Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
May 27, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3865 words
HEADLINE:
TESTIMONY May 27, 1999 NANCY W. DICKEY SENATE FINANCE HEALTH
CARE CHANGES TO THE MEDICARE SYSTEM
BODY:
Statement
to the Committee on Finance United States Senate Re: Rethinking Medicare: A
Proposal to Reform Medicare Presented by Nancy W. Dickey, MD May 27, 1999 The
American Medical Association (AMA) appreciates the opportunity to present to
this Committee its views on and plan for Medicare reform, and applauds the
efforts of the members of this Committee in focusing on this important issue.
For years the AMA has been a strong advocate of basic, essential reforms of the
Medicare program. It is clear that the system, as currently structured, cannot
continue to support the provision of quality medical services to the elderly and
disabled in this country, particularly as the baby boom generation becomes
Medicare- eligible while at the same time the numbers of employees in the
workforce who financially support the system dwindle. Congress has already
acknowledged that Medicare must be reformed to keep the promise of health care
for this and future generations of elderly Americans, as represented by the
establishment under The Balanced Budget Act of 1997 (BBA) of the National
Bipartisan Commission on the Future of Medicare. We urge, however, that this
Committee and Congress not delay in passing badly needed reform. Now is the
time, before the new millennium, to fix the Medicare program. Medicare's current
tax-based "pay-as-you-go" financing structure makes it highly unlikely that the
promise of health care to our elderly can be sustained in the coming years.
Moving Medicare from an open-ended entitlement system to one in which the
government makes a contribution that allows individuals to have meaningful
choice and quality care is the key to gaining budgetary control over outlays.
FOR THE LONG TERM: DEAL WITH THE TRUST FUND MYTH Because the term "trust fund"
is officially used to describe the financing of Medicare, many people think that
the payroll taxes they pay are saved and accumulate interest to pay for their
personal medical needs in retirement. In fact, the Part A program is financed on
a "pay-as- you-go" basis, with taxes paid into the program being used to pay for
the benefits received by current retirees, and the excess used to purchase
federal debt. Part B is financed mostly out of general revenues, with the
premiums that retirees pay calculated to cover only about 25 percent of the
outlays. Part B is modeled after private sector health plans, with a significant
difference: beneficiaries fund only 25 percent of the cost of their services
through premiums, leaving taxpayers to fund a significant portion of the
remaining cost of providing Part B services. Most retirees have received much
more in benefits than their contributions to the program could purchase. The
pay-as-you-go financing is often likened to a "Ponzi" or "pyramid" scheme. The
similarity lies in the promise of future benefits to those who fund services for
current beneficiaries, and the need for a growing number of new contributors to
fund the growing number of beneficiaries. Pyramid schemes, almost by definition,
must eventually collapse from an insufficient influx of new participants. The
number of workers contributing payroll taxes to finance the current hospital
trust fund is declining. In 1965 when Medicare was enacted, there were 5.5
working-age Americans for every individual over age 65. Today, there are only
3.9 workers supporting each Medicare-age individual. In the coming decades, as
the "baby boom" generation continues to age, this number will fall more rapidly.
By the year 2030, it is estimated that there will be only 2.2 working-age
Americans for each individual over age 65. By that time, Medicare will enroll 20
percent of the population, compared with the 12.8 percent of the population now
enrolled. Medicare's actuaries base their calculations for funding the Medicare
fee-for-service program on the assumption that the rate of health care cost
inflation will be controlled over the next 25 years. This assumption allows them
to project a significantly lower tax increase needed to fund the program than
would be needed if the historical rate of cost inflation continued. Continuing
the "pay-as-you-go" system of financing Medicare will impose an ever-increasing
burden on working U.S. taxpayers. While this country's obligations to those who
are and will be dependent on Medicare in the future must clearly be honored, we
need to implement reforms so that the program is available for future
generations. How would we design Medicare if we had it to do over again? How
would we protect the younger generations that will face ever- increasing taxes
and prospects of eroding benefits and less choice if the current program were to
be continued? To restore the viability of the program's promise to future
generations, certain immediate priorities must be met, including shifting from
the "pay-as-you-go " system to one in which the government makes a contribution
that allows individuals to have meaningful choice and quality care, and
improving the fee-for- service Medicare program. This will assure that all
working Americans have access to health care in retirement and will maintain
choice and quality of care for the elderly. IMMEDIATE PRIORITIES IMPROVING
FEE-FOR-SERVICE MEDICARE Despite the establishment of and focus on
Medicare+Choice, 85 percent of Medicare beneficiaries receive health care
through the Medicare fee-for-service program. It is imperative to improve the
efficiency of the fee-for-service program, thereby constraining Medicare's cost
growth at a sustainable level over the next several decades and limiting out-
of-pocket costs incurred by beneficiaries. The AMA proposes the following
structural modifications to the program that would save both beneficiaries and
the government money by providing needed incentives for efficiency. The Path to
Scoreable Savings: Eliminate the "Gap" Problem The large cost imposed on the
Medicare program and beneficiaries by the "Medigap problem" has long been
recognized as a potential source of significant government budget savings. When
Medicare's intended cost sharing is covered by private supplemental insurance
(Medigap), it has been demonstrated that beneficiaries use more services than
they would otherwise. Since more than 75 percent of beneficiaries own such
supplemental coverage, Medicare's outlays are considerably higher than they
would be if the cost sharing were not subverted by Medigap insurance.
Effectively solving this problem presents the best source of scoreable budget
savings because the savings produced are the result of efficiency improvements,
rather than from imposing additional costs on taxpayers, beneficiaries or
providers of medical care. The potential cost sharing exposure for beneficiaries
under the current system can reach more than $34,000 per year since, unlike most
private insurance policies, Medicare does not place a ceiling on the
out-of-pocket cost that beneficiaries can be required to pay. The current system
is designed so that the beneficiary's rational response is to purchase
supplemental coverage, which over three-quarters of beneficiaries do as a hedge
against economic catastrophe. This occurs, despite the fact that 20 percent of
beneficiaries incur no actual cost sharing liability each year, while 70 percent
incur a cost sharing liability under $500 and 80 percent incur under $1000 of
expense. The risk of paying tens of thousands of dollars out-of-pocket is not
one that most beneficiaries want to take. It is safe to assume that if
beneficiaries were not exposed to such potentially high out-of- pocket costs,
they (and/or their former employers who provide insurance to supplement Medicare
as a retirement benefit) would not feel compelled to insure against it. In fact,
the government does not need to expose beneficiaries to such high risk,
precipitating the increased burden on beneficiaries and its own budget. The
government can give beneficiaries and their former employers an economic break
by eliminating their need for supplemental coverage. In so doing, the government
can also lessen the pressure that Medigap puts on the federal budget. The AMA
proposes that Medicare restructure its cost sharing to reduce potential
beneficiary liability in a manner that eliminates the need for private Medigap
insurance. In exchange, beneficiaries would pay a somewhat higher premium than
they do now, but they would also have more money available to help cover
out-of-pocket costs, such as prescription drugs that are not covered by
Medicare. The premium charged by Medicare for the expanded coverage would be
much less than that charged by private insurance companies because the
government's premium would not be padded by marketing expense and profit. The
reinstitution of effective cost sharing would reduce government outlays for
medical services. The balance to be struck would be one in which beneficiaries
would be provided an effective incentive to reasonably moderate their demand for
covered services, while eliminating their need to insure against an enormous
potential out-of-pocket liability. Specifically, the AMA proposes that Medicare
convert its current cost sharing into a modest deductible with no coinsurance
requirement above the deductible, and charge a fair premium for the extra
coverage implied by lowering the cost sharing. In this way, beneficiaries would
readily know in advance the maximum liability to which they would be exposed. In
turn, few would be motivated to buy supplemental insurance (which would no
longer be valuable because its premium cost would meet or exceed the liability
it would be purchased to insure against). Beneficiaries would be trading the
unknown for the known. As an illustration of this reallocation approach, we
estimate that the average cost of the Medigap "Plan C" that covers all of
Medicare's potential cost sharing liability as about $1,330 in 1999. This amount
could be divided into two parts, consisting of a modest, single deductible for
both Parts A and B of Medicare, and a premium for the extra Medicare coverage
represented by eliminating all existing cost sharing liability except for the
single deductible. Dividing the current cost of Medigap Plan C into two parts --
a deductible and a premium for extra coverage - - would guarantee that
beneficiaries would incur no greater out- of-pocket expense than they do now,
and many of them would actually save money. For example, consider dividing the
current Medigap cost into a $500 deductible and a premium of $830. According to
the most recent actuarial analysis by PriceWaterhouse, the average beneficiary
would spend only $400 of the $500 deductible, saving $100 per year from the cost
of $1,330 for Medigap. By neutralizing the first-dollar-coverage incentive of
Medigap, the Medicare program would save an average of $334 per beneficiary,
which could be returned to beneficiaries in the form of reduced Part B premiums
or additional coverage. If the government savings were used to reduce the
deficit, a total of $40 billion of savings would accrue over the 5-year budget
period 1999-2003. Medicare's current cost sharing requirements are
self-defeating because they frighten beneficiaries into insuring against them
with expensive private coverage. By incorporating most of Medigap's coverage
into Medicare benefits, the government could save beneficiaries money by
reducing the premium required for the coverage. In turn, the government can
achieve the intended benefit of effective cost sharing to reduce program
expenditures. Neutralizing Medigap is a "win" for patients and beneficiaries,
the government and taxpayers. For example, we understand that Congress and the
Administration are exploring various methods to help beneficiaries pay the
exorbitant cost of pharmaceutical drugs. As discussed above, it is expected that
beneficiaries' out- of-pocket costs will almost double over the next couple of
decades. A significant portion of those costs will be for pharmaceutical drugs
that are covered by the Medicare fee-for- service program, which CBO projects
will increase between 13 percent and 21 percent each year during the next
decade. The savings received by beneficiaries as a result of eliminating the
Medigap problem will help offset the cost of the drugs. Increased Competition
Will Improve Medicare Prices in Part A of Medicare are controlled through the
prospective payment system for hospital payment and in Part B through the
payment schedule system for physician payment. These price controls prevent
prices from varying, provide no incentive for either innovation by physicians or
price-comparison by beneficiaries, and results in payments levels that are not
based on the real cost of services. For example, under the BBA, Congress
implemented a payment update system for physicians' services that is based on a
cumulative target rate of expenditure growth, i.e., the sustainable growth rate
(SGR). Although the SGR is tied to real gross domestic product (GDP) per capita,
utilization of, and thus expenditures on, health care services are not related
to GDP. Indeed, GDP does not take into account such factors as changes in
technology or shifts in usage of sites-of-service. Payment updates under the SGR
will match inflation only if utilization growth meets the target of real per
capita GDP growth. Yet, utilization growth has historically been much greater
than GDP growth. If history is any guide, future Medicare physician payment
levels will decline significantly under the current SGR formula. The AAM
believes that the SGR system needs to be improved so that the 85 percent of
Medicare beneficiaries in the fee-for-service program continue to receive the
benefits to which they are entitled In the long term, as discussed, price
controls should be replaced with price competition. Continued cuts threaten to
drive physicians from Medicare when the baseline cost of treating Medicare
patients is greater than the Medicare allowance. The reduction in beneficiary
access to care seems inevitable in such a scenario. Physicians have had to
adjust in a number of ways to the failure of Medicare payment rates to keep up
with their cost of providing services. They are reducing staff, curtailing
salary increases, and replacing full- time with part-time staff to reduce fringe
benefit expense. Some have eliminated research such as outcome studies of
procedures they perform frequently. There is pressure to reduce the time spent
with Medicare patients on each visit, although the complexity of these cases has
not changed, and multiple visits for multiple problems are sometimes required.
Some physicians selectively refer the more difficult, costly cases to other
physicians. Services formerly offered for patients' convenience are being
dropped, such as arranging for community-based services, in- office phlebotomy
and x-ray services, and incidentals such as post-procedure care kits. Screening
and counseling are being curtailed. Satellite offices are being closed.
Telephone consultations are being reduced, with office staff rather than
physicians returning more telephone calls from patients. Offices are no longer
offering commercially produced patient education pamphlets and brochures.
Medicare patient loads are being reduced, limited or eliminated. Some physicians
accept Medicare patients only by referral. Money-losing services, especially
surgical procedures, are not being offered to Medicare patients; simple
procedures formerly performed in the office are done in outpatient facilities.
Many physicians are not renewing or updating equipment used in their office, and
instead are shifting to hospitals to perform Medicare procedures. Purchases of
equipment for promising new procedures and techniques are being postponed or
canceled. Under this cost-cutting environment, physicians must continually ask
themselves whether they can continue seeing Medicare patients when Medicare's
fixed prices are too low to even cover costs. The AMA believes that the
replacement of price controls with price competition in Medicare's
fee-for-service sector would help alleviate this problem. Price competition
would be achieved by allowing physicians competitively to establish conversion
factors that convert relative values into dollar charges under Part B, and
likewise, DRG payments for Part A services would also be competitively
determined. Additional Modifications to Fee-For-Service Medicare There are
several other considerations that we believe are necessary for reforming
fee-for- service Medicare. First, Medicare reform legislation must address
funding for graduate medical education. We believe that a
national all-payer Rind should be established to provide a stable source of
funding for the direct costs of GME, including resident stipends and benefits,
faculty supervision and program administration and allowable institutional
costs. Without predictable and reliable funding, this important training program
is seriously undermined, with a resulting adverse impact on patient care.
Additionally, other issues should be addressed, including increasing the age of
Medicare eligibility to match the eligibility requirements for purposes of
Social Security and establishing income-related premium payments for Medicare
benefits. IMPROVING MEDICARE + CHOICE Seniors may choose to receive health care
benefits through the new Medicare+Choice program. While this program will
eventually provide many choices of health insurance coverage to Medicare, there
are a number of related matters for Congress to consider to improve upon the
program. We must protect the erosion of patient and physician protections that
currently are at risk under this program. Medicare+Choice plans must be held to
adequate standards of accountability. Currently, we believe plans in this
program are being held to a lower standard than is applicable to the Medicare
fee-for-service program, especially with respect to payment policy and
timeframes. For example, while carriers that process Medicare fee-for-service
claims are required to pay 95 percent of claims within 30 days, there are no
deadlines for payments to physicians who contract with Medicare+Choice plans
that use fee- for-service reimbursement. There is no reasonable justification
for this duality of accountability standards between the Medicare+Choice and
Medicare fee-for-service programs. Medicare+Choice plans using fee- for-service
reimbursement or that make capitation payments should be held to the same
payment deadlines and policies as apply under the fee-for-service program.
Further, as plans pull out of the Medicare+Choice market, resulting in a
significantly more concentrated payer market, there must be checks and balances
in place to protect against arbitrary health plan anti-patient actions and to
increase quality of care for patients by permitting effective advocacy by their
physicians. Physicians increasingly face enormous health plan bureaucracies at
the negotiating table, and are thus not in a position to advocate effectively on
behalf of their patients. Thus, we strongly urge Congress to pass legislation
that would allow self-employed physicians and other health care professionals to
engage in joint negotiations with Medicare+Choice plans without violating the
antitrust laws. In addition, we agree with concerns raised by Members of the
National Bipartisan Commission on the Future of Medicare about providing HCFA
with increased authority to contract for health care services with lowest cost
bidders, and believe HCFA's contracting authority should be strictly limited.
Such authority often permits HCFA to contract selectively for individual
services. Competition should be based on choice of a comprehensive health plan,
not with respect to individual services. Proposals that carve out certain
services dangerously fail to recognize a crucial dynamic within the health care
market. That is, certain services are a mainstay for many providers' economic
base. If that base is jeopardized because HCFA has the ability to contract
elsewhere for this singular service, the cost of other services offered by that
provider will significantly increase, or, worse, the provider may cease to exist
due to insolvency. Either alternative is extremely damaging to patients with
respect to cost, quality and continuity of care and convenience. Indeed, AMA
policy firmly opposes competitive bidding initiatives for professional medical
services with respect to the Medicare program and health care payers generally.
First, as discussed above, this type of system threatens a dramatic decrease in
quality of and access to medical care. In any bid process, there are always low
cost bidders that wish to comer a large share of the market. The low cost bidder
may drive competitors out of the market, in which case the bidder will obtain a
monopoly and will be free to set prices in an environment that is unconstrained
by competition. Since the current health care payer market has become more
significantly concentrated, as discussed above, this result would be a
significant threat. Additionally, providers, including those that provide the
highest quality of care using new state-of-the art technology, will have a
strong incentive to provide less costly and lower quality alternatives to
maintain competitiveness within a competitive bidding environment. Further,
there have been cases when the competitive bidding process has resulted in the
procurement of services from organizations that have gone bankrupt, thereby
disrupting continuity of and access to care, as well as causing harm to
physicians and other providers who rely on a failed contractor for payment. This
would be even more damaging if competitors have already been driven from the
market. Finally, the AMA is aware that there is interest among a number of
states in allowing them to make managed care enrollment mandatory for
dually-eligible Medicare and Medicaid beneficiaries. State medical societies
have told us of numerous serious problems in states with mandated Medicaid
managed care programs for their non-Medicare populations, including Tennessee,
Kentucky, Massachusetts, Florida, Nebraska, Washington, and others. Given the
current instability within both Medicare and Medicaid managed care plans, we
urge Congress not to extend the states' authority to mandate managed care
enrollment to their dually-eligible populations. CONCLUSION The tax-based method
of financing Medicare originally envisioned is no longer sustainable. Putting
Medicare on sound financial footing requires a multi-faceted transformation of
the program's funding, actuarial design, and incentive structure, as outlined
above. We urge this Committee and Congress to consider these proposals and to
act now to fulfill the promise of health care for the elderly in this country.
We appreciate the efforts of the members of this Committee to explore approaches
to Medicare reform, and also appreciate the opportunity to present our reform
proposal. We are prepared to engage fully in detailed discussions with this
Committee and Congress as we work to find a common solution.
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