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Document 23 of 76.

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OCTOBER 1, 1999, FRIDAY

SECTION: IN THE NEWS

LENGTH: 4846 words

HEADLINE: PREPARED TESTIMONY OF
MARIBETH CAPELOTO
DIRECTOR, FEDERAL RELATIONS
GROUP HEALTH COOPERATIVE OF PUGET SOUND
BEFORE THE HOUSE WAYS AND MEANS COMMITTEE
SUBCOMMITTEE ON HEALTH
SUBJECT - MEDICARE BALANCED BUDGET ACT REFINEMENTS

BODY:

(NOTE: Charts not transmittable)
I. Introduction
Mr. Chairman and members of the Subcommittee, thank you very much for the opportunity to comment on issues related to the Health Care Financing Administration's (HCFA) implementation of the Medicare+Choice program. I am Maribeth Capeloto, Director of Federal Relations and former Administrator of Government Programs for Group Health Cooperative, based in Seattle, Washington. Group Health is a not-for-profit company and is the nation's largest consumer-governed health care organization. We signed our first Medicare HMO contract more than 20 years ago in 1976 and at present serve nearly 60,000 Medicare beneficiaries. I am testifying today on behalf of the members of the American Association of Health Plans (AAHP), which represents more than 1,000 HMOs, PPOs, and similar network health plans. AAHP's membership includes the majority of Medicare+Choice organizations, which collectively serve more than 75 percent of beneficiaries in the Medicare+Choice program. Together, AAHP member plans provide care for more than 150 million Americans nationwide and have strongly supported efforts to modernize Medicare and give beneficiaries the same health care choices that are available to working Americans.
AAHP's member plans have had a longstanding commitment to Medicare and to the mission of providing high-quality, comprehensive, cost- effective services to beneficiaries. In fact, like Group Health, many of our fellow member plans have served beneficiaries since the inception of the Medicare HMO program fifteen years ago, if not before, when the program was offered as a demonstration. In establishing the Medicare HMO program, Congress and the Administration were seeking to offer beneficiaries more coverage choices - choices through which plans could offer beneficiaries additional benefits not available in fee-for-service Medicare in exchange for a more limited provider panel. The new pro,am was viewed as a milestone, holding both opportunities and challenges for the government, health plans, and beneficiaries. Over time, the number of Medicare HMOs steadily increased, reaching 346 in 1998. More than 17 percent -- or 6.2 million beneficiaries - have voluntarily chosen a health plan over fee-for-service Medicare, up from only six percent just five years ago.
According to recent research, health plans are attracting an increasing number of older Medicare beneficiaries and beneficiaries are remaining in health plans longer. In addition, near-poor Medicare beneficiaries are more likely to enroll in health plans than higher- income beneficiaries. An AAHP analysis of Medicare Current Beneficiary Survey (MCBS) data shows that minority beneficiaries are at least as likely to be in Medicare+Choice as in fee-for-service Medicare. These health plans offer Medicare beneficiaries numerous benefits that are not covered under fee-for-service Medicare, such as full year's hospitalization, lower copayments and deductibles, and prescription drug coverage (Figure 1).
Figure 1: Comparison of Medicare+Choice and Fee-For-Service Benefits
Medicare+Choice Fee-For- Service
Outpatient Prescription Drug Coverage Yes No Deductible for Physician Visits No Yes, $100 Copayment for Physician Visit Nominal copayment 20 percent coinsurance after
$100 deductible Hospital Inpatient Cost-Sharing Typically, No Yes Day Limit on Extended Hospital Coverage Typically, No Yes
Recent studies also highlight Medicare beneficiaries' high levels of satisfaction with their Medicare health plans. HCFA data show that, among beneficiaries with strong preferences, HMOs have a larger proportion of very satisfied enrollees than fee-for-service Medicare. A July 1997 study by CareData in conjunction with Towers Perrin also revealed very high rates of enrollee satisfaction among retirees who joined Medicare HMOs offered by their employers. Overall, almost 70 percent of retirees enrolled in an HMO that offered Medicare coverage were extremely or very satisfied with their HMOs.
The strong and steady growth in the number of beneficiaries who chose a health plan over fee-for-service Medicare and plans that participate, along with the high-levels of satisfaction, signaled a program that was flourishing. In approving the Balanced Budget Act (BBA) two years ago, Congress sought to build on the success of the Medicare risk program and to expand coverage choices even further, while at the same time taking steps toward ensuring the solvency of the Medicare trust fund. The establishment of the Medicare+Choice program was supported by AAHP and regarded as the foundation for moving forward with a program design that can be sustained for future generations of Medicare beneficiaries. Without action this year, the promises made to beneficiaries with the passage of the BBA will remain unfulfilled, and of equal importance, prevent the successful implementation of virtually every long-term Medicare reform initiative that this Subcommittee might examine.
II. Current State of the Medicare+Choice Program
The Medicare HMO and Medicare+Choice programs share the fundamental goal of expanding availability of new Medicare coverage options. But rather than continuing to evolve and grow, the Medicare+Choice program is devolving and contracting. As members of the Subcommittee know, the first public sign of trouble in the Medicare+Choice program surfaced last fall when nearly one hundred health plans were forced to reduce or end their participation in the program, resulting in more than 400,000 beneficiaries losing their health plan choice. Fifty thousand of these beneficiaries were left with no other health plan option. At that time, AAHP and others urged the Administration and Congress to make mid-course corrections, arguing that if program problems were left unaddressed, more health plans, many of which have participated in the program for years, would face the same difficult decisions in 1999 and beyond. As members of the Subcommittee fully know, this concern became the unfortunate reality.
In mid-July, HCFA announced that 327,000 beneficiaries in another ninety-nine health plans, including some enrollees in Group Health, would lose their health plan on January 1, 2000. Of the 327,000 affected beneficiaries, 70,000 will have no choice but to return to the fee-for-service program because there is no other Medicare+Choice plan in their area. Although total enrollment in Medicare+Choice has increased, the year to date growth rate has fallen dramatically to 6.8 percent for the first eight months of 1999. Growth between January, and September in 1998 and 1997 was 11.1 percent and 17.4 percent, respectively. Between August and September 1999, fewer than 25,000 beneficiaries joined Medicare+Choice plans, compared to the pre-BBA monthly average of approximately 100,000 beneficiaries.

In addition to these sobering events, three months ago, on July 1 st, AAHP released results of a survey of its 26 largest members that participate in the Medicare+Choice program, which showed that among responding organizations, a substantial number of beneficiaries who will be able keep their plan next year will face increased out-of- pocket costs and reductions in benefit levels. AAHP's survey results, which were independently collected and tabulated by Peter D. Hart Research, showed that premium changes to be instituted by 18 companies will affect nearly 1.5 million of the 3.86 million beneficiaries covered by the survey whose plans will remain in the program next year. Among these individuals, monthly premiums will increase by $20 or more for 926,009 persons and $40 or more for 400,757 of the 926,009 persons. Monthly premiums will decrease for just fewer than 12,000 individuals; in all instances, these decreases will be less than $20. More than 1.3 million enrollees will face an increase in prescription drug copayments, while just 10,000 enrollees will have decreased prescription drug copayments next year. Additionally, about 600,000 individuals covered by the survey will face hospital inpatient copayments averaging $275 next year.1 These results coincide with those of an Administration survey released less than two weeks ago.
III. Sources of Medicare+Choice Program Instability
The health plans that announced their decisions to leave the Medicare+Choice program or to reduce benefits did not make their decisions lightly. Many of these plans worked up to the July 1st deadline to devise strategies that would enable them to maintain their current service area, to stay in the program next year, or to minimize benefit reductions. But for many of these plans, current problems with the Medicare+Choice payments and increased regulatory burdens were too overwhelming, and they were forced to reduce their participation, to withdraw from the program or to scale-back benefits. Without a doubt, HCFA's approach to implementing policies and changes required by the BBA have influenced these decisions.
Medicare+Choice Payment
HCFA Risk-Adjustment Approach Undermines BBA Medicare+Choice Payment Reforms Goals
The BBA limited the annual rate of growth in payments to health plans, producing $22.5 billion in savings from the Medicare+Choice program. The BBA also sought to reduce geographic variation in payments to encourage the development of coverage choices in areas of the country with lower payments. In 1998 and 1999, however, no counties received blended payment rates because of the low national growth percentage and the inability to achieve budget neutrality.
AAHP and its member plans supported the passage of payment reforms in the BBA and understood the need to contribute our fair share toward the savings necessary to stabilize the Medicare Trust Fund. We are deeply concerned, however, that administrative actions taken by HCFA affecting Medicare+Choice payments do not serve the best interests of beneficiaries and were not anticipated by Congress. Together with unintended consequences of higher than anticipated inflation, HCFA's actions are contributing to a growing gap in funding between the Medicare+Choice and fee-for-service sides of the program, which is undermining the program's stability.
As members of the Subcommittee know, Congress directed HCFA to establish a health-status based risk-adjustment methodology. HCFA has chosen to fulfill this requirement by implementing its new risk- adjustment methodology in a manner that will cut aggregate payments to Medicare+Choice organizations by an estimated additional $11.2 billion over a five-year period beginning in 2000. This is an administratively imposed increase in the $22.5 billion savings Congress expected from the payment methodology as enacted in the BBA. This reduction reflects only the first stage of risk-adjustment. According to the Administration, the second stage, which will be based on utilization in all settings, is expected to reduce payments by another 7.5 percent beginning in 2004 resulting in a 15 percent total reduction.
At the time of the BBA's approval, the Congressional Budget Office (CBO) did not score the new risk-adjuster as saving money. More recently, CBO stated that it had "previously assumed" that the health status-based risk-adjustment in the Medicare+Choice pro,am would be budget neutral? There is no doubt that HCFA has the authority to implement the risk-adjuster on a budget-neutral basis. Sadly, we already have begun to see the effects of HCFA's decision not to take this approach, which has contributed to the recent decisions by health plans to curtail their participation or to reduce benefits next year.
Short of any action - either administrative or legislative - the situation is not likely to improve. AAHP analyses of PricewaterhouseCoopers projections of Medicare+Choice rates in each county over the next five years shows that a significant gap opens up between reimbursement under the fee-for-service program and reimbursement under the Medicare+Choice pro,am.3 These analyses show that:
- The Medicare+Choice Fairness Gap will be at least $1,000 for two- thirds of Medicare+Choice enrollees living in the top 100 counties, as ranked by Medicare+Choice enrollment (Figure 2). - For nearly half of Medicare+Choice enrollees living in the top 100 counties, government payments to health plans on behalf of beneficiaries will be 85 percent or less of fee-for-service Medicare payments in 2004, significantly exceeding estimates of so-called overpayment due to favorable selection by plans (Figure 3).
- In the top 101 to 200 counties as ranked by enrollment, nearly half of Medicare+Choice enrollees live in areas where the Fairness Gap will be $1,000 or more in 2004. These counties include smaller markets in which plans were expected to expand into under the policy changes implemented by the BBA.
Perhaps most importantly, AAHP found that a large percentage of the "Fairness Gap" is attributable to HCFA's risk-adjuster, the design of which is severely flawed. Rather than measuring health-status, as required by the BBA statute, HCFA's risk-adjustment method measures inpatient hospital utilization. This design penalizes numerous health plans, which like Group Health, use disease management programs that are designed to reduce hospitalizations for chronically ill patients who would have otherwise been treated in inpatient settings. These programs are structured to prevent costly hospitalizations by treating patients in alternative settings. Contrary to ensuring predictability in the new Medicare+Choice program, the impact of this risk-adjustment methodology will be to restrict new' market entrants and leave beneficiaries with fewer options, reduced benefits and higher out-of- pocket costs. This result squarely contradicts Congress' goals in developing the Medicare+Choice payment reforms included in the BBA. AAHP has found, for example, that the impact of HCFA's risk-adjuster on Medicare+Choice payments to rural and urban counties is similar - rural areas with Medicare+Choice beneficiaries are cut by about 6 percent, while urban areas are cut by about 7 percent.
Another AAHP analysis of PricewaterhouseCoopers projections that incorporates the effect of the risk-adjustment methodology when it is phased-in at 10 percent indicates that nearly half of current Medicare+Choice enrollees live in areas in which year 2000 payments will increase by 2 percent or less over 1999 payments. This situation will likely worsen in 2001 when HCFA will base 30 percent of Medicare+Choice payments on its risk-adjustment methodology. This means that payments in many parts of the country will fall below' the two percent minimum update established by Congress. HCFA's risk- adjuster also will diminish the effectiveness of the blended payment methodology and payment floor in reducing geographic variation in Medicare+Choice payments.
Exclusion of Spending on Medicare-Eligible Retirees From Medicare+Choice Rate Calculation
Spending on medical services furnished to Medicare-eligible military retirees by Department of Veterans Affairs (VA) and Department of Defense (DOD) hospitals continues to be omitted from the calculation of Medicare+Choice rates. A few years ago, the Prospective Payment Advisory Commission (ProPAC) estimated that health care provided in DoD and VA facilities to Medicare beneficiaries accounts for 3.1 percent of the total resource costs of treating Medicare beneficiaries. ProPAC concludes from its findings that the omission of the cost of care provided in DoD and VA facilities to Medicare beneficiaries leads to systematic errors in both the level and distribution of Medicare managed care payments. H.R. 2447, introduced by Congressman McDermott, represents one approach that would help address this problem by including these amounts in Medicare+Choice rate calculations.

Plans Have Limited Ability to Reflect GME Carve-Out In Contracts with Teaching Facilities
In addition, the BBA sought to begin tackling some of the issues related to Graduate Medical Education (GME) reform by limiting the number of residents supported by the Medicare program and by providing incentives to hospitals to reduce the size of their training programs. However, a central BBA provision, the removal of GME funds from the calculation of payments to Medicare+Choice organizations, does not appear to address broader GME reform goals. Studies show that health plan members do use teaching facilities and that plan payments on behalf of a member receiving treatment in a teaching hospital greatly exceed payments for the same case in a non-teaching hospital. Although GME payments are being removed from Medicare+Choice payments, in many markets, the dominance of teaching hospitals limits health plans' ability to reflect the carve-out by making commensurate reductions in payments to teaching hospitals. Consequently, teaching hospitals are receiving GME payments from the Medicare program as well as higher payments from health plans. Ultimately, it is the Medicare beneficiary who bears the burden of these higher payments due to reductions in additional benefits that they otherwise would receive.
User Fee Further Erodes Medicare+Choice Payment Updates
AAHP also has significant concerns about the funding of the Medicare beneficiary information campaign. While it is reasonable for health plans and their enrollees to contribute to funding HCFA's education and information dissemination initiatives, their contribution should be in proportion to their participation in the Medicare program. On average, generating the $95 million will require a tax of $1.90 each month for each beneficiary enrolled in a Medicare+Choice plan (the tax is collected over only the first nine months of the year). This $1.90 per month per beneficiary tax represents 18 percent of the average monthly 1998 to 1999 payment increase under the new BBA payment methodology.
AAHP supports the goal of providing beneficiaries with accurate information that allows them to compare all options and select the one that best meets their needs. Thus far, however, the campaigns have not met expectations. Many beneficiaries received incorrect or confusing information and some plans were left out of the brochure altogether. AAHP urges Congress to ask HCFA for an accounting of its use of resources for educational purposes. We also urge Congress to adopt MedPAC's recommendation to fund this program through HCFA's operating funds rather than a tax on Medicare+Choice enrollees. AAHP continues to believe that the entire beneficiary information program should be reevaluated and streamlined.
Stabilizing Payment Will Help Stabilize the Medicare+Choice Program
The present state of the Medicare+Choice program is not what Congress expected when the BBA was approved two years ago. Rather than having expanded coverage choices, beneficiaries face fewer coverage choices. Additional benefits offered by plans that are not available in the fee-for-service program are being jeopardized. Some have argued that HCFA overpays health plans and that plans withdrawing from the market are simply making "business decisions." In response, first let me say this: overpaid health plans do not leave a market. Overpaid health plans do not reduce benefits. Second, payment and regulatory requirements dictate the type of environment in which health plans participate in the Medicare+Choice "business." So yes, the current payment and regulatory environment is forcing plans to make difficult business decisions regarding their participation in the Medicare+Choice program.
In the absence of an administrative action, H.R. 2419, introduced by Congressmen Bilirakis (R-FL) and Deutsch (D-FL), is one approach that would go a long way toward stabilizing the payment situation in both urban and rural areas by requiring that HCFA implement the new risk- adjuster on a budget-neutral basis, which is in keeping with Congressional intent. The bill also would ensure that national updates to government payments for beneficiaries choosing a Medicare+Choice plan grow at the same rate as government payments for beneficiaries choosing fee-for-service Medicare. H.R. 2419 represents one equitable approach to restoring funding by increasing the total dollars available in setting Medicare+Choice payment rates. This approach will help ensure that the BBA goal of expanding coverage choices for all beneficiaries is met.
Another way that payments could be stabilized is through establishment of a true payment floor. As discussed earlier in this testimony, Medicare+Choice payments are falling drastically relative to fee-for- service Medicare payments - in many areas, payments are falling to 80 percent or less of fee-for-service payment. To prevent this, a true floor could be set such that Medicare+Choice payments would not fall below a specified percentage of fee-for-service per capita payments in a county.
Medicare+Choice Regulatory Environment Contributes to Program Volatility
The challenges facing the Medicare+Choice program do not result from payment alone. HCFA's approach to overseeing the program and the structure of the Medicare+Choice program are contributing to the volatility in the program. Further complicating issues is the reorganization of HCFA, which has undermined communication between health plans and HCFA staff. Taken together, the issues of payment and regulation have challenged plans' abilities to maintain their health care networks. In an increasing number of cases, providers around the country, simply have told health plans that given low payments and increased regulatory requirements on them, that they are better off just seeing beneficiaries under the fee-for-service program. Without an adequate provider network, health plans cannot meet HCFA's Medicare+Choice participation requirements leaving them with no other option but to exit the program.
HCFA Roles as Purchaser and Regulator in Conflict
HCFA's dual roles as purchaser and regulator are, at times, in conflict, and nowhere has this conflict been more evident than in HCFA's implementation of the BBA. These role conflicts remain unresolved, even largely unaddressed. Until ways are found to reconcile them, however, they will stand in the way of designing and delivering a Medicare+Choice program that really works for beneficiaries. Unfortunately, there are numerous examples that point to this inherent conflict between HCFA's roles.
Request for Adjustments to ACRs. The circumstances that plans faced in the fall of 1998 perhaps best illustrate this situation. HCFA published the Medicare+Choice regulation, which was more burdensome than expected, nearly a month and a half after the date plans were required to file their 1999 adjusted community rate proposals (ACRs) last year. This situation and the unrealistic compliance deadlines, combined with the reduced rate of increase in payments and the uncertainty created by the new risk-adjustment model, were major factors in decisions by plans across the country and across model types to become deeply concerned last fall about the viability of the benefits and rates included in their ACRs on the originally mandated May 1st deadline. This led AAHP members to make an unprecedented request to HCFA to allow plans to resubmit parts of their ACRs. In some service areas, the ability to vary copayments -- even minimally -- meant the difference between a plan's ability to stay in the Medicare+Choice program or to pull out of a market.
While this request presented HCFA with a complicated situation, AAHP strongly believes that an affirmative decision would have been better for beneficiaries. As a purchaser, HCFA had a strong motivation to maintain as many options as possible for beneficiaries by responding to health plans' concerns and adopting a more flexible approach to Medicare+Choice implementation. As a regulator, however, HCFA had concerns about criticism that could result from reopening benefit and rate proposals, and thus chose not to allow any opportunity for adjustment of ACRs. HCFA's decision in part contributed to the withdrawal of nearly 100 health plans from the program, affecting more than 400,000 beneficiaries. This unfortunately is not the only example of a policy decision made by HCFA that is undermining the fulfillment of the BBA goals. HCFA to Implement QISMC without Exercising Deeming Authority. The provisions of the BBA concerning quality, oversight standards for Medicare and Medicaid participating health plans call for an implementation that builds upon the quality improvement standards of existing accreditation organizations and avoids duplicate reviews. AAHP has long advocated for coordination of quality standards for health plans in order to maximize the value of plan resources dedicated to quality improvement. In an effort to avoid duplication with other quality initiatives undertaken by plans, the BBA explicitly authorizes HCFA to develop a process through which health plans would be "deemed" to meet quality-related requirements. Unfortunately, HCFA has chosen to begin implementation of its Quality Improvement System for Managed Care (QISMC) and it has done so without completing work that will permit Medicare+Choice plans to take advantage of the statutory authority for deeming.

HCFA's Approval Process for Marketing Materials Creates Delays. HCFA recently issued a standard summary of benefits document to facilitate the comparison of benefits offered by health plans. AAHP supports the goal of this project, however, we believe it was completed on a time frame that did not allow for the completion of necessary development work. As a result, HCFA made modifications to improve the document even after plans had been asked to submit compliant materials. The Agency now is in the process of revising its model evidence of coverage (EOC). Some HCFA regional offices are delaying approval of plans' EOCs pending their receipt of the new model EOC from the central office. These examples clearly indicate the need to devote adequate time to projects and the need for clear communication between central and regional HCFA offices on the effective date of new requirements, such as the use of the revised EOC.
IV. Solving the Problems that Undermine the Success of the Medicare+Choice Program
The Medicare+Choice program is critical to strengthening and stabilizing Medicare over the long term. There is no doubt that HCFA faces an enormous task in implementing the BBA. But as we have described in this testimony, we believe that HCFA has made decisions and taken approaches that clearly do not serve the best interests of beneficiaries. AAHP and its member plans stand ready to provide assistance as policymakers work to understand the combination of factors that threaten the success of the Medicare+Choice program. We emphasize that it is in everyone's interest --including beneficiaries, providers, health plans, HCFA and Congress -- for the BBA to achieve its full promise. Our concern last year that without action, more beneficiaries would lose access to their plan and that others would face reductions in benefits has become a dismal reality. Further delay in instituting administrative and legislative remedies could render the Medicare+Choice program beyond repair or salvage. This outcome would be a loss not only for the beneficiaries who have chosen a Medicare+Choice plan, but also for future beneficiaries who would be denied the opportunity to do so.
FOOTNOTES:
1 In responding to the survey, plans were asked to provide information on the benefit arrangement that presently applies to the largest share of their Medicare+Choice enrollees. Plans were asked to describe the 1999 benefit, any change in the benefit to become effective on January 1, 2000. and the number of enrollees covered under the benefit. Using this information. Peter D. Hart Research estimated the number of enrollees affected by benefit changes and the magnitude of these changes among the subset of enrollees covered by the most common benefit arrangement. Not all companies responded to each question.
2 "An Analysis of the President's Budgetary Proposals for FY 2000." Congressional Budget Office. AAHP calculation from PricewaterhouseCoopers (PWC) analysis prepared for AAHP, March 1999. AAHP's analysis produces conservative estimates of the Fairness Gap by assuming that county-level Medicare+Choice and FFS payments were equal in 1997, even though Medicare+Choice payments were actually lower than FFS per capita payments in 1997. PWC analysis based on first stage of risk adjustment. PWC analysis does not reflect second stage of risk adjustment, which HCFA expects to reduce payments by an additional 7.5 percent in 2004. The Fairness Gap represents growth between 1997 and 2004 in the projected difference between county-level aged Medicare+Choice risk adjusted per capita payments and FFS per capita payments. Top 100 counties by enrollment account for 72 percent of enrollment.
END

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