WHAT HAVE PRIVATE PLANS ACCOMPLISHED?

RICHARD SMITH: I would like to start this discussion around the role of private plans in Medicare by looking at the accomplishments that have been achieved by plans in Medicare over the last several years, both as risk contractors and as Medicare Plus Choice plans.

In Washington, discussions of Medicare reform often immediately go right to issues of financing and subsidy amounts and regional distributions of dollars. I want to take a step back because I believe that, ultimately, the importance of private plans in Medicare goes to the health and well-being of our citizens, and I believe the private plans offer substantial opportunities to improve their health and well-being. I think that that's been demonstrated by the track record to date.

Facilitating Access to Health Care
Looking at health care results, in 1999, we had a study by Harvard researchers that appeared in the Archives of Internal Medicine . It was the first large-scale study comparing quality of care for elderly heart attack victims in HMOs [health maintenance organizations] and in fee for service. The HMO patients were more likely to receive aspirin therapy, more likely to receive beta blockers, and more likely to be transported to the hospital with emergency transportation.

I know that all of this may be counter-intuitive to those who have a portrait in mind of HMOs as not facilitating access to care. Here are critical instances in which HMO members, Medicare HMO members, received what is literally life-saving therapy. Notably, the researchers speculated that the reason more HMO members than Medicare fee-for-service members arrived in the emergency department through emergency transportation ambulances may well have been that help lines and the advice lines that HMOs make available to their members may have facilitated emergency transportation, may have told people, "Go right now; call 911, get the emergency transportation, and get right to the hospital."

So in this instance we have important results that go to literally life-saving therapies in which Medicare HMO members had substantially better results than was the case in fee for service, an issue not frequently discussed in the current debate.

HMOs vs. Fee for Service
Likewise, the National Cancer Institute in 1999 published the results of a study on prostate cancer care in two Medicare HMOs, and they found the care was as aggressive or more aggressive for HMO members than it was in fee for service, again exploding the myth that care will not be provided as aggressively on the HMO side.

In 1996, what was then the Physician Payment Review Commission, one of the predecessor organizations of today's Med-Pac, reported that women in Medicare HMOs are more likely than women in fee for service to have had a mammogram by a stunning 62 to 39 percent. Strikingly, for African-American women, the gap was even larger: 67 percent of African-American women in HMOs had mammograms versus only 34 percent of African-American women in fee-for-service Medicare.

All of you know the importance of timely mammograms. This is not an abstract financing issue. This is an issue that goes directly to the health and well-being of Medicare beneficiaries.

The National Cancer Institute reported in the Journal of the American Medical Association in February 1999 that Medicare HMO enrollees were less likely than fee-for-service enrollees to have late diagnoses of breast cancer; 7.6 percent of those in HMOs versus 10.8 percent of those in fee for service had a late diagnosis. This is a critical number since early diagnosis leads to more successful treatment. Additionally, women in HMOs with early diagnosis were slightly more likely to receive breast-conserving surgery, and those with breast-conserving surgery were more likely to receive recommended radiation therapy.

Again, at every point along the way, no matter how we measure the importance of this program of Medicare to the health status of the individuals it covers, we find important progress being made through HMOs participating in the program.

A 1994 HCFA [Health Care Financing Administration] study showed that it wasn't only breast cancer where diagnosis was earlier on the HMO side of the program. It was also true of cervical cancer, colon cancer, and melanoma, all of which were more likely to be diagnosed early among HMO patients than fee-for-service patients. Finally, in 1996, the Journal of the American Medical Association published a study which reported that in terms of intensive care units, the length of stay and survival rates in Massachusetts, Medicare HMO members had lower mortality despite having a similar usage of intensive care unit resources.

Importance of Private Plans
So again, at each point along the way, we have a portrait of better results, and we also have a portrait of access to high-technology care and costly care on the Medicare HMO side. Ultimately, I believe that this is the reason that we need to maintain the role of private plans in Medicare and find ways to expand opportunities for beneficiaries to enroll in private plans in Medicare. It's why the current Medicare Plus Choice program is the bridge to broader reform of Medicare in its entirety.

We have had exits of Medicare Plus Choice plans that have been widely publicized over the last several years. I believe the aggregate number in the last three years is a total of about 1.6 million or 1.7 million beneficiaries who have been affected by exits of plans from Medicare Plus Choice, which has led to questions around the feasibility of building a reformed Medicare in such a manner that the choice of private plans is expanded for beneficiaries.

To give you a benchmark for comparison, the 1.7 million is against a current enrollment of about 5.5 million seniors who have chosen Medicare Plus Choice over the fee-for-service program. At one point, that number was actually 6.5 million seniors who had chosen to disenroll from Medicare fee for service and to enroll in Medicare Plus Choice plans.

Constraints on Payment
In looking at the future, we have to look at the reasons that plans were forced to exit the program. Clearly, we have significant issues around payment. Over the last several years, payment growth has been extremely constrained. The cumulative growth for 1998 through 2001 is averaging about 14 percent in Medicare, compared to 24 percent in FEHBP and 40 percent in another bellwether purchaser, CALPERS, the personnel system in California, which has long been known as one of the most aggressive purchasers as well as a large purchaser.

So we see a 14-percent increase versus 24 to 40 percent among bellwether large purchasers that have generally been viewed as doing an effective job. The constraints on payment have been a principal cause of plans being forced to exit the program.

We know from modeling that AAHP has done that under the current formula in many counties, we're going to see very sharp drop-offs in payment to Medicare Plus Choice plans relative to the payment within that area to fee for service, and that in many of the major population centers where many of the Medicare Plus Choice enrollees reside, we're going to see very sharp deterioration of that ratio of payment on behalf of Medicare Plus Choice beneficiaries to payment on behalf of fee-for-service beneficiaries.

In addition, we have been facing significant regulatory issues to go along with the payment difficulties. Certainly, we've seen fragmented policymaking with responsibility for administering the Medicare Plus Choice program in HCFA divided among three different centers with particular areas. For example, QISMC, the Quality Improvement System for Managed Care that managed care plans are required to adhere to, was developed by the Office of Clinical Standards and Quality, which created confusion about HCFA standards because it overlapped with and differed from requirements developed by the Center for Health Plans and Providers and requirements developed by the Center for Beneficiary Service.

Delays in Decision-Making
We've also had delays in decision-making in part due to the three-center structure. For example, rates for 2001 were issued on March 1, 2000, as required, but instructions for filing were issued in early June. The plans actually had to go ahead and file July 1. These are complex filings that involve putting together a great deal of data. These are filings that are subject to regulatory approval. They're taken very seriously, yet the instructions needed to go ahead and file were issued literally weeks in advance of the actual filing date.

Absence of Program-Wide Priorities
There has also been an absence of program-wide priorities. I'm sure all of you are familiar with the over 800-page interim final rule that came out governing the new Medicare Plus Choice program after the enactment of the Balanced Budget Act (BBA). This included voluminous new requirements rather than focusing on priority issues, subsequent to which we saw a stream of clarifications and revisions.

Let me give you one concrete example that shows how difficult it can be to operate in this environment. Plans were required to recontract with providers, and their recontracting was required to include 23 specific provisions. We have one plan that recontracted with, I believe, 60,000 providers based on the interim final rule, and it spent about $3 million to do so. This is all money going directly to overhead. I don't think anyone would say that these are funds going to patient care.

Later, the final rule reduced the number of elements that needed to be included from 23 to five. However, it was unfeasible at that point to go back and recontract again because opening up the contract again would have required additional expenditure of personnel and resources that could be better directed elsewhere.

We also have seen inconsistencies between the central and regional offices. As you know, there's a central office, and then the country is divided into 10 regions, each of which has a HCFA regional office, again giving you an example that goes to the day-to-day difficulty of operating in the environment that we've had.

The central office has, for example, issued model language for beneficiary communications. It said the use of the language is discretionary, but if that model language is used, it's not subject to change by the regional offices and will receive expedited review. In some cases, however, the regional offices have required the use of the model language which the central office had identified as discretionary and then required changes in use of the model language which the central office had specified as not subject to change.

Administrative Burdens
We also are facing very extensive administrative burdens. In another area, risk adjustment, we're now looking at collection of 100 percent encounter data, which requires Medicare Plus Choice plans to develop all the systems and staffing necessary to process claims in the same way as fee for service rather than building on existing plan data systems and capabilities and recognizing that the concept behind M+C and its predecessor program, the risk program, was that there may be different ways of doing things in fee for service.

We want to create opportunities for those different mechanisms to be out in the market because they can offer some advantages to beneficiaries, but we're now being forced increasingly by the evolution of the risk adjustment data collection requirements to do things exactly the way that fee for service does them. That's obviously not consistent with a long-term direction around innovation and choice of beneficiaries.

I'd also note, in the area of excessive administrative burden, that when fully implemented, the QISMC requirements--the quality improvement program for managed care plans that I mentioned earlier--require simultaneously pursuing six different QISMC projects, plus follow-up work on completed QISMC projects, plus additional requirements for demonstrating soundness of quality improvement programs that are not part of QISMC.

Again, there seems to have been, in the past, little weighing of the administrative burden, identifying priorities that can really add value and allowing a focus in those areas and not forcing a dispersion of resources to areas of low value.

I think that as we move forward with Medicare Plus Choice as well as moving forward with broader reform, we need to have better coordinated policymaking around this program and timely decision-making. We need to have a set of program-wide priorities. We need to achieve consistency between central and regional offices, and we need to streamline oversight and the administrative burden.

There have been some efforts to begin to better coordinate piecemeal issuances of policy known as OPLs, operational policy letters. We applaud that, and we believe this is the start of what needs to be done to improve program administration. Consolidation, as I mentioned, is critical, getting all M+C functions back into one office as they were prior to about four or five years ago.

Principles for Reform
Looking at what it will take to make Medicare Plus Choice work and be the platform for broader Medicare reform, in addition to achieving improvements in the regulatory environment, achieving stability in payment, and developing risk-adjustment mechanisms that make more sense than the ones now on the table, we have developed a set of principles for such reform.

First, AAHP supports expanding choices for Medicare beneficiaries.

Second, we believe that fee for service must be included in any broad reform. There has been an extraordinary amount of attention paid to the once 16 percent and now 14 percent of the program made up by Medicare Plus Choice beneficiaries. It does not seem that there has been anything like a similar level of attention paid to the 85 percent of the program that is in fee for service.

As we look at a range of issues around Medicare, it's often the case that we end up focusing solely on the M+C side of the program without thinking about fee for service. So what kind of quality initiatives are we going to have in fee for service that are comparable to the quality initiatives that we have in Medicare Plus Choice?

Quality Protection in Fee for Service
It's fair to say that there has been something of a presumption that it is important to have a far more rigorous set of quality protections on the HMO side than on the fee-for-service side. We certainly support meaningful, well-designed quality protections, but we believe that they need to be extended across the program. There should not be a presumption, as there is today, that fee for service delivers better quality and that consumers in fee for service don't need to be the beneficiaries of quality standards.

The results that I read off to you earlier provide a portrait in which one may ask a series of questions about fee for service that are very fundamental. For example, why are there lower rates of people who have had heart attacks getting beta blockers that can save their lives and prevent them from second heart attacks in fee for service as compared to M+C?

Choice Through Flexibility in Benefits Design
Going forward, we need to promote greater choice for beneficiaries by permitting flexibility in benefit design. We don't think that there is a one-size-fits-all benefit design out there that will work well. We also know that beneficiaries are often quite savvy about the benefit package that's going to work best for them.

Government contributions need to adequately fund choice, and there needs to be a certain stability to those government contributions. The zigging and zagging that we've done over the last couple of years has been one of the elements that's been particularly destructive.

We need to get to funding stability as well as funding that adequately funds choice. And as I mentioned earlier, we need to develop an improved regulatory framework along the principles that I have outlined.

PROMOTING CONSUMER CHOICE THROUGH REFORM

ALISSA FOX: I represent the Blue Cross and Blue Shield Association, the 46 Blue Cross/Blue Shield plans across the country that together provide coverage to 79 million Americans, about one in every four persons in this country.

The hallmark of Blue Cross and Blue Shield is choice for all Americans. Whether you purchase coverage through a large employer or a small employer, whether you purchase coverage as an individual or through government partnerships like Medicare and Tricare, Blue Cross/Blue Shield provides options. We pride ourselves on offering a very broad range of options that our customers can choose from, including HMOs, point-of-service plans, and PPOs [preferred provider organizations], as well as traditional fee for service.

In fact, when you look at our 79 million members, they roughly fall into a third HMO coverage, HMO point of service; about a third PPO, and that's really rising; and then a big chunk still in traditional fee for service. So we want to be there providing customers a lot of choices and let them select what best meets their needs.

A Unique Perspective
Blue Cross/Blue Shield plans have a unique perspective in looking at Medicare reform because we work with Medicare as part of Medicare in several ways.

First, we provide Medicare Plus Choice HMO coverage to over a million Medicare beneficiaries collectively. We are the largest Medicare Plus Choice HMO provider, and we're providing coverage in 20 states today.

Second, on the fee-for-service side, many of you know that Blue Cross/Blue Shield plans contract with Medicare, with the Health Care Financing Administration, to handle the day-to-day administration of paying claims. We do the majority of those claims.

Finally, all of our plans provide Medigap coverage to individuals as well as retiree benefits as part of employer-sponsored coverage. So we're there in a variety of different ways.

In addition to our participation in the Medicare program, we are also the leading choice in the Federal Employees Health Benefits Program. Almost 50 percent of all federal employees opt to select the Blue Cross/Blue Shield option that's offered under the federal employees program.

Principles for Effective Reform
So what do we think about Medicare reform? Like AAHP, we support Medicare reform to assure that the program remains financially stable and secure so that it can be there for current beneficiaries and all of us as we retire. We are urging policymakers to consider four key points as they go forward in reforming Medicare.

First, any reform should provide beneficiaries the same types of choices and innovations that working Americans now have. As I mentioned, we're there providing choices. Any choice that people imagine, we want to be there to provide a range of choices that make sense.

Second, we believe Congress should view Medicare Plus Choice as the foundation for broad reform. We've got to make Medicare Plus Choice work. It's not working very well today.

Third, a well-planned transition is absolutely critical to making sure any new program works right. A transition has to be well thought out. It can't be a postscript. It has to be the guts of any reform plan. How you get there is critical.

Finally, because a substantial number of beneficiaries are likely to remain in fee for service for the foreseeable future, Congress should maintain the viability of the Medigap program as well as assure proper administration of the fee-for-service program.

The Need for Private-Sector Choices
With respect to our first recommendation, any reform should provide for a range of private-sector choices. This was clearly the goal of Congress in 1997 when they enacted the Medicare Plus Choice program.

Unfortunately, that hasn't happened. Today, we have fewer Blue Cross/Blue Shield plans participating in the program than in 1997. Over the past two years alone, 14 Blue Cross/Blue Shield plans have dropped out of the Medicare Plus Choice program. That's not a trend that we want to see continue.

I must tell you that our plans agonize over these decisions. It often means telling long-time subscribers that their coverage will be disrupted. That's the last thing our plans want to do. Our plans are in the community. It's not like they leave the community and go someplace else. When they withdraw from the program, they're withdrawing from the program, not from just one state to go to another state. It also means terminating entire staffs.

So our Blue plans are very committed to their communities, and it's an extremely hard decision pulling out of the program. When we go into the program, we want to make sure we're going in and staying in so there's stability and predictability for our customers. It's absolutely critical.

Why did our plans pull out? There are really three reasons.

The first two reasons are unnecessarily complex federal regulations and a high level of business risk, where the risk of unintentionally failing to comply with a particular requirement is just immense. There was a requirement up until about a year ago that a CEO had to certify that all the data was 100 percent accurate. We can tell you, no claims system is designed to be absolutely 100 percent accurate, so we were being asked to sign something that we really questioned. People were very concerned because there are very severe and significant penalties, and you could lose your entire corporation if something went awry.

The third area is the unpredictable and inadequate payment rates.

Micromanagement
We believe the success of Medicare reform is going to depend upon a fundamental change in government's relationship with the private sector. Consider, for example, the QISMC quality improvement management system.

The private sector has accreditation systems in place. There are quality measurement programs. What HCFA did, instead of relying on what the private sector had come up with, was to decide they're going to design their own. Instead of using the gold standard that all employers are using across the country, they said, "We're going to design our entire new program, very prescriptive, very detailed, nothing like anybody has used in the private sector," and it's been a major problem for plans as they've tried to comply with these.

It's also hundreds of detailed rules for virtually every aspect of a health plan's operations. Clearly, when we deal with the private sector and contract with employers as we do, we are not operating under these types of micromanaged rules as we are under the HCFA scenario.

With respect to providing reasonable and predictable payment rates, payments to plans must keep pace with changes in spending in the government-run fee-for-service program. Here again, almost 40 percent of plans are facing another capped year of 2 percent when the fee-for-service system is growing. You can't manage a program like that.

Importance of Stability and Predictability
While adequate payments are absolutely critical, stability and predictability are equally as critical. Our plans are committed to a retention strategy. In other words, we place a high priority on not only attracting people, but keeping our current beneficiaries satisfied. A key way to do that is to avoid large premium increases and instability in benefits.

We don't want to provide a great benefit today if we know that next year the money is not going to be there and we're going to have to cut back benefits. That's critical as you look at reforms. We want to make sure that if we're going to provide a new benefit, we're going to stay there, because we know that our customers don't like it when we say here's a good benefit and then pull it away next year. It just creates unhappiness in the system.

Strengthening Medicare Plus Choice
A second key principle is strengthening Medicare Plus Choice as the foundation for reform, as Rick mentioned. We greatly appreciate that Congress approved significant new monies last year, as well as changes to reduce the regulatory burden to improve the way the Medicare Plus program works. These monies are making a difference. Several of our plans lowered premiums, added benefits, paid their providers more. That is very helpful.

Now that rates are out for next year, we are examining what additional changes may be needed to make this program viable, and the problem is that a lot of places are facing a 2 percent gap. Again, it's very hard to stay in a program when you're capped at 2 percent, way below what the rest of the community is getting.

We're very concerned about the risk-adjustment program that's scheduled for full implementation in 2004. To be honest, it's just more instability and unpredictability. A new risk-adjustment methodology is on the horizon. We don't know what the methodology is. It hasn't been tested. It will be a lot more problems if it's not thoroughly discussed, reviewed, and tested. It needs to be tested to make sure it works right.

Planning for Reform
Again, a well-planned transition is critical. We need to make sure we discuss and debate how we're going to get to the reformed system, how will it be phased in given the recent upheaval in the Medicare Plus Choice program. Introducing new, sweeping changes in Medicare could undermine beneficiaries' confidence in the program as well as our provider partners. We need to make sure, for our providers and our beneficiaries, that things are well planned and run smoothly.

Finally, we need to make sure, for the beneficiaries who remain in the fee-for-service system, that the program works for them. We are urging Congress to make sure they don't undermine Medigap. Beneficiaries are very pleased with their Medigap. If they stay in the private fee for service, they want to be able to buy Medigap. There's been a lot of discussion that maybe people don't need that first dollar coverage. I can tell you, beneficiaries want that first dollar coverage.

When you look at the array of options that are being offered in the marketplace, hardly anyone buys the streamlined package. Less than 5 percent of all beneficiaries who purchase Medigap choose the lowest-cost option that doesn't cover the Part A and Part B deductibles; 95 percent want the higher-coverage options even though they're getting more expensive. So we believe that we need to make sure that we're meeting beneficiaries' needs. They want that type of coverage.

UNDERSTANDING THE HEALTH CARE MARKET

JANET STOKES TRAUTWEIN: We have a little different perspective. Our association is the National Association of Health Underwriters, and our people are involved primarily in the sale and service of all types of Medicare-related plans: Medigap plans, different types of Medicare Plus Choice plans, and so forth. We also deal quite a bit in the under-65 health insurance market and do quite a bit of work with a number of organizations as it relates to health insurance markets across the country.

I think the health plans are really good at saying what it is that they need in order to stay in or participate more fully, but I think it would be helpful to have a basic understanding of what happens in markets that can make things go wrong, whether it's the under-65 market or the over-65 market because some of the principles are the same.

One of the problems with plans across the country, regardless of which market they're in, is their ability to negotiate effective discounts with providers. By providers we mean physicians; hospitals; ancillary providers such as laboratories, radiology facilities, and so forth; and those that provide prescription drug coverage, which most do in the under-65 market.

Problems of Managed Care in Rural Areas
The problem is not getting any better. In fact, it is getting quite a bit worse, particularly in rural areas. I mention the rural areas because the Senate Finance Committee is working on this issue, based on what they're telling us. If you look at the makeup of the Senate Finance Committee, we have a really rural-based committee, and they are going to be very concerned about issues that relate to people in rural areas.

Our members report across the country that we have a huge problem in rural areas with managed care plans being able to offer the most cost-effective types of products. They have often reported to us that the plans cannot effectively negotiate rates with providers. This is the information that we have received also from some people with the carriers we've talked to.

The Medicare Plus Choice Market
I mentioned the under-65 market, but all of this holds true for the Medicare Plus Choice market as well. I was recently in the state of Maine, and we were concerned because they have some severe market problems in all areas. We were trying to figure out exactly what the problem is. Some of the things were obvious. There were some regulatory burdens that were ridiculous. But some of the other things were less obvious, and we started looking at their HMO products and why they weren't less expensive. We found that the hospitals would only give a 5 percent discount to an HMO. A 5 percent discount isn't much. It might as well not be there.

So, basically, what happens in those types of products is that you have a pass-through on the cost, and it's not really an effective management of care. You don't get the volume purchasing discounts that you otherwise would. That's just an example. Those types of things are found across the country.

Low Reimbursement Rates
Not to point the finger at the providers, because that's not the intention there, but one of the reasons why the providers are reluctant to enter in some areas into managed care arrangements is because of the low reimbursement rates that they already get from Medicare. For example, Maine is one of the lowest reimbursement states for Medicare in the country, and any time they can cost-shift into a private plan, they feel they have to do that.

In this discussion, it's not useful to point your finger at any one person or group and say, "Well, you are not playing by the rules." But this ability to negotiate contracts is part of the reason for the cost. I mention this because the plans talk about their inability to get adequate reimbursements, and a lot of people wonder why they don't have enough money. Why isn't this current Medicare payment enough to pay for the services? There are market realities out there in addition to the huge regulatory burdens. These are just some realities of life that have to do with negotiating contracts.

To return to the Senate Finance Committee for a minute, a number of members of that committee want to know why there aren't any PPO plans in Medicare Plus Choice. Medicare Plus Choice is supposed to be about choice, and a lot of them are asking the question, "We have PPOs, and we participate in them in our areas, and our constituents love them. Why can't we have them in Medicare Plus Choice?"

We've watched these markets for a long time, and one of the problems is that when, let's say, an HMO plan comes into an area where there aren't any other HMOs, when they talk to providers, the providers don't want any part of a capitated rate. They're afraid that they will lose their shirts, and they don't understand how anybody could make it on just getting one fee per member per month. Yet in a Medicare Plus Choice program, that's the way that HMO is paid. They get one fee per month, and they are expected to work it however they can with the providers in the community to get an adequate spread of the types of services that they need under the plan.

A PPO is even more compounded because, while they have some per diem negotiations, they largely work already on discounted fees. So it becomes even more difficult to try to make that work within the program. That just compounds the other problems. These are market realities that we don't know exactly how to deal with, but they're there, and there are reasons why it costs the plans as much as it does to be in some areas.

You may or may not be aware of this, but Medicare Plus Choice up until very recently has pretty much had just HMOs and point-of-service plans in terms of the types of plans that were available for people to select from if they didn't want to be in traditional Medicare. This year we did get a private fee-for-service plan through one insurance company, the Sterling Plan, and I'm very curious as to how well that is going to work. Under that plan, beneficiaries can go to any provider they want. The providers are paid based on what Medicare normally pays providers to accept Medicare assignment.

I think it's an important experiment. I think it will be a good test to see whether or not a PPO-type plan could be offered as well, and we can maybe learn to see what the people at Sterling learned in this arrangement.

Changing the Regulatory Structure
Based on the information that we've gotten in our conversations with people on the Hill, because the balance of power in the Senate right now is pretty much equal, we feel that there probably will be some demands that plans stay in for an extended period of time and give a guarantee that they're going to stay in the program. I'm not sure, under the regulatory situation that they have right now and the compensation structure, that that's a fair thing to ask. So I think that Congress will be looking at making some significant changes in the regulatory structure so that we can actually expand it.

There is no way that we can start with Breaux-Frist until we fix Medicare Plus Choice. Medicare Plus Choice, if you remember what it was supposed to be like, would have been like the original Breaux-Frist idea from a choice perspective. It's supposed to offer a variety of different choices, and it could have worked like that, although overall reforms needed to be made in the underlying program.

I agree with what you said, Rick, that the underlying program has some significant problems with it in spite of the fact that beneficiaries might like it when they combine it with Medigap. A lot of our people sell Medigap policies, and they would agree with what you said, Alissa, that consumers really like it. But there are some underlying problems with the program: If underlying Medicare doesn't cover something, and if that's not changed, Medigap isn't going to cover it either because it's not an approved Medicare charge in many circumstances.

This is a huge project. It's not a small undertaking, and there are a lot of changes that need to be made.

MARKET COMPETITION THROUGH STRUCTURAL REFORM

VICTORIA CRAIG BUNCE: The Council for Affordable Health Insurance is a national research and advocacy organization, and the benefit of being such an organization is that we have everybody from the different aspects of the health care delivery system: doctors, health actuaries, health insurance agents, underwriters. We even have consumers and pharmacy benefit managers and senior groups. So when we come up with a policy, it's a knock-down, drag-out fight to make sure that everybody agrees or is singing along the same lines.

Everybody pretty much agrees that there are some structural changes in Medicare that need to be made in order for it to be a viable solution for the long term. Congress identified two reasons for initiating Medicare Plus Choice, or M+C as everybody refers to it. One was to allow beneficiaries to have access to a wide variety of health plan choices in addition to the traditional fee for service. The second was to enable the Medicare program to utilize innovations that have helped the private market contain costs and expand health care delivery options.

Greater Regulatory Power, Fewer Options
Instead, what we have seen over the past couple of years is that because of the expanded regulatory power of the Health Care Financing Administration (HCFA), the number of options available for Medicare beneficiaries was reduced. This really surprised a lot of people. Maybe not so much the health plans, as we were dealing on a daily basis with HCFA trying to explain that a lot of what they were proposing in terms of their regulatory efforts were not going to work in the private market, but they would not learn from the benefit of our experience of being out there in the trenches.

I think what we would most agree with is that the Balanced Budget Act's mandates resulted in four things: fewer participating health plans; more seniors needing Medi-Gap coverage because when some insurance carriers were leaving markets, they were forced to go back to the traditional health insurance of Medicare; no private fee-for-service plans or medical savings account plans being introduced because of the regulatory environment; and benefits cuts. Companies were forced to work within the benefit structure to try to make an affordable product.

Market Competition: The Key to Reform
The National Bipartisan Commission on the Future of Medicare basically, as Jim indicated earlier, came up with a reform model of the Federal Employees Health Benefits Program. We at CAHI think that they had the right idea: that free-market competition is the key to a successful Medicare program for the future.

One of the things that CAHI has done since 1992 is look at the Medicare reform issue. We've put our health insurance actuaries, who are members of the American Academy of Actuaries as well as the Society of Actuaries Foundation, to the task of coming up with some options for Medicare reform, from looking at the current program, current beneficiaries, to looking at a transition period, and then looking to the future. We have studies available at our office or on our Web site at cahi.org if anybody is interested in getting that information.

One of our principal consulting actuaries, who's with Milliman and Robertson, Inc., said that preserving Medicare for the long term will include opportunities for individuals to select their Medicare benefits from a variety of options available in the private market. Any long-term solution needs to preserve quality of care for seniors, maintain reasonable federal budgets, and provide a system upon which all generations of taxpayers can rely.

Basically, what we did was to come with our own proposal. We looked at a system wherein individuals would build a fund over their working careers that will provide the resources to pay for their health care needs in retirement. This would replace over a long period of time, 60 years out from now, the current pyramid scheme where your taxes are funding health care for the people who are currently retired.

One thing that we found was that, according to the Society of Actuaries Foundation, during the lifetime of the next generation, Medicare's income will cover only 60 percent of its expenditures. So now is the time to look at fundamental changes needed for the long term.

A Growing Share of the Federal Budget
In 1996, Medicare expenditures made up 12 percent of the federal budget, more than double what it was in 1975. The Congressional Budget Office (CBO) estimates that at the current rate, by 2006, Medicare will consume 18 percent of the federal budget, more than the U.S. crime, education, and defense budgets combined. In 2010, 77 million baby boomers, those born between 1945 and 1965, start retiring. The number of Medicare beneficiaries will increase much faster than the number of workers supporting Medicare through payroll taxes. Today, four workers pay taxes to support each Medicare beneficiary.

When we were looking at some of the Society of Actuaries information, we also surveyed seniors, high school students, and other people, and we found that without long-term structural changes in the Medicare program, the following could be in store for various factions of the American population.

• If you're a young person, you would have an increase in the Medicare tax extracted from your paycheck to support the current program. Further, by the time you would reach the Medicare eligibility age in the program or its current benefit structure, it might or might not be in existence for your use. Health care rationing certainly would be a part of the program if you're a young person. This is what people are seeing today in terms of what they're thinking about for the future.

• If you're a middle-aged person, 35 to 55 or 60, you would have an increase in the Medicare tax extracted from your paycheck to support the current program. By the time you would reach the Medicare eligibility age in the program or its current benefit structure, it would be more limited.

• If you're a current Medicare beneficiary, you are in the best situation because you can draw from Medicare benefits. However, since the average life span has increased from 67 in 1965 when Medicare was enacted to 77 years of age today, you will see structural changes in the benefits you currently receive unless longer-term solutions are in place to sustain the program.

So what we discovered from our surveys is that if nothing is done to alter the structure of Medicare in order to finance the health care needs of future beneficiaries, deficit spending will reach astronomical and unsustainable levels in the early parts of this century.

Helping the Elderly Pay for Health Care
For some time, the Medicare debate has focused on only two approaches to providing financial support to the elderly to pay for health care.

First, you have defined benefits, which guarantees those eligible for Medicare a comprehensive set of benefits without regard to the cost of those services. While this approach protects seniors from future rises in the cost of health care services, it has been criticized by many because it places a huge financial risk on taxpayers.

Second, there is defined contribution, which provides seniors with a specified dollar amount of financial help to pay for Medicare benefits. While this approach limits the risk for taxpayers and creates incentives for seniors to seek cost-effective plans, it has been criticized for shifting all the financial risk onto the backs of the beneficiaries, many of which have not planned for such an event.

A Third Choice: Premium Support
What we learned from our surveys and our members and talking to other organizations is that perhaps sensible Medicare reform can consist of a compromise between these two approaches in the form of premium support. This is basically what the Medicare Commission also came up with. While there are several variations under such a scenario, seniors would receive a contribution to the cost of a plan. It could be adjusted each year to cover the plan's market price and could provide a core set of benefits.

This would assure senior citizens that they would continue to have an entitlement and that the cost of the standard Medicare coverage would be guaranteed. At the same time, the premium-support approach means they would have a strong incentive to choose a cost-effective plan.

It does not mean that the premium-support approach forces the elderly and disabled to be given a voucher or be at risk for unexpected costs, however, because you could adjust for health status or income levels. So there would be ways within the premium-support approach to make sure that seniors would be covered and cared for.

Medical Savings Accounts
Seniors like my parents might want a more generous plan. They might choose to have what we like to refer to as a medical savings account that would be just for their medical costs and pay for medical care out of that account if they wanted such a plan. If the federal government said "Here is X amount that we're going to give you," there might be some sort of tax advantage to putting money into an account, taking it from your IRA or something else like that and getting some sort of benefit for paying for other costs.

CAHI came up with a way to see how the medical account would work. We've been working with our actuaries since 1996. Basically, what we thought was that we need a commitment to a long-term solution. Senator Breaux said to the AARP in February of 1998, when he was talking about the Medicare Commission and their recommendations and what they were looking at, that they need to come up with a system that will ensure the long-term solvency of Medicare, not a system that needs to be fixed every two years. We definitely think that he and the commission were on the right track.

We have a 15-step plan on how you would go from the current Medicare system all the way to using the medical individual account. Essentially, let me just say that for those people that wanted to stay in Medicare, the program would be available to current Medicare beneficiaries.

We see this as the transition, and that if you're age 45 to 64, you would have a choice of creating a medical account or remaining in the Medicare program. But if you're under age 45, you probably would have your individual medical account about the time that you would retire and be receiving benefits.

CAHI recognizes that addressing any long-term solutions to sustaining the Medicare program will be difficult and challenging under any circumstance. However, finding longer-term solutions will be better facilitated if we can improve the current Medicare program and create a balance between the traditional program and private offerings. A balanced system should create efficiencies in both the delivery and financing of medical care at the same time.