Copyright 1999 Federal News Service, Inc.
Federal News Service
MAY 27, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
3850 words
HEADLINE: PREPARED TESTIMONY OF
MARY
NELL LEHNHARD
SENIOR VICE PRESIDENT
BLUE CROSS AND BLUE SHIELD
ASSOCIATION
BEFORE THE SENATE COMMITTEE ON FINANCE
BODY:
Mr. Chairman and members of the
committee, I am Mary Nell Lehnhard, Senior Vice President of the Blue Cross and
Blue Shield Association. BCBSA represents 52 independent Blue Cross and Blue
Shield Plans throughout the nation that together provide health coverage to 71.4
million Americans. I appreciate the opportunity to testify on some of the key
issues in Medicare reform.
Blue Cross and Blue Shield (BCBS) Plans have a
unique point of view because they are a major presence in all aspects of the
Medicare program. Collectively, BCBS Plans provide Medicare HMO coverage to more
than one million Medicare beneficiaries, making them the second largest
Medicare+Choice (M+C) provider in the country. On the fee- forservice side of
Medicare, BCBS Plans process 90 percent of Medicare Part A claims and about 57
percent of all Part B claims. Finally, BCBS Plans are a trusted source of
Medigap and Medicare Select coverage, which provide supplemental coverage of
Medicare fee-for-service benefits. BCBSA supports Medicare reforms that will
assure that the program remains financially stable and secure so that it can
successfully serve both current and future beneficiaries. As the Finance
Committee debates the future direction of the Medicare program, I would urge
that you consider these key points:
First, any reform should harness the
power of the private sector to bring Medicare beneficiaries the types of choices
and innovations that working-age Americans now enjoy. Accomplishing this will
demand a fundamental change in how the government partners with private health
plans.
- Second, Congress should view the Medicare+Choice program as the
foundation of any broader private sector based reform. Congress should assure a
strong working relationship between the government and the private sector by
making Medicare+Choice payments more reasonable and predictable, and by reducing
excessive regulatory mandates.- Third, because a substantial number of
beneficiaries are likely to stay in fee-forservice Medicare for the foreseeable
future, it is vital that Congress maintain the viability of Medigap and assure
the proper administration of the Medicare feefor-service program.
- Finally,
Congress should look to and learn from the experience of the private sector in
efforts to develop a prescription drug benefit for Medicare beneficiaries.
I. HARNESS THE POWER OF THE PRIVATE SECTOR
Over the last two decades, a
wave of innovation and vitality has swept through much of the private health
care industry. Today, the market offers more choices of products and benefits
than ever before. Medicare+Choice, created in 1997, was meant to infuse the
Medicare program with this innovation and vitality. Unfortunately, this has not
happened. Because of unnecessarily complex federal regulations, a high level of
business risk, and unpredictable and inadequate payment rates, the private
sector has not played as great an expanded role as the Congress envisioned when
it created Medicare+Choice.
We believe the success of Medicare reform will
depend on a fundamental change in the government's relationship with the private
sector:
- The government must act more like a private sector purchaser and
partner with plans;
- The government must provide for reasonable and
predictable payments; and
- The government must assure that any reform will
be fair and workable.
Model Behavior After the Private Sector
Since
Congress enacted Medicare+Choice, the Health Care Financing Administration
(HCFA) has issued hundreds upon hundreds of pages of regulations and literally
thousands of detailed conditions, including the 800+ page "mega-reg," 98
operational policy letters, and the Quality Improvement System for Managed Care
(QISMC). HCFA's massiveregulations - unheard of in the private sector - set out
detailed requirements for virtually all aspects of a health plan's operations.
Given the tremendous changes still to come in health care, in medicine,
technology, pharmacy, electronics, and organization, the government must abandon
this highly regulatory approach and act more like a private sector purchaser,
partnering not micromanaging.
Private sector purchasers treat health plans
as their business partners and establish clear performance expectations and
payments in advance. They do not, however, become involved in every aspect of a
health plan's operations. They focus on broader, critical goals such as the
price they pay, the satisfaction of their employees, and the quality of service.
Let me provide you with two examples of requirements that would never be
imposed by private purchasers:
,, Excessive business risks: The
Medicare+Choice program requires that health plans agree to an exceptionally
high level of compliance with numerous, complex and detailed rules. The risk of
unintentionally failing to comply with a particular requirement is immense. For
example, health plans are asked to certify that all the data they submit,
including data developed by providers, are 100 percent accurate. Penalties for
non-compliance are extremely severe. These penalties could ultimately put a
plan's entire corporation, including its private business, at risk and expose
senior officials to the possibility of criminal penalties. This is clearly
unreasonable, especially when one realizes that no claims operation is set to
achieve a 100 percent accuracy rate.
- Rigid and unreasonable
"one-size-fits-all" quality standards: In recent years, private sector
purchasers have worked closely with health plans and private accrediting
organizations to develop workable models for quality measures for HMOs. Instead
of using these private standards, HCFA has developed their own quality standards
for Medicare+Choice plans that are far more stringent, arbitrary and rigid than
the "goldstandard" used in the private sector for HMOs. Moreover, HCFA
unilaterally applied these HMO standards to PPOs, a very different type of
health plan option, making it extremely difficult for PPOs to participate in
Medicare+Choice. To date, the program offers virtually no PPO options.
Provide Reasonable and Predictable Payment Rates
Transforming the
government's regulatory mindset is essential for long-term Medicare reform. But
it must be be accompanied by appropriate payment rates to ensure private sector
interest in Medicare. Payments to private plans should keep pace with changes in
spending in the government-run fee-for-service program. If payments to private
health plans fall significantly below per person spending in the Medicare
fee-for-service program - as is currently projected under Medicare+Choice -
plans will have difficulty attracting sufficient numbers and types of providers
to their networks and in providing the Medicare benefit package.
While
adequate payments to health plans are critical, stability and predictability in
future year payments are just as important.
Blue Cross and Blue Shield
Plans are committed to a "retention strategy." In other words, our Plans place a
high priority on both attracting new beneficiaries and keeping current
beneficiaries satisfied over the long term. One of the most important ways of
retaining members is to avoid large increases in premiums and instability in
benefits. Significant increases in premiums can trigger "shopping" by
individuals who will look for a better price. The way to avoid the disruption of
this "churning" is to assure that payments do not fluctuate significantly from
one year to the next.
A key element of predictability is having sufficient
information in order to price premiums properly. This means that all the
requirements for a given year must be spelled out in advance. It is especially
problematic when the government demands big "change orders" in the middle of the
year, increasing the expenses of the plan, without providing a corresponding
increase in payment levels. Such actions will invariably require plans toadjust
their premiums in future years simply to catch up with the government's actions
in the previous year. This is a recipe for market instability.
Assure Fair
and Workable Reforms
If Medicare reform is to engender widespread private
sector participation, it must assure that all players are treated fairly, the
reforms are workable, and that the steps to full implementation are well
designed and practical.
Today's most discussed model for reform is Senator
Breaux's and Congressman Thomas' "premium-support" proposal. Fashioned, in part,
after the Federal Employees Health Benefits Program, and building on the current
Medicare+Choice structure, the premiumsupport proposal would replace the
government-set formula payments now used to pay private plans with a new
competitive pricing model. It would also include the traditional fee-for-service
(FFS) Medicare program in the competitive pricing formula. Private plans and the
government-ran FFS plan would submit annual bids for the basic Medicare package.
The government would contribute a set percentage of the national weighted
average of all plans' bids (adjusted for geography, demographics and health
status); beneficiaries would be responsible for the remaining premiums. A
brand-new "Medicare Board" would oversee this process, and possibly negotiate
premiums.
While the details of this proposal are now being developed, many
design issues, such as the following, should be resolved to assure the success
of the program:
- How can adverse selection be minimized? The
premium-support proposal envisions a nationally priced government-run
fee-for-service program competing against locally or regionally priced private
plans (e.g., PPOs and HMOs). Private plans will have an incentive to compete in
low cost areas, where they can offer lower premiums than the nationally priced
fee-for-service plan. This is likely to increase the cost of the Medicare
program. Alternatively, if the government fee-for-service program is
locally-priced, consistent with private plans, equity and political issues are
raised. Forexample, beneficiaries could pay twice as much for the
fee-for-service program in high cost areas as in low cost areas. (For example,
in 1996, Medicare fee-for-service per beneficiary costs ranged from $3,199 in
rural Nebraska to $6,592 in urban Louisiana).
- How will plan bids compare
to the government contribution? The proposal calls for the government
contribution to be a percentage of the weighted average of all bids across the
country. Actual payments to plans will be the government contribution, adjusted
by a new geographic index.
- How will the new government contribution rates
compare to current Medicare+Choice payments? This will be especially significant
in the first year of the program, where major changes in the government
contribution and, therefore, premiums to beneficiaries could cause upheaval in
the marketplace.
- Can the Medicare Board handle a nationwide annual
competition, all at once?
- Can the Social Security Administration, which
currently handles collection of the Medicare Part B premiums, handle deducting
the new premiums (that will replace the Part B premium and will vary by
beneficiary) from Social Security checks and send the appropriate share to
plans? (A portion of these premiums will have to be deposited in the Medicare
trust fund and the balance will have to be mailed to private plans.)
- What
would happen if plans' bids significantly exceed projected Medicare estimates?
- What happens if Medicare fee-for-service outlays in a given year
significantly exceed the government's bid? Would beneficiaries have to pay more?
How would this effect private plan payments?
Given Medicare's complexity and
importance to its beneficiaries, as well as the health care system overall, the
reforms should be designed carefully so that all stakeholders -- beneficiaries,
private plans, and providers -- understand the new program and thatunintended
consequences are avoided. This calls for a detailed, multi-year transition plan.
Congress may want to consider phasing in the program, such as on a geographic
basis or with newly eligible beneficiaries.
II. STRENGTHEN MEDICARE+CHOICE
AS THE FOUNDATION FOR MEDICARE REFORM
Medicare+Choice is and must continue
to be the foundation of any future Medicare reform. Medicare+Choice was designed
to "enable the Medicare program to utilize innovations that have helped the
private market contain costs and expand health care delivery options" (H.R,
Conf. Rep. No. 105-217, p. 585). Unfortunately, for reasons alluded to earlier
in my testimony, Medicare+Choice has fallen short of expectations. If
Medicare+Choice is to serve as a stepping stone to future reform, then it is
vital that Congress gamer the private sector's confidence in the program.
HCFA's highly regulatory approach has not inspired confidence. Nor have
current trends in payment levels for Medicare+Choice plans. As you know, in the
first two years of Medicare+Choice all health plans (except for those serving
"floor" counties) were capped at annual payment increases of 2 percent. A
substantial number of plans (enrolling more than one-third of beneficiaries)
will stay at 2 percent next year and into the foreseeable future. By 2004 this
trend will open up a yawning gap, with these Medicare+Choice plans receiving
less than 75 percent of the amounts spent per person in traditional
fee-for-service Medicare.
Risk Adjustment
Compounding
the trend in payment levels is the uncertainty introduced by HCFA's new
risk adjustment methodology, scheduled to begin in 2000. In
many areas, the risk adjuster could lead to severe reductions in plan payments
that will result in higher premiums and reduced benefits for beneficiaries. HCFA
estimates that risk adjusters will reduce payments to M+C plans by 7 percent, or
$11 billion between 2000 and 2004, and by anadditional 7.5 percent from 2005
through 2009. The Congressional Budget Office has said this cumulative reduction
is not sustainable for the program.
A major success of managed care has been
reducing hospital costs through prevention and expansion of outpatient
treatments. Yet HCFA's new risk adjustment method will penalize
plans that keep people out of the hospital because it only gives "credit" for
members with selected inpatient hospital stays of two or more days (i.e., the
method pays plans higher amounts only for patients who have been hospitalized).
It defies good medical and business planning: according to the American Academy
of Actuaries, "A plan which manages care (and keeps beneficiaries out of the
hospital) may be paid less than a plan which does not manage care for exactly
the same type of patient."
HCFA does plan eventually to incorporate selected
outpatient data, but it will be several years before this happens and the exact
effects cannot be predicted. Even over the next couple of year, plans face the
prospect of wide and unpredictable swings in payment because HCFA will phase in
the hospital-based risk adjuster (i.e., 10 percent in 2000, 30 percent in 2001,
etc.) and the switch to yet another methodology in 2004. As I mentioned earlier,
significant changes in premiums will undermine efforts by plans to attract new
beneficiaries and keep them satisfied over the long term.
We urge Congress
to delay enactment of the risk adjuster. This step is essential to the viability
of the Medicare+Choice program; it will give HCFA and industry time to develop a
risk adjuster with the right incentives and time to test a new system and avoid
the serious data and systems problems currently plaguing plans.
III.
MAINTAIN THE VIABILITY OF MEDIGAP AND MEDICARE ADMINISTRATION
As the
Congress decides to reform Medicare, it is highly likely that many beneficiaries
will continue to receive coverage through Medicare's traditional,
fee-for-service program, at least for the foreseeable future. That makes it
important that beneficiaries continue to haveaccess to affordable Medigap
policies, and that the administration of the fee-for-service program receives
adequate support.
Medigap
As Congress debates Medicare reform, it will
be important not to undermine the existing Medicare supplemental programs that
serve 12 million seniors. Medigap plans offer Medicare beneficiaries valuable
protection from Medicare's cost-sharing requirements, and they are very popular
in the marketplace. A July 1998 report from the Department of Health and Human
Services Inspector General found that 88 percent of beneficiaries are satisfied
with their Medigap coverage.
One serious risk to the affordability of
Medigap is the possibility of a federal mandate for all Medigap options to cover
drugs. Tampering with Medigap, such as expanding guarantee issue, community
rating, and prescription coverage would have the unintended consequence of
significantly increasing Medigap premiums. Of the 10 current standardized
Medigap packages, only three include prescription drug coverage (H, I, and J). A
study recently released by BCBSA and the Health Insurance Association of America
found that mandated drug coverage could increase all Medigap premiums by $1,000
or more a year. Such increases would force many Medicare beneficiaries to drop
coverage, thus leaving them to bear the full cost of copays and deductibles. As
you consider reforming Medicare, I would urge that you keep Medigap affordable.
Proper Administration of Medicare
Inadequate administration of
fee-for-service Medicare could wreak havoc with overall reform plans.
Fee-for-service Medicare will always need to pay claims timely and accurately,
provide high quality customer service to providers and beneficiaries, handle
numerous appeals and hearings, and fight fraud, waste, and abuse. But the
contractors whoadminister these activities must receive adequate financial
support because they can perform required functions only when their payments for
such tasks are adequate.
It takes experienced, efficient, and properly
funded contractors to limit improper Medicare payments. With adequate funding,
contractors can act effectively as Medicare's first line of defense against
fraud and abuse. Indeed this year's Inspector General's report shows that recent
strides in rooting out fraud, waste, and abuse have brought about a drastic
reduction in improper Medicare payments.
In 1996, Congress strengthened
contractors' ability to fight fraud and abuse by establishing a separate funding
source for specific fraud and abuse initiatives through the Medicare Integrity
Program (MIP). Claims processing activities continue to be funded in the program
management account.
Unfortunately, HCFA is proposing to break up program
management activities and fraud and abuse among different organizations. We
believe this will undercut fraud and abuse detection efforts. Program management
and fraud and abuse are not autonomous services; they require constant
coordination and communication. Nearly all program management activities -
including educating providers on how to bill correctly, determining appropriate
payment amounts, and detecting duplicate claims - safeguard the Medicare trust
funds and are closely integrated with fraud and abuse activities.
IV.
PROCEED WITH CAUTION ON DRUG COVERAGE
The final topic I would like to
address is adding a prescription drag benefit under the Medicare program,
whether constructed as a government-financed program or as a mandatory offering
by Medicare+Choice and Medigap plans. BCBSA shares the Congress's concern that
beneficiaries have access to affordable drug coverage. We recognize that since
Medicare's inception, prescription drugs have assumed an increasingly important
role in improving and maintaining the quality of health care. However, wewould
urge Congress to proceed with caution in developing any drug benefit because
drug costs are the fastest-growing segment of health care.
High Costs
Private sector experience suggests that a Medicare drug benefit would be
costly:
- Private insurance payments for drugs increased 18 percent per year
over the past 3 years; overall annual growth rate in private insurance payments
was less than 4 percent.
- For many health plans, prescription drugs now
account for 11 percent to 14 percent of total medical expenses, up from 7
percent a few years ago. - One Northeastern BCBS Plan experienced an increase in
its prescription drag spending from just over 10 percent of premium in 1996 to
more than 16 percent last year. This Plan now spends more on prescription drags
than it does on primary medical care. A Midwestern Plan spent more last year on
prescription drugs than on either inpatient hospital or physician spending: 25
percent of premium versus 24 percent each for inpatient hospital and physicians.
Given the potentially high costs, any Medicare drag proposal would have to
include incentives for appropriate drug utilization as well as cost management
provisions. In fact, many health plans and employers have responded to
double-digit increases in drag costs by redesigning their prescription drug
benefits. Many health insurers are now assessing the usefulness and
cost-effectiveness of prescription drugs and developing lists of drugs that they
will cover (i.e., formularies). In instances where the only difference in a
particular therapeutic category is that one drag costs less than the other, it
makes sense for plans to free up money by covering the less expensive drug. In
other instances, where studies prove that one drug is more effective than
another, plans will promote those drugs even though they may be more expensive
than the other drugs in the therapeutic category.Plans are also introducing
innovative three-tier benefit systems to address cost concerns, as well as
consumer demands for flexible coverage. These new systems provide varying levels
of coverage for generic drugs (e.g., a $5 copay), for brand-name formulary drugs
(e.g., a $15 copay), and for drugs that are not on the formulary (e.g., a $30
copay).
Even with these cost-containment tools, prescription drag costs
continue to rise in the private sector. Congress must confront the challenge of
managing costs and an adequate benefit design if it moves toward a Medicare drug
benefit.
CONCLUSION
In conclusion, reforming Medicare poses monumental
challenges. First and foremost, Congress must stabilize the Medicare+Choice
program. If a future Medicare program is to harness fully the power of the
private sector, Congress should act now to make the Medicare+Choice program a
true partnership with the private sector: this includes providing stable and
predictable payment rates and sensible regulatory rules. Expanded participation
by the private sector will also raise beneficiaries' confidence in the
Medicare+Choice program, which is important for the program to withstand the
stresses of change. In addition, Congress should support both existing Medicare
supplemental programs and the contractors who administer the traditional
fee-for- service program.
We look forward to working with this Committee as
you craft a stronger Medicare program for the 21st century.
END
LOAD-DATE: May 28, 1999 
