[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
FIFTH IN SERIES ON MEDICARE REFORM: STRENGTHENING MEDICARE: MODERNIZING
BENEFICIARY COST SHARING
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MAY 9, 2001
__________
Serial No. 107-21
__________
Printed for the use of the Committee on Ways and Means
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74-223 WASHINGTON : 2001
COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Health
NANCY L. JOHNSON, Connecticut, Chairman
JIM McCRERY, Louisiana FORTNEY PETE STARK, California
PHILIP M. CRANE, Illinois GERALD D. KLECZKA, Wisconsin
SAM JOHNSON, Texas JOHN LEWIS, Georgia
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota KAREN L. THURMAN, Florida
PHIL ENGLISH, Pennsylvania
JENNIFER DUNN, Washington
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
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C O N T E N T S
__________
Page
Advisory of May 2, 2001, announcing the hearing.................. 2
WITNESSES
Library of Congress, Jennifer O'Sullivan, Specialist in Social
Legislation, Congressional Research Service.................... 10
U.S. General Accounting Office, William J. Scanlon, Ph.D.,
Director, Health Care Issues................................... 16
______
Commonwealth Fund, Karen Davis................................... 31
Direct Research, LLC, Christopher Hogan.......................... 25
SUBMISSION FOR THE RECORD
United Healthcare Insurance Company, statement................... 68
FIFTH IN SERIES ON MEDICARE REFORM: STRENGTHENING MEDICARE: MODERNIZING
BENEFICIARY COST SHARING
----------
WEDNESDAY, MAY 9, 2001
House of Representatives,
Committee on Ways and Means,
Subcommittee on Health,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:11 p.m., in
room 1100 Longworth House Office Building, Hon. Nancy Johnson
(Chairwoman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH
CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
May 2, 2001
HL-7
Johnson Announces Fifth Subcommittee Hearing in Series on Strengthening
Medicare: Modernizing Beneficiary Cost Sharing
Congresswoman Nancy L. Johnson (R-CT), Chairwoman, Subcommittee on
Health of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on beneficiary cost sharing. The
hearing will take place on Wednesday, May 9, 2001, in the main
Committee hearing room, 1100 Longworth House Office Building, beginning
at 2:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include program experts on beneficiary cost sharing
under the Medicare benefit and Medigap insurance coverage. However, any
individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing.
BACKGROUND:
The structure of Medicare beneficiary cost sharing in the fee-for-
service program reflects the insurance practices at the inception of
the Medicare program in 1965. As such, more than 35 years later,
beneficiaries are confronted with irrational and confusing cost-sharing
which does not reflect the current delivery of health care.
For example, the program has two different deductibles--a $792
deductible for Part A and a $100 deductible for Part B. This means that
when a beneficiary is hospitalized for an in-patient procedure and less
likely to be sensitive to pricing issues, the beneficiary is faced with
a significant deductible. In addition, after a beneficiary has been
hospitalized for 60 days, the beneficiary must then pay $198
coinsurance per day for days 61 through 90. There is a separate $100
Part B deductible for out-patient procedures, which is arguably more
discretionary, never having been indexed to inflation.
Unlike 97 percent of private health policies, the Medicare fee-for-
service program still lacks catastrophic insurance protection for those
with serious health conditions. Medicare Part B, which is financed 25
percent from beneficiary premiums--about $50 per month--and 75 percent
from the General Fund, has unlimited beneficiary cost-sharing. Part B
has different coinsurance depending on the service--none for lab or
home health, 20 percent for physician services and supplies, and close
to 50 percent for hospital outpatient services.
In total, due to cost-sharing obligations and Medicare's limited
benefit package, nearly half of seniors' health care costs are not
covered by Medicare. As a result, 90 percent of beneficiaries have some
type of supplemental coverage. Those with retiree coverage from their
former employers generally receive generous benefits, including
catastrophic protection and good prescription drug coverage. The
poorest beneficiaries receive wrap-around coverage through Medicaid.
Medicare's confusing and irrational cost-sharing has also induced
29 percent of beneficiaries to purchase Medigap insurance. In 1990,
Congress created 10 standardized Medigap policies. Nine out of 10 of
those policies, which comprise more than 90 percent of the Medigap
market, are required to cover the Part A deductible, and the most
popular Medigap policy covers both deductibles. Numerous studies have
demonstrated that covering the deductibles has led to markedly higher
Medicare spending because beneficiaries become insensitive to costs. In
addition, only the three most expensive Medigap plans cover
prescription drugs, and that coverage is limited. Yet, eight of the 10
plans are required to cover foreign travel insurance, while most
beneficiaries never leave the country.
In announcing the hearing, Chairwoman Johnson stated: ``A critical
element of strengthening Medicare is modernizing the fee-for-service
program's byzantine cost-sharing structure. No one designing a seniors'
health program today would construct such a convoluted and irrational
cost-sharing structure for beneficiaries. The system is a patchwork of
outdated policies that fail to protect beneficiaries or taxpayers. We
must learn from our experience and work to ensure a more consistent and
understandable system for the future.''
FOCUS OF THE HEARING:
The hearing's panel will include private and public experts on the
Medicare fee-for-service program's beneficiary cost sharing. They will
describe in detail the current structure of beneficiary cost-sharing
and the incentives that have arisen from the benefit design. In
addition, there will be a focus on the structure and policy
implications of Medigap.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
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diskette in WordPerfect or MS Word format, with their name, address,
and hearing date noted on a label, by the close of business, Tuesday,
May 23, 2001, to Allison Giles, Chief of Staff, Committee on Ways and
Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Health office, room 1136 Longworth House
Office Building, by close of business the day before the hearing.
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noted above.
Chairwoman Johnson. The hearing will come to order.
Today will be the fifth Subcommittee hearing on modernizing
the Medicare program. In earlier hearings, we examined new
ideas on Medicare reform. We solicited proposals to reduce the
regulatory burden on providers and beneficiaries. We examined
the adequacy and the usefulness of the current definition of
Medicare solvency. We brought forth new information to lay the
groundwork for a prescription drug benefit, and we heard about
the importance of the Medicare Plus Choice program to
beneficiaries and evaluated ideas to strengthen that program.
Today, we turn to modernizing the fee-for-service Medicare
Program's beneficiary cost sharing. The structure of Medicare
beneficiary cost sharing in the fee-for-service program
reflects the insurance practices at the inception of the
Medicare Program in 1965. As such, more than 35 years later,
beneficiaries are confronted with irrational and confusing
cost-sharing requirements which do not reflect the current
delivery of health care.
For example, the program has two different deductibles, a
$792 deductible for Part A and $100 deductible for Part B. This
means that when a beneficiary is hospitalized for an inpatient
procedure and least likely to be sensitive to pricing issues,
the beneficiary is faced with a significant deductible.
In addition, after a beneficiary has been hospitalized for
2 months, the beneficiary must then pay $198 coinsurance per
day for day 61 through 90. This simply makes no sense.
At the same time, the $100 Part B deductible for outpatient
procedures, which are arguably more discretionary, has never
been indexed to inflation. Unlike 97 percent of private health
policies, the Medicare fee-for-service program still lacks
catastrophic insurance protection for those with serious health
conditions. Medicare Part B has unlimited beneficiary cost
sharing. Part B has different coinsurance depending on the
service, none for lab or home health, 20 percent for physician
services and supplies, and close to 50 percent for hospital
outpatient services and mental health services.
This Committee has made progress in three consecutive
Medicare bills to substantially reduce beneficiary cost sharing
for outpatient hospital services, but more needs to be done. In
total, due to cost-sharing obligations and Medicare's limited
benefit package, nearly half of seniors health care costs are
not covered by Medicare. As a result, 90 percent of
beneficiaries have some type of supplemental coverage. Those
with retiree coverage from their former employers generally
receive generous benefits, including catastrophic protection
and good prescription drug coverage. The poorest beneficiaries
receive wrap-around coverage through Medicaid. Medicare's
confusing and irrational cost sharing has also induced 29
percent of beneficiaries to purchase Medigap insurance.
In 1990, Congress created 10 standardized Medigap policies.
Nine out of the 10 of those policies, which comprise more than
90 percent of the Medigap market, are required to cover the
Part A deductible, and the most popular Medigap policy covers
both deductibles. Numerous studies have demonstrated that
covering the deductibles has led to markedly higher Medicare
spending because beneficiaries become insensitive to costs.
In addition, only the three most expensive Medigap plans
cover prescription drugs, and that coverage is limited. Yet, 8
of the 10 plans are required to cover foreign travel insurance
while most beneficiaries never leave the country. Between 1998
and 2000, Medigap premiums have escalated by 15.5 percent for
plans without drug coverage and 37 percent forthose with drug
coverage. Modernizing beneficiary cost sharing must include appropriate
changes in Medigap.
A critical element of strengthening Medicare is modernizing
the fee-for-service programs' byzantine cost-sharing structure.
No one designing a senior's health program today would
construct such a convoluted and irrational cost-sharing
structure for beneficiaries. The system is a patchwork of
outdated policies that fail to protect beneficiaries or
taxpayers. We must learn from our experience and work to ensure
a more consistent, understandable, and affordable system for
the future.
Mr. Stark.
[The opening statement of Chairwoman Johnson follows:]
Opening Statement of the Hon. Nancy L. Johnson, a Representative in
Congress from the State of Connecticut, and Chairwoman, Subcommittee on
Health
Today will be the fifth subcommittee hearing on modernizing the
Medicare program. In earlier hearings we examined new ideas on Medicare
reform, we solicited proposals to reduce the regulatory burden on
providers and beneficiaries, we examined the adequacy and usefulness of
the current definition of Medicare solvency, we brought forth new
information to lay the ground work for a prescription drug benefit, and
we heard about the importance of the Medicare+Choice program to
beneficiaries and evaluated ideas to strengthen that program. Today, we
turn to modernizing the fee-for-service program's beneficiary cost-
sharing.
The structure of Medicare beneficiary cost sharing in the fee-for-
service program reflects the insurance practices at the inception of
the Medicare program in 1965. As such, more than 35 years later,
beneficiaries are confronted with irrational and confusing cost-sharing
which does not reflect the current delivery of health care.
For example, the program has two different deductibles--a $792
deductible for Part A and a $100 deductible for Part B. This means that
when a beneficiary is hospitalized for an in-patient procedure and
least likely to be sensitive to pricing issues, the beneficiary is
faced with a significant deductible. In addition, after a beneficiary
has been hospitalized for two months, the beneficiary must then pay
$198 coinsurance per day for days 61 through 90. This simply makes no
sense. At the same time, the $100 Part B deductible for out-patient
procedures, which are arguably more discretionary, has never been
indexed to inflation.
Unlike 97 percent of private health policies, the Medicare fee-for-
service program still lacks catastrophic insurance protection for those
with serious health conditions. Medicare Part B has unlimited
beneficiary cost-sharing. Part B has different coinsurance depending on
the service--none for lab or home health, 20 percent for physician
services and supplies, and close to 50 percent for hospital outpatient
services. This Committee has made progress in three consecutive
Medicare bills to substantially reduce beneficiary cost-sharing for
outpatient hospital services. But more needs to be done.
In total, due to cost-sharing obligations and Medicare's limited
benefit package, nearly half of seniors' health care costs are not
covered by Medicare. As a result, 90 percent of beneficiaries have some
type of supplemental coverage. Those with retiree coverage from their
former employers generally receive generous benefits, including
catastrophic protection and good prescription drug coverage. The
poorest beneficiaries receive wrap-around coverage through Medicaid.
Medicare's confusing and irrational cost-sharing has also induced
29 percent of beneficiaries to purchase Medigap insurance. In 1990,
Congress created 10 standardized Medigap policies. Nine out of 10 of
those policies, which comprise more than 90 percent of the Medigap
market, are required to cover the Part A deductible, and the most
popular Medigap policy covers both deductibles. Numerous studies have
demonstrated that covering the deductibles has led to markedly higher
Medicare spending because beneficiaries become insensitive to costs. In
addition, only the three most expensive Medigap plans cover
prescription drugs, and that coverage is limited. Yet, eight of the 10
plans are required to cover foreign travel insurance, while most
beneficiaries never leave the country. Between 1998 and 2000 Medigap
premiums have escalated by 15.5 percent for plans without drug coverage
and 37.2 percent for those with drug coverage. Modernizing beneficiary
cost-sharing must include appropriate changes to Medigap.
A critical element of strengthening Medicare is modernizing the
fee-for-service program's byzantine cost-sharing structure. No one
designing a seniors' health program today would construct such a
convoluted and irrational cost-sharing structure for beneficiaries. The
system is a patchwork of outdated policies that fail to protect
beneficiaries or taxpayers. We must learn for our experience and work
to ensure a more consistent and understandable system for the future.
Mr. Stark. Thank you, Madam Chair.
I agree that Medicare cost sharing can benefit from a fresh
look. The fact is that Medicare currently covers only about
half of the beneficiary health costs, and the beneficiaries
spend a disproportionate share of their income on health
expenses.
Now, much of the gap is due to the lack of coverage of
prescription drugs, but it is also clear that the current cost-
sharing arrangement continues to force too many beneficiaries
to pay too much.
We have made some modest progress to correct the
coinsurance quirk that forces beneficiaries to pay far more
than we intended for hospital outpatient services, but we have
got a long way to go on that one. Beneficiaries do shoulder an
unfair percentage of the cost for mental health services, and
we have not corrected that.
I do not oppose efforts to develop or examine options in
this area, but I think we must keep foremost in our mind the
effects that these changes have on all Medicare beneficiaries.
For example, there are good reasons to slower the hospital
deductible, but that is often considered in the context of
raising the Part B deductible. Given only that 90 percent of
the beneficiaries use Part B and only about less than 20
percent use the hospital benefit, we could end up reducing
expenses for a few, the 20 percent that use hospitals, and then
kick all the Part B costs up, and I am not sure if that is what
we want to do.
While cost sharing can increase the cost awareness of
beneficiaries, I see it as a sickness tax, and I have never
been convinced that beyond the nuisance value of a minimal $5,
$10 copay that people will overutilize medical care.
I think, mostly, we do not like going. We like doctors.
Some of us are married to them. Some of us have them as
colleagues.
Chairwoman Johnson. Some of us lucky folks are married to
them.
Mr. Stark. Professionally, we do not like to visit them so
much.
I have often said if I arranged with the George Washington
Hospital for each one of these Subcommittee Members this
afternoon to go over to George Washington Hospital and for $10,
you could have a Pap smear or a proctoscopic examination, I do
not think any of you would go. This is not the kind of thing
that we want to do on a nice, sunny afternoon, and I do not
think the Medicare beneficiaries are much different. I do not
think they are out there saying, ``Gosh, I do not have anything
else to do. There is no ball game. There is nothing on
television. I think I will go and have an examination.''
Yes, I can see that there are some hypochondriac types that
abuse it, but you have got to make the case to me that we will
not prevent people from getting needed medical care if we raise
that barrier too high.
I think that it is tempting to look at CBO's (Congressional
Budget Office) projected savings from various options in this
area, but the dollars come from increasing or changing
beneficiary cost-sharing responsibilities that might have
unintended consequences. As I say, we assume that utilization
is bad, and maybe it is not.
I find it hard to believe that Medicare beneficiaries, as I
said, go out of their way to just get extra cost. That may not
be true of the providers or their advisors, but it certainly, I
think, is true to the beneficiaries.
Benefit packages under the OBRA '90 rules could be tweaked,
but I would say we should be careful not to upset a precarious
market, unless you choose to eliminate Medigap. Given the
strong desire of beneficiaries to purchase this insurance, my
personal belief is that that would be politically unwise or, if
you wanted to replace it with a HCFA-sponsored (Health Care
Financing Administration) Medigap, I think politically
unsellable at this time.
So I am just saying right now Medigap is the best we have
got, and unless we are ready to step up to the plate and think
about making it part of the Federal program, we should be very
careful that we do not destroy the private providers who are in
the business.
I agree that regardless of what we do with first-dollar
coverage, Medigap needs improvements, and we have got
beneficiaries who missed the open enrollment and they are
locked out forever. We have got a problem with Medicare Plus
Choice cancels. They are limited in their options to go back
into Medigap. None of them have drug coverage. Maybe that will
change if we have a drug benefit.
Disabled younger beneficiaries cannot get into the initial
open enrollment until they are 65. I think we should look at
that.
Why? I guess the insurance industry basically does not want
to insure these folks, and I think we have to keep in mind
their aversion to risk when we consider changes that we would
ask the private insurance industry to take up.
So, while I am anxious to review what we are doing and
improve it, I hope we can be cautious because we could perhaps
do more harm. It is a program that is tenuous. We see people
dropping out of the Medigap. I mean we see insurers dropping
out of the Medigap market every year. We see it becoming more
expensive, and I hope this hearing will lead us toward some of
the answers that we might do to improve the Medicare Program
for all of the beneficiaries.
Thank you very much.
[The opening statements of Mr. Stark and Mr. Ramstad
follow:]
Opening Statement of the Hon. Fortney Pete Stark, a Representative in
Congress from the State of California
Thank you, Madam Chairwoman, for holding this hearing. This is an
impressive, balanced panel, and I look forward to the discussion.
Medicare cost-sharing could benefit from a fresh look. Medicare
currently covers only approximately half of beneficiary health costs,
and beneficiaries spend a disproportionate share of their income on
health expenses. While much of the gap is due to the lack of coverage
under Medicare for prescription drugs and other important items or
services, it is also clear that the current cost-sharing arrangement
continues to force too many beneficiaries to pay too much.
We have made modest progress in our effort to correct the co-
insurance quirk that forces beneficiaries to pay far more than we
intended for hospital outpatient services. But we have a long way to
go. Beneficiaries also shoulder an unfair percentage of the cost for
mental health services.
For these and other reasons, it may initially seem attractive to
rearrange cost-sharing obligations. I am not averse to developing or
examining options in this area, but we must keep in mind the effects of
these changes on all Medicare beneficiaries. For example, there are
good reasons to lower the hospital deductible, but that is often
considered in the context of raising the Part B deductible. However, it
is important to remember that 90 percent of beneficiaries use Part B
services, while only approximately 18 percent use the inpatient
hospital benefit. Any policy that lowers the hospital deductible while
raising the Part B deductible reduces expenses for a few at the expense
of many. While cost-sharing can be used as a tool to heighten ``cost
consciousness'' of beneficiaries, it can also be used as a sickness tax
on those who need health services the most.
I am sure that some of today's discussion will center around the
so-called ``first dollar coverage'' under Medigap and its effect on
Medicare spending. Some people think that we should prohibit Medigap
and other insurance from providing coverage that essentially insulates
beneficiaries from Medicare's patchwork quilt of co-insurance and co-
payment obligations. I know it is intriguing to look at the options
book produced by CBO and see the potential for enormous savings in some
proposals, but I think a few words of caution are in order before
anyone heads down that particular road.
Too often, it is assumed that utilization is bad. While we
certainly want to curtail unnecessary utilization, cost-sharing is a
blunt tool with which to accomplish that goal. Too often, it results in
decreased use of both necessary and unnecessary services. Certainly,
steps can be taken to minimize or direct the effects of cost-sharing,
but we must keep in mind that cost-sharing requirements in a vulnerable
lower-income population may result in adverse health effects. With very
few exceptions, I find it hard to believe that Medicare beneficiaries
seek unnecessary services. Most people are reluctant, not eager, to go
to the doctor or be subject to procedures. Also, except for showing up
at a doctor's office, most of us are unable to direct our care, and
cost-sharing has little impact on our choices, except to discourage
compliance with treatment regimens. After all, we can't order our own
tests or procedures or prescribe other treatments.
In addition, the OBRA 1990 Medigap standardization legislation was
desperately needed to address rampant abuses in the Medigap market. And
it has largely served its purpose. Among other problems, there were
reports of beneficiaries having dozens of policies, thanks to
unscrupulous sales agents who preyed on unsuspecting senior citizens.
Not so anymore. I admit that the benefit packages may be in need of
some tweaking, but I remind my colleagues that they were designed
through painful, lengthy negotiated rule-making process that involved
all relevant parties. In addition, as we will hear from GAO, one-third
of current Medigap policies have been in force since before 1992 and
have non-standardized benefits. If Congress decides to dramatically
change the benefit packages, care must be taken to avoid further
segmenting the market and risk pools. Unless, of course, Congress
wishes to force beneficiaries to give up the Medigap insurance they
currently have. However, given the strong desire of beneficiaries to
purchase this insurance, my personal belief is that it would be
politically unwise to force change. On the other hand, if it is clearly
a better deal, many may well be willing to voluntarily leave their
current policies.
We might also consider creating a HCFA-sponsored Medigap option to
compete with the private insurers. After all, given that Medigap's
administrative costs and insurer profits total more than 20 percent of
the premium, a HCFA option could offer equivalent coverage at a much
lower price.
Finally, I would be remiss if I didn't advocate for some long-
overdue Medigap improvements--regardless of what happens with respect
to first-dollar coverage. Medicare beneficiaries essentially get one
chance at purchasing Medigap when they first turn 65 and enroll in Part
B. If they fail to take advantage of the one-time open enrollment
period at that time, they may find themselves forever locked out of
supplemental coverage. In addition, there are virtually no federal
restrictions on underwriting or rating practices. That means that even
if an insurer agrees to offer you coverage, they can charge you
whatever they want. Or they can entice you in at age 65 with an
attractive premium, while raising it as your age and needs increase.
That's one reason why enrollment in the Medigap drug packages is so
low. Their value is questionable, and most beneficiaries with any
indication of need are priced out of the plans. When Congress finally
acted to allow beneficiaries whose circumstances change beyond their
control (e.g., M+C plan cancels, employer benefits drop, etc.) to get
another chance at enrollment, we limited their ability to enroll or re-
enroll to just four options--none with drug coverage. Disabled younger
beneficiaries are still waiting to get an initial open enrollment
period upon first becoming eligible for Medicare. Right now, they have
to wait until they are 65 to be guaranteed an opportunity to purchase
Medigap. Why are these things so? Because the insurance industry
doesn't want to insure these folks. Keep this aversion to risk in mind
as we consider other changes to Medicare that would increase the role
of the private insurance industry.
Caution is the watchword as we work in this important area. There
is an opportunity for improvement, but also for destruction. I look
forward to today's testimony and discussion.
Opening Statement of the Hon. Jim Ramstad, a Representative in Congress
from the State of Minnesota
Madam Chairwoman, thank you for calling this important hearing
today to continue exploring Medicare reform.
I strongly believe that Medicare needs comprehensive reform. We
cannot focus on tinkering around the edges, and we must not take the
easy road of simply adding a prescription drug benefit to an already
overburdened program.
I am particularly concerned about the costs that Medicare
beneficiaries must pay when they get sick and the plans they must
purchase to cover their needs because of Medicare's copays and lack of
catastrophic coverage.
For example, the program has a $792 deductible for Part A when the
patient is least sensitive to price; after 60 days in the hospital, a
beneficiary must pay $198 coinsurance per day for days 61 through 90.
In Part B, a beneficiary must pay a $100 which has never been adjusted
for inflation.
This problem is exacerbated by the fact that Medicare lacks
catastrophic protection. This compares with 97% of private health
policies which have this protection.
In total, Medicare's limited benefits package, high copays and
complete absence of catastrophic coverage means that nearly half of our
seniors' health care costs are not covered by Medicare.
This means that Medicare seniors must bear the cost themselves. In
fact, 90% of beneficiaries have some type of supplemental coverage
which ranges from quite good to very limited.
In my view, Madam Chairwoman, this is just another example of why
we must bring the Medicare program into the 21st century, and do it
this year. I believe that together, in a bipartisan way, we can design
an effective and efficient way to comprehensively improve the system
and preserve it for tomorrow's seniors.
Madam Chairwoman, thanks again for your leadership. I look forward
to learning more from today's witnesses on how we can best address this
critical issue.
Chairwoman Johnson. Thank you, Mr. Stark.
The panel that we are going to hear from today will start
with Jennifer O'Sullivan who is the specialist in Social
Legislation, Domestic Social Policy Division of the
Congressional Research Service; Dr. William Scanlon who is the
director of Health Care Issues at the United States General
Accounting Office; Dr. Christopher Hogan, president of Direct
Research of Vienna, Virginia; and Dr. Karen Davis, president of
The Commonwealth Fund of New York, New York.
Ms. O'Sullivan, if you would start, please.
STATEMENT OF JENNIFER O'SULLIVAN, SPECIALIST IN SOCIAL
LEGISLATION, CONGRESSIONAL RESEARCH SERVICE, LIBRARY OF
CONGRESS
Ms. O'Sullivan. Thank you, Madam Chairman and Members of
the Subcommittee. My name is Jennifer O'Sullivan.
Today, you have asked me to outline Medicare's cost-sharing
structure, specifically what out-of-pocket expenses
beneficiaries are liable for when they use covered services. My
testimony will highlight three points: first, Medicare's cost-
sharing requirements are complex; second, the cost-sharing
requirements differ in significant ways from those applicable
in the private market; and, third, Medicare's requirements
remain relatively unchanged since 1966.
There are very significant differences between the cost-
sharing requirements under Medicare Part A and Medicare Part B.
Medicare Part A uses a spell-of-illness concept. A spell of
illness, also known as a benefit period, starts when a
beneficiary enters a hospital and ends when he or she has not
been in a hospital or skilled nursing facility for 60 days. In
each benefit period, the beneficiary pays a $792 deductible for
hospital stays up to 60 days. Longer stays are subject to
coinsurance charges. Days 60 to 90 are subject to a daily
charge of $198, and persons in the hospital over 90 days may
draw on 60 lifetime reserve days subject to a daily coinsurance
charge of $396. There is no coverage after 150 days.
The spell-of-illness concept gets even more complex when
you consider that an individual can have more than one benefit
period in a calendar year and, therefore, have to pay more than
one deductible in a calendar year.
A person requiring post-hospital skilled nursing facility
services may get up to 100 days of care in a benefit period.
There is a daily coinsurance charge of $99 for days 21 to 100.
In general, cost sharing under Medicare Part B is somewhat
simpler. In each calendar year, beneficiaries must first meet
the $100 Part B deductible. Beneficiaries then generally pay 20
percent in coinsurance. However, certain Part B services such
as home health services, lab services, and some preventive
services are exempt from either the deductible and/or
coinsurance requirements. On the other hand, mental health
services are subject to 50-percent cost sharing. Beneficiaries
using hospital outpatient services pay a fixed amount which
varies by the service category, and thisamount is often
considerably above 20 percent of the approved Medicare payment amount.
There are significant differences between Medicare's cost-
sharing structure and that available to the under-age-65
population under employer-based plans. Perhaps the most
significant difference is that private plans typically have an
annual limit on out-of-pocket expenses, sometimes referred to
as a catastrophic cap. In contrast, Medicare has on upper limit
on cost-sharing charges.
Another key feature of the private insurance market is that
over 95 percent of the under-65 population is enrolled in a
managed-care arrangement compared to only about 15 percent of
the Medicare population. These managed-care arrangements
typically have simpler cost-sharing structures. Many of the
under-65 population are enrolled in preferred provider plans.
Individuals in these plans have lower cost sharing when they
use in-network providers and somewhat higher cost sharing when
they use out-of-network providers. These preferred provider
arrangements are not available to the Medicare fee-for-service
population.
Several other observations can be made about Medicare's
cost sharing. While the dollar amounts have changed, the
structure is virtually unchanged from that which was in effect
when the program started in 1966. The Congress did enact
legislation in 1988, the Medicare Catastrophic Act, which would
have significantly modified the requirements, and one of the
key features of that legislation was an annual out-of-pocket
limit on Part B cost-sharing. However, as you know, Congress
repealed that legislation in the following year.
I should note that the preceding discussion has focused on
beneficiary liability in connection with their use of Medicare
services. Unlike the under-age-65 population, most
beneficiaries have a second source of health insurance
coverage. This supplementary coverage typically covers some or
all of Medicare's cost-sharing charges. As a result,
beneficiaries may not actually incur out-of-pocket costs at the
time they use covered services.
This discussion only focuses on cost sharing for Medicare-
covered services. It does not address expenses beneficiaries
may have for non-covered services. As you know, Medicare does
not cover certain items such as hearing aids and dentures. It
also provides very limited coverage for some other services
such as outpatient prescription drugs and long-term care. As a
result, Medicare only covers about half of the beneficiary's
total health care bill.
Thank you.
[The prepared statement of Ms. O'Sullivan follows:]
Statement of Jennifer O'Sullivan, Specialist in Social Legislation,
Congressional Research Service, Library of Congress
Madam Chairman and Members of the Subcommittee. My name is Jennifer
O'Sullivan. I am a Specialist in Social Legislation at the
Congressional Research Service. Today you have asked me to outline
Medicare's cost-sharing structure-specifically what out-of-pocket
expenses beneficiaries are liable for when they use covered services. I
will briefly summarize Medicare's requirements under the traditional
fee-for-service program; more details are provided in the table
included as part of my written testimony. My testimony will highlight
three points:
First, Medicare's cost-sharing requirements are
complex;
Second, the cost-sharing requirements differ in
significant ways from those applicable in the private market;
Third, Medicare's requirements have remained
relatively unchanged from 1966.
There are significant differences between the cost sharing
requirements for Medicare Part A and Medicare Part B. Part A uses the
``spell of illness'' concept. A spell of illness, also known as a
``benefit period'' starts when a person enters a hospital and ends when
he or she has not been in a hospital or skilled nursing facility for 60
days. In each benefit period, the beneficiary pays a $792 (in 2001)
deductible for hospital stays of 1--60 days. Hospital stays beyond 60
days are subject to coinsurance charges. Days 60--90 are subject to a
daily charge of $198 (in 2001). Persons in the hospital over 90 days
may draw on 60 lifetime reserve days subject to a daily coinsurance
charge of $396 (in 2001). Hospital stays in excess of 150 days in a
benefit period are not covered.
The spell of illness concept gets even more complex when you
consider that an individual can have more than one benefit period in a
year and therefore have to pay more than one deductible in a year.
Potentially, an individual could even have to pay coinsurance charges
for more than one inpatient stay.
A person requiring post-hospital skilled nursing facility (SNF)
services may get up to 100 days of care in a benefit period. There is a
daily coinsurance charge for days 21--100 ($99 in 2001). There is no
cost sharing for home health services and nominal cost-sharing for
hospice care.
In general, cost-sharing under Medicare Part B is somewhat simpler.
In each calendar year, beneficiaries must first meet the $100 Part B
deductible before the program will begin making payments. Beneficiaries
are then subject to coinsurance which equals 20% of Medicare's approved
amount. Certain Part B services, such as home health care and some
preventive services, are exempt from the deductible and/or coinsurance
requirements. On the other hand, mental health services are subject to
50% cost sharing. Beneficiaries using hospital outpatient services pay
a fixed amount which varies by service category; this fixed amount is
often substantially more than 20% of the approved payment for the
service under the new outpatient prospective payment system.
There are a number of differences between Medicare's cost-sharing
structure and that available to the under-65 population under private
employer-based plans. Perhaps the most significant difference is that
private plans typically have an annual limit on out-of-pocket
expenses--sometimes referred to as a catastrophic cap. In contrast,
Medicare has no upper limit on cost-sharing charges.
Another key feature of the private insurance market is that over
90% of the under 65 population is enrolled in a managed care
arrangement compared to only 15% of the Medicare population. These
managed care arrangements typically have simpler cost-sharing
structures. Many of the under-65 population are enrolled in preferred
provider plans. Individuals in these plans have lower cost-sharing
charges when they use specific network providers and higher cost-
sharing when they use out-of-network providers. These preferred
provider arrangements are not available to the fee-for-service Medicare
population.
Several other observations can be made about Medicare's cost-
sharing. While the dollar amounts have changed, the structure is
virtually unchanged from that in effect when the program went into
effect in 1966. For example, the concept of a spell of illness was part
of the original legislation. The Congress did enact legislation in
1988, the Medicare Catastrophic Coverage Act, which would have
significantly modified current requirements. One of the key features of
that legislation was the addition of an annual limit on Part B out-of-
pocket spending. However, as you know, this legislation was repealed
the following year.
Medicare Part B cost-sharing applies to a broader range of services
than when the program first went into effect. This istrue for two
reasons. Medicare Part B now covers a number of additional services. It
also pays directly for some practitioner services previously covered
indirectly under other service categories.
I should note that the preceding discussion has focused on
beneficiary liability in connection with their use of Medicare
services. Unlike the under-age 65 population, most Medicare
beneficiaries have a second source of health insurance coverage. This
supplementary coverage typically covers some or all of Medicare's cost
sharing charges, thus further complicating the picture. As a result of
supplementary insurance, beneficiaries may not actually incur out-of-
pocket costs at the time they use covered services.
I should also note that this discussion only focuses on cost-
sharing charges for Medicare-covered services. It does not address
expenses beneficiaries may have for non-covered services. As you know
Medicare does not cover certain items such as hearing aids and
dentures. It also provides very limited coverage for some other
services such as outpatient prescription drugs and long-term care. As a
result, Medicare covers only about half of a beneficiary's health care
bill.
COMPARISON OF MEDICARE COST-SHARING AND BENEFITS--1966 AND 2001
------------------------------------------------------------------------
1966 2001
------------------------------------------------------------------------
Part A
Inpatient Hospital Services..... Coverage up to 90 Same except:
days in each --2001 deductible
spell of illness:. is $792 and daily
--Days 1-60: coinsurance is
deductible ($40 $198.
in 1966). 60 lifetime
--Days 61-90: reserve days:
daily coinsurance daily coinsurance
equal to \1/4\ of equal to \1/2\ of
deductible ($10 hospital
in 1966). deductible ($396
No lifetime in 2001).
reserve days. [Deductible set at
[Deductible based $520 in 1987. It
on average per is updated each
diem rate for year based on the
inpatient applicable
services.]. percentage
increase used for
Medicare's
prospective
payment rates,
adjusted to
reflect changes
in real case
mix.]
Inpatient psychiatric hospital Maximum 190 days Same.
services. per lifetime
(covered as part
of inpatient
hospital benefit).
Skilled Nursing Facility (SNF) Maximum of 100 Same except daily
Services. post-hospital coinsurance is
days per spell of $99 in 2001.
illness:.
--Days 1-20: No
coinsurance.
--Days 21-100:
daily coinsurance
equal to \1/8\
hospital
deductible ($5 in
1967--first year
benefit in
effect).
Hospice Services................ Not covered....... Covered for
terminally ill
beneficiaries
with life
expectancy of 6
months or less.
Limited cost-
sharing for drugs
and respite care.
Blood deductible................ Covered all but Same, except
cost of first waived if blood
three pints in replaced. [Any
spell of illness. deductible
required under
Part A or B
offsets
requirements
under other
Part.]
Part B
In General
Part B Premium.................. Set in law to Set in law to
cover 50% of cover 25% of
program costs program costs
($3.00/month ($50 a month in
1966). 2001).
Deductible...................... $50............... $100.
Blood deductible................ No provision...... Medicare covers
80% of approved
amount after
beneficiary pays
(or replaces)
first 3 pints per
year. [Any
deductible
required under
Part A or B
offsets
requirements
under other
Part.]
Services
Physicians...................... Services provided Services provided
by doctors of by doctors of
medicine and medicine and
osteopathy, and, osteopathy, and,
under limited under limited
circumstances, circumstances,
dentists. Covered dentists. Also
for 80% of specific services
reasonable provided by
charges; doctors of
beneficiary pays optometry,
20%. podiatry, and
chiropractic.
Covered for 80%
of fee schedule;
beneficiary pays
20%.
Non-physician Practitioners..... Not paid directly. Services provided
by physician
assistants, nurse
practitioners,
clinical nurse
specialists,
clinical social
workers,
psychologists,
certified
registered nurse
anesthetists, and
certified nurse
midwives. Covered
for 80% of
approved amount;
beneficiary pays
20%.
Physical Therapists, and Not paid directly. Services provided
Occupational Therapists. by therapists in
independent
practice. Covered
for 80% of
approved amount;
beneficiary pays
20%.
Durable Medical Equipment....... Rentals covered Rental or purchase
for 80% of covered for 80%
approved amount; of approved fee
beneficiary pays schedule amount;
20%. beneficiary pays
20%.
Prosthetic devices.............. Covered for 80% of Same, except
approved amount; coverage for
beneficiary pays orthotics added.
20%. Covered for 80%
of approved fee
schedule amount;
beneficiary pays
20%.
Outpatient Mental Health Limited to the Limited to 50% of
Treatment. lesser of $250 or fee schedule
50% of approved amount;
amount; beneficiary pays
beneficiary pays 50%.
remainder.
Partial Hospitalization Services Not covered....... Covered for 80% of
for Mental Illness. approved amount;
beneficiary pays
20%.
Outpatient Hospital Services Covered for 80% of Covered under Part
(excludes services which are approved amount; B. Beneficiary
paid under another service beneficiary pays fixed amount
category). liable for 20% of which varies by
charges. service category;
Diagnostic Medicare pays the
services covered remainder.
for 80% of
approved amount
under Part A
after beneficiary
met deductible
equal to \1/2\ of
Part A deductible
($20 in 1966).
Clinical Laboratory Services.... Covered for 80% of Covered for 100%
approved amount; of fee schedule
beneficiary pays amount. No cost-
20%. sharing.
Comprehensive Outpatient No provision...... Covered for 80% of
Rehabilitation Facility (CORF) approved amount;
Services. beneficiary pays
20%.
Ambulatory Surgical Center (ASC) No provision...... Covered for 80% of
Services. approved amount;
beneficiary pays
20%.
Ambulance Services.............. Covered for 80% of Same.
approved amount;
beneficiary pays
20%.
Benefit Category
Outpatient Prescription Drugs... Coverage limited Same, except
to drugs and coverage also
biologicals which provided for:
are not self- --immunosuppressiv
administered and e drugs following
are incident to a covered organ
physicians transplant;
services. Covered --erythropoietin
for 80% of for treatment of
approved amounts; anemia for
beneficiary pays persons with
20%. chronic renal
failure;
--oral anti-cancer
drugs comparable
to chemotherapy
drugs which would
be covered if
they were not
self-
administered; and
--hemophilia
clotting factors.
Immunizations................... Not covered....... Vaccine coverage
for influenza,
pneumococcal
pneumonia, and
Hepatitis B. No
cost-sharing for
influenza and
pneumococcal
pneumonia.
Screening mammography........... Not covered....... Pays up to limit
($69.23 in 2001)
for exam.
Beginning 1/1/
2002 paid under
physician fee
schedule.
Beneficiary pays
20%. Deductible
waived.
Screening pap smear............. Not covered....... Covered, generally
at 3-year
intervals (2-year
intervals
beginning 7/1/
2001), for 100%
of approved
amount.
Colorectal screening............ Not covered....... Covered for 80% of
approved amounts
according to
periodicity
schedule;
beneficiary pays
20%. (No
coinsurance for
fecal occult
blood test.
Coinsurance is
25% if service
performed in
ambulatory
surgical center
or hospital
outpatient
department.)
Diabetes self-management Not covered....... Covered for 80% of
training services. approved amounts;
beneficiary pays
20%.
Bone Mass measurement........... Not covered....... Covered for 80% of
approved amounts
for high risk
persons;
beneficiary pays
20%.
Prostate screening exam......... Not covered....... Covered for 80% of
approved amounts
for digital
rectal exam;
beneficiary pays
20%. No cost-
sharing for
prostate specific
antigen test.
Parts A and B
Home Health Services............ Part A: Maximum of Covered for those
100 post-hospital who need it on an
visits. Covered intermittent
for 100% of basis without
approved amount. visit
Part B: Maximum of limitations,
100 visits per coinsurance, or
year (with no deductibles. Over
prior 1998-2003 period,
hospitalization home health
requirement)--cov visits that are
ered for 80% of not part of the
approved amount. first 100 visits
following a
hospital or SNF
stay are being
transferred from
Part A to Part B.
End Stage Renal Disease (ESRD).. Not covered....... Services for ESRD
patients are
covered under
Part A and B, as
appropriate. For
example,
transplants are
covered as Part A
inpatient
hospital services
and Part B
physicians
services.
Dialysis is
generally covered
under Part B.
------------------------------------------------------------------------
Chairwoman Johnson. Thank you.
Dr. Scanlon.
STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR, HEALTH CARE
ISSUES, U.S. GENERAL ACCOUNTING OFFICE
Dr. Scanlon. Thank you very much, Madam Chairwoman and Mr.
Stark and Subcommittee members.
I am very pleased to be here today as you continue to
consider the need to modernize and strengthen Medicare and
particularly as you look into the area of beneficiary cost
sharing.
Medicare provides valuable and extensive coverage, but it
has not kept pace with the changing health care needs and
private insurance practices of today. Essentially, there are
two issues with cost sharing for Medicare beneficiaries. First,
Medicare does not provide genuine insurance; that is,
protection from catastrophe. Gaps in Medicare's benefit
package, such as the lack of prescription drug coverage as well
as required copayments for covered services, can contribute to
substantial financial burdens for beneficiaries.
Second, how that deficiency has been addressed, namely
through most beneficiaries having some form of supplemental
insurance, creates additional issues. Of particular concern are
Medigap policies which can be expensive, not offer
comprehensive protection, and increase use of potentially
discretionary services.
I would like to summarize some of the information on those
two points from my written statement before you today. Health
insurers commonly include cost-sharing provisions in their
policies to make beneficiaries aware of cost. The goal is to
encourage prudent use of services that may be discretionary and
at the same time avoid creating financial barriers to necessary
care.
Medicare cost-sharing rules diverge from these practices in
important ways. While Medicare's cost-sharing requirements can
be substantial, they are not designed well to discourage
unnecessary use of services. Given the example that you gave,
Madam Chairman, Medicare imposes a relatively high deductible
for hospital stays and nocoverage for extremely long stays,
which are rarely optional. In contrast, it requires no cost sharing for
home health care where utilization has been seen to vary widely raising
concerns about the appropriateness of use.
Meanwhile, the lack of a cost-sharing limit on Medicare-
covered services can leave beneficiaries with extensive health
care needs liable for very large expenses. Employer-sponsored
plans, as Ms. O'Sullivan indicated, typically limit out-of-
pocket costs to less than $2,000 per year, but many Medicare
beneficiaries pay much more than that. In 1997, more than 3.4
million were liable for more than $2,000 on covered services,
and approximately 750,000 were liable for more than $5,000.
In addition, uncovered services like prescription drugs add
to Medicare's beneficiaries' financial risk. On average,
beneficiaries were estimated to spend about $3,100, or 22
percent of their incomes, on total out-of-pocket expenses, and
this is excluding long-term care in the year 2000. Those in
poor health without Medicaid or supplemental coverage spent 44
percent of their incomes.
Most beneficiaries do have supplemental coverage, however.
Some get it from former employers, Medicare Plus Choice plans,
or State Medicaid programs. However, Medigap is the only
supplemental coverage available to all elderly Medicare
beneficiaries, and more than one-fourth have purchased a
Medigap policy.
Medigap itself, though, is problematic. These policies can
be expensive. Annual premiums average more than $1,300.
Premiums for plans offering drug coverage are about $400 more
and are rising rapidly.
In the last year alone, these premiums increased 17 to 34
percent for the three types of plan that offer drug coverage.
Premiums vary widely also across geographic areas and insurers.
For example, in Massachusetts, premiums average 45 percent more
than the national average.
Many policies have premiums that rise with the purchaser's
age. In addition, individuals in poor health can find policies
difficult to obtain or expensive as many insurers screen
purchasers' for poor health status. Guaranteed access is only
assured for that short period that generally follows initial
enrollment into Part B.
Despite their high costs, Medigap policies do not fully
protect beneficiaries. Medigap prescription drug coverage, in
particular, can be inadequate because policies have relatively
low caps on how much is covered and require beneficiaries to
pay most of the cost of their drugs.
In addition, there is concern about Medigap's so-called
first dollar coverage that eliminates beneficiary liability for
deductibles, copayments, and coinsurance. Employer-sponsored
supplemental policies in Medicare Plus Choice plans typically
reduce such liabilities, but do not offer first dollar
coverage. First dollar coverage undermines the objective of
Medicare's cost-sharing requirements to promote prudent use of
services. As a result, some services may be overused,
ultimately increasing cost for both the beneficiary and the
program.
I would end by saying as you continue to consider how to
modernize and to reform Medicare, focusing on beneficiaries'
financial liabilities and risks is very important.
Reconsideration of coverage in cost-sharing policies, while
difficult, both within the Medicare program and with any
supplemental options that may be available could improve
coverage for beneficiaries and the financial health of the
program.
Thank you very much, Madam Chairwoman. I would be happy to
answer any questions you or members of the Subcommittee may
have.
[The prepared statement of Dr. Scanlon follows:]
Statement of William J. Scanlon, Ph.D., Director, Health Care Issues,
U.S. General Accounting Office
I am pleased to be here today as you consider the need to modernize
and strengthen the Medicare program and review the role of supplemental
``Medigap'' policies that many seniors buy to help improve their
Medicare coverage. Medicare provides valuable and extensive coverage
for beneficiaries' health care needs. Nevertheless, recent discussions
have underscored the significant gaps that leave some beneficiaries
vulnerable to sizeable financial burdens from out-of-pocket costs. Most
beneficiaries have additional supplemental coverage that helps to fill
Medicare's coverage gaps and pay some out-of-pocket expenses. Privately
purchased Medigap is an important source of this supplemental coverage
because it is widely available to beneficiaries. The other sources--
employer-sponsored policies, Medicare+Choice plans, and Medicaid
programs--are not available to all beneficiaries. However, concerns
exist that supplemental coverage can be expensive and may undermine the
legitimate role of cost sharing in a health insurance plan--to
encourage cost-effective use of services.
To assist the Subcommittee as it considers proposals to improve
coverage for beneficiaries and the financial health of the Medicare
program, my remarks today focus on the design of Medicare's benefit
package and the role of private supplemental coverage. Specifically, I
will discuss (1) beneficiaries' potential financial liability under
Medicare's current benefit structure and cost-sharing requirements, (2)
the cost of Medigap policies and the extent to which they provide
additional coverage, and (3) concerns that Medigap's so-called ``first
dollar'' coverage undermines the cost control incentives of Medicare's
cost-sharing requirements. My comments are based on our prior and
ongoing work \1\ on Medicare and Medigap as well as other published
research.
---------------------------------------------------------------------------
\1\ The Consolidated Appropriations Act of 2000 mandated that we
report to the Congress by July 2001 on various aspects of Medigap
coverage.
---------------------------------------------------------------------------
In summary, Medicare's benefits package and cost-sharing
requirements leave beneficiaries liable for high out-of-pocket costs.
As currently structured, Medicare provides no limit on out-of-pocket
spending and no coverage for most outpatient prescription drugs--a
component of medical care that is of growing importance in treatment
and rapidly increasing in cost. At the same time, Medicare's cost-
sharing requirements are poorly targeted and fail to promote prudent
use of services.
Medigap policies that many Medicare beneficiaries purchase help to
fill in some of Medicare's gaps but are themselves problematic.
Premiums paid for Medigap policies averaged $1,300 in 1999, with 20
percent going to administrative costs. While these policies pay for
some or all Medicare cost-sharing requirements, they do not fully
protect beneficiaries from potentially significant out-of-pocket costs.
In particular, some Medigap policies offer prescription drug coverage,
however, this coverage can be inadequate because beneficiaries still
pay most of the cost and the maximum Medigap benefit is capped. In
addition, Medigap first-dollar coverage eliminates the effect
Medicare's cost-sharing requirements could have to promote prudent use
of services. The danger is that some services may be overused--
ultimately increasing costs for beneficiaries and the Medicare program.
BACKGROUND
Individuals who are eligible for Medicare automatically receive
Hospital Insurance (HI), known as Part A, which helps pay for inpatient
hospital, skilled nursing facility, hospice, and certain home health
care services. Beneficiaries pay no premium for this coverage but are
liable for required deductibles, coinsurance, and copayment amounts.
(See table 1.) Medicare eligible beneficiaries may elect to purchase
Supplementary Medical Insurance (SMI), known as Part B, which helps pay
for selected physician, outpatient hospital, laboratory, and other
services. Beneficiaries must pay a premium for Part B coverage,
currently $50 per month.\2\ Beneficiaries are also responsible for Part
B deductibles, coinsurance, and copayments.
---------------------------------------------------------------------------
\2\ The premium amount is adjusted each year so that expected
premium revenues equal 25 percent of expected Part B spending.
Table 1: Medicare Coverage and Beneficiary Cost-Sharing for 2001
------------------------------------------------------------------------
Beneficiary copayments,
coinsurance, and
deductibles:
------------------------------------------------------------------------
Part A Coverage:
Inpatient hospital........................ $792 deductible per
admission.a
$198 copayment per day for
days 61-90.
$396 copayment per day for
days 91-150.
All costs beyond 150 days.
Skilled nursing facility.................. No cost sharing for first 20
days.
$99 copayment or less for
days 21-100.
All costs beyond 100 days.
Home health............................... No cost sharing.
20 percent coinsurance for
durable medical equipment.
Hospice................................... $5 copayment for outpatient
drugs.
5 percent coinsurance for
inpatient respite care.
Blood..................................... Cost of first 3 pints.
Part B Coverage: b
Physician and medical..................... $100 deductible each year.
20 percent coinsurance for
most services.
50 percent coinsurance for
mental health services.
Clinical laboratory....................... No cost sharing.
Home health............................... No cost sharing.
20 percent coinsurance for
durable medical equipment.
Outpatient hospital....................... Coinsurance varies by
service and may exceed 50
percent.
Blood..................................... Cost of first 3 pints.
20 percent coinsurance for
additional pints.
------------------------------------------------------------------------
a No deductible is charged for second and subsequent hospital admissions
if they occur within 60 days of the beneficiary's most recent covered
inpatient stay.
b No cost-sharing is required for certain preventive services--including
specific screening tests for colon, cervical, and prostate cancer, and
flu and pneumonia vaccines.
Source: Medicare & You 2001, Health Care Financing Administration. Most
Medicare beneficiaries have some type of supplemental coverage to help
pay for Medicare cost-sharing requirements as well as some benefits
not covered by Medicare. They obtain this coverage either through
employers, Medicare+Choice plans, state Medicaid programs, or Medigap
policies sold by private insurers.
About one-third of Medicare's 39 million beneficiaries have
employer-sponsored supplemental coverage. These benefits typically pay
for some or all of the costs not covered by Medicare, such as
coinsurance, deductibles, and prescription drugs. However, many
beneficiaries do not have access to employer-sponsored coverage. A
recent survey found that more than 70 percent of large employers with
at least 500 employees did not offer these health benefits to Medicare-
eligible retirees.\3\ Small employers are even less likely to offer
retiree health benefits.
---------------------------------------------------------------------------
\3\ Mercer/Foster Higgins National Survey of Employer-sponsored
Health Plans 2000 William M. Mercer, Incorporated (New York, New York).
---------------------------------------------------------------------------
Approximately 15 percent of Medicare beneficiaries enroll in
Medicare+Choice plans, which include healthmaintenance organizations
and other private insurers who are paid a set amount each month to
provide all Medicare-covered services. These plans typically offer
lower cost-sharing requirements and additional benefits compared to
Medicare's traditional fee-for-service program, in exchange for a
restricted choice of providers. However, Medicare+Choice plans are not
available in all parts of the country. As of February 2001, about a
third of all beneficiaries lived in counties where no Medicare+Choice
plans were offered.
About 17 percent of Medicare beneficiaries receive assistance from
Medicaid, the federal-state health financing program for low-income
aged and disabled individuals. All Medicare beneficiaries with incomes
below the federal poverty level can have their Medicare premiums and
cost sharing paid for by Medicaid. Beneficiaries with incomes slightly
above the poverty level may have all or part of their Medicare premium
paid for by Medicaid. Also, some low-income individuals may be entitled
to full Medicaid benefits (so called ``dual eligibles''), which include
coverage for certain services not available through Medicare, such as
outpatient prescription drugs. However, the income level at which
beneficiaries qualify for full Medicaid benefits varies, as determined
by each state, and many Medicare beneficiaries with low incomes may not
qualify.\4\
---------------------------------------------------------------------------
\4\ In addition, many low-income beneficiaries who are eligible for
Medicaid and other federal/state programs to provide assistance with
premiums and cost-sharing requirements may not enroll, in part due to
limited awareness of these programs and the administrative complexity
of demonstrating eligibility. See Low-Income Medicare Beneficiaries:
Further Outreach and Administrative Simplification Could Increase
Enrollment (GAO/HEHS-99-61, April 9, 1999). Aiming to increase
awareness and enrollment in these programs, the Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000 directed the
Social Security Administration to identify and notify potentially
eligible individuals and the Department of Health and Human Services to
develop and distribute to states a simplified uniform enrollment
application.
---------------------------------------------------------------------------
Medigap is the only supplemental coverage option available to all
beneficiaries when the initially enroll in Medicare at age 65 or older.
Medigap policies are offered by private insurance companies in
accordance with state and federal insurance regulations. In 1999, more
than 10 million individuals--more than one-fourth of all
beneficiaries--were covered by Medigap policies.\5\ The Omnibus Budget
Reconciliation Act (OBRA) of 1990 \6\ required that Medigap policies be
standardized and allowed a maximum of 10 different benefit packages
offering varying levels of supplemental coverage to be provided. All
policies sold since July 31, 1992 have offered one of the 10
standardized packages, known as plans A through J. (See table 2.)
Policies sold prior to August 1992 were not required to comply with the
standard benefit package requirements.
---------------------------------------------------------------------------
\5\ The National Association of Insurance Commissioners reports
that Medigap enrollment has declined from about 14 million in 1994.
\6\P. L. 101-508, Nov. 5, 1990.
Table 2: Benefits Covered by Standardized Medigap Policies
--------------------------------------------------------------------------------------------------------------------------------------------------------
Benefits Plan A Plan B Plan C Plan D Plan E Plan F a Plan G Plan H Plan I Plan J a
--------------------------------------------------------------------------------------------------------------------------------------------------------
Coverage for........................................ X X X X X X X X X X
Part A coinsurance
365 additional hospital days during
lifetime
Part B coinsurance
Blood products
Skilled nursing facility coinsurance................ X X X X X X X X
Part A deductible................................... X X X X X X X X X
Part B deductible................................... X X X
Part B balance billing b............................ X X X X
Foreign travel emergency............................ X X X X X X X X
Home health care.................................... X X X X
Prescription drugs.................................. X c X c X d
Preventive medical care............................. X X
--------------------------------------------------------------------------------------------------------------------------------------------------------
a Plans F and J also have a high deductible option of $1,580, under which beneficiaries also pay deductibles for prescriptions ($250 per year for Plan
J) and foreign travel emergency ($250 per year for Plans F and J).
b Some providers do not accept the Medicare rate as payment in full and ``balance bill'' beneficiaries for additional amounts that can be no more than
15 percent higher than the Medicare payment rate. Plan G pays 80 percent of balance billing; Plans F, I, and J cover 100 percent of these charges.
c Plans H and I pay 50 percent of drug charges up to $1,250 per year and have a $250 annual deductible.
d Plan J pays 50 percent of drug charges up to $3,000 per year and has a $250 annual deductible.
Source: HCFA 2001 Guide to Health Insurance for People with Medicare. Note: This chart does not apply in Massachusetts, Minnesota, and Wisconsin, where
alternative standards exist.
Under OBRA 1990, Medicare beneficiaries are guaranteed access to
Medigap policies within 6 months of enrolling in Part B regardless of
their health status. Subsequent laws have added guarantees for certain
other beneficiaries. Beneficiaries who either terminated their Medigap
policy to join a Medicare+Choice plan or enrolled in a Medicare+Choice
plan when first becoming eligible for Medicare and then leave the plan
within one year are also guaranteed access to any Medigap policy. Also,
individuals whose employers eliminate retiree benefits or whose
Medicare+Choice plans leave the program or stop serving their areas are
guaranteed access to 4 of the 10 standardized Medigap policies (plans
A, B, C, and F) but none of the policies that include prescription drug
coverage.\7\ Otherwise, insurers can either deny coverage or charge
higher premiums to beneficiaries who are older or in poorer health.
---------------------------------------------------------------------------
\7\ These protections were added by section 4003 of the Balanced
Budget Act of 1997 (P.L. 105-33, 111 Stat. 330). In addition to these
federal protections, 21 states provide for additional Medigap
protections.
---------------------------------------------------------------------------
MEDICARE COST-SHARING REQUIREMENTS AND BENEFIT DESIGN ARE OUT OF STEP
WITH CURRENT PRIVATE SECTOR PRACTICES
Medicare's design has changed little since its inception 35 years
ago, and in many ways has not kept pace with changing health care needs
and private sector insurance practices. Medicare cost-sharing
requirements are not well designed to discourage unnecessary use of
services. At the same time, they can create financial barriers to care.
In addition, the lack of a cost-sharing limit can leave some
beneficiaries with extensive health care needs liable for very large
Medicare expenses. Moreover, gaps in Medicare's benefit package can
contribute to substantial financial burdens on beneficiaries who lack
supplemental insurance or Medicaid coverage.
Medicare's Cost-Sharing Requirements Not Well Structured
Health insurers commonly design cost-sharing provisions--in the
form of deductibles, coinsurance, and copayments--to ensure that
beneficiaries are aware there is a cost associated with the provision
of services and to encourage them to use services prudently. Ideally,
cost sharing should encourage beneficiaries to evaluate the need for
discretionary care but not discourage necessary care. Optimal cost-
sharing designs would generally require coinsurance or copayments for
services that may be discretionary and could potentially be overused,
and would also aim to steer patients to lower cost or better treatment
options. Care must be taken, however, to avoid setting cost-sharing
amounts so high as to create financial barriers to necessary care.
The benefit packages of Medicare+Choice plans illustrate cost-
sharing arrangements that have been designed to reinforce cost
containment and treatment goals. Most Medicare+Choice plans charge a
small copayment for physician visits ($10 or less) and emergency room
services (less than $50). Relatively few Medicare+Choice plans charge
copayments for hospital admissions. Plans that offer prescription drug
benefits typically design cost-sharing provisions that encourage
beneficiaries to use cheaper generic drugs or brand name drugs for
which the plan has negotiated a discount.
Medicare fee-for-service cost-sharing rules diverge from these
common insurance industry practices in important ways. For example, as
indicated in table 1, Medicare imposes a relatively high deductible for
hospital admissions, which are rarely optional. In contrast, Medicare
requires no cost sharing for home health care services, even though
historically high utilization growth and wide geographic disparities in
the use of such services have raised concerns about the potentially
discretionary nature of some services.\8\ Medicare also has not
increased the Part B deductible since 1991. For the last 10 years the
deductible has remained constant at $100 and has thus steadily
decreased as a proportion of beneficiaries' real income.
---------------------------------------------------------------------------
\8\ See Medicare Home Health Care: Prospective Payment System Will
Need Refinement as Data Become Available (GAO/HEHS-00-9, Apr. 2000).
---------------------------------------------------------------------------
Medicare Does Not Limit Beneficiaries' Cost-Sharing Liability
Also unlike most employer-sponsored plans for active workers,
Medicare does not limit beneficiaries' cost-sharing liability, which
can represent a significant share of their personal resources.
Premiums, deductibles, coinsurance, and copayments that beneficiaries
are required to pay for services that Medicare covers equaled an
estimated 23 percent of total Medicare expenditures in 2000. The
average beneficiary who obtained services in 1997 had a total liability
of $1,451, consisting of $925 in Medicare copayments and deductibles in
addition to the $526 in annual Part B premiums required that year.
The burden of Medicare cost sharing can be much higher, however,
for beneficiaries with extensive health care needs. In 1997, the most
current year of available data on the distribution of these costs,
slightly more than 3.4 million beneficiaries (11.4 percent of
beneficiaries who obtained services) were liable for more than $2,000.
Approximately 750,000 of these beneficiaries (2.5 percent) were liable
for more than $5,000, and about 173,000 beneficiaries (0.6 percent)
were liable for more than $10,000. In contrast, private employer-
sponsored health plans typically limit maximum annual out-of-pocket
costs for covered services to less than $2,000 per year for single
coverage.\9\
---------------------------------------------------------------------------
\9\ The Kaiser Family Foundation and Health Research and
Educational Trust, Employer Health Benefits: 2000 Annual Survey.
---------------------------------------------------------------------------
Cost of Uncovered Services Adds to Beneficiaries' Financial Burden
Medicare does not cover some services that are commonly included in
private insurers' benefit packages. The most notable omission in
Medicare's benefit package is coverage for outpatient prescription
drugs. This benefit is available to most active workers enrolled in
employer-sponsored plans. More than 95 percent of private employer-
sponsored health plans for active workers cover prescription drugs,
typically providing comprehensive coverage with relatively low cost-
sharing requirements.
Current estimates suggest that the combination of Medicare's cost-
sharing requirements and limited benefits leaves about 45 percent of
beneficiaries' health care costs uncovered. The average beneficiary in
2000 is estimated to have incurred about $3,100 in out-of-pocket
expenses for health care--an amount equal to about 22 percent of the
average beneficiary's income.\10\
---------------------------------------------------------------------------
\10\ Stephanie Maxwell, Marilyn Moon, and Mesha Segal, Growth in
Medicare and Out-Of-Pocket Spending: Impact on Vulnerable
Beneficiaries, (Urban Institute, Dec. 2000).
---------------------------------------------------------------------------
Some beneficiaries potentially face much greater financial burdens
for health care expenses. For example, elderly beneficiaries in poor
health and with no Medicaid or supplemental insurance coverage are
estimated to have spent 44 percent of their incomes on health care in
2000. Low-income single women over age 85 in poor health and not
covered by Medicaid are estimated to have spent more than half (about
52 percent) of their incomes on health care services.\11\ These
percentages are expected to increase over time as Medicare premiums and
costs for prescription drugs and other health care goods and services
rise faster than incomes.
---------------------------------------------------------------------------
\11\ Maxwell, Moon, and Segal.
---------------------------------------------------------------------------
MEDIGAP POLICIES ADDRESS SOME MEDICARE SHORTCOMINGS BUT ARE EXPENSIVE
While more than one-fourth of beneficiaries have Medigap policies
to fill Medicare coverage gaps, these policies can be expensive and
provide only limited protection from catastrophic expenses. Medigap
drug coverage in particular offers only limited protection because of
high cost sharing and low coverage caps.
Medigap Fills Some Needs
More than 10 million Medicare beneficiaries have Medigap policies
to cover some potentially high costs that Medicare does not pay,
including cost-sharing requirements, extended hospitalizations, and
some prescription drug expenses. By offering a choice among
standardized plans, beneficiaries can match their coverage needs and
financial resources with plan coverage. Medigap policies are widely
available to beneficiaries including those who are not eligible for or
do not have access to other insurance to supplement Medicare, such as
Medicaid or employer-sponsored retiree benefits. In fact, most Medicare
beneficiaries who do not otherwise have employer-sponsored supplemental
coverage, Medicaid, or Medicare+Choice plans purchase a Medigap policy,
demonstrating the value of this coverage to the Medicare population.
Medigap Policies Can Have High Cost
Medigap policies can be expensive. The average annual Medigap
premium was more than $1,300 in 1999. Premiums varied widely based on
the level of coverage purchased. Plan A, which provides the fewest
benefits, was the least expensive with average premiums paid of nearly
$900 per year. The most popular plans--C and F--had average premiums
paid of about $1,200. The most comprehensive plans--I and J--were the
most expensive, with average premiums paid around $1,700. (See table
3.)
Table 3: Distribution of Medigap Plans and Annual Premiums Per Covered
Life, 1999
------------------------------------------------------------------------
Average
annual
Covered premium
Medigap plan lives earned per
(percentage) covered
life
------------------------------------------------------------------------
A............................................ ............ $877
B............................................ 8.0 $1,093
C............................................ 15.9 $1,151
D............................................ 3.8 $1,032
E............................................ 1.5 $1,067
F............................................ 23.4 $1,217
G............................................ 1.5 $980
H............................................ 1.5 $1,379
I............................................ 1.5 $1,704
J............................................ 2.7 $1,669
Pre-standard (policies originally sold before 32.9 $1,573
July 1992)..................................
Plans in states exempt from plan standardsa.. 4.5 $1,405
Total b...................................... 100.0 $1,322
------------------------------------------------------------------------
a Massachusetts, Minnesota, and Wisconsin have alternative plans in
effect and waivers that exempt them from selling the national standard
Medigap plans.
b Data reported by insurers to the National Association of Insurance
Commissioners (NAIC) do not include plan type for policies
representing less than 9 percent of Medigap policy covered lives, with
an average paid premium of $1,016. These plans are not included in the
plan distribution or average premiums reported in the table.
Source: GAO analysis of data collected by the NAIC from the 1999
Medicare Supplement Insurance Experience Exhibit.
Premiums also vary widely across geographic areas and insurers. For
example, average annual premiums in Massachusetts ($1,915) were 45
percent higher than the national average. While varying average
premiums may reflectgeographic differences in terms of use of Medicare
and supplemental services and costs, beneficiaries in the same state
may face widely varying premiums for a given plan type offered by
different insurers. For example, in Nevada, plan A premiums for a 65-
year-old ranged from $446 to as much as $1,004, depending on the
insurer. Similarly, in Florida, plan F premiums for a 65-year-old male
ranged from $1,548 to $2,123; and in Maine, plan J premiums ranged from
$2,697 to $3,612.\12\
---------------------------------------------------------------------------
\12\ Premium quotes for policies available in 2000 and 2001 from
most recently available state guides for consumers on Medigap policies.
---------------------------------------------------------------------------
Medigap policies are becoming more expensive. One recent study
reports that premiums for the three Medigap plan types offering
prescription drug coverage (H, I, and J) have increased the most
rapidly--by 17 to 34 percent in 2000. Medigap plans without
prescription drug coverage rose by 4 to 10 percent in 2000.\13\
---------------------------------------------------------------------------
\13\ Weiss Ratings, ``Prescription Drug Costs Boost Medigap
Premiums Dramatically,'' March 26, 2001, at http://
www.weissratings.com/NewsReleases/Ins--Medigap/20010326Medigap.htm.
---------------------------------------------------------------------------
A major reason premiums are high is that a large share of premium
dollars are used for administrative costs rather than benefits. More
than 20 cents from each Medigap premium dollar is spent for costs other
than medical expenses, including administration. Administrative costs
are high, in part, because nearly three-quarters of policies are sold
to individuals rather than groups.\14\ The share of premiums spent on
benefits varies significantly among carriers. The 15 largest sellers of
Medigap policies spent between 64 and 88 percent of premiums on
benefits in 1999. The share of premiums spent on benefits is lower for
Medigap plans than either typical Medicare+Choice plans or health
benefits for employees of large employers. Also, 98 percent of Medicare
fee-for-service funds are used for benefits.
---------------------------------------------------------------------------
\14\ Federal law requires Medigap plans to spend at least 65
percent of premiums on benefits for policies sold to individuals, and
75 percent for policies sold to groups.
---------------------------------------------------------------------------
Remaining Gaps Leave Beneficiaries at Significant Risk
While Medigap policies cover some costs beneficiaries would
otherwise pay out of pocket, Medigap policies have limits and can still
leave beneficiaries exposed to significant out-of-pocket costs. Medigap
prescription drug coverage in particular leaves beneficiaries exposed
to substantial financial liability. Prescription drugs are of growing
importance in medical treatment and one of the fastest growing
components of health care costs. Medigap policies with a drug benefit
are the most expensive yet the benefit offered can be of limited value
to many beneficiaries. For example,
Medigap policies offering drug coverage typically
cost much more than policies without drug coverage--the most
popular plan with prescription drug coverage (plan J) costs on
average $450 more than the most popular plan without drug
coverage (plan F)--although the benefit is at most $1,250 or
$3,000, depending on plan type, and
under the Medigap plan with the most comprehensive
drug coverage, type J, a beneficiary would have to incur $6,250
in prescription drug costs to get the full $3,000 benefit,
because of the plan's deductible and coinsurance requirements.
That may explain why more than 90 percent of beneficiaries with one
of the standardized Medigap plans purchased standard Medigap plans that
do not include drug benefits.\15\ Further, Medicare beneficiaries who
do not purchase Medigap policies when they initially enroll in Part B
at age 65 or older are not guaranteed access to the Medigap policies
with prescription drug coverage in most states. Insurers may then
either deny coverage or charge higher premiums, especially to Medicare
beneficiaries with any adverse health conditions.
---------------------------------------------------------------------------
\15\ While less is known about the benefits offered by
prestandardized plans that were sold prior to 1992--representing about
30 percent of Medigap enrollment in 1999--one expert estimated that
most are likely to have some coverage for prescription drugs but that
this coverage is even more limited than that offered by the
standardized plans. See Deborah J. Chollet, Mathematica Policy Research
Inc., ``Medigap Coverage for Prescription Drugs,'' Testimony before the
U.S. Senate Committee on Finance, April 24, 2001.
---------------------------------------------------------------------------
The Medigap standard prescription drug benefit differs greatly from
that typically offered by employer-sponsored plans for active employees
or Medicare-eligible retirees. The Medigap prescription drug benefit
has a $250 deductible, requires 50 percent coinsurance, and is limited
to $1,250 or $3,000 depending on the plan purchased. In contrast,
employer-sponsored plans typically require small copayments of $8 to
$20 or coinsurance of about 20 to 25 percent, depending on whether the
enrollees purchase generic brands, those for which the plan has
negotiated a price discount, or other drugs. Further, few employer-
sponsored health plans have separate deductibles or maximum annual
benefits for prescription drugs. These plans may also offer enrollees
access to discounted prices the plans have negotiated even when the
beneficiary is paying the entire cost.
FIRST-DOLLAR COVERAGE THROUGH MEDIGAP DISTORTS MEDICARE'S COST CONTROL
FEATURES
Even though Medicare's original design has been criticized as
outmoded, it included various cost-sharing requirements intended to
encourage prudent use of services. These requirements have also
traditionally been features of private insurance. However, Medigap's
first-dollar coverage--the elimination of any deductibles or
coinsurance associated with the use of specific services--undermines
this objective. All standard Medigap plans cover hospital and physician
coinsurance, while nearly all beneficiaries with standardized Medigap
plans purchase plans covering the full hospital deductible, and most
purchase plans covering the full skilled nursing home coinsurance and
Part B deductible. First-dollar coverage reduces financial barriers to
health care, but it also diminishes beneficiaries' sensitivity to costs
and could thus increase unnecessary service utilization and total
Medicare program costs.
A substantial body of research clearly indicates that Medicare
spends more on beneficiaries with supplemental insurance relative to
beneficiaries who have Medicare coverage only. For example, an analysis
of 1993 and 1995 data found that Medicare per capita expenditures for
beneficiaries with Medigap insurance were from $1,000 to $1,400 higher
than for beneficiaries with Medicare only. Medicare per capita spending
on beneficiaries with employer-sponsored plans was $700 to $900 higher
than for beneficiaries with Medicare only.
Some evidence suggests that first-dollar, or near first-dollar,
coverage may partially be responsible for the higher spending. For
example, one study found that beneficiaries with Medigap insurance use
28 percent more medical services (outpatient visits and inpatient
hospital days) relative to beneficiaries who did not have supplemental
insurance, but were otherwise similar in terms of age, sex, income,
education, and health status.\16\ Service use among beneficiaries with
employer-sponsored supplemental insurance (which often reduces, but
does not eliminate, cost sharing) was approximately 17 percent higher
than the service use of beneficiaries with Medicare coverage only.
---------------------------------------------------------------------------
\16\ ``Effects of Supplemental Coverage on Use of Services by
Medicare Enrollees,'' Christensen and Shinogle, Health Care Financing
Review, Fall 1997.
---------------------------------------------------------------------------
Unlike Medigap policies, employer-sponsored supplemental insurance
policies and Medicare+Choice plans typically reduce beneficiaries'
financial liabilities but do not offer first-dollar coverage. Although
there is a wide variety in design of employer-sponsored insurance
plans, many retain cost-sharing provisions. Medicare+Choice plans also
typically require copayments for most services. Moreover, unlike the
traditional fee-for-service program, Medicare+Choice plans require
referrals or prior authorization for certain services to minimize
unnecessary utilization.
CONCLUDING OBSERVATIONS
As Congress continues to consider proposals to reform Medicare, it
is important to examine all facets of the program and how they relate
to other coverage that beneficiaries may have. Current Medicare cost-
sharing provisions do not reflect common insurance practices that have
evolved over time to promote prudent use and protect beneficiaries from
catastrophic care costs. Medigap policies also fail to provide the
comprehensive coverage needed by some beneficiaries. In addition, by
offering first-dollar coverage, they may undermine incentives for
prudent use of Medicare services. In light of how prevailing private
sector coverage and practice have evolved, reconsideration of coverage
and cost-sharing policies, both within the Medicare program and within
any supplemental options that may be available, would be valuable to
improve both coverage for beneficiaries and the financial health of the
Medicare program.
Madam Chairwoman, this concludes my statement. I would be happy to
answer any questions that you or Members of the Subcommittee may have.
GAO CONTACTS AND STAFF ACKNOWLEDGMENTS
For more information, regarding this testimony, please contact me
or Laura Dummit at (202) 512-7114. Rashmi Agarwal, Susan Anthony, James
Cosgrove, Paul Cotton, John Dicken, and Carmen Rivera-Lowitt also made
key contributions to this statement.
Chairwoman Johnson. Thank you very much, Dr. Scanlon.
Dr. Hogan.
STATEMENT OF CHRISTOPHER HOGAN, PH.D., PRESIDENT, DIRECT
RESEARCH, LLC, VIENNA, VIRGINIA
Dr. Hogan. Madam Chairwoman, Members of the Subcommittee, I
am Christopher Hogan. I am an economist. I am an independent
consultant in the area of health services research.
I was invited here to deliver this message: Secondary
insurance raises Medicare's cost substantially. For Medicare--
and I mean the tax-funded portion of Medicare--I estimate that
the beneficiaries who have secondary insurance, such as Medigap
or employer-sponsored insurance, cost the taxpayers about
$1,000 a year more than those who do not, and that is after
adjusting for their age and their income and their health
status. That is my estimate. It is clearly a round number, but
it is consistent with many other estimates of that impact,
including estimates by the staff of your own Congressional
Budget Office.
In addition to raising the cost of the program, secondary
insurance has another impact that is often overlooked in
discussions of reforming the Medicare program. Coinsurance and
deductibles no longer matter for determining service use for
the 90 percent of beneficiaries who have secondary insurance.
Let me say that again. Medicare's copayment and deductible
structure is essentially irrelevant from an economic
standpoint. It helps to determine beneficiaries' Medigap
premiums, but it does not really affect them in any other way.
From the beneficiary standpoint, you have to keep three
things in mind. First, the people who do not have secondary
coverage are poor. Second, those without secondary coverage use
less of everything, including preventive care. Third,
beneficiaries who have the money and have the opportunity seem
to express a strong desire for first dollar coverage. At least
that is my reading of the Medigap market. If you look at what
they buy, there is little demand for catastrophic-only policies
substantial willingness to pay top dollar for that first dollar
coverage and strong evidence of little price-shopping on the
part of beneficiaries.
Let me sum it up. Secondary insurance costs the program a
lot of money, but beneficiaries like it an awful lot. What are
you going to do?
Let me give you two thoughts that you may not hear from
other sources. First, it would be completely actuarially fair
to charge a lower Part B premium to the beneficiaries who do
not have secondary coverage. They cost you $1,000 a head less.
You charge them the same amount of money. That is kind of
regressive considering these are poor people. It would be
actuarially fair. It is probably a little bit difficult to
administer, but it would be fair, as I say.
Second, I wanted to bring an idea in front of you that was
floated by, of all people, the American Medical Association
back in the nineties, as a way of reintroducing economically
effective copays and deductibles in the Medicare program, if
you wanted to do that.
What the AMA had suggested was essentially a prepaid
refundable deductible for the Medicare Program. It is not
insurance. It is not a subsidy. I will just give you the bare
bones of it.
You could ask beneficiaries to pay an additional amount
every month. For the purposes of illustration, I have put forth
a rather hefty amount, $80 a month; 80 times 12 is 960 bucks,
you would be asking beneficiaries to pay to HCFA. Medicare
would then pay the first $960 of copays and deductibles, no
muss, no fuss, no secondary insurers, no paperwork. They would
simply pay them. If a beneficiary did not use 960 bucks,
Medicare would give them their money back, maybe with a nice
note thanking them for the use of money over the year.
Beneficiaries that used more than 960 bucks, those costs would
be covered by the secondary insurers or not, as they are now.
This was the only feasible way that I saw to introduce
economically rational coinsurance in the Medicare Program, but
not put the secondary insurers out of business. In effect, it
would work like a little miniature medical savings account, not
for all health care, not even for all the copays and
deductibles, but for whatever portion of the copays and
deductibles that you thought might be reasonable to ask
beneficiaries to prepay.
Let me summarize. Secondary insurance raises the program's
costs substantially. It disconnects those financial levers that
you call copay and deductible and makes them absolutely
irrelevant to the typical beneficiary, but beneficiaries like
to be fully insured and they will pay top dollar to become
fully insured if they have the money to do it. Those who cannot
afford to pay, well, they are poor, they are disadvantaged, and
they use less of everything, including good services like
preventive care.
If you wanted to reintroduce economically important copays
and deductibles, economically active copays and deductibles
back into Medicare, the only thing I saw that would do that was
this prepaid deductible notion. It is very difficult otherwise
because whatever you do, secondary insurers fill in the copays
and deductibles and make care free.
If you want to consider this, that is great. If you do not
and you want to have copays and deductibles that matter, you
are going to have to restructure the secondary insurance market
because your copayments and deductibles do not matter. They
control that now.
Thank you very much.
[The prepared statement of Dr. Hogan follows:]
Statement of Christopher Hogan, Ph.D., President, Direct Research, LLC,
Vienna, Virginia
Madam Chairwoman and members of the subcommittee, my name is
Christopher Hogan. I'm an economist familiar with the issues of
coverage and cost in the Medicare program, having worked almost 10
years on the staff of the Medicare Payment Advisory Commission and the
Physician Payment Review Commission. Currently, I am an independent
consultant in the area of health services research.
I was asked to talk about the impact of secondary insurance on
Medicare beneficiaries' use and cost of services. In the next five
minutes, I'd like to make a few points about this, then sketch some
possible policies you might pursue. First, I'd like to talk about the
impact that secondary insurance has on Medicare program costs. Second,
I'd like to talk about some of the beneficiary-oriented aspects of
secondary insurance, including impact on use of care. Finally, I'd like
to sketch out some potential policy directions you might consider in
this area.
The first fact for this discussion is that almost no one actually
pays fee-for-service Medicare's copayment and deductible amounts in
full. Analysts may quibble about the exact fraction of the Medicare
population that has only fee-for-service Medicare and no secondary
insurance, but everyone will agree that this fraction is small, on the
order of 10 to 15 percent of all non-institutionalized Medicare
beneficiaries. The rest have employer-sponsored coverage, individual
purchase Medigap, Medicaid, Medicare+Choice, some other coverage or
some combination of the above.
Medigap plans by design typically provide first-dollar or very
nearly first-dollar coverage, filling in those copayment amounts
completely. Employer-sponsored coverage is more of a mixed bag and can
be coordinated with Medicare in a variety of ways, but it is
increasingly typical for employer-sponsored coverage to fill in only
part of Medicare's copayment and deductible amounts. For example,
beneficiary financial liability might be limited to the amounts that
the employers' policy specifies for active workers.
The second major point I would like to stress is that by filling in
Medicare's copayments and deductibles, secondary insurance raises the
costs of the Medicare program substantially. Common sense suggests that
individuals are more likely to use care if it is free (although ``pre-
paid'' is a better description than ``free''). The empirical evidence
of this effect is very solid. Numerous researchers using a variety of
data sources, methods, populations, and time periods have all shown
that removing deductibles and copayments from an unrestricted fee-for-
service health plan substantially increases health care use.
This is not news. In addition to research stretching back at least
as far as 1972, the impact of secondary insurance on Medicare program
costs has been reported by legislative-branch agencies including the
Congressional Budget Office and the Physician Payment Review
Commission. In fact, the last few years of CBO Budget Options books
have included options for restructuring Medicare's copayments and
deductibles and for reducing the impact of secondary insurance on
Medicare program costs.
Even though there is no particular account or line-item labeled
``additional Medicare spending due to secondary insurance'', the
evidence is so strong that it is not really worth discussing whether or
not secondary insurance raises Medicare's costs. Ask any actuary.
We could have some reasonable disagreement on exactly how much the
presence of secondary insurance adds to Medicare's costs. The estimates
of impact are all based on statistical analyses, and I'm sure that some
of you agree with Mark Twain's assessment of statisticians. On a more
serious note, we can question whether the statistical analysis
adequately controls for factors affecting spending, such as age, health
status, income, education and the like. Most analyses of this issue
suggest that beneficiaries with secondary insurance cost anywhere
between 15 and 30 percent more than beneficiaries with no secondary
insurance, after accounting for the factors listed above.
In round numbers, an additional $1,000 per beneficiary per year is
a good figure to use when discussing the magnitude of the effect of
secondary insurance on the costs of the Medicare program. That's not
very precise but it is about the right size, which I think correctly
characterizes the literature on the effect of secondary insurance on
Medicare costs.
Most analyses also find that Medigap coverage raises Medicare costs
somewhat more than does employer-sponsored coverage. The assumption is
that this is a result of the copayment structure: Medigap coverage
tends to be first-dollar coverage, but some substantial portion of
employer sponsored coverage requires some (reduced) beneficiary
copayments. That is a plausible explanation but there is not enough
detail in available data sources to provide an easy, direct test of
this assumption.
Estimated Impact of Secondary Insurance on Medicare Per-Capita Spending
------------------------------------------------------------------------
Insurance Status Medicare Cost
------------------------------------------------------------------------
Medicare+Medigap................... $5,400
Medicare+Employer-sponsored........ $4,900
Medicare only...................... $4,000
Memo: Assumed Medicare cost per $5,000
capita............................
------------------------------------------------------------------------
Notes: For ease of presentation, this analysis was based on an assumed
Medicare average cost of $5,000 per beneficiary per year. Estimates
were adjusted for numerous sociodemographic characteristics, including
age, gender, income, education, and health status.
Source: Calculated from PPRC 1997 Annual Report to the Congress, Chapter
15.
Beyond the issue of costs, filling in the deductibles and
copayments of fee-for-service Medicare also affects the ability to
modernize and improve the traditional Medicare program. Private
insurance in many market areas evolved via the PPO model, where
individuals are offered modest financial incentives to use preferred
providers. Currently, this is the most popular approach for health
insurance for the working population. Properly done, modestly higher
copayments for out-of-network use are not coercive or hugely
restrictive. Instead, subscribers who have no strong preferences about
using any particular provider are channeled toward the plan's preferred
providers.
Traditional Medicare, by contrast, cannot evolve via that PPO
model. Modestly lower copayments for use of preferred providers simply
will not work in Medicare because almost no beneficiaries actually pay
those copayments in the first place. Medigap plans themselves can adopt
this approach (as in Medicare Select), but the Medicare program does
not have these financial levers in its control. This tends to put the
traditional Medicare program into an evolutionary dead end. It is, to
some approximation, an unrestricted fee-for-service program with no
copayments or deductibles and no easy path for moving toward
alternative approaches to financing care.
Turning now to the beneficiaries, the first fact to absorb is that
beneficiaries without secondary insurance are, on average, poorer, more
likely to be minority race, and in worse health than the rest of the
Medicare population. They can reasonably be characterized as not poor
enough for Medicaid, not having had a good enough job to get employer-
sponsored coverage, and not well-enough off to want to purchase
Medigap. Roughly speaking, the lack of coverage appears driven more by
wealth than by health. The disabled (under-65) are also
disproportionately represented in this group.
It is worth noting that the cost-increasing effects of secondary
insurance are therefore substantially regressive. Medicare costs (and
hence the Part B premium) are inflated by better-off beneficiaries who
have some secondary insurance. Those without secondary insurance have
far lower use of service, but pay a Part B premium that largely
reflects the high use of those with complete insurance coverage. In
effect, they pay a share of the high costs incurred by better-off,
fully-insured beneficiaries.
The second fact to consider is that beneficiaries without secondary
insurance consume less of all types of health care services. This
includes things that are generally viewed as ``good'' care, such as
preventive services. For five preventive services that can easily be
tracked in the 1997 Medicare Current Beneficiary Survey (some physician
visit during the year, flu shot, pneumonia shot, mammogram, pap smear),
beneficiaries with no secondary insurance had lower use of every
service, with use rates ranging from 13 to 30 percent lower than
beneficiaries with employer-sponsored or Medigap coverage. (Those use
rates were adjusted for differences in age, gender, race, income,
health status, and self-reported presence of diseases.)
It is inherently difficult to demonstrate whether or not this has
an impact on beneficiaries' health. The definitive study of this issue
for the under-65 population was the RAND National Health Insurance
Experiment. The conclusion from that research (summarized in the book
Free for All by Joseph Newhouse and colleagues) was that modest
copayments did not noticeably reduce health status, with the
substantial exception of low income individuals with mental health
problems. For the Medicare population, the research is less clear-cut.
One study found that individuals without secondary insurance were more
likely to move from no disability to some disability (limitation on
activity of daily living) over a two-year period, but that the progress
to higher levels of disability beyond that occurred at the same rate
regardless of secondary insurance coverage. In other studies, some have
found no differences in outcomes for specific diseases such as cancers,
others have found differences in treatment and outcome.
The third relevant fact about beneficiaries and secondary insurance
is the strong desire for complete (first-dollar) coverage, to the point
of behavior that economists would label irrational or inefficient.
Beneficiaries will indeed pay more than $100 to insure the cost of the
Part B deductible. Prior to 1990, in the rare instances when
beneficiaries were offered inexpensive catastrophic-only Medigap or
expensive first-dollar Medigap, few individuals opted for the
catastrophic-only plans. After 1990, faced with standardized Medigap
products with wildly varying prices, almost no beneficiaries shopped
and switched insurers. In a 1996 report, the GAO estimated that, of
individuals owning Medigap policies in 1991 and alive in 1994, only
about 1 percent had switched insurers over that three-year period. I do
not know whether shopping for policies remains as rare in the Medigap
market now as it was then.
The point here is that if you expect beneficiaries to engage in
what economists would like to think of as reasonable, rational,
efficient behavior toward Medigap coverage, you will be sorely
disappointed. Behavior in the Medigap market does not suggest that
beneficiaries typically act as cost-minimizing rational shoppers.
Instead, behavior far more strongly suggests that beneficiaries want
first-dollar coverage regardless, and that once they have it they do
not want to change coverage.
Allow me to summarize the points in the presentation so far, then
to describe some potential directions for policy.
Only 10 to 15 percent of beneficiaries have fee-for-
service Medicare with no secondary insurance.
Secondary insurance fills in Medicare's deductible
and copayment liabilities, increases use of services, and
raises Medicare's costs substantially. A reasonable round
number for discussion is that secondary insurance raises
Medicare outlays by around $1,000 per beneficiary per year.
Those without secondary insurance tend to be poorer,
in worse health, and are more likely to be minorities.
Individuals without secondary insurance use less of
all types of care, including ``good'' preventive services. It
is difficult to say empirically whether their health does or
does not suffer as a consequence of that.
Behavior in the market for Medigap insurance reveals
a strong apparent preference for first-dollar insurance
coverage and little evidence of price-shopping.
Given these observations on the Medicare beneficiaries' secondary
insurance, what types of policy options could you reasonably consider?
Several years ago I engaged in discussions of fairly radical approaches
in this area, both at the Physician Payment Review Commission and in
testimony to the National Bipartisan Commission on the Future of
Medicare. These proposals included banning or taxing Medigap, or
requiring Medigap insurers to become full-risk plans under
Medicare+Choice. My impression from that earlier experience was that
even if the potential cost and cost savings are as exactly as stated
above, few would be willing to risk the disruptions that such radical
changes might create. Based on my earlier experience, I will limit my
suggestions in this testimony to more incremental approachesthat would
not eliminate Medigap insurance.
Discussion of the issues centers around which concerns you are
trying to address. Is your interest on the cost-increasing effects of
secondary insurance? Is your concern with the well-being of the 10 to
15 percent who have no secondary coverage? Or is concern on the high
prices that beneficiaries and employers must pay to obtain that
secondary insurance coverage?
First, I would like to draw your attention to the February 2001 CBO
Budget Options book, where there is a short discussion of budget-
neutral restructuring of Medicare's copayment and deductible
liabilities. In particular, they show a restructuring that would
provide maximum out-of-pocket protection for Medicare beneficiaries and
generate some small cost savings for Medicare. Nothing is free: in
order to provide a stop-loss provision of $2,000, the CBO option would
require a combined A/B deductible of $1,000 and a 20 percent copayment
for all care above the deductible. So, discussion can start from that
basis. It is absolutely feasible to limit beneficiaries' total out-of-
pocket costs for Medicare-covered services to $2,000 annually, in
exchange for higher payments for care below that catastrophic cap.
A second option would be to try to offer some sort of advantage to
that 10 to 15 percent of beneficiaries who have no secondary insurance
coverage. It would certainly be fair to offer them a lower Part B
premium, since their spending is substantially below that of other
beneficiaries. From an actuarial standpoint, that's reasonable. From an
operational standpoint, having beneficiaries sign up for this, certify
that they don't have secondary insurance, and receive a reduced or zero
Part B premium in response is likely to be a difficult system. Hence,
this option probably has more theoretical than practical merit.
A third option focusing on those without secondary insurance would
be to eliminate Medicare copayment liabilities on selected preventive
services. For example, if good health care requires that beneficiaries
see a doctor at least once a year, then Medicare could make that first
office visit free. This type of approach is likely to have a very high
cost per net new preventive service delivered. Not only would it make
services free for the vast majority of beneficiaries who have secondary
insurance, research shows that most beneficiaries will not obtain
preventive care at the recommended rates even when it is free. Thus,
the likely cost per additional preventive service actually delivered to
those without secondary insurance is likely to be high.
A fourth option would be to take a new benefit design and impose it
on the Medigap industry, either for existing policies or, more likely,
for all newly-issued policies. For example, first dollar coverage could
be replaced by a low and simple copayment structure (e.g., $10 per
office visit), while again certain key items of preventive care might
be covered in full. This would not achieve the technical efficiencies
potentially available in a federally-run alternative (such as paperwork
reduction and elimination of overhead costs), but would not displace
the current private-sector providers of such insurance. Applying the
restructured benefits only to newly issued policies would avoid
disrupting Medigap insurers' ongoing lines of business.
In any revised Medigap benefit structure, there has to be some
caution about paperwork burden relative to amounts collected. The cost
of the paperwork for small copayment amounts may exceed the cost of the
copayments. The current first-dollar Medigap system typically results
in two financial transactions per service when the Medigap insurer's
systems are coordinated with Medicare's. There is a large payment from
Medicare to the provider, and a smaller payment from the Medigap
insurer to the provider, with the Medicare carrier passing along the
bill for the copayment directly to the Medigap insurer. Adding yet a
third, even smaller payment directly from the beneficiary to the
provider may increase the overall administrative burden of the system
unless that payment is very simply structured and is routinely handled
at the time of the service, such as a flat $10 copayment per visit.
Finally, I would like to mention an option that was developed in
the mid-1990s by the American Medical Association. They proposed a plan
that amounted to a prepaid, refundable deductible for Medicare, in
effect creating a small Medical Savings Account (MSA) within Medicare
for each beneficiary. Beneficiaries would pay an additional monthly
premium of (say) $80 to Medicare. All Medicare copayment and deductible
liabilities for the year below $960 (80 x 12) would be paid from this
pre-funded amount, with no paperwork burden involved. Beneficiaries
with under $960 in copayment/deductible liabilities would receive a
refund at year-end (similar to an MSA). Those with copayment/deductible
liabilities in excess of this amount would pay them as in the current
Medicare program. Secondary insurers would be free to cover copayment/
deductible liabilities in excess of this $960 limit, but would never
see anything below the $960 limit. Employers or others would be free to
pay the beneficiary's $80 monthly premium. In effect, this proposal
would take the first $960 of current copayment and deductible
liabilities and simply make them off-limits to secondary insurers,
handling them internally within Medicare instead.
This proposal provides a potential efficiency-versus-equity
tradeoff. On the efficiency side, it reduces but does not eliminate the
role of secondary insurers and the paperwork burdens from copayment/
deductible liabilities. The potential for a rebate provides incentive
to constrain use of care (as in an MSA). (If third parties paid the
monthly premium and collected any year-end rebate, that would nullify
incentives for reduced use of care.) But like the MSA proposal, this
approach reduces pooling of risks. Healthy beneficiaries would pay the
least and those with high use of care would face an effective $960
deductible, plus any copayment liabilities incurred excess of that (if
any). The overall tolerance for this efficiency-versus-equity tradeoff
could be fine-tuned by lowering or raising the amount of the prepaid,
refundable deductible.
In conclusion, there are few obvious alternatives for restructuring
Medicare copayments, liabilities, and secondary insurance. First-dollar
coverage from secondary insurance raises Medicare costs and is probably
not the most efficient way to structure payment. Yet, beneficiaries'
demand for Medigap reveals a strong desire for such coverage. Reworking
Medigap to require small copayments for each service would likely be
unpopular and might increase paperwork burden disproportionate to the
amounts of money involved. As CBO has demonstrated, we could
restructure Medicare rather than restructure Medigap, protecting
beneficiaries from catastrophic costs at the expense of higher payments
from non-catastrophic users. A final alternative that seems plausible
is to create, in effect, a mini-MSA for the first few hundred dollars
of Medicare copayment/deductible liabilities. This might allow some
reductions in overhead and paperwork burdens (and possibly some
reduction in service use) without eliminating the private provision of
secondary insurance.
Chairwoman Johnson. Thank you, Dr. Hogan.
Dr. Davis.
STATEMENT OF KAREN DAVIS, PH.D., PRESIDENT, COMMONWEALTH FUND,
NEW YORK, NEW YORK
Dr. Davis. Thank you, Madam Chairman, Mr. Stark, Members of
the Subcommittee for this invitation to testify on Medicare's
cost sharing.
I think it is important to remember that Medicare was
created in 1965 to ensure financial protection for older
Americans against the cost of medical expenses and to ensure
access to quality health care. Modernizing Medicare's benefit
should involve adding prescription drugs and reducing the
burdensome deductibles and cost sharing that we have heard
about this afternoon.
Remember that Medicare beneficiaries already spend a high
proportion of their income on health care. Last year, the
average elderly Medicare beneficiary spent over $3,000 per
person on health care expenses, or 22 percent of income. By
2025, that figure will increase to 30 percent of income.
We should also remember that Medicare beneficiaries are
sick or poor. Two out of three either have serious health
problems or incomes below twice the poverty level. In fact,
one-third of Medicare beneficiaries are cognitively impaired or
have serious physical limitations, and those third account for
60 percent of all Medicare outlays.
Cost sharing has risen more rapidly than both inflation and
the incomes of beneficiaries, eroding the protection that the
program was designed to provide. If Medicare's 1966 cost
sharing had only risen with general inflation, today's Part A
deductible would be $218, not almost $800, and the Part B
annual premium would be $196, not $600.
The sickest beneficiaries or those without good
supplemental insurance bear the heaviest brunt of out-of-pocket
spending. Medicare cost sharing contributes to beneficiary
access and bill problems, especially for lower income
beneficiaries. Two out of five beneficiaries who are most at
risk report either problems obtaining needed services or
problems paying their medical bills. Cost sharing and the
absence of supplemental insurance contribute significantly to
failure to obtain preventive services and proper management of
chronic conditions.
Medicare cost sharing is higher than typical employer
plans. Non-elderly Americans spend 9 percent of their incomes
on health care, compared with 22 percent for elderly
beneficiaries. Deductibles and premiums under employer plans
are lower than they are in Medicare, and as we have heard
today, they typically include catastrophic ceilings. They also
cover physical exams and prescription drugs, which Medicare
does not.
Despite this, in fact, Medicare beneficiaries report higher
satisfaction with Medicare than working families do with
employer coverage.
Medicare beneficiaries need supplemental insurance
coverage, but it is increasingly unaffordable or unavailable.
As we have heard, 9 out of 10 have supplemental coverage, but
Medigap premiums are expensive, over $100 a month, and for some
plans in some geographic areas as high as $3,000 a year.
Employers are cutting back on retiree coverage, and Medicare
Plus Choice enrollment is dropping.
There are a number of options for improving Medicare
benefits and reducing cost sharing. In a report being released
today by my organization, The Commonwealth Fund, Marilyn Moon
and colleagues and the Urban Institute simulate the impact on
beneficiaries of improving Medicare benefits and cost sharing.
Under all four of the options simulated, both the elderly and
the disabled would experience a reduction in total out-of-
pocket expenses, including private insurance premiums. Savings
would be greatest for beneficiaries with serious health
problems. It would reduce the percent of income from 22 percent
to 20 percent or, in one option, down to 16 percent. By
eliminating or reducing the need for private supplemental
insurance, efficiency and coverage would be improved. State
Medicaid programs would also be expected to benefit because
they now pick up many of these costs for low-income
beneficiaries.
Finally, Medicare beneficiaries have a claim on a portion
of the budget surplus. As you know well, the Balanced Budget
Act achieved major savings largely from the Medicare Program.
Together, the slowdown in Medicare and Medicaid outlays in the
late nineties account for $1 trillion out of the $5.6-trillion
10-year budget surplus. More than $50 billion of the 10-year
budget surplus is attributable to the higher premiums that were
part of the 1997 Balanced Budget Act. Returning this
contribution to beneficiaries in the form of the improved
benefits and reduced cost sharing is worthy of consideration.
Thank you.
[The prepared statement of Dr. Davis follows:]
Statement of Karen Davis, Ph.D., President, Commonwealth Fund, New
York, New York
Thank you, Madam Chairman, Mr. Stark, and members of the committee,
for this invitation to testify on Medicare's cost-sharing. Medicare
provides health insurance for 40 million elderly and disabled
beneficiaries. The program was created in 1965 to provide older
Americans with financial protection against the cost of medical
expenses and to ensure access to quality health care. At the time, half
of the elderly were uninsured, since few had retiree coverage through
work or could afford private coverage on their own. Today, nearly all
of the elderly have basic coverage through Medicare.
However, Medicare's cost-sharing has risen more rapidly than
inflation and the incomes of beneficiaries, eroding the protection
Medicare was designed to provide. In 2000, the average elderly Medicare
beneficiary spent $3,142 on their own health care expenses, or nearly
22 percent of income.\1\ By 2025, that will increase to $5,248 (in
constant 2000 dollars)--almost 30 percent of income. Financial burdens
on beneficiaries need to be reduced, not increased.
---------------------------------------------------------------------------
\1\ Stephanie Maxwell, Marilyn Moon, and Misha Segal, Growth in
Medicare and Out-of-Pocket Spending: Impact on Vulnerable
Beneficiaries, The Commonwealth Fund, January 2001.
---------------------------------------------------------------------------
Medicare Beneficiaries are Disproportionately Poor and Sick
Some argue that Medicare cost-sharing is necessary to encourage
beneficiaries to be cost-conscious when making choices about their
health care. Any discussion of restructuring Medicare cost-sharing
should be firmly rooted in an understanding of the characteristics of
beneficiaries, their financial contributions to their care, and the
difficulties they have obtaining access to care and paying medical
bills.
Two of three Medicare beneficiaries are either sick or poor.\2\ Of
all groups in society, they are perhaps the least able to ``help the
market work'' by making cost-conscious choices. Eleven million
beneficiaries have less than a high school education. One-third of
Medicare beneficiaries are cognitively impaired or have serious
physical limitations; \3\ these beneficiaries account for 60 percent of
all Medicare outlays. Included in this figure are over 9 million
beneficiaries who are cognitively impaired, accounting for 42 percent
of Medicare outlays. One and a half million Medicare beneficiaries are
in nursing homes.\4\ Terminal illness strikes 2.4 million beneficiaries
each year. The majority of beneficiaries suffer from a chronic
condition such as diabetes, arthritis, heart disease, cancer, or
recurrent stroke. Three-fourths must regularly take prescription
drugs.\5\
---------------------------------------------------------------------------
\2\ Patricia Neuman, Cathy Schoen, Diane Rowland, Karen Davis,
Michelle Kitchman, Elaine Puleo, and Drew Altman, ``Understanding the
Diverse Needs of the Medicare Population: Implications for Medicare
Reform,'' Journal of Aging and Social Policy, 10(4), pp. 25-30, 1999.
\3\ Marilyn Moon and Matthew Storeygard, One-Third at Risk: The
Special Circumstances of Medicare Beneficiaries with Health Problems,
The Commonwealth Fund, May 2001.
\4\ National Center for Health Statistics, Health, United States,
2000, HHS/CDC/NCHS, July 2000.
\5\ Cathy Schoen, Patricia Neuman, Michelle Kitchman, Karen Davis,
and Diane Rowland, Medicare Beneficiaries: A Population at Risk--
Findings from the Kaiser/Commonwealth 1997 Survey of Medicare
Beneficiaries, Henry J. Kaiser Family Foundation and The Commonwealth
Fund, December 1998.
---------------------------------------------------------------------------
Beneficiaries with the lowest incomes are also the sickest. Over
half of those with incomes below the poverty level ($8,259 for a single
elderly person in 2000, $10,409 for a couple) are in fair or poor
health. One-fourth of the poor need assistance with at least one
activity of daily living, such as eating or bathing.
Medicare Beneficiary Cost-Sharing is High
When Medicare began in 1966, the major expenses for which
beneficiaries were responsible were the average cost of the first day
of hospital care under Part A, a deductible for Part B physician and
other ambulatory services, 20 percent coinsurance for Part B services
(plus any physician charges over the allowed fees), and a Part B
premium. Even adjusting for inflation, today's Part A hospital
deductible and Part B premium are three to four times higher than they
were in 1966. The rapid growth in the Part A deductible reflects
changes in health care technology that have led to shorter but more
intensive hospital stays, driving up the average daily cost. Only the
Part B deductible is lower today in real terms than it was in 1966. If
these cost-sharing amounts had remained constant, adjusted for
inflation, today's Part A deductible would be $218, not $792; the Part
B deductible would be $272, not $100; and the Part B annual premium
would be $196 ($16 a month), not $600.\6\
---------------------------------------------------------------------------
\6\ Author's calculations based on average inflation rates applied
to the original deductibles and premium.
---------------------------------------------------------------------------
These cost-sharing amounts or the supplemental insurance premiums
required to cover them represent significant financial burdens on
Medicare beneficiaries. In 2000, elderly Medicare beneficiaries spent,
on average, $3,142 out-of-pocket on health care. About half of this
amount came from cost-sharing for covered services or private
supplementalinsurance premiums to pick up costs not covered by
Medicare. About one-fifth is Part B premiums, and the remaining 30
percent is for services not covered by Medicare, primarily prescription
drugs.
Despite Medicaid and other programs to subsidize Medicare cost-
sharing and premiums for low-income beneficiaries, burdens on low-
income beneficiaries are particularly heavy. The poorest beneficiaries
spend 30 percent of income on health care. Only 40 percent of low-
income beneficiaries eligible for Medicaid and other programs
(Qualified Medicare Beneficiaries (QMB), Supplemental Low Income
Medicare Beneficiaries (SLMB), Qualified Individuals) participate.\7\
Outreach efforts to inform and enroll eligible beneficiaries have been
limited.
---------------------------------------------------------------------------
\7\ Stephanie Maxwell, Marilyn Moon, and Matthew Storeygard,
Reforming Medicare's Benefit Package: Impact on Beneficiary
Expenditures, The Commonwealth Fund, May 2001.
---------------------------------------------------------------------------
A study by Marilyn Moon and colleagues at the Urban Institute
supported by The Commonwealth Fund modeled average out-of-pocket costs
for six cohorts of beneficiaries to illustrate how widely costs vary
depending on health and income. For each group, the estimates provide
averages given the groups' likely health expenses. The six groups
include:
All elderly
Elderly with physical or cognitive health problems
with no supplemental coverage
Disabled beneficiaries ages 45 to 64
Beneficiaries ages 65 to 74 with incomes above
$50,000 and employer-sponsored supplemental coverage
Women with QMB coverage
Women age 85 and older with physical or cognitive
health problems and incomes between $5,000 and $20,000.\8\
---------------------------------------------------------------------------
\8\ Stephanie Maxwell, Marilyn Moon, and Misha Segal, Growth in
Medicare and Out-of-Pocket Spending: Impact on Vulnerable
Beneficiaries, The Commonwealth Fund, January 2001.
---------------------------------------------------------------------------
Out-of-pocket spending as a percent of income ranges from 6 percent
for younger, higher-income beneficiaries with employer supplemental
coverage to 52 percent for older women in poor health with limited
incomes. It averages 22 percent for all elderly, and 29 percent for
disabled ages 45 to 64. On a per capita basis, expenses average $3,142
for all elderly beneficiaries, and $3,870 for disabled beneficiaries
ages 45 to 64. They reach as high as $4,815 for those elderly in poor
health with no supplemental coverage, and $5,969 for older, low-income
women in poor health. These are staggering amounts for a retired
population with little income and limited savings.
Medicare Cost-Sharing Contributes to Beneficiary Access and Bill
Problems
Not surprisingly, Medicare's cost-sharing affects access to care.
This is particularly true for lower-income beneficiaries and for those
with serious health problems. The Kaiser/Commonwealth 1997 Survey of
Medicare Beneficiaries found that about 15 percent of Medicare
beneficiaries experience difficulty obtaining needed care.\9\ Almost
one-fourth of those with incomes below the poverty level have access
problems, as do one-third of the disabled under age 65. Problems paying
medical bills were reported by 14 percent of all beneficiaries, by one-
fourth of those below poverty, and by nearly one-third of the disabled
under age 65.
---------------------------------------------------------------------------
\9\ Cathy Schoen, Patricia Neuman, Michelle Kitchman, Karen Davis,
and Diane Rowland, Medicare Beneficiaries: A Population at Risk, The
Commonwealth Fund, December 1998.
---------------------------------------------------------------------------
About two of five of the most at-risk beneficiaries reported either
difficulties obtaining needed services or problems paying medical
bills. This includes 41 percent of those with incomes below the poverty
level, 39 percent of those in fair or poor health, 47 percent of the
disabled under age 65, and 40 percent of those needing help with one or
more activities of daily living.
Financial barriers to health care particularly affect use of
preventive care. A 1995 study supported by The Commonwealth Fund found
that elderly women were less likely to receive a mammogram if they did
not have supplemental health insurance coverage.\10\ Medicare has since
covered mammograms without subjecting services to the Part B
deductible.
---------------------------------------------------------------------------
\10\ Janice Blustein, ``Medicare Coverage, Supplemental Insurance,
and the Use of Mammography by Older Women,'' New England Journal of
Medicine 332:1138-1143, April 27, 1995.
---------------------------------------------------------------------------
The absence of coverage for prescription drugs, however, continues
to lead to underutilization of services and inadequate maintenance of
chronic conditions. A 2000 study supported by The Commonwealth Fund
found that absence of supplemental coverage for prescription drugs was
a major reason why many Medicare beneficiaries with hypertension fail
to receive appropriate medication.\11\
---------------------------------------------------------------------------
\11\ Jan Blustein, ``Drug Coverage and Drug Purchases by Medicare
Beneficiaries with Hypertension,'' Health Affairs 19 (March/April
2000):219-230.
---------------------------------------------------------------------------
Rates of hospital admissions that could have been prevented with
better preventive or primary care are particularly high for poor and
minority elderly--indicating inadequate access to primary care. In sum,
poor and near-poor elderly are more likely to experience health
problems that require medical services than elderly people who are
economically better off. Yet they are less able to afford needed care
because of their lower incomes.
Medicare Cost-Sharing is Higher than Typical Employer Plans
Nonelderly Americans spend about 9 percent of their income on
health care--much less than what the elderly spend.\12\ In large part,
this reflects extensive employer-sponsored health insurance with lower
cost-sharing, and better benefits. Most employer plans include a
ceiling on out-of-pocket expenses; Medicare does not. In the generosity
of its benefit package, Medicare ranks in the bottom decile of
insurance plans.
---------------------------------------------------------------------------
\12\ Agency for Healthcare Research and Quality, Center for Cost
and Financing Studies, Medical Expenditure Panel Survey, 1996.
---------------------------------------------------------------------------
The average deductible for all services--including hospital,
physician, and other services--is $239 in conventional fee-for-service
plans offered by employers.\13\ Deductibles are even lower in managed
care plans including preferred provider option (PPO) plans and point-
of-service (POS) plans, and are virtually nonexistent in health
maintenance organizations (HMOs). The typical ceiling on out-of-pocket
expenses in conventional employer plans is $1,500. Benefits are
substantially more comprehensive: 71 percent of firms cover adult
physical exams, which Medicare does not; 87 percent cover prescription
drugs; and 25 percent cover dental care. Employers pick up, on average,
86 percent of the premium for single coverage for workers, leaving the
worker with a monthly premium share of $28. In contrast, a Medicare
beneficiary's monthly premium share is $50 (on top of Medigap premiums
that average over $100 a month).
---------------------------------------------------------------------------
\13\ Henry J. Kaiser Family Foundation/Health Research and
Educational Trust, Employer Health Benefits, 2000 Annual Survey.
---------------------------------------------------------------------------
Over an individual's lifetime, health care expenses are greatest
after reaching retirement, when incomes are lower and savings are being
drawn down. Improving Medicare benefits--even if financed by greater
contributions during the working years--would smooth lifetime health
spending patterns and afford greater economic security in older age.
Despite the fact that Medicare's benefits do not compare favorably
with employer coverage, it is noteworthy that Medicare beneficiaries
report higher satisfaction with Medicare than do working families with
their own coverage. Fifty-seven percent of Medicare beneficiaries say
they are very satisfied with Medicare, compared with 46 percent of
working families covered by employer health insurance.\14\
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\14\ Henry J. Kaiser Family Foundation and The Commonwealth Fund,
Working Families at Risk: Coverage, Access, Costs, and Worries, Kaiser/
Commonwealth 1997 National Survey of Health Insurance, December 1997.
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A Commonwealth Fund survey of 50-to-70-year-old adults finds strong
support for Medicare.\15\ Older adults trust Medicare and value its
reliability. Nearly two-thirds of all adults 50 to 64 would like the
option of buying into Medicare early, while 86 percent of uninsured
older adults would like that option. Preference for Medicare may
reflect the predominance of the program's fee-for-service option; most
employer plans are limited to one or more managed care plans. But it
may also reflect an appreciation for the fact that Medicare will be
there for them over time, as well as a concern that private coverage
may be unavailable or unaffordable when serious illness or disability
strikes or when older adults are no longer able to work.
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\15\ Cathy Schoen, Elisabeth Simantov, Lisa Duchon, and Karen
Davis, Counting on Medicare: Perspectives and Concerns of Americans
Ages 50 to 70, The Commonwealth Fund, July 2000.
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Supplemental Coverage Needed by Medicare Beneficiaries
While workers with employer health insurance rarely purchase
supplemental coverage, nine of 10 Medicare beneficiaries obtain
supplemental coverage to augment Medicare's benefits. About 38 percent
of Medicare beneficiaries have supplemental coverage from a current or
former employer.\16\ About 23 percent are covered by individually
purchased private supplemental insurance (Medigap), 15 percent are
enrolled in Medicare+Choice plans, and 13 percent are covered in part
or in full by Medicaid. About one of 10 Medicare beneficiaries are
covered by traditional Medicare only. The ability of Medicare
beneficiaries to supplement Medicare's benefit with additional coverage
is undoubtedly a factor in the high satisfaction with Medicare reported
by beneficiaries. On the other hand, the widespread need for
supplemental coverage attests to the perceived inadequacy of the
Medicare benefit package.
---------------------------------------------------------------------------
\16\ Stephanie Maxwell, Marilyn Moon, and Matthew Storeygard,
Reforming Medicare's Benefit Package: Impact on Beneficiary
Expenditures, The Commonwealth Fund, May 2001.
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Not all Medicare beneficiaries are able to afford supplemental
coverage, nor is coverage with prescription drug benefits available to
those with serious health problems. A recent study by a team of
investigators at the University of California, Los Angeles, that was
supported by The Commonwealth Fund reported that 17 percent of
beneficiaries with incomes below $10,000 had no supplemental coverage,
compared with 5 percent of those with incomes above $25,000.\17\
Similarly, employer-sponsored supplemental coverage is much lower as is
Medigap coverage for lower-income beneficiaries.
---------------------------------------------------------------------------
\17\ Nadereh Pourat, Thomas Rice, Gerald Kominsky, and Rani E.
Synder, ``Socioeconomic Differences in Medicare Supplemental
Coverage,'' Health Affairs 19 (September/October 2000).
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Nor does supplemental coverage always include prescription drug
benefits. Only half of Medicare beneficiaries have year-long
supplemental prescription drug coverage.\18\ Prescription drug coverage
is quite expensive, and Medigap plans that cover drugs (Plans H-J) are
subject to underwriting and exclude beneficiaries who are deemed poor
health risks. In 2000, Medigap annual premiums for Plan J, including
prescription drugs, averaged $3,252 for a 65-year-old woman.\19\ Even
Plan E plans that exclude prescription drugs average annual premiums of
$1,320 ($110 a month)--an amount on top of Medicare Part B premiums
that are now $600 a year. While standardization of Medigap policies has
reduced confusion, not all plans are in compliance with federal
standards on the ratio of benefits to premiums and many plans offer
poor value at high cost.\20\
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\18\ Bruce Stuart, Dennis Shea, and Becky Briesacher, Prescription
Drug Costs for Medicare Beneficiaries: Coverage and Health Status
Matter, The Commonwealth Fund, January 2000.
\19\ Quotesmith.com, as cited in Marilyn Moon, Assessing the
President's Proposal to Modernize and Strengthen Medicare, The
Commonwealth Fund, January 2000.
\20\ General Accounting Office, Medigap Insurance: Insurers'
Compliance with Federal Minimum Loss Ratio Standards, 1988-93, August
12, 1995; and Lutzky, Alecxih, Pankaj, Laud, and Schaab, Restricting
Underwriting and Premium Rating Practices in the Medigap Market: The
Experience of Three States, AARP Public Policy Institute, January 2001.
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Most disturbing is the trend in future coverage. Eighty-one percent
of employers report that they are planning to increase retiree health
premiums and/or cost-sharing in the future, and 40 percent are cutting
back on prescription drugs.\21\ Thirty percent are planning to
terminate coverage for future retirees.
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\21\ McArdle, Coppock, Yamamoto, and Zebrak, Retiree Health
Coverage: Recent Trends and Employer Perspectives on Future Benefits,
Hewitt Associates, October 1999.
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Medicare+Choice plans have enrolled about 6 million beneficiaries.
Better benefits and lower cost-sharing are major reasons why
beneficiaries choose managed care plans. But instability in the managed
care market and the withdrawal of plans either nationally or from
selected geographic areas raise questions about the long-term future of
this option. Medicare+Choice plans are increasing monthly premiums and
reducing benefits, especially prescription drug benefits.\22\ As a
result, the number of beneficiaries enrolled in Medicare+Choice peaked
in 1999 at 6.3 million; such plans now cover 5.6 million people.
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\22\ Marsha Gold and Lori Achman, Trends in Premiums, Cost-Sharing,
and Benefits in Medicare+Choice Health Plans, 1999-2001, The
Commonwealth Fund, April 2001.
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If private market trends continue, Medicare beneficiaries will be
increasingly reliant on the individual, Medigap market to supplement
Medicare's basic benefits. There are now signs that premiums in this
market--where costs cannot be pooled through employer groups or managed
care health plans--are beginning to spiral upward for policies that
include prescription drug coverage (and that already feature high
administrative costs). Further increases may well expand the proportion
of beneficiaries who can afford only basic Medicare benefits.
Options to Improve Medicare Benefits and Reduce Cost-Sharing
Given the increasing unreliability of supplemental coverage and the
serious financial burdens and barriers to needed care that Medicare
beneficiaries face, consideration should be given to improving
Medicare's benefits. In a Commonwealth Fund-supported study by Marilyn
Moon and colleagues at the Urban Institute being released today,\23\
four options for improving Medicare's benefit package are simulated:
---------------------------------------------------------------------------
\23\ Stephanie Maxwell, Marilyn Moon, and Matthew Storeygard,
Reforming Medicare's Benefit Package: Impact on Beneficiary
Expenditures, The Commonwealth Fund, May 2001.
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Option 1 combines Part A and Part B, replaces the
current deductibles with a single combined annual deductible of
$400, and introduces a $3,000 annual beneficiary limit on cost-
sharing and deductible expenses. It would increase Medicare
outlays by an estimated $3.2 billion in 2000.
Option 2 reduces the Part A deductible to $200 per
spell of illness and increases the Part B deductible to $200.
Part B coinsurance is reduced to 10 percent, a new 10 percent
coinsurance on home health services is introduced, and all
cost-sharing and deductible expenses are subject to a $2,000
annual beneficiary limit. This option would increase Medicare
outlays by an estimated $16.4 billion in 2000.
Option 3 eliminates the Part A deductible and all
Part A cost-sharing. While increasing the Part B deductible to
$200, it eliminates Part B coinsurance. This improved coverage
is financed by increasing the Part B premium to $105 per month,
achieving virtual budget-neutrality.
Option 4 adds a prescription drug benefit with 50
percent coinsurance, a $2,500 limit on beneficiary cost-
sharing, and a $26 monthly premium. This option would increase
Medicare spending by $13.9 billion in 2000.
The first three options reduce out-of-pocket spending by improving
covered Medicare benefits and/or reducing or eliminating the need to
purchase costly Medigap coverage. The fourth option introduces coverage
for a currently uncovered benefit, prescription drugs, and could be
combined with any one of the first three options.
Under all four options, both the elderly and the disabled would
experience a reduction in total out-of-pocket expenses, including
private insurance premiums, cost-sharing for covered services, and
expenses of noncovered services. The elderly would save $27 per capita
under Option 1, $240 under Option 2, and $763 under Option 3. Disabled
beneficiaries ages 45 to 64 would save $103, $280, and $408,
respectively, under Options 1, 2, and 3. The disabled would
particularly benefit from a prescription drug benefit: Option 4 would
save the elderly $181 per person, while the disabled ages 45 to 64
would save $824 per person.
Savings would be greater for beneficiaries with serious health
problems. The Urban Institute team estimates that elderly beneficiaries
in poor health without supplemental coverage would save $285, $587, and
$1,591 per person, respectively, under Options 1, 2, and 3. For low-
income women over age 85 and in poor health, savings would be even
greater--$495, $753, and $2,092.
On average, out-of-pocket spending for elderly beneficiaries would
decline from the current rate of 21.7 percent of income to 21.5 percent
under Option 1, 20.0 percent under Option 2, and 16.4 percent under
Option 3. Option 4, if enacted alone, would reduce spending to 20.4
percent of income.
Option 3, by eliminating the need for private supplemental
insurance, represents an important way to improve efficiency in
coverage for Medicare beneficiaries. Consolidating coverage under
Medicare produces savings through reduced administrative costs by
eliminating the need to coordinate two sources of coverage. Medicare
administrative costs are also lower than private insurance plans.
Medicare does not need to maintain reserves to protect against adverse
risk selection, nor are marketing or sales commissions needed.
Some beneficiaries, however, could face higher costs. About 20
percent of Medicare beneficiaries are hospitalized in a given year.\24\
Under Option 1, replacing the current Medicare Part B $100 deductible
with a combined A/B deductible of $400 would result in higher costs for
the 80 percent of beneficiaries without a hospital episode during the
year. For beneficiaries lacking supplemental coverage, the immediate
effect would be a substantially higher overall deductible.
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\24\ U.S. House of Representatives, Committee on Ways and Means,
2000 Green Book, October 6, 2000.
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Similarly, for retirees with employer-sponsored coverage, much
depends on how employers respond to improved Medicare benefits. If
employers pick up the higher Part B premiums under Option 3, most
beneficiaries with retireecoverage would gain. If any savings to
employers were devoted to improving other benefits (such as
prescription drugs), beneficiaries would gain further. But employers
could use the improvement in Medicare benefits as an opportunity to
drop retiree coverage even more rapidly than is currently anticipated.
State Medicaid programs would also be expected to benefit from an
improvement in Medicare benefits. This is particularly true under
Option 4 with the addition of prescription drugs to Medicare, a benefit
now covered by most Medicaid programs. But the reduced cost-sharing
under Options 1, 2, and 3 would also provide fiscal relief to state
governments. Improved Medicare benefits might be coupled with increased
state responsibility for coverage of low-income families under Medicaid
or the Children's Health Insurance Plan.
Conclusion
For more than 35 years, the Medicare program has assured health and
economic security for older and disabled Americans. Understanding the
strengths of the program and its contributions to improving health
outcomes and access to health services is an important foundation on
which to build.
Medicare beneficiaries are heterogeneous. Some fit the stereotype
of vigorous and well-to-do seniors. But others are older widows living
alone, some are in nursing homes, some are terminally ill, and some
live on quite modest incomes. These are the faces of Medicare, and they
should be kept foremost in mind as new ideas for modernizing Medicare's
benefits are developed and considered. Improving Medicare's benefits--
not just looking for savings or shifting costs to beneficiaries--should
be an important priority.
Reducing the financial burden beneficiaries already bear, as well
as the increasing burden they are expected to face over the next 25
years, should be a priority for use of federal budget outlays. We
should remember that a considerable portion of the federal budget
surplus was generated by the Balanced Budget Act (BBA). An estimated $1
trillion of the $5.6 trillion 10-year surplus was derived from a slow-
down in Medicare outlays, in large part as a result of BBA, and from
the slow-down in Medicaid outlays, an unintended consequence of welfare
reform.\25\
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\25\ Karen Davis, Cathy Schoen, and Stephen C. Schoenbaum, ``A 2020
Vision for American Health Care,'' Archives of Internal Medicine, 260,
December 11/25, 2000.
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Ten percent of the Medicare BBA savings came from increased
beneficiary premiums, as home health services were moved from Part A to
Part B and subjected to 25 percent beneficiary premium
contributions.\26\ For example, the Part B premium in 2006 was raised
more than 50 percent by the BBA. As a result of the BBA, over $50
billion of the 10-year budget surplus was from higher premiums charged
to Medicare beneficiaries. Returning this contribution to beneficiaries
in the form of improved benefits and reduced cost-sharing is worthy of
consideration.
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\26\ Marilyn Moon, Barbara Gage, and Alison Evans, An Examination
of Key Medicare Provisions in the Balanced Budget Act of 1997, The
Commonwealth Fund, September 1997.
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Thank you for this opportunity to testify. I would be pleased to
answer any questions.
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Chairwoman Johnson. I thank the panel for their
contribution.
Dr. Davis, you make the point that Medicare needs to be
modernized both in terms of benefits, and you point to
prescription drug benefits, and in terms of cost sharing. While
I appreciate your comments about what we have saved from
Medicare, it is true that Medicare costs will double in 10
years. It is a very big program, and it is growing very
rapidly. That is without prescription drugs or annual physicals
or any of the other things that we ought to be doing to
modernize the benefit package.
If this is your recommendation, how would you control
costs? In the private sector, we just heard that 90 percent are
in some form of managed care, but in Medicare, only 15 percent.
What would you do to control costs if you are going to expand
the benefit package and reduce cost sharing?
Dr. Davis. You are certainly correct, Madam Chairman, that
Medicare outlays will increase as costs go up and as there are
more baby-boomers retiring, but costs will also go up for
beneficiaries so that the average amount beneficiaries will pay
will go up from $3,000 to over $5,000 a person, and that is
holding constant for inflation.
Chairwoman Johnson. Right. That is holding constant for
inflation and no new benefits. So that has got to be ofconcern
to us, but if that is a concern to us under the current program, what
is it that you propose that might control costs so that this would be
affordable, so that beneficiaries would not be harmed?
Dr. Davis. Right. The first thing I am saying is that we do
not want to just shift more costs onto beneficiaries to protect
the Federal budget. That will make the beneficiary situation
worse.
We are all looking for the magic bullet that would achieve
savings.
Chairwoman Johnson. We did use a few good ones.
Dr. Davis. The one that is proposed in this testimony is
eliminating dual coverage by integrating that into one source
of coverage.
Certainly, right now, Medicare's administrative costs run 2
percent a year. As we have heard from the General Accounting
Office, Medigap administrative costs run 20 percent a year. One
way to achieve savings is to cover those benefits under
Medicare at a 2-percent administrative cost instead of a 20-
percent administrative cost add-on. That would mean
beneficiaries would be paying a premium, an additional premium
to Medicare, but they would achieve savings by having no or
lower Medigap coverage premiums.
So one source of efficiency is instead of having two plans
covering the same benefits, having one plan integrated, under
Medicare, a single premium being paid to Medicare, and
realizing those administrative savings.
Chairwoman Johnson. All of that would actually increase
costs significantly since Medigap covers new benefits. So, if
you were going to merge those premiums, you would have to also
merge the benefits.
So you really are obliged to give us some ways to control
costs. The private sector has controlled costs by adopting a
managed care protocol that, while it has some failings, has
both better integrated care and, in many instances, responsibly
controlled costs.
So I hear what you are saying about improving benefits and
reducing the beneficiary burden, but without better research
and recommendations in terms of overall cost control, we cannot
be blind by the fact that the program is growing by leaps and
bounds. In only 10 years--that is before the baby-boomers will
retire--the program will double, with no improvements.
Dr. Scanlon and anyone else who wants to pitch in on this,
what is the research that demonstrates that deductibles have an
impact on usage, utilization, and, therefore, cost? How much
does that research tell us about that personal discipline over
utilization? Does it eliminate needed care as well as unneeded
care? What do we know about deductibles and cost control? Dr.
Scanlon?
Dr. Scanlon. Madam Chairwoman, what we do know is that the
absence of cost sharing does lead to a significant increase in
cost. I think as Dr. Hogan's testimony points out in detail,
studies have indicated that costs may increase as much as 25
percent when there is first dollar coverage because one has a
Medigap plan.
When one has employer-based insurance, which still has
reduced deductible, there is an increase in utilization
compared to those without any supplement coverage at all, but
it is less than having first dollar coverage. So we do know
that there is a very positive increase in terms of utilization.
Being able to sort what are necessary services that are
being used because there is no longer a financial barrier
versus those which are discretionary or unneeded, is not
something that has been possible to do.
We have done work in looking at other aspects of Medicare,
in particular, looking at laboratory services under the End
Stage Renal Disease (ESRD) program. We find where there is no
cost sharing a totally inexplicable pattern of service use:
extensive overuse as well as underuse. We had a panel of
nephrologists review the tests that were being provided. In
some instances, tests were being provided every week, and the
nephrologist panel said they never understood why you would
ever provide this kind of a test.
So the absence of cost sharing creates lack of discipline.
Having cost sharing potentially creates some barriers. Finding
the balance between those two is the challenge that we face.
Chairwoman Johnson. Thank you. Does anyone else wish to
comment on that point? Is that what you mean, Dr. Hogan, by
Medigap costing us $1,000 per beneficiary?
Dr. Hogan. That is right. Once all of the copays and
deductibles are paid, when care is free, beneficiaries will use
more.
Chairwoman Johnson. You say that, but Mr. Stark in his
opening statement did not agree with you. So you need to
document that if you believe that is true.
Dr. Hogan. Yes. If I wanted to point to some particular
pieces of research, the Congressional Budget Office has their
own studies. Joe Newhouse at RAND had the National Health
Insurance Experiment in the eighties. It was an under-65
population, but it was a true experiment. They literally
assigned people to different plans and looked at their
expenditures and that found the same result.
I can guarantee you that every cost estimate you see for
the cost of a drug benefit will have such an effect embedded in
it, and every cost estimate comes out of the actuary's office
and HCFA will have such a cost estimate.
I am kind of an agnostic on the whole concept of necessary
care. I do not think that is the way decisions are actually
made. It is not healthy beneficiaries who are using services
frivolously. Most beneficiaries have something wrong with them,
and if you look at the services where Medicare pays the most
money, Part B--Part B is what I know. I worked for the
Physician Payment Review Commission for a number of years.
Cataract surgery is the number-one service for which Medicare
pays physicians. What is the indication for cataract surgery?
Well, you have to have some loss of visual acuity. It is not a
necessary or unnecessary decision. If you say to a beneficiary,
``Now with current technology, cataract surgery is quick,
painless, and has almost no complications,'' you say to a
beneficiary, ``We can fix your visual deficit and it is free''
versus ``We can fix your visual deficit and it will cost you
$600 or $700,'' I think that is enough to deter enough people
to at least think about it a while. So I just want to say I am
an agnostic on the concept of necessary care.
You definitely find that people will use fewer preventive
services when they have to have copays and deductibles, but
they use fewer services right across the board.
Chairwoman Johnson. Thank you.
Mr. Stark.
Mr. Stark. Madam Chair, I would like to follow on that.
In your chart, Dr. Hogan, you suggest that you are using
$5,000 per beneficiary per year, and then you are comparing and
you are saying that with employer-based Medicare plus some kind
of an employer base-sponsored supplement, you save 100 bucks,
it is $4,900. With Medicare and a Medigap policy, you are
suggesting the cost is $5,400. So that is $400 more. What you
further say to get to that $1,000 savings is that those people
with Medicare only, only costs $4,000, right? But you further
said that that is only 10 percent of the Medicare
beneficiaries, right? I think it follows that they are the very
poorest of the Medicare beneficiaries, right, and least apt to
have medical services available and, and, and, and. So that, I
think that the idea of suggesting that these copays cost us
1,000 bucks may not be entirely based in the supplemental
payments is what I am getting at. We are talking about 10
percent who arguably are the most challenged of our
beneficiaries.
Further, we did not get into this. Dr. Scanlon, what is the
average per-capita Medicare cost for the 40 million
beneficiaries? Do you have a number off the top of your hat?
Dr. Scanlon. I think it is approximately $6,000 per year.
Mr. Stark. OK, it is 6,000 bucks. So Dr. Hogan used $5,000
just as an estimate here.
But if you take the $6,000 figure and take the Medicare
Plus Choice, we have been told that if we risk the Plus Choice,
we would be paying 7-percent less, so there is a $420
overpayment in Plus Choice. It certainly does not have any
deductibles, I do not think, any Plus Choice. It may have some
modest copays. But I am not sure that we can just capriciously
suggest that a variety of charges tacked on hither and yon will
save money that we want to save because, in none of these
purely numeric calculations, I do not believe, any of our
witnesses have talked about whether the savings came from
unnecessary medical procedures.
You did not take that into account, did you, Dr. Hogan? You
do not make a judgment here as to whether the difference in the
$4,000 for Medicare only was a savings of 1,000 bucks on
services that were unnecessary.
Dr. Hogan. In my written testimony, I point out it is, more
or less, across the board. In fact, all of the five preventive
services that can easily be identified in the current
beneficiary survey are used less by the beneficiaries who have
to pay their own copays and deductibles.
Mr. Stark. I guess you could get a fight in any bar in town
as to whether or not preventive services are worthwhile and
which ones we ought to be paying for, but this Subcommittee has
added preventive services. We may all have a different list of
priorities, but I think many of us have some we still do not
pay for that we would like to add.
So all I would like my colleagues to consider in this is
that while there can be some savings in ratcheting up copays or
certainly in deductibles in going to the hospital for a day
where it is $600 or $700 is that what we want to do? There are
ways to save money, and we have got a whole litany of those,
but I just want to urge us to be cautious that we do not
eliminate necessary medical procedures and overlook unnecessary
ones. I am not sure that just dealing with broad copays or
Medigap does that.
I do not have any answer, but I just want to remind us that
we could do some real harm here to people who need services.
Chairwoman Johnson. I certainly appreciate the barrier that
copayments can cause, but that is why I asked Dr. Scanlon and
Dr. Hogan and they did name off a number of research projects
that have been done that demonstrate that deductibles do lead
people to think about whether they need the service or not. In
the employer sector or even actually in Medicare, there does
not seem to be any evidence that deductibles have been a
barrier to care.
Now, in Medicare, there are a lot of other barriers to
care. So it is a little hard to make the comparison.
Why don't I recognize Mr. McCrery and see if others pursue
this topic and can come back to it. I think the point is we
really have to have better documentation on this issue of
deductibles because it does seem to be a factor, and we need to
understand what kind of factor it could be for us as we face
governing a program whose costs are exploding.
Mr. McCrery.
Mr. McCrery. I appreciate the testimony and especially the
references to other studies that have been done on the
effectiveness of copays and deductibles in discouraging over
utilization.
My own sense is, though, that discouragement is probably
greater in the under-65 population than it is the over-65
population. The over-65 population, generally speaking,
probably has more need to go for services than the under-65
population.
Having said that, though, I do believe that there ought to
be some requirement on the part of beneficiaries to pay some
copayment or some deductible. The question to me is finding the
right balance between discouraging over utilization and
discouraging proper utilization, and I have not heard any of
you give us that magic formula today.
I was intrigued, though, Dr. Hogan, by your proposal or, I
think it was, the AMA's proposal that you mentioned for a
prepaid deductible that they could get back at the end of the
year if they did not use. Have you thought about what effect
that proposal would have on the secondary insurance market?
Dr. Hogan. Really, the point of that proposal is twofold.
For better or worse, it works like a small medical savings
account.
Mr. McCrery. Right.
Dr. Hogan. But, mostly, it creates a little space where
Medicare says for the amount that we are comfortable with, it
might be a few hundred dollars, copays and deductibles shall
apply, and the secondary insurers will not touch that. So the
main point of it is to assert a small amount of money over
which Medicare controls the copays and deductibles, not the
secondary insurers.
Their Medigap premiums would fall because they would not
pay that first few hundred dollars of copays and deductibles,
but would not fall a whole lot because you have to realize
there is an awful lot of money out there on the far tail of
spending. There is a few catastrophic cases that account for
most of the costs, but other than that, if they would make
their packages conform to Medicare's new structure, they would
simply take it in stride. They would have a new set of plans, A
through whatever, and they would charge somewhat lower premiums
to cover the amounts beyond that prepaid deductible.
Mr. McCrery. So, in other words, you would not allow
secondary insurance to cover that prepaid deductible?
Dr. Hogan. No. The whole point is you would not allow
secondary insurance to cover the prepaid deductible.
Mr. McCrery. That is a very interesting proposal, Madam
Chair, and I hope that we will explore that further. It might
be that we could even encourage it by making it like an MSA
(medical savings account) and making it pre-tax dollars to be
put into the account, and it could be rolled over from year to
year if they so desired.
Dr. Davis, you encouraged us to look at providing more
services, prescription drugs, lower deductibles, and so forth,
and it rang familiar. Isn't what you are describing very much
like the catastrophic plan that Congress adopted back in 1988,
I believe it was?
Dr. Davis. Obviously, the catastrophic plan was designed to
improve benefits. It was designed to put a ceiling on total
spending that the elderly would have to pay, and it did have a
prescription drug benefit.
There are some significant differences. That particular
proposal was financed by an income-related premium. That was a
very sharp increase for beneficiaries that currently have
employer supplemental coverage. So they saw themselves as
getting no new benefits and, yet, paying a higher premium.
What is laid out in this report that we have released today
are four options, one with prescription drugs, three to change
the cost sharing. All of them actually would increase the Part
B deductible slightly, up to $200 from $100. That is the one
deductible that has not increased in real terms, but they would
markedly reduce the Part A deductible.
One of the effects of that, for example, one of the options
reduces the Part A deductible to $200. More people would be
willing to do without supplemental coverage if they knew the
most they had to pay for Part B was $200, the most they had to
pay for Part A was $200, and there was a total ceiling of
$2,000 on any cost sharing and deductibles overall.
So, in fact, it is restructuring it, but the basic effect
is to lower the average amount that beneficiaries pay as a
percent of income across all services.
Mr. McCrery. Did your study estimate a cost of the
proposal?
Dr. Davis. Yes.
Mr. McCrery. What was that?
Dr. Davis. There are cost estimates attached to those. If
you think about, say, the year 2000 as a typical base, the
first option increases Medicare outlays by about 2 percent,
option two by about 7 percent, option three is budget-neutral.
Obviously, if you were to do that, you would want to do
participation rates, and you would want to do estimates over
time and behavioral shifts, but there are estimates in
percentage terms and in dollar terms. Option one is $3.2
billion in the year 2000; option two, 16.4. Option three is
financed by increasing the Part B premium to $105 a month. So
there is actually budget neutrality in that particular option,
but there are cost estimates provided, to give you a sense of
what these would entail.
Mr. McCrery. Thank you.
Chairwoman Johnson. Mr. Kleczka.
Mr. Kleczka. Thank you, Madam Chair.
Dr. Hogan, in your testimony, you indicated those folks
with supplemental insurance or Medigap actually cost the
Medicare Program on average about $1,000 more.
Can you point out specifically what services are being over
utilized or where we are being taken advantage of or where the
Federal Government is paying more?
Dr. Hogan. I keep telling you folks necessary care is a
fiction that physicians created. I do not think there is any
such thing.
There are some clear-cut cases. There are some cases that
are not clear-cut. Most medical care is kind of gray, and I do
not think it is particularly profitable to talk about necessary
and unnecessary care. Maybe ``value'' is the better word,
whether the value of the services that you get with zero copay
is----
Mr. Kleczka. But if, in fact, you are going to contend that
on average, we are spending for the program $1,000 more, I
would think that at least you could pinpoint where. Is it just
doctor's visits?
Dr. Hogan. Oh, no, no. If you look at the research, the
research shows that the impact is much higher on the B side
than on the A side. So it is not the hospitalization. That is
the typical research.
Mr. Kleczka. So with physician's visits, OK.
Dr. Hogan. Right. So it is physician visits and tests and
procedures and images. That is where the largest dollar impact
is.
If you go back to the national health insurance experiment,
which is the under-65 and it is old, Joe Newhouse found that
when you charge copays and deductibles, their utilization fell
mostly, again, for physician services, but it did not seem to
affect their health status as far as he could tell with some
important exceptions, and the exceptions were pretty obvious
once you saw them.
Poor people with mental health problems: If you charge them
copays and deductibles, their health deteriorates. So there is
a bit of research to tell you where you should not charge
copays and deductibles, and poor people with mental health
problems is one of them.
Beyond that, doctors cannot tell you what is necessary and
unnecessary. You certainly would not want to ask an economist
to tell you that.
Mr. Kleczka. But if I were a doctor, I would want to do
more versus less because medicine is an imprecise science, and
so, if I am trying to do a decent analysis of a patient, I am
going to have to maybe do another test which you say if it was
not for this Medigap policy, this doctor would have done it,
anyway. It gets kind of murky and cloudy.
This is an interesting discussion, and I guess it is a
rhetorical question. However, what I am wondering about is what
is the actual purpose of copays. Is the purpose of copays and
deductibles to have the patients share in the cost, or is it to
try to restrict utilization, or is it a combination of both? If
it is an effort to restrict utilization, then the answer for
this Committee and the Congress is raise those copays and
people just will not go. So, in your view, Ms. O'Sullivan, what
are we trying to accomplish with copays and deductibles?
Ms. O'Sullivan. It is essentially a combination of the two.
Mr. Kleczka. That is what I was afraid of.
Ms. O'Sullivan. You are trying to make beneficiaries cost-
conscious at the point when they use services, but not make the
cost sharing so high that they will forego needed services and
then perhaps incur larger expenditures down the road.
Mr. Kleczka. Do you agree with Dr. Hogan's contention that
because of supplementals and Medigaps that we are under a
Medicare Program paying about $1,000 more?
Ms. O'Sullivan. There is research that shows that Medicare
beneficiaries that also had Medigap policies do cost the
Medicare Program more.
I think you should remember that people who buy Medigap
policies are buying a policy that they know is going to cover
most, if not all, of their cost sharing, and they probably
purchased a policy based on the expectation that they are
actually going to need covered services. So there is some of
that entering the picture, also.
We know that people that have employer-based policies cost
Medicare more. They cost about 10 percent more than people that
have no coverage. Arguably, people that have no coverage are
the people that are low income, but above the Medicaid line. So
any cost sharing could seem fairly burdensome to them. For
them, cost sharing has a fairly big implication for them, and
they may well be foregoing services that they actually need.
The other comment I would make is when you are talking
about impact of change in cost sharing, we do not have one
supplementary market out there. We have Medigap. We have the
Qualified Medicare Beneficiaries and the Specified Low-Income
Beneficiaries (QMB/SLMB) populations for whom Medicaid is
paying Medicare's cost-sharing charges. We have employer-based
policies which have various ways of wrapping around Medicare,
and we also have Medigap and there are 10 of those. So any
tweaking of Medicare will have differential impacts.
Mr. Kleczka. Fine. Thank you.
Chairwoman Johnson. Mr. Ramstad.
Mr. Ramstad. Thank you, Madam Chairwoman, and thank you for
calling this important hearing on Medicare beneficiary cost
sharing.
I am concerned like you, Madam Chair, about the costs that
beneficiaries must pay when they get sick, the plans they must
purchase to cover their needs because of Medicare's copays and
the lack of catastrophic coverage, and, of course, I am also
concerned about the fact that this problem is really
exacerbated because Medicare lacks catastrophic protection.
That is contrasted with 97 percent of private health policies
which have such protection.
So I think in total, when you look at Medicare's limited
benefits package, it is high copays, and the complete absence
of catastrophic, that means that nearly half of our seniors'
health care costs are not covered by Medicare. That practically
means that Medicare seniors must bear the cost themselves. This
fact of lack of coverage is unacceptable and needs to be
addressed through our comprehensive reform.
In that vein, I would like to ask you, Dr. Scanlon, first,
does the status quo in Medicare cost saving make sense to you
when compared to private-sector health insurance plans which
structure, of course, are out-of-pocket obligations?
Dr. Scanlon. No, sir, they do not.
Clearly, as you indicated, the lack of catastrophic
protection is something that private insurance does not have,
and it is sorely lacking in Medicare. It creates a situation
where we do not really have a true insurance policy. You can be
catastrophically harmed by your medical expenses, and that is
something that we would hope for as the first thing to
accomplish in a Medicare reform.
Second, what has happened is over time, the cost sharing
that was put into place in 1966 and has been modified, as Ms.
O'Sullivan indicated, only slightly since then has evolved in
ways that distort it even further than what it was before.
We did not expect in 1966 hospital costs to be growing so
much so that the deductible would be close to $800 today, so
that a single hospitalization alone creates a large expense for
individuals.
We have not seen the Part B deductible keep pace with
inflation. So it is withering in terms of the share of real
income that it represents.
These are not the kinds of things you would see in most
private insurance plans because they have been adjusted over
time to try and reflect the changes in medicine as well as the
changes in the cost of medicine.
Mr. Ramstad. Dr. Scanlon, I think your summary statement
says it all when you said that Medicare beneficiaries do not
really have a true insurance policy. That should concern all of
us on this panel, as I know it concerns so many people in the
Medicare system.
Let me ask you, Dr. Hogan, if you will, please. In your
testimony, you stated that the current Medicare supplemental
system is, to use your words, regressive and disproportionately
affects the poor. Could you just expand on those comments?
Dr. Hogan. I will not say it is the worst of all possible
worlds, but beneficiaries who can most afford to pay the
copayments do not. They buy Medigap. The beneficiaries who
cannot afford to pay the copayments cannot afford Medigap, and
those who can afford Medigap drive up costs for everyone,
including the Part B premiums that poor people have to pay.
So I could think of two reasonable approaches. Either make
it free for everybody or make everybody pay, but allowing the
working stiffs who do not have a decent job and do not have
decent employer-sponsored coverage have to pay those
copayments, those irrational copayments out of pocket, and
everybody else has enough money to buy Medigap. That is not
sensible.
Mr. Ramstad. I thank you for that very honest and, I think,
accurate response.
I think oftentimes a statement made earlier this year by
our colleague working on Medicare reform on the Senate side,
Senator Breaux, who said right now what we are doing with
respect to the Medicare system is analogous to putting gasoline
into a 1965 Chevy when, in fact, we need a new car, and I think
all of you would agree to that statement as to the need for
overall comprehensive Medicare reform.
I thank you for your testimony here before the
Subcommittee, and your continuing counsel is definitely
appreciated. Thank you, and I yield back the balance of my
time.
Chairwoman Johnson. Congresswoman Thurman.
Mrs. Thurman. Thank you, Madam Chairman.
I want to thank the witnesses for being here today and
giving us some information here.
I go through this every time we have a group before us. So
you guys kind of need to help me here. If a Medicare
beneficiary chooses to enroll in a Medicare Plus program, he or
she then does not have to have a Medigap coverage. We all know
that because they have no deductibles. They have maybe some co-
payments.
Then, in an article--and I just kind of would like your
all's opinion about this--published in Health Affairs in
January 1999, Gail Wilensky and Joe Newhouse suggested--and I
will quote them here--that, ``In an informed program,
additional benefits should be provided through the Medicare
Program and not through a Medigap plan.'' In other words, my
understanding of this is to create a level playingfield between
traditional Medicare and Medicare Plus Choice plans, Medigap
should be merged into traditional Medicare fee-for-service
plans so that the Medicare beneficiaries would not have to
purchase separate Medigap insurance.
So the question is do you agree or not agree with that
summary, and if so, why, and if not, why. I will ask all four
of you that question.
Dr. Davis. I certainly have a lot of agreement with the
idea that Medicare benefits ought to be improved to the extent
that people would not need to buy Medigap. So that means
covering prescription drugs, which is covered in most Medicare
Plus Choice plans. It means getting the deductibles down to
modest amounts that people can afford to pay without filling
in, and to really have a modern benefit package.
We talked a lot about employer plans. The typical employer
conventional fee-for-service plan has a $239 deductible across
all services. Medicare has far more than that. It has a $1,500
ceiling on a lot of out-of-pocket expenses, and that is for
conventional fee-for-service. For their preferred provider
plans, their point-of-service plans, those amounts are lower.
So I think modernizing Medicare's benefits means you do not
have to buy supplemental.
People with employer coverage do not go buy supplemental
coverage. The fact that 90 percent of Medicare beneficiaries
have to go buy something else means that what they have, they
certainly perceive as inadequate. I think there are, as I have
mentioned, efficiencies to be gained by simply consolidating
that benefit within the Medicare Program.
Mrs. Thurman. And just to add to that, I would further
think that it puts everybody then on that level playingfield.
Right now, we have so many things going on in Medicare, quite
frankly, that just because of where your geographical location
is does not give you the same benefit even though the payment
is coming still directly from the government.
Dr. Hogan.
Dr. Hogan. While I agree with the sentiment of that, there
are a few little details. I only say this because I used to
work for Joe and Gail. I was on the staff of one of their
commissions, and there are a few little details you have to
keep in mind. How much are you going to charge for the
Medicare-sponsored Medigap policy, and are you going to pay
less if you do not have it? If you add the Medigap premium to
my $1,000 cost estimate, there would be almost $2,000
difference between what you would want to have, a beneficiary
with no supplemental insurance pay and a beneficiary who has
the Federally sponsored Medigap pay. So there may be a premium
attached to that, that might be kind of unpleasant to look at.
The second issue is what about the people who have
employer-sponsored coverage now. How are you going to make
their employers continue to pay for that coverage, or are you
just going to let them skate and have the taxpayers pay for it?
So it is not as easy as you might think.
Nevertheless, what Karen said is exactly right. You would
certainly get some efficiencies just from the overhead alone
rolling Medigap into the Medicare program because their
overhead charges are lower, and it is a lot easier for Medicare
to run the individual purchase policy than it is for the
private sector to do it.
Having said that, this sentiment is correct, but there is a
devil in the details that you really have to pay attention to.
Dr. Scanlon. I agree, and I think there is a rationality to
improving Medicare so that the need for a Medigap policy
declines.
There is a reality today that there is a rational need to
buy catastrophic protection. It is somewhat irrational to be
buying first dollar coverage. Essentially, what you are doing
is for that first $100 of medical care that you are going to
use, you are paying someone $120 to write that check. That does
not make a lot of sense.
So the idea of incorporating these types of protections
into a better Medicare program and offering it to
beneficiaries, I think, would reduce the need for Medigap.
Mr. Stark indicated, also, we have a very complex system
that has developed here in terms of the different participants
and that we would be creating some very significant disruption
in terms of making a change like that.
Mrs. Thurman. But aren't we creating some problems out
there with the Medicare population, anyway, because their
benefits are so different depending, again, whether they can
have prescription drugs, whether they can have eyeglasses,
whatever other procedures, and in Medicare Choice, really
catastrophic? I mean, they have a catastrophic payment, and
that is us.
Dr. Scanlon. We definitely are.
Our problem is we sometimes have trouble making the
transition to a new system. If you look at the statistics on
Medigap policies fully, a third today are policies that existed
before 1992, many of which have much poorer coverage than the
policies that are available today.
There may be issues of people not being able to get access
to these benefits because of health status, but a full third
are those are in older policies which have relatively limited
coverage.
Ms. O'Sullivan. Certainly, one advantage of expanding
Medicare's benefits would presumably make it more in line with
the coverage people are used to up through age 65. Now, when
they transition to Medicare, they are faced with a whole new
set of requirements. So, from that perspective, it could
potentially be easier for the population. Obviously, of course,
this is a much more expensive population group than the under-
65 population, and also, as has been mentioned here, you have
to think of what the implications are for people with employer-
based policies, would they just wrap around to the new Medicare
coverage. Presumably, it could potentially be cheaper for some
of the employers, though we also know a lot of employers who
are getting out of the business of retiree coverage, anyway. So
whether this would speed it or slow it down is a question you
could ask.
But, yes, there are certainly some advantages. So,
obviously, it has many implications when you flesh out the
details.
Chairwoman Johnson. Mr. McCrery.
Mr. McCrery. Thank you, Madam Chair.
Since we have such a distinguished panel--I read a news
report just a couple of days ago or maybe yesterday about a
study that was done recently that indicated that seniors are in
better health than they used to be, basically, and that because
they are in better health, they are costing less and that that
might have fairly significant, positive consequences for
Medicare spending in the out years. Did you all see that
report, and do you have any comment on it?
Dr. Hogan. May I be the first to jump in here?
Mr. McCrery. Sure.
Dr. Hogan. Ken Manton, who did that report, is a well-
respected demographer, and if he says it, I imagine it so. I
certainly have not seen that come through in any statistics
that I look at, but I do not look at a long-time series.
The only point I really want to make is this.
Mr. McCrery. I am from Louisiana. If you would talk just a
little slower.
Dr. Hogan. I am sorry, and I need less caffeine.
Jim Lubitz, years ago, did a study. Jim Lubitz is a
researcher at the Health Care Financing Administration and did
a study of beneficiaries' lifetime spending. What you find is
the longer you live, the more you cost Medicare, period.
Mr. McCrery. All right.
Dr. Hogan. You will spend less in the last couple of years
of life, but extending lifespan or coming in a little bit
healthier and living a little bit longer, it is arguable that
that will reduce. Even if it is true, it is arguable that that
will reduce costs.
Dr. Davis. I do think it is a very important study that the
National Academy of Sciences has published showing that
disability rates of the elderly have dropped markedly from 1982
to 1997. If you really break it down by the kinds of
conditions, you do see that we have had a major reduction in
strokes over that period and much better control of
hypertension over that period, breakthroughs in treatment for
heart disease over that period. There is another major study
supported by the Lasker Foundation that really looks at the
benefits to the economy of that improved health, particularly
in the last half of the 20th century that comes from these
kinds of improvements, both in preventive care and
breakthroughs like beta blocker treatment for heart attack
victims.
They argue that the gains to the economy in the last half
of the 20th century from these advances in health care equal
the gains that have come from increased productivity over that
period. So they really are quite significant. It is not just a
matter of looking at how they affect Medicare spending. The
longer we live, certainly there are going to be more years that
we are on the Medicare program. That is, in part, the goal. The
fact that we are improving life expectancy, we are reducing
disability, I think it is quite significant.
I think it plays in today's discussion in the following
way. When you talk about cost sharing, we have emphasized
preventive services like getting mammograms or Pap smears or
colonoscopies, but it is also important to have chronic
conditions well maintained.
If you have got hypertension, if you have got diabetes, if
you have got high cholesterol or arthritis, you need to be
making regular visits to physicians. Many times, you need to be
on a prescription medication to control that condition to avoid
these adverse consequences of strokes and mortality from heart
disease or disability from heart disease.
So, if you deter people from getting proper maintenance of
chronic conditions--we supported, for example, a study that
showed that people without supplemental drug coverage are much
less likely to get hypertensive medication for people with
hypertension than those that have supplemental drug coverage.
So these issues of cost sharing and supplemental coverage and
the quality of the benefits do affect these issues of life
expectancy, disability, and quality of life.
Mr. McCrery. Dr. Scanlon.
Dr. Scanlon. Yes. I think the studies indicate some of the
very positive things that have happened with medicine over the
last 30 years, and that is part of why we are so concerned
about getting people access to health care.
Dr. Hogan's comment about the lifetime expenditures, we do
not know how that is going to work out yet because we have a
new cohort of people who are aging with a very different life
history than the cohorts of the past--better nutrition, better
medical care, different lifestyles--and we will wait to see how
that happens. That is the positive side.
In terms of your question of how much relief this provides
us, it may provide some relief in terms of per-capita spending,
but as I have heard others say, it is not the per capita that
is our problem. It is the capitas. It is when those baby-
boomers come and they multiply whatever per-capita amount we
are going to spend. That is the challenge, I think, that we are
overwhelmed by.
Mr. McCrery. Ms. O'Sullivan.
Ms. O'Sullivan. I would agree with Dr. Scanlon.
Mr. McCrery. Madam Chair, it was a very interesting summary
of the study that I read, and it might be that ina future
hearing, we would like to bring in the authors of that study
and others on the panel that might want to comment on the
study. It would be very interesting for this Subcommittee to
investigate.
Chairwoman Johnson. Thank you.
Let me ask the panel one final question. If you added the
deductibles and the premiums under Part B or I guess you would
probably want to exclude the deductibles since Medigap covers
that--I mean, I am impressed that so many of my seniors are
paying Part B and also Medigap premium. The Medigap premiums
right now are pretty steep. They have gone up considerably.
So, if you just took the two of those and made them the
deductible, then the out-of-pocket expenditure--I mean, I am
not really proposing this. I just want to get your opinion.
This is what seniors are spending now, a big chunk of them. If
they spend it in a different pattern and if instead of spending
it for premiums, it was a deductible or it was some kind of
prepare bank account like Dr. Hogan proposes, then what would
be the impact? Would you get the benefits of first dollar
expenditure thinking? On the other hand, the exposure would not
be any greater? See, if you do that, there are some advantages
for low-income people, just above the levels that we now
subsidize. You could subsidize those premiums, but that is, in
fact, what seniors are spending now. If we are going to merge
these and rationalize the program and broaden its coverage,
then what would be wrong with broadening the deductible to
cover, in a sense, what they are already paying and turn it in
from a premium to a deductible and subsidize the premium for
people in that group that now cannot afford either? That is one
way. Would that have any impact on cost, Ms. O'Sullivan?
Ms. O'Sullivan. I believe your proposal is saying basically
you take the Part B premium which is $600 a year and you would
be adding to that an average Medigap premium which is $1,300,
$1,500 a year. So you would be talking something----
Chairwoman Johnson. Except the Medigap premium usually pays
the Part B premium.
Ms. O'Sullivan. No. No, it does not. It is separate.
Chairwoman Johnson. Or, just the deductible?
Ms. O'Sullivan. It is separate. So you would be talking
something close to $2,000 as a deductible.
We know that beneficiaries, regardless of how you present
something to them, are very risk-averse, and they do not want
to be liable for even that first dollar coverage. Many of them
might view the $2,000 as a very large gap before the program--
--
Chairwoman Johnson. They might, and I understand the fear
issue, but they would not have any monthly payments.
Ms. O'Sullivan. Correct. The issue would be it would have
to be presented, I believe, in a very simple form to be
understood by everybody and people would have to understand
what the tradeoffs are and you would probably also have to
think about the implications of the people on the lower end of
the income scale.
Chairwoman Johnson. Oh, you certainly would have to think
about that, no question about that, but it is sort of
interesting to contemplate. You have got a lot of people out
there putting a lot of money out and not getting much for it,
frankly, except peace of mind. Peace of mind is worth a lot,
but it is not buying medical care.
Dr. Scanlon.
Dr. Scanlon. You do need to look at all of the sources of
cost to the elderly, but you do need to break up these, the
Medicare beneficiary population into the different groups
because they are having very different experiences right now.
Those that are paying the Medigap premium are about a
quarter of all beneficiaries. We have got more than a third who
have employer coverage, and they are paying more in premiums
today than they used to in the past, but they may be paying
much lower premiums.
We have the people in Medicare Plus Choice plans. They are
paying more today than they used to, but they still may be
paying a lot less.
Then, finally, we have those who are Medicaid-eligible.
That is a key part of this equation that you are thinking about
in terms of how do you balance a restructured cost-sharing
framework with affordability while avoiding negative impacts.
The Medicaid dual eligibles and the QMB program provide you one
of the mechanisms that you have already in place to think about
how to protect people with lower income.
Chairwoman Johnson. Yes. The reason this is very important
is that, as you say, there are different populations with
different coverage. There is a third that has pretty good
coverage, not just for prescription drugs, but for a lot of
things that Medicare does not cover. Then there is this other
third with Medigap who are paying an awful lot of money and,
for the most part, not getting much in terms of prescription
drugs. Then you have the ones that are Medicaid-eligible, as we
say in our slang down here, SLMBs and QMBs, but they get
everything for the most part. Some of them pay a little
premium, but they are pretty well cared for and covered.
So you have then the group just above 100 percent of
poverty income, and people in that level of income that can
afford Medigap insurance, in a sense, they are the worst off.
They have the Medicare-only plan. They have the Medicare
premium of about $50 every month, and they have all the
copayments under Medicare. If you look at all of the
prescription drug plans, regardless of which party they
originated from, they provide the least help to that very group
because the other groups would have plans that would wrap
around the help that is provided. So they will all do better
under a prescription drug program, but the group that has the
least will pay an additional premium which they can ill afford,
and then they will get 50 percent of their cost of drugs up to
$2,000. This is not a big benefit in today's world of drug
prices.
So I hear, Dr. Davis, your concern for the beneficiary cost
issue, but I do not see the solutions directing themselves to
the beneficiaries who right now have the highest costs with the
least means, and I do not see how you can, frankly, in good
faith deal with their concerns fairly and honestly and provide
retirees with comfortable incomes the same benefits.
I do not think it is outright fair that my husband and I
would have the same catastrophic level of coverage that I think
many of these seniors need, which I think is about $1,000. I do
not even know where some of them would get $1,000 to meet the
catastrophic coverage, but many seniors we are most concerned
about will never meet the threshold, the $4,000 catastrophic
coverage. So I am very concerned that we talked blithely about
helping the beneficiary, but the group that is least helped by
any of these plans is the group that is least helped by any of
the reform proposals unless you take Dr. Davis' that is very
much richer in every, every case, but, frankly, I think would
be unaffordable.
I will look at your cost estimates, but I cannot imagine
without some means testing that you could do all the things you
want to do and have no disincentive to buy because there is too
much evidence in every market, employer-provided market, every
market that people buy more health care than they actually
need.
I will look more closely, and I will help the Committee
look more closely at the evidence of the discipline of first
dollar coverage. I think we absolutely are obliged to look at
that and any other proposals you can think of to help us look
at cost discipline because the more we rationally govern costs,
the more we can help those who need it most to have the
resources to get a fair and reasonable health plan.
If you have any closing comments, you may comment.
Otherwise, we will close the hearing.
Dr. Davis. Just to stress that all of the options I laid
out are not first dollar. They all have at least a $200 Part B
deductible.
Chairwoman Johnson. Oh, yes. I am sorry. I forgot that. I
was glad to hear that.
Dr. Davis. A Part B deductible of $200, which is the
typical employer plan, but I think the idea of charging a
$2,000 deductible for beneficiaries, two-thirds of whom are
either very sick and paying an awful lot of money already or
have very modest incomes below----
Chairwoman Johnson. But you could not do it outright.
Dr. Davis. Twenty thousand dollars is just not an
affordable kind of benefit package.
Chairwoman Johnson. What I guess I am suggesting is if you
think of what are currently paid as ``premiums,'' as instead a
kind of savings account, that if you did not use it all, you
could roll it over for future expenses, we need some creative
thinking, and that would functionally be a higher deductible,
but it would be paid out like a premium into a savings account.
Anyway, we will talk about these ideas, and I hope you will
all think about them because we do not really have the ideas
that we need yet, and I hope you will be a part of generating
them. I think the old way of linear thinking, sort of using the
old employer model, is for this population not very useful
because the costs are so extraordinarily variable and we are
insuring people now, so very many years, with varying different
means and capacities to participate in the costs themselves,
and also with an urgency to keep in the market a variety of
solutions, the employer solution, the choice solution, as well
as a decent fee-for-service plan.
I hope you will draw from this hearing that we are really
at the beginning of the road, and we are really not toward the
end.
Thank you.
[Whereupon, at 3:37 p.m., the hearing was adjourned.]
[Submission for the record follows:]
Statement of the United HealthCare Insurance Company
The United HealthCare Insurance Company (United) is pleased to
provide the Subcommittee with this written statement to supplement the
transcript of the Subcommittee's May 9 hearing on modernizing
beneficiary cost sharing in Medicare. The United HealthCare Insurance
Company underwrites Medicare Supplement Insurance plans provided to
AARP members through AARP's Health Care Options program. The views
expressed in this statement are solely those of the United HealthCare
Insurance Company and are not necessarily the views of AARP.
Medicare cost sharing is an important issue. Over the years,
beneficiaries have been asked to cover an increasing share of their
health costs. Today, Medicare covers roughly half of a typical
beneficiary's health care costs, and it is likely that this proportion
will continue to decline.
To remain viable, Medicare has relied upon supplemental coverage
from a number of sources, including employers and Medicare Supplement
carriers. Without this supplemental coverage, many seniors would not be
able to meet their cost-sharing obligations.
Roughly one third of Medicare beneficiaries have a Medicare
Supplement policy. For many beneficiaries, particularly in rural areas,
Medicare Supplement policies are the only available supplemental
insurance option. Therefore, it is extremely important that Congress
consider the impact upon Medicare Supplement of any potential
legislation to reform or modernize Medicare.
Issues for Consideration
In reviewing the supplemental insurance market, Congress should
consider whether to revise the existing standardized benefits and
whether there are ways to make supplemental insurance more affordable
and accessible to beneficiaries.
Standardization was intended to provide consumers with a common set
of benefits around which carriers would compete based upon price and
service. Ten years of experience, however, has shown that
standardization has not achieved all of its original goals.
First, although there are ten plans, only a few are frequently
purchased by consumers. This suggests that some of the benefits need to
be reexamined in light of the existing market and changes that have
been implemented in Medicare.
Second, premiums have increased substantially, primarily due to
medical inflation and additional requirements placed on Medigap
carriers, such as coverage for beneficiaries under age 65. At the same
time, many carriers have switched to attained age rating, a pricing
system that raises premiums annually based solely upon age. To ensure
that fee-for-service remains viable, Medicare Supplement plans need to
be affordable for seniors of all ages.
Finally, since standardization, most Medicare Supplement carriers
have imposed substantial medical underwriting requirements, excluding
many people with high cost health conditions. At the same time, recent
changes in guaranteed issue rights have created an extremely complex
set of requirements that are almost impossible to administer.
Underwriting requirements and guaranteed issue rules should be examined
to ensure that Medicare Supplement plans are as widely available as
possible.
Options for Reform
There are a number of reform options that Congress should consider
in examining the Medigap market. First, because only a few plans are
popular among consumers, Congress should consider combining existing
plans and adding new benefits that consumers want, such as alternative
medicine.
Similarly, Congress should review the prescription drug benefit in
plans H, I, and J. Despite consumer desire for prescription drug
coverage, these plans are not as popular as the non-drug plans.
Moreover, most companies do not offer the drug plans in many areas.
United is the only carrier offering at least one of the three drug
plans in every state and, as a result, sells roughly half of all
Medicare Supplement drug plans in the country.
Second, Congress should consider standardizing the rating
methodology by which carriers establish premiums. Although
standardization was intended to simplify the market, multiple rating
methodologies are confusing to seniors and, particularly with attained
age rating, create market incentives that actually disadvantage
seniors. A uniform rating methodology would help accomplish one of the
original goals of standardization--competition based upon comparable
prices, value, and service.
Third, Congress should consider options that reduce premiums and
utilization, such as co-pays and additional deductibles. Although these
low-cost options should not be in every plan, they could provide
broader benefit choices for people who want to reduce or minimize their
monthly payments.
Finally, Congress should consider other reforms designed to reduce
premiums and increase benefits to consumers, such as standardizing
enrollment and other regulatory requirements, implementing ``speed to
market'' measures that reduce administrative burdens on states and
insurers, and allowing standardized plans as additional options in
waiver states.