since I know that you and
the other senators have had a chance to look at that, is to now just come to the
Mr. Chairman, I believe that it's important to note the
historic opportunity presented by the recently projected budget surpluses, but
to note that they are projected budget surpluses. As recently as two years ago,
they were projected budget deficits, and I think it's important that we keep
that in mind. I think it's especially important that we keep that in mind when
we're talking about potential real spending increases in an entitlement program
that would be hard coded for the future.
The bottom line is that
surpluses represent both an opportunity and an obligation. We have an
opportunity to use our unprecedented economic wealth and fiscal good fortune to
address today's needs. But an obligation to do so in a way that improves the
prospects for future generations.
This generation has a stewardship
responsibility to future generations to reduce the debt burden they inherit, to
provide a strong foundation for future economic growth and to ensure that the
future commitments are both adequate and affordable. Prudence requires making
the tough choices today while the economy is healthy and the cohort of workers
is relatively large.
National saving pays future dividends over the
long term, but only if meaningful reform begins soon. Entitlement reform is best
done with considerable lead time to phase in the changes and before the changes
needed become dramatic and disruptive. The prudent use of the nation's current
and projected budget surpluses, combined with meaningful Medicare and Social
Security program reforms, can help us to achieve these objectives.
Mr. Chairman, that concludes my summary remarks. I'd be more than
happy to answer questions after Mr. -- Dr. Crippen has had a chance to make his
ROTH: Thank you.
Dan, do you want to proceed?
CRIPPEN: Mr. Chairman, Senator Moynihan, other members of the
The last time we were together, we discussed the nature
and size of the reforms needed for the Medicare program, particularly as the
baby boomers swell the ranks of the retired. The president's latest proposals
address some desirable reforms, including additional pharmaceutical benefits to
It is worth noting, Mr. Chairman, that these issues are
not new. Soon after Medicare was enacted in 1965, the cost of the program...
GRAMM: Mr. Chairman, could Dr. Crippen speak -- pull that thing
closer to you and speak right into it.
CRIPPEN: Is that any better?
CRIPPEN: OK. Soon after Medicare was enacted
in 1965, the cost of the program began to exceed all estimates. We've been
chasing that tail ever since. And in 1969, only three years after the program
was kicked off, there was serious consideration of a proposal to add
pharmaceutical coverage -- pharmaceutical benefits to the coverage. Coverage
that has been considered at least once a decade ever since.
president's proposal provides a framework for making significant changes to the
Medicare program. It is intended to modernize Medicare's benefits, enable the
federal government to become a more prudent purchaser of health services, and
encourage price competition among health plans to slow the growth of Medicare
spending in the longer term. CBO estimates that the president's Medicare reform
plan would increase federal outlays by $111 billion over the next 10 years.
I'll be referring from now -- turning to Table 1 in the testimony,
and reproduced on the chart up here, Mr. Chairman.
There are three
components to our analysis and resulting differences with the president's
estimates. The most significant is obviously the cost of the pharmaceutical
benefit. The president proposes a new prescription drug benefit that would
provide first- dollar coverage with an annual limit of $2,500 when fully phased
in in 2008.
Although most Medicare enrollees would receive some
benefit, on average 25 -- the average is a 25 percent subsidy up to the limit.
The proposal would not substantially protect those in poor health who incur very
large out-of-pocket expenses for prescription drugs.
Before we go
much further, I'd like to discuss what may be the nature of the problem here.
According to HCFA, as we just heard from the secretary and past publications,
about 35 percent of Medicare beneficiaries lack drug coverage. That percentage
probably hasn't changed much in the recent past, where beneficiaries are
enrolled in managed care plans and most of them have coverage, but fewer
retirees are likely to have coverage from their employers now, as the secretary
Moreover, some beneficiaries, especially those that are
purchasing Medigap coverage, have quite meager benefits. The coverage offered in
the president's proposal would be more generous than Medigap. Concerns about the
adequacy of drug coverage are growing as Medicare HMOs are also cutting back
their drug benefits.
The other side of the story is that 65 percent
of the beneficiaries do have coverage. And those that have employer- sponsored
retiree plans usually have generous benefits including protection against
catastrophically high drug expenses.
Our estimates are obviously
higher than the administration's. Higher for what we obviously think are three
First, our estimates enjoy the advantage of having
data released by HCFA only a few days ago that clearly indicate more cost growth
than has occurred in even the most recent past. They assume this growth will
slow sharply over the next few years. We also assume that the slow down will
occur, but not quite as rapidly as those projections suggest.
Second, we've included drug costs for Medicare beneficiaries who are
in nursing homes, something the actuaries do not currently account for.
Finally, we expect the cost of Medicaid will be substantially
higher, largely because some of the elderly who are currently eligible for
Medicaid but are not enrolled will enroll to take advantage of the drug benefit.
Currently, there are approximately 2.6 million potentially eligible elderly for
Medicaid who are not enrolled.
The president proposes a number of
cost saving measures for the traditional fee-for-service program, including the
extension of some provisions of the budget -- of the BBA that limit payment
updates beyond 2002.
The president will provide a small amount of
additional funds to reduce the more immediate impact of the X (ph) payment
reductions through as-yet-unspecified legislation. On balance, payments to
providers will be reduced from baseline levels, although those reductions would
accrue only after 2002. The president also proposed to change some of the
beneficiary cost sharing requirements with a net increase in contributions by
Taken together, we estimate the savings in additional
programs proposed by the president would be somewhat less than his estimates
suggest. The difference is largely found in the estimated effects of new
authorities to be given to the secretary of HHS. Some, due to skepticism about
how both beneficiaries and providers would react to new incentives that may be
implemented by the secretary, and some due to lack of specificity in the
proposals made by the president.
The proposed competitive defined
benefit will provide new opportunities for Medicare's managed care plan to
compete on the basis of price as well as quality of service. Although the
president's proposal would introduce new elements of competition among health
plans that could help slow the growth of Medicare spending, it would fall short
of a fully competitive program.
By establishing the fee-for-service
sector as the benchmark for defining Medicare benefits and setting premiums for
health plans, it would blunt the incentives for efficiency. For that reason, CBO
has serious reservations about the magnitude of savings that could be expected
from the competitive defined benefit.
We have not, however,
completed an independent estimate of that part of the proposal, and for purposes
of today's testimony, we have assumed the savings the administration has
indicated they expect.
Finally, the president proposes to pay for
the federal share of the prescription drug benefit through transfers from the
general fund. As both the comptroller general and I have testified in the past,
and he just said moments ago, those transfers are promises to pay future
benefits with future general revenues. How burdensome that commitment might be
depends on both the growth of future spending for prescription drugs and the
growth of the economy over the coming decades.
president's proposal provides incremental changes in some promising directions.
They fall short of fundamental reform, however. For example, reducing payments
for free-for-service providers would yield Medicare savings without contributing
to the program's efficiency. But improving the efficiency of the fee-for-
service sector is key to achieving short-term cost savings and longer- term
Fee-for-service is likely to remain the plan of choice for
most Medicare enrollees over at least this next decade, even under the most
favorable assumptions about the growth of enrollment in managed care plans.
Successful adoption of the contracting and payment methods of
private health plans used to manage their costs could establish a basis for a
competitive fee-for-service sector, but recent efforts to test such methods have
not found much acceptance among providers, and the president's proposal treads
lightly on that issue.
Another element of many reform proposals is
rationalizing cost- sharing requirements. The president's provisions would
modestly increase some of those requirements and lower others without reducing
their complexity. A more thorough reform might subject all Medicare coverage
services to a single deductible and uniform co-insurance rates, at the same
time, placing an annual limit on the amount that will at least pay in
cost-sharing for all covered services, including drugs, if that's part of the
In conclusion, Mr. Chairman, the overall effect of
the president's proposal is to increase Medicare spending largely funded with
general revenues. The proposed pharmaceutical coverage would give a small
benefit to most enrollees but not provide catastrophic coverage to those with
unusually high drug costs. The proposed reforms would move toward a more
competitive system in the Medicare Plus Choice (ph) program but do little to
reform the traditional fee- for-service sector.
Thank you, Mr. Chairman.
ROTH: Thank you.
David, in your prepared testimony, you
express concern that financial controls such as cost-sharing in the Medicare
program historically have eroded over time, and that we have not always been
successful in predicting the cost of program expansion. You further suggest that
to implement funding thresholds would require periodic congressional review.
Now, discussing those what you call threshold triggers have led to
criticism that this conflicts with the entitlement concept of Medicare. So, I
have two questions.
One, how do you respond to such criticisms, and
can you elaborate on any specific threshold mechanisms that you may have in
WALKER: Well, a couple of things, Mr. Chairman. First, we've
been down this road before with regard to voluntary expansion of Medicare based
on funding in part through general revenues, and that was Part B. When we
started out with Part B, it was anticipated that 25 -- pardon me, 50 percent of
the cost would be paid for by the beneficiaries and 50 percent of the cost would
be paid for by general revenues.
WALKER: Today, 75 percent of
the costs are paid for by general revenues, and 25 percent of the costs are paid
for by beneficiaries. So, we don't really have a very good track record of being
able to maintain fiscal discipline over these types of programs.
Secondly, we're talking about projected budget surpluses here, and
the proposal would say that it is designed to pay for 60 percent of the
estimated costs, but in a large part, based upon these projected budget
surpluses and then the premiums that would be there.
I think we have
to realize that these surpluses may or may not occur. And therefore, we have to
have some mechanism that if, in fact they do not occur, what can be done in
order to try to restrain the escalating costs of this program.
addition, there are a number of estimates as can -- differences of opinion.
Reasonable people can differ on what the real costs of this benefit is going to
be. The difference between what HCFA's actuary, OMB and CBO have projected. I
know that there's great uncertainty here. For example, I was just out on the
West Coast with CalPERS, which is probably the largest public employee
retirement system in the country, California system, about two months ago. And I
know that health -- that prescription drugs is the fastest growing part of their
health care costs, and they're trying to figure out how they are going to get
control of these costs in the future.
So, I think we have to have
mechanisms in place that, not just look at percentages, but look possibly at
hard-dollar limits; that look at percentages of the economy with regards to
Medicare and certain other factors. Because there is a difference between what
people want, what they need and what we can afford. And I think that's one of
the problems quite frankly, with regard to health care: we haven't made a
distinction between those and we need to, because if we don't, we're never going
to control the costs.
ROTH: Do you have any specific suggestion as
to the technique, process or mechanism we should use?
I think several things. I think one -- you know, the president, in his proposal
with regards to prescription drugs, has tried to do some things to control
utilization. I mean, he's got a co-pay. But I think, you know, obviously you can
look at the possible of the deductible; you can look at whether or not the --
you know, the premium ought to be modified based upon, you know, ability to pay;
how you might be able to target this benefit more. And then, whoever you decide
that you're going to target the benefit for, somehow consider some type of
hard-dollar limits, or some type of mechanism, such as point of order or
whatever, to re-look at this, if you do create a new, in effect, Part D, which
is prescription drug benefit under Medicare.
ROTH: Let me turn to
The GAO has issued, I think, two reports recently
indicating that Medicare Plus Choice plans are still overpaid even after
implementation of BBA revisions, in that payment amounts are not the primary
cause of ongoing Medicare Choice plans withdrawal. Now, I happen to believe that
if plans were currently making excessive profits they would not be withdrawing
from the program. Can you correlate your findings with the large number of plan
withdrawals we've been witnessing?
WALKER: Well, Mr. Chairman, as
you know, there is a difference between the urban area and the rural areas with
regards to this. I mean, there is a problem to begin with in trying to get these
types of plans to go into the rural areas to begin with.
regards to Medicare Plus Choice, I think we have to keep in mind that a vast
majority of these plans are making enough on them such that, in addition to
making a profit, they can offer beneficiaries enhanced benefits. In many cases,
prescription drugs benefits, for example, as a way to entice coverage under
So in many cases, I think what you're finding is
that they can still make a profit, but they can't provide as much of an
enticement as otherwise they could do to attract coverage, or they have to
decide that they're going to take less of a profit if they're going to maintain
the same benefit level.
And so, part of the issue is, is that,
what's their target with regards to profit margin here? And I think in time this
thing will settle out. I think we had a lot of people rush into it. In some
cases, they didn't do enough economic analysis. There was an over supply. And
now, with some of the corrections that are occurring now, they're making more
determinations on what makes economic sense based on their profit motives. So in
time, I think it'll settle out.
ROTH: And let me ask you -- I'm very
much concerned about the president's plan targeting employers to drop retiree
prescription drug coverage. Would you elaborate on those implementations and the
potential costs to the federal government?
WALKER: Well, we know,
Mr. Chairman that the costs will be at least 67 percent of what the average in
the program is. That's the subsidy the administration proposes to use to keep
employers offering their plans. That coupled with their current tax
deductibility, as I think you pointed out earlier in your opening remarks, it
may be enough to keep many employers in the game. Many of those benefit packages
are more lucrative or more generous than certainly what the president's proposal
So, between the 67 percent subsidy and the tax
deductibility, we expect most employers, if they have coverage today, would
continue the coverage at least for the foreseeable future. But again, it will
have a cost because of the 67 percent subsidy off the top.
Mr. Chairman, can I clarify one thing which I think is important?
ROTH: Sure, please.
CRIPPEN: You know, one of the things
that we're talking about here is comparing the benefit package, and what do you
compare the benefit package to in the case of Medicare? What's the appropriate
comparison? I think one thing just to note for the record, the comparisons that
are being made are comparing to benefit packages typically for active employees
for the private sector.
Only about 15 to 16 percent of employers in
the private sector have any retiree health care whatsoever for their retirees. A
vast majority of employers are out of that business. And to the extent that they
are in the business at all, they may or may not provide prescription drug
And so, to the extent that individuals are getting this
coverage now, in many cases they are getting it through Medicare Plus Choice,
they're getting it through Medigap policies or they're getting it through other
types of arrangements. Because, for the most part, they're not getting
prescription drug coverage through employer sponsored programs, in part because
of the costs.
ROTH: Senator Mack.
MACK: Thank you, Mr.
ROTH: I thought you were next.
stayed, Mr. Chairman. I went back to -- I'd learned all I was going to learn
from the secretary. So, I went back and I came back.
MACK: What are the unknowns with respect to prescription drugs that
could affect the cost of the program? What are the things that both of you worry
about as you try to project those costs? And I -- just so you know where I'm
going with this -- as I said to the secretary, I thought it made a lot more
sense to begin the prescription drug coverage in a much more targeted way. And
that targeted way would be to those at the lower end of the income ladder.
And one of the reasons, in addition to the obvious, is to try to get
a sense about how it's all going to work. How are you going to provide the
prescription drugs, the pharmaceuticals? What -- how is it organized?
And so, what I'm asking you is as you both looked at making your
estimates, what are the concerns out there -- what would you like to have more
information about in order to have a better understanding of the impact?
Dan, why don't you start.
CRIPPEN: Well, the primary
concern, Senator, is of course we start with the base, and what's in the base,
and what level of benefit subsidy, the federal costs, all of that. But more
critically, it's the growth in costs that's most important. What are the trends?
Just like in the Medicare program at-large, it's not -- the
demographics are important and the baby boom numbers are...
Are you talking about utilization are you?
CRIPPEN: Both utilization
But just like in the Medicare program itself, the
critical fact is the cost per person and its growth. It's not just the number of
bodies in the program.
So, with these estimates, important -- the
most important single driving factor is how fast are drug cost and utilization
going to go up? And as we found from the most recent data, as I said, just days
old, that's changing upwards dramatically even from a year ago. The estimates
the actuaries based their overall administration estimates on were that drug
costs, and utilization for this program were developed about eight percent. They
now have numbers that are double digits, and that's just the change from last
So, there are -- that's the single most important thing. Now,
there are others that are considering some design questions in this particular
program that one has to be concerned about. First, the limit is relatively high,
as you pointed out, and not catastrophic in nature, so there's going to be a
temptation to change the limit. It's only indexed to CPI, not to drug cost or
health care costs. So again, there'll be pressure, I suspect, to legislate a
higher limit at some point if this were to become law.
It's also --
they keep Medicare current drug expenditures -- although very limited, there are
some drug expenditures in Part B. Those stay in Part B with a 75-percent
subsidy, as opposed to the drugs that will be included in Part D, with a
25-percent subsidy. So, there'll be a temptation to try and migrate drugs
across, I assume, from D to B.
So there are a number of things to
worry about in the design of the program. But in terms of its implementation and
experience, the single most important thing is the growth of costs.
WALKER: Three things, Senator, first utilization; secondly...
MACK: I should stop you there. Why don't you tell us -- I assume
that there are factors -- there are several layers of things that can affect
utilization; is that right?
WALKER: Well -- and obviously, one of
the things that can affect it is what kind of financial incentives exist for the
individual to decide whether or not they're going to seek, you know, an
additional prescription drug benefit or whatever. And whether or not they're
going to be covered to begin with. I think that's the second point -- adverse
One of the concerns that you have to guard against is, my
understanding of the president's proposal it would be a voluntary program.
People would make an election at the point in time they become eligible for
Medicare -- e.g., age 65 -- as to whether or not they want to participate in
this program or not. They could get out, but they couldn't get in after that
point in time. So, it would be a one-time election.
people would then have to make a judgment based upon the design of this program,
and based upon how much prescription drug coverage they expect they're going to
need as to whether or not they want to play or not. Depending upon the design,
you could have a circumstance in which people who are expecting a much higher
prescription drug costs would play, and the people that don't would not.
And the last one, I guess, would be -- major one would be the fact
that a lot of the benefit is being funded based upon a projected surplus which
may or may not occur. And therefore, what kind of safety valves are there in the
event that the surplus doesn't occur?
MACK: Let me just touch on
another subject that I'm, I know a little bit about so it might be dangerous.
The competitive defined benefit. And we hear the word competition used over and
over and over again in the presentation of the president's proposal.
As I understand it though, that competition is a fairly small
portion of the overall Medicare program. That is, for the managed care portion
of it. Is that correct?
WALKER: It is correct, Senator. And it will
get -- they don't claim to get a lot of savings out of that either. But if -- I
mean, the flip side is, there isn't a lot of new proposed competition for the
fee-for-service side, which is -- as I said in my opening remarks, is the most
important in the foreseeable future.
MACK: And let me -- I think I
generally understand -- there will be an establishment of this defined benefit.
There would be an invitation to bid on those benefits. Then there would be the
effort by the provider to enroll beneficiaries in the program. And at that --
then after that, there would be a risk adjustment done by -- I'll say HCFA --
I'm not sure who does it, but someone does a risk adjustment.
that going to entice providers into this form of business? Is there -- I guess
what I'm raising here is won't they, kind of, see this last step, this risk
adjusted process, as something that could put them very much at risk about
whether they actually go into the program?
CRIPPEN: Certainly. There
is not only the risk adjuster, Senator, I think the overall assumption behind
the president's plan is that there will be providers here who will meet the
needs of anyone who wants them. I don't know that that's a safe assumption.
Part of the calculus too, that you didn't mention, is that there
will be provided an incentive for individuals to join these managed care plans,
because any price they charge lower than the reference point, the difference
would be split between the government and the individual.
assumes that the individual is willing to trade in a dollar of insurance
benefits for 75 cents in cash and maybe pay a premium somewhere else.
So, it's far from clear, and again, as I said in my opening
statement, we're not sure exactly how it's going to work. But for the moment,
we've assumed the administration's estimates are probably about right because
they aren't making strong claims.
MACK: My time is up so if you have
WALKER: Real quick one, Senator. Risk adjustment's a double-
edged sword. On one hand, it could have an impact on whether or not insurance
companies are willing to play, and on what basis they're willing to play,
including how long they are willing to play, which we're seeing with regards to
Medicare Plus Choice to a certain extent.
On another hand, it's
essential in order to avoid adverse selection. Because otherwise, what you can
have is creaming, where if you can go out and then try to pre-select your
population and try to somehow design it such that you're getting the people that
are less likely to need the coverage, that leaves a lot more room for profit
margin, if you will. So, it's a double-edge sword.
CRIPPEN: Part of
the problem, Senator, with risk adjusters is that traditionally while it's a
nice -- it's certainly nice in theory, it's very hard to implement. The current
proposal that HCFA has, for example, I believe accounts for about nine percent
of the variance in health expenditures. So, it accounts for very little of the
differences in expenditures across people. And so -- I mean, it's very hard to
do. It's a nice theoretical concept but very hard to implement.
ROTH: Senator Gramm.
GRAMM: Well, Mr. Chairman, first of
all thank you very much for the hearing. I'd just like to express a frustration,
that this is at least the second, and probably the third, time that we've had
our two official estimators or checkers of reality appear after we've had an
administration witness, where, for all practical purposes, most people are gone
by the time we get the reality check. And I'd like to just suggest, Mr.
Chairman, that maybe in the future we ought to have the administration one day
and then have the reality check the next, so that people have an opportunity to
hear the facts after we've heard what, unfortunately, has become the propaganda.
I'd like to outline a scenario that worries me about the
prescription drugs. And just bear with me until I get through and then I'd like
to see, if I can, to entice you to comment to see if you share some of the
Number one: today, for people who are getting the full
payment of their pharmaceuticals in programs like Medicaid, we know that the
level of average spending on pharmaceuticals -- I think the number is $711.
GRAMM: For people who have no third-party payment, it's less
than $350. So, the one thing we know for sure is that the demand for
pharmaceuticals is pretty price elastic in terms of the price to the person
that's consuming. If you're going to make them free or nearly free, people are
going to increase consumption dramatically.
Secondly, there's some
new data that suggests that half of seniors don't spend $500 a year on drugs, so
they would have no incentive to join the administration's program, especially
when they're younger seniors. I've seen figures as high as 40 percent of seniors
don't spend $200 a year on pharmaceuticals.
So, I think it is clear
we're going to have a tremendous amount of adverse selection. The people who are
older, sicker, heavier users are going to tend to join the program; younger
people aren't. We started out with a 50/50 cost-sharing on Part B; it's down to
25. We're not going to be able to hold the 50/50 cost share. We're not going to
be able to hold the $1,000 cap. In fact, the administration's program cuts on
when you don't need it, and cuts off when you do.
So, we're going to
end up increasing the amount that the government will pay. And I'm concerned
that, if we have a universal system where everybody's involved, that we're going
to end up with costs that ultimately will dictate -- especially when we're
already looking at the cost of the current program, without repealing any of the
balanced budget provisions, and without adding pharmaceuticals, we're looking
at, in 25 years, Medicare costing at least 12 percent a payroll.
don't see how, if we adopt the president's program, we can avoid spiraling
costs, ultimately price controls and ultimately rationing. Could I get you all
to be so bold as to comment on that?
WALKER: Senator, you have the
luxury of making those assertions. I can't.
CRIPPEN: Senator, I
think I pointed out in the previous question that one of the things we have to
be concerned about is, depending upon the design of the program, as to whether
there might be an opportunity for adverse selection. And I think one of the
things you're reinforcing is you think, in your opinion, there would be under
GRAMM: And a lot of it.
utilization, obviously, there's a trade-off. I think one of the things,
candidly, that we need to do in health care, which I get concerned about when we
approach health care incrementally, is that issue that I've talked about before:
the wants, the needs versus afford.
Everybody wants unlimited health
care; whether it be prescription drug, whether it be acute care, whatever, they
want unlimited. They need certain basic things. Arguably, they need access to
health care group rates. They might need protection against catastrophic illness
or whatever. I mean, they need that. I mean, whether they want it, they need it.
And then, we have to somehow figure out how we can break this down
to say, Look, let's differentiate between what people want and what they need.
Let's recognize there's a difference between giving people access to health care
group rates so they can get insurability, versus who's going to pay for it. How
much they ought to pay, how much the taxpayers ought to pay.
think that's something we really haven't done. And I think it's something that
it's important that we do do.
I think the other thing we have to
keep in mind is we've got a consumption problem in health care. It's going out
the roof, and yet we're incenting (ph) health care in many ways, including
through the tax code, big time.
And so, we've got a break -- we've
got a disconnection between what we're trying to accomplish, which is to make
people more sensitive to the cost versus risk trade-off to try to control
consumption and utilization, to try to prevent adverse selection. I think we
need to look at it more comprehensively.
GRAMM: Let me, Mr.
Chairman, do one final question.
I -- in looking at the data that
came out yesterday from CBO on your mid-session review of the president's
budget, you estimate that in -- over the next 10 years, as I read your numbers,
that the president will have basic spending up 207, additional discretionary
spending up 328. The USA accounts, which are outlays, as you properly note, of
$245 billion. Medicare prescription drugs of 111. Debt service will go up as a
result of all of this spending.
And in total, the president -- as I
read your charts, the president would spend $1.033 trillion in additional
spending as compared to what we are looking at in terms of the budget that we
have adopted, if you projected it out 10 years. Am I reading that right?
CRIPPEN: Yes, sir. It's relative to our standard baseline, which at
the moment assumes the caps are met, and that thereafter, the amount of
discretionary spending will go up with inflation.
GRAMM: Well, Mr.
Chairman, I'd just like to note that, with all of the whining and gnashing of
teeth yesterday about your $794 billion tax cut, that even if you funded the
president's Medicare program with $111 billion you're still -- with a tax cut
and Medicare, you're still substantially below the total level of new spending
the president's talking about.
So, the incredible paradox is, is
that while we have our Democrat colleagues screaming and hollering about us
using the surplus -- the non-Social Security surplus for tax cuts, the president
has in fact submitted a budget that spends far more in new spending than we're
talking about in terms of tax cuts.
So every horror they talk about
if we cut taxes by $794 billion, in terms of not having the money for other
things, if we spend $1.033 trillion we won't have it for other things either.
And the important thing is, you can raise taxes and get the money back, as we've
proven on many occasions, but if you start all these new programs, I don't see a
corresponding evidence that we can eliminate programs and save money.
So, I wish we had had this mid-session review a week earlier that we
could have used in this debate. But facts would only confuse our critics and
probably not help us.
Thank you, Mr. Chairman.
GRASSLEY: Thank you, Mr. Chairman.
Walker, I'd like to start with you about one of the main differences between the
plan of the administration and the model that was put forth by the Medicare
Commission. And that is that the administration would not force traditional
Medicare programs to compete with private plans. The commission suggested that
including the fee-for-service program in this competition was necessary in order
to modernize it. And so, I'd appreciate a comment from you on the effects of
this aspect of the administration's plan.
WALKER: Well, Senator, I
-- my main comment that I would give you is, is that the president's proposal, I
think, represents an attempt to get the debate going on reform. But it doesn't
do nearly enough on sustainability. It doesn't do anything hardly at all with
regard to fee-for-service programs, which is where a vast majority of the
dollars that we're dealing with here now.
And I think that's
something that we're going to have to eventually come to grips with. We're going
to have to come to grips with, not just the issue of solvency, but also the
issue of sustainability. And we're also going to have to come to grips with
meaningful reforms in the fee-for-service program. That's one possibility --
what the Medicare Commission talked about, is one possibility for coming at
GRASSLEY: And both to you and to Dr. Crippen, about the
estimates that vary so much on the prescription drug benefit from the way that
you have designed the benefit to who's covered. We have two very different
estimates from the CBO and from OMB on the president's proposal. A difference of
about $50 billion, and of course, this isn't a small amount of money. And it is
why we need to proceed, of course, with caution when we decide how to provide a
prescription drug benefit, so we don't end up promising something that we can't
I'm concerned that we may be relying on a strong economy,
surpluses, the current level of Medicare savings which may not be sustainable to
finance a program. How can we craft a benefit in a responsible manner avoiding a
financing disaster should a picture change?
WALKER: I think that
you're correct. There's a lot of uncertainties here. I think the differences
between the numbers that HCFA has come up with, and OMB has come up with, and
what CBO has come up with, serves to reinforce the inherent uncertainties, the
variability, the volatility associated with prescription drug costs. We have to
proceed with caution.
Secondly, I think we have to recognize that
this is an expansion of benefits in a program where we already have significant
unfunded promises. And part of the expansion of benefits here is proposed to be
funded by projected surpluses that may or may not occur.
So, I think
we need to look at -- if the Congress decides it's going to move forward in a
prescription drug benefit, on targeting -- targeting it to those that need it;
on making sure that the design is such that there are adequate incentives to
avoid adverse selection and to control utilization; and that there be some
safety valves to make sure that if these surpluses don't occur, that we can
re-look at, you know, the financing of this program to decide what, if any,
adjustments are necessary.
And last, I think we have to shine a
light on this -- on any program the Congress would decide to go forward, as to
the financial integrity of this benefit by itself, because recent data has shown
that this part of health care costs is escalating much more rapidly than overall
health care costs, and that's a matter of concern.
Crippen, did your estimate include any suggestions of how to approach it so you
don't avoid that $50 billion difference?
CRIPPEN: No, Senator, our
differences in estimates really go to the last point that the comptroller
general made, which is we have very rapid -- or much more rapid than we expected
increases in both utilization and prices of drugs. And so much of our difference
between CBO and OMB is due to the more current data which shows the more rapidly
increasing prices. There is nothing in that, of course, that suggests you could
do anything different with the design of the program.
you see the -- Dr. Crippen, do you see that as the administration plans on at
least one of the assumptions, on a big down turn in the price of drugs? And that
coincides obviously with the introduction of the drug benefit. I suppose it's a
rationale for being able to pay for it and sustain it. Do you see that
CRIPPEN: It's entirely possible, Senator. What the
administration is assuming is that, by organizing this large a benefit, they
will have some power to negotiate discounts with pharmaceutical providers, and
that's probably possible. Certainly, the current pharmacy benefit managers can
do that. It does beg the question, however, as I said the other night, when
everyone has a discount, does a discount exist? So, it is unclear exactly how
much they could get through negotiations.
But more importantly
again, Senator, is that if that's a question of what our initial costs are going
to be, what's more important is how quickly will it grow. And so, the discount,
while an important factor of those initial cost estimates, has not much to do
with the out-year costs.
I think the other issue is, is that while clearly, due to the number of persons
likely to be involved in the prescription drug benefit under Medicare, that
would give one a significant amount of leverage to negotiate. The question is,
at what price? At what price with regards to, you know, research and
development, and some other activities that are going on in the area of
And so, you know, there's no free lunch. I mean,
there's going to be an effect. And I know that even parts of the government have
expressed concern about what the potential implications might end up being on
the discounts that they're getting.
So, I think we have to proceed
with caution. I mean, I think there's increasing recognition that there may be a
need to modernize the benefit package. But I hope that we just don't take a step
backwards on the financial integrity of this program. I hope that we can make a
GRASSLEY: Thank you, Mr. Chairman.
ROTH: Well, gentlemen, as always, your testimony's
extremely useful, and we do hope that upon our return in September to proceed
with reform. So, we'll be counting on your continued advice and recommendations.
Thank you very much.
The committee is in recess.
Unknown - Indicates Speaker Unkown
Inaudible - Could not make out what was being said.
off mike -
Indicates could not make out what was being said.
PERSON: WILLIAM V ROTH JR (94%); JOHN H
CHAFEE (72%); DANIEL PATRICK MOYNIHAN (67%); ORRIN G
HATCH (57%); PHIL GRAMM (56%); DON
NICKLES (56%); FRANK H MURKOWSKI (56%); CONNIE
MACK (55%); TRENT LOTT (55%); FRED
THOMPSON (54%); MAX BAUCUS (53%); RICHARD H
BRYAN (52%); BOB GRAHAM (52%); KENT
CONRAD (52%); DONNA EDNA SHALALA (51%); CHARLES S
ROBB (51%); J ROBERT KERREY (51%);
LOAD-DATE: July 27, 1999