Staff Document
Major Options to Modernize and Secure the Medicare Program for the 21st Century
Purpose: To provide background information to Members of the Senate Committee on Finance on major legislative options for modernizing the Medicare program.
Contents:
Section 1: Overview
Section 2. Medicare+Choice and Health Plan Competition
Section 3. Fee-for-Service Plan Management Modernization
Section 4. Benefit Design Improvements Within the Current Law Standard Package
Section 5. Access to Outpatient Prescription Drug Coverage
Section 6. Medicare Governance
Section 7. Medicare Solvency Standards
Section 1. Overview
Overview: Under the chairmanship of Senator William Roth (R-DE), and with the support and cooperation of the Ranking Member, Senator Daniel Patrick Moynihan (D-NY), the Senate Committee on Finance initiated a systematic and comprehensive review of the Medicare program beginning in March,1999. The purpose of this review was to examine the current benefits, operation and financing of the Medicare program to assess whether, and in what ways, the program needs to be modernized to meet the needs of current and future beneficiaries. This work was initiated about the time the Bipartisan Commission on the Future of Medicare was completing its examination of Medicare, as provided for in the Balanced Budget Act of 1997.
The Committee began with presentations by a panel of experts in a bipartisan retreat held under the auspices of the Library of Congress, followed by a series of 14 hearings, the most recent of which was held in May of 2000. In this process, the Committee took testimony from a wide range of witnesses, including experts in government finance, health insurance benefit design, medical care, the Health Care Financing Administration, and State health care programs, as well as advocates representing program beneficiaries, taxpayers, health care providers, manufacturers of pharmaceuticals and others.
From this testimony, it is evident that the Medicare program has served millions of aged and disabled persons well since its inception in 1965. It is equally evident, however, that the Medicare program is showing its age. Numerous problems in scope of benefits, benefit design, program administration, and services to beneficiaries and participating health care providers and private health plans, are emerging due in part to Medicare's growing size and complexity. Moreover, the Congress itself must shoulder some of the responsibility for program design and resource allocation issues.
The overall thrust of testimony before the Finance Committee indicates that significant steps must begin to be taken now to modernize the Medicare program. The most crucial problems identified through testimony are 1) outmoded health benefits design relative to what is customary for most Americans prior to retirement, 2) an accumulation of complex statutes and regulations governing many aspects of program policy and administration, 3) design and implementation issues in the Medicare+Choice program - an earlier effort to introduce more flexible ways of delivering Medicare benefits through private health plans, and 4) inadequate resources devoted to program administration, exacerbated by mission and workforce issues in the Health Care Financing Administration. The issue of adequacy of current resources for Medicare is overshadowed by the looming financial demands of sustaining the program in the face of enrollment that will double to 80 million individuals (one-fifth of the U.S. population) in about 15 years.
Earlier this year, the Chairman sent a letter to Members of the Committee asking them, on a confidential basis, to share their views on how best to address issues of Medicare modernization in six broad areas. The areas included 1) Medicare+Choice and health plan competition, 2) fee-for-service program modernization, 3) benefit design improvements within the current law standard package, 4) other benefit changes outside the current law standard package, including access to outpatient prescription drug coverage, 5) governance changes needed to support Medicare modernization, and 6) solvency provisions to assist in sustaining Medicare's financial viability. The staff paper is organized to present for Members' review and discussion, the major policy options under consideration within each of these areas and supporting information.
Section 2. Medicare+Choice and Health Plan Competition
Present Law
Medicare+Choice plans are private insurers that contract with HCFA to provide the full range of Medicare benefits. A Medicare+Choice plan can be a coordinated care plan (such as a health maintenance organization (HMO) or preferred provider option), a high deductible plan offered with a Medicare+Choice medical savings account, or a private fee-for-service plan. At the current time almost all Medicare+Choice (M+C) plans are HMO's. As of April 2000, there were 262 M+C plans, serving 6.2 million beneficiaries.
For each enrolled beneficiary, Medicare pays Medicare+Choice contractors a prospectively determined monthly capitation payment. These monthly rates are equivalent to a government-administered premium, the level of which is set largely by formula in the Medicare law.(1)
These HCFA payments/premiums represent a complete shifting of financial liability or insurance risk from the government to the M+C insurers with respect to the covered health care costs of the individuals who choose to enroll in the M+C plan. Unlike other HCFA contractors that provide administrative support-only services to HCFA on the fee-for-service plan, the M+C insurers hold full financial risk for the provision of all Medicare benefits to the beneficiaries enrolled in their plan. In exchange, M+C plans must provide all necessary covered services for beneficiaries who enroll in their plan and are at risk if the cost of those services exceeds the premium payment they received. Under the traditional fee-for-service plan, the government holds all the financial liability for claims expenses of individuals covered by that program.
The major differences between the current Medicare+Choice program and one envisioned by reform advocates, is the way the premium payment to health plans is derived, and to what extent beneficiaries face different premium levels for different plan choices that may influence their enrollment decisions from year-to-year. Currently, Medicare+Choice plans receive an administered, county-based premium derived from a formula that is built upon Medicare fee-for-service expenditures in each county. For a variety of reasons, it is very difficult under such pricing formulas to create premiums that are reasonably consistent with what would have been produced by premium bidding and negotiation approaches. Premium formulas can lead to both overpayments and underpayments to plans. Bidding and/or negotiation are the more customary ways for health plans to operate in employer-based and other government-sponsored health plan systems.
Some proponents of change believe that premiums derived from health plan bids submitted to Medicare or other approaches more consistent with that of other major payers (e.g., employers, including the Federal Employee Health Benefit Plan) would be more efficient than an administered premium, because it would ensure that Medicare is paying an amount closer to a plan's actuarially based estimate of the anticipated costs of providing services to beneficiaries, plus administrative costs and retention margins (the latter are relevant to both for-profit and not-for-profit health plans.)
In addition, it is argued that such models provide a framework for beneficiary choices among plans that could introduce an element of price-sensitivity in their plan choices that is not achievable in today's Medicare+Choice program, for a variety of reasons. In all models of competing private health plans, attention must be given to tools for minimizing the negative effects of adverse selection, i.e., the effects on premiums due to certain plans systematically drawing enrollment of high-cost cases that are not offset by sufficient enrollment of persons who are average and below average users of services.
Reason for Change
While it has provided increased choice of Medicare-sponsored benefit designs for many Medicare beneficiaries, the Medicare+Choice program has not been without its problems. In the past, these have included plan pull-outs, reductions in service-areas, variation in benefit offerings from year-to-year, and uncertainty in beneficiary premiums. While the majority of beneficiaries have a Medicare+Choice plan available to them in their area (69%, according to MedPAC), there are large sections of the country without a Medicare+Choice option. Moreover, market-based issues such as provider contracting difficulties, drug and medical price inflation, and insufficient market share also affects plan participation. Still, it has been argued that allowing plans to adopt a more flexible, competitive business model could positively address many of these difficulties.
Reforming the Medicare+Choice system centers on three key questions:
How would plan premiums be developed? Under the current system, premiums are determined for each service area by an administrative formula. There is no substantial bidding or negotiation between the plan and the government over premiums resulting from the administrative formula. In effect, it is a "take it or leave it" system for private health plans. In addition, private plans cannot offer beneficiaries premiums lower than those they pay for participation in the public fee-for-service (FFS) plan. This results in competition between plans to add more benefits relative to the FFS plan, rather than offer lower prices. Plans are compensated for the core benefits, but not compensated by the government in its premium formula for providing additional benefits. Under certain circumstances, the government will permit beneficiaries to be charged an additional amount for supplemental benefits.
Rather than a traditional competitive bidding process (e.g., lowest bid wins, or winner takes all), most of the proposals envision a process similar to that used by the Federal Employees Health Benefits Program (FEHBP). FEHBP accepts nearly all applicant plans for participation, provided a plan's benefits and premium offer meets the aforementioned tests established through a tightly scheduled and professional negotiation process between the plan and the government, designed to ensure high quality care at competitive prices. Adapted to Medicare, it is argued that such an approach would promote added flexibility, price competition, and plan participation by basing premiums and benefits on a plan's actual fiscal experience with their own enrolled Medicare beneficiaries in a specific market. This is in contrast to the Medicare+Choice administered premium formula and other rules that often introduce pricing, benefit design and plan marketability and availability issues.
Establishment of Medicare+Choice Premiums
Option 1: Continue with Medicare+Choice government premium formula approach.
Option 2: Adopt a plan premium bidding approach.
Most of the reform proposals, including that of the Chairmen of the Bipartisan Commission on the Future of Medicare, the President's, and both Breaux-Frist proposals, recommend moving to a system where instead of "taking or leaving" a government premium set for a given market, plans develop and submit to the government their actuarially based premium reflecting the benefits they plan to offer, the population they expect to enroll, and the geographic areas in which they intend to offer their plan. These proposed premiums and benefit offerings would be reviewed by the government taking into considerations factors such as quality assurance, actuarial soundness, and plan solvency.
How would the government contribution be determined? Once there is agreement on the basic approach to establishing the premium for private health plans participating in Medicare, then decisions must be made on two related fronts with respect to the government's contribution. First, an approach must be decided upon for establishing what share of a given plan's premium would be paid by the government, and the resulting share that would become the beneficiary's obligation. Second, given the long-established system in traditional Medicare of beneficiaries paying a uniform, average premium at the national level (the Part B premium), decisions must be made about the relationship that will be allowed to develop over time between premiums in the traditional program, and comparative beneficiary premiums in the Medicare+Choice plans.
Under current law, the government's premiums for Medicare+Choice plans are set in law and these rates are not negotiable. Further, the beneficiary sees no change whatsoever in his/her Part B premium contribution, meaning that there may not be a clear price consideration for beneficiaries when deciding between remaining in the FFS plan versus enrollment in a Medicare+Choice plan. Even when a beneficiary chooses a Medicare+Choice plan, the government continues to collect the Part B premium, and then in a manner not discernable to beneficiaries, makes Medicare revenue allocation decisions between the traditional program and the Medicare+Choice system. In effect, the Medicare+Choice premium formulas can be thought of as the means by which the Medicare program distributes Medicare revenues behind the scenes to health plans.
This system tends to insulate beneficiaries from the principal purpose of premiums in a multi-plan system, which is to introduce price sensitivity to consumer choices, and to encourage choices that reward the most efficient plans with increasing enrollment. Reform advocates have proposed two major options to making these premium relationships more evident to beneficiaries. They differ principally over the extent to which the government's contribution approach exposes the traditional FFS plan's premium to direct competition with Medicare+Choice plans' premiums.
Determining the Government Contribution to Premiums
Option 1: National Model #1 - Link the government/taxpayers' contribution to the average premium of both the public FFS plan and the private Medicare+Choice plans (most direct FFS premium exposure)
Use the approach suggested in the Bipartisan Commission Chairmen's proposal and the original Breaux-Frist proposal -- tradeoff some protection of FFS premiums for potentially greater efficiency gains. This would allow the growth of the government contribution to be determined by the average growth rate in the premiums of all Medicare plans, both public and private. The relative influence of any particular plan's premium growth rate would be in proportion, i.e., weighted, by the percentage of the total Medicare population the plan enrolls. Plans whose premiums rise faster than the other plans would be at a competitive disadvantage. Plans whose premiums rise slower than the other plans would be at a competitive advantage. Special premium protections could be devised for beneficiaries in areas were there is little or no choice among plans, e.g., rural areas. One concern with this type of design is that there could be a significant risk of higher premiums for beneficiaries remaining in the traditional FFS plan.
Option 2: National Model #2 - Link the government/taxpayers' contribution to private plans to the premium of only the public FFS plan (moderated FFS premium exposure)
Use the Administration's or current Breaux-Frist approach - in effect, tradeoff some efficiency gains for greater protection of traditional FFS premiums. The calculation of the beneficiary FFS premium would remain unchanged. Private plans would receive a contribution based on a percentage of FFS costs. Beneficiaries in private plans would pay the difference between the total plan premium and the government contribution. Private plans would have the ability to offer additional benefits and/or reduced premiums, including premium reductions below the cost of the Part B premium. This approach leaves unchanged the current system for calculating Part B premiums, but permits Medicare+Choice plans to offer lower premiums or premium rebates. Beneficiaries would share in savings below FFS costs and the government would also benefit from lower, more efficient pricing.
Discussion: The original Bipartisan Commission Chairmen's proposal and the original Breaux-Frist proposal used the average total premium charged by plans as the benchmark for the government's premium contribution. This formula exposes the FFS plan to the greatest competitive pressure on a comparative premium basis. Alternatively, the President's reform proposal and the latest Breaux-Frist 2000 proposal would link the government contribution to the cost of covered benefits in the traditional fee-for-service program (FFS). This formula is a compromise approach that exposes the FFS plan to much more moderate premium competition than does Option 1, but introduces elements of premium competition that do not exist in today's Medicare+Choice system.
Under Option 1 above, (the Bipartisan Commission Chairmen's proposal and the original Breaux-Frist proposal) Medicare savings could accrue by requiring the FFS plan to compete more directly on the basis of how its premium compares to those of competing private plans. However, there are concerns over the possibility that selection bias would favor private plans, leaving the most costly beneficiaries behind in the traditional FFS plan. If this scenario materialized, premiums in the FFS plan could increase significantly relative to those of the private plans. This is viewed as most problematic if viable Medicare+Choice plans are not available in all areas of the country, leaving some beneficiaries with no choice but to pay the FFS plan premiums.
Under Option 2, linking the government contribution to the FFS plan could hold beneficiaries in the FFS plan harmless in terms of the effects of competition on their Part B premium costs. This approach has been faulted by some for overly moderating the degree of competition between the traditional FFS plan and Medicare+Choice relative to the original Breaux-Frist proposal. Still, plans would be paid based on their competitively-bid prices, and a beneficiary would be given incentives to choose a lower-cost private plan in order to obtain a reduced Part B premium or to purchase additional benefits.
Below are two tables prepared by CRS to help illustrate the relationship between total plan premiums and beneficiary premiums. Some key differences between the two approaches are:
Original Breaux-Frist Competitive Medicare Premium System:
Hypothetical Example of Beneficiary Premiums and Government Payments a
| Plan | Plan's premium bid | Premium for
core benefits |
Beneficiary premium | |
| $ | % of total | |||
| Private 1 - standard |
$4,700 |
$4,700 | $0 | 0% |
| Private 2 - standard |
$4,800 |
$4,800 | $0 | 0% |
| Private 3 - standard |
$5,600 |
$5,600 | $469 | 8% |
| Private 4 - standard |
$5,760 |
$5,760 | $597 | 10% |
| Private 5 - standard |
$5,900 |
$5,900 | $709 | 12% |
| Private 6 -standard |
$6,000 |
$5,900 | $809 | 13% |
| FFS - standard |
$6,000 |
$6,000 | $809 | 13% |
| Private 7 - high |
$6,300 |
$5,500 | $909 | 14% |
| Private 8 - high |
$6,500 |
$5,700 | $1,109 | 17% |
| FFS - high |
$6,800 |
$6,000 | $1,409 | 21% |
| Weighted average |
$6,101 |
$5,899 | $884 | 14% |
Source: Table prepared by the Congressional Research Service.
Administration's Competitive Defined Benefit Program:
Hypothetical Example of Beneficiary Premiums and Government Payments
| Plan | Total cost | Percent of traditional Medicare | Beneficiary premium | |
| $ | % of total | |||
| Private 1 |
$4,700 |
78% | $0 | 0% |
| Private 2 |
$4,800 |
80% | $0 | 0% |
| Private 3 |
$5,600 |
93% | $600 | 11% |
| Private 4 |
$5,760 |
96% | $720 | 13% |
| Private 5 |
$5,900 |
98% | $860 | 15% |
| Private 6 |
$6,000 |
100% | $960 | 16% |
| FFS |
$6,000 |
100% | $720 | 12% |
| Private 7 + drugs |
$6,300 |
105% | $972 | 15% |
| Private 8 + drugs |
$6,476 |
108% | $1,148 | 18% |
| FFS + drugsa |
$6,576 |
110% | $1,008 | 15% |
| Weighted average |
$6,056 |
101% | $763 | 13% |
Source: Table prepared by the Congressional Research Service.
a Assumes prescription drug premiums are $576 annually, with half paid by beneficiary and half by government.
How would the benefits offered be determined? After deciding the premium approach and the government contribution approach, the third major decision is whether to permit Medicare+Choice plans some flexibility in the minimum benefit package offering, which currently is the Medicare standard benefit package.
All the proposals currently under consideration use the current Medicare benefit package as the core or minimum any plan would have to offer. Assuming that the current Medicare benefit package is the minimum any plans would have to offer, there is still a question about how much variation around that core set of benefits is optimal. Reduced copays and deductibles are an attractive option in many M+C plans. Still, benefit variation has been the focus of concerns that M+C plans may have attempted to attract lower-cost beneficiaries in order to profit relative to the existing government-determined Medicare+Choice payment formula. This dynamic may not continue under a premium bidding approach, but steps may still be necessary to minimize adverse selection problems.
Standard vs. Flexible Benefit Offerings By Plans
Option 1: Require the Medicare benefit package to be offered as the minimum, without variation (Medicare+Choice current law)
Option 2: Allow moderate benefit variation around the core set of benefits (FEHBP model)
The Bipartisan Commission Chairmen's, the President's, and both Breaux-Frist proposals use the current benefit package as the core and allow variation that is more generous than current benefits. The amount of variation that is allowed is a matter of degree. The President's proposal allows the least benefit variation, especially in the proposed drug benefit. Coinsurance, benefit limits, etc. would be specified by statute.
The Bipartisan Commission Chairmen's and the Breaux-Frist approaches allow the most variation. For instance, in the Breaux-Frist proposals the overall generosity of the drug portion of the benefit is specified by a particular dollar amount, i.e., $800 in 2003. Plans are allowed to design any variety of drug benefits as long as the government actuaries are satisfied that the benefit is worth $800 (so-called actuarially equivalent).
The tradeoff is between maximizing flexibility and innovation in benefit design, while promoting appropriate price comparisons between plans and providing protections against adverse selection. The greater the amount of variation allowed the greater the ability of the plans to adapt to the changing needs of the beneficiaries they serve and to design benefits to encourage efficient, effective use of services. However, greater variation makes it harder for beneficiaries to compare plans based on their premium prices and increases the ability of plans to shape their benefits to attract particular subpopulations, e.g., those with lower costs. FEHBP permits benefit variation; the extent of that variation is occasionally constrained by government and plan negotiations, and program directives where certain benefit configurations have been shown to lead to adverse selection problems. In the Medicare context, there may be special concerns given the characteristics of the Medicare population.
Section 3. Fee-for-Service Program Management Modernization
Present Law
Please see explanation under each proposed option below.
Reason for Change
As the Committee considers the option of moving the traditional fee-for-service program into an enhanced plan competition model, Committee Members expressed concern over whether the traditional fee-for-service plan has adequate contracting flexibility and benefit management tools to constrain costs and improve quality assurance under an increasingly competitive program orientation. These provisions are intended to provide the fee-for-service program flexibility to contract with providers and suppliers in a more efficient, cost-effective manner and to provide beneficiaries with care that is better coordinated and quality-focused. The tools that these provisions entail have all been used successfully in existing demonstration projects or are currently used in the private sector.
Option 1 - Contractor Reform
Present Law: The Secretary has the authority to use independent health insuring organizations to perform claims processing and other administrative functions for the Medicare Part A and Part B programs. The statute also contains a provision that allows for provider nomination for selection of an intermediary (Part A contractor) where the professional organizations of hospitals and certain other institutional providers choose claims processing contractors on behalf of their members. Medicare law generally requires intermediary and carrier (Part B contractor) contracts to be based on cost reimbursement. Contractors are paid for the necessary, allowed costs of carrying out Medicare activities but are not permitted to make a profit.
Proposed Change: Allow the Secretary more flexibility in entering into Medicare claims processing and administrative contracts, in particular by being able to choose from a variety of firms other than insurance companies, and grant increased authority for oversight of contractor performance.
Option 2 - Primary Care Case Management
Present Law: There are no current provisions regarding these services in Medicare law. However, this section incorporates the definitions of primary care case management services and primary care case managers that are contained in Medicaid law (established in the Balanced Budget Act of 1997).
Proposed Change: Eligible beneficiaries would choose to have medical care managed and coordinated by designated case managers.
Option 3 - Disease Management Services
Present Law: Under the Secretary's demonstration authority, HCFA began a demonstration program earlier this year to test certain forms of treatment for heart disease. The goal of the demonstration is to determine whether changes in lifestyle, including nutritional changes, can reduce the need for more invasive procedures after a disease has reached a more advanced stage.
Proposed Change: Authorizes the Secretary to contract with entities to provide disease management services to beneficiaries with certain high-cost, chronic health conditions.
Option 4 - Competitive Bidding of Certain Products
Present Law: Normally, beneficiaries are free to choose any qualified providers. The Balanced Budget Act of 1997 authorized the Secretary to implement 5 competitive bidding demonstration projects. Under each project, up to 3 competitive bidding areas are to be established for furnishing Part B services (except for physician services) for a 3 year period. Different areas could be established for different classes of items and services. The Secretary conducts a competition among qualified individuals and entities supplying items and services for each acquisition area. The Secretary cannot award a contract unless the Secretary finds that the entity meets quality standards. The Secretary is authorized to limit the number of contractors in an area to the number needed to meet projected demand. Payment will not be made in a competitive bidding area to a noncontracting entity unless the Secretary finds that the expenses are incurred in a case of urgent need or other circumstances specified by the Secretary. The Secretary is required to evaluate the projects and expand a project to additional competitive bidding areas if the Secretary determines, based on the evaluation, that there is clear evidence that a project would result in reduced federal expenditures without an adverse impact on access, diversity of product selection, and quality.
One of the demonstration projects became effective on October 1, 1999 where competitively selected suppliers began furnishing durable medical equipment in Polk County, Florida. A second pilot for durable medical equipment is scheduled to begin in January, 2001 in Bexar, Comal and Guadalupe Counties in Texas.
Proposed Change: Makes permanent the Secretary's current demonstration authority to competitively select suppliers of Part B products and services.
Option 5 - Provider and Physician Collaborations
Present Law: No provisions in current law.
Proposed Change: Participating providers would enter into agreements to furnish all services for an episode of care and receive a bundled, capitated payment.
Option 6 - Preferred Providers
Present Law: No provisions in current law.
Proposed Change: Participating providers would agree to furnish Medicare items and services at negotiated rates. Beneficiaries would receive cost-sharing reductions for utilizing these providers.
Option 7- Centers of Excellence
Present Law: There are no provisions in current law. However, the legislative proposal discussed below adopts and expands a payment arrangement tested in a demonstration project that was in place between 1991 and 1998 where several participating hospitals received bundled payments for coronary artery by-pass grafts (CABGs). The demonstration was suspended due to Y2K systems issues, and has not been resumed. A bundled payment is a single fee that covers all of the facility, diagnostic and physician services for this designated procedure. The now inoperative project was established under HCFA's general authority to establish such demonstrations to test alternative payment methods.
Proposed Change: Participating providers would receive a bundled payment for services related to a specific procedure, including items and services associated with post-acute care.
Option 8 - Demonstration of Bonus Payments for Health Care Groups
Present Law: No provisions in current law.
Proposed Change: Demonstration project designed to test the effectiveness of paying health care groups incentives to encourage coordination of care and improved efficiency and outcomes.
Option 9 - Purchasing and Quality Improvement Programs
Present Law: No provisions in current law.
Proposed Change: Authorizes Secretary to establish performance standards and quality improvement programs for providers and beneficiaries choosing to enroll.
Option 10 - Funding for Overpayment Recoveries
Present Law: The Health Insurance Portability and Accountability Act of 1996 (HIPAA) established the Medicare Integrity Program and dedicated, multiyear funding for certain activities related to safeguarding Part A and B expenditures. Specifically, it expanded HCFA's authority to permit contracting with eligible entities to perform Medicare program integrity activities performed currently by intermediaries (Part A claims processors) and carriers (Part B claim processors). The activities include: medical and utilization review; fraud review; audit of cost reports; Medicare secondary payer determinations and overpayment recoveries; provider, supplier and beneficiary education regarding payment integrity and benefit quality assurance issues; and development of durable medical equipment prior authorization lists.
Proposed Change: Provides funds to recover overpayments made to providers. Fiscal intermediaries and contractors would be permitted to receive MIP funding for the following activities: (1) overpayment determinations and recoveries and (2) provider enrollment and verification. The legislation would also expand the MIP contractor functions to include these activities after a phase in period.
Section 4. Benefit Design Improvements Within the Current Law Standard Package
Present Law
The Medicare program has a complex benefit structure specified in considerable detail in statute since the program's inception in 1965. Medicare, authorized under Title XVIII of the Social Security Act, provides health insurance for over 38 million people aged 65 years and over and certain disabled individuals. Part A, Hospital Insurance, provides premium-free coverage for people who paid the Medicare payroll tax, for inpatient hospital care and care provided by skilled nursing facilities, home health agencies, and hospices. Part B, Supplementary Medical Insurance, is optional, and requires a premium payment. It covers physician services as well as services provided by certain non-physician practitioners, and such other items and services as durable medical equipment, clinical laboratory tests, and ambulance services. Beneficiaries are subject to cost sharing charges for most services. Part C provides managed care options for beneficiaries who are enrolled in both Parts A and B.
Among the structural changes to the Medicare program made by the Balanced Budget Act of 1997 was the creation of a new Part C, the Medicare+Choice (M+C) program. It expands the health plan options of Medicare beneficiaries to include the traditional fee-for-service program as well as several types of managed care plans. Not all of these options are available in all areas. Under current law, the standard benefit package outlined in the law is the package that M+C programs must offer as well. They have limited authority to enhance benefits, such as adding drug coverage or reducing cost-sharing in the standard package, but are not permitted to increase cost-sharing or otherwise restructure standard benefits, even where evidence suggests benefit design or efficiency might be improved.
Under Tab 4 is a chart outlining the original benefit package in 1966, contrasted to the package in effect at this time.
Reason for Change
Overview. The Medicare benefit package has not kept pace with changes and improvements that have occurred in health insurance benefits design in the private sector. Not only does it omit significant benefits (discussed in section 4), but the premium, deductible and other cost-sharing aspects of the benefit could be designed to better promote appropriate utilization of services. Some payment obligations, such as the inpatient hospital deductible currently set at $776 per hospital admission, are viewed as quite high relative to what is customary in private health plans, where annual deductibles of $500 or less are more customary. Alternatively, the Part B deductible has risen to only $100 from its initial level of $40 in 1966, although Part B spending has increased many times over during the same period.
Medicare has a spell-of-illness concept for inpatient hospital services that can lead to payment of the inpatient hospital deductible multiple times in any given year depending on the timing of repeat hospitalizations. Further, Medicare does not cover catastrophic hospital stays, compared to most private health insurance which covers 365 days of inpatient care, where medically necessary. Coinsurance and copayment amounts for a variety of other current benefits have not been reassessed and recalibrated in accordance with the latest information on levels and use of services for many years. Also, private health plans typically contain annual limits on out-of-pocket spending to protect enrollees from excessive costs due to a catastrophic illness. Medicare's current package does not contain such protections.
Medigap. Private insurance carriers marketing supplemental (i.e.Medigap) policies are permitted to sell policies that permit existing deductibles and costsharing obligations to be insured against for a premium cost to the beneficiary. While it is widely held that individuals should be free to purchase insurance against risks of any cost they prefer not to incur, this is a practice that has been found to increase costs in the underlying Medicare program and in some instances, may not be cost-effective for beneficiaries. Currently, there are 12 model Medigap plans permitted for sale to beneficiaries. These plans are designed to dovetail with the benefit structure of the standard package, and changes to the standard package would require reassessment of and modifications to the approved Medigap models, as well. (Note: The National Association of Insurance Commissioners (NAIC) was consulted in 1990 over the original "policy forms" that could be sold in the Medigap market. The NAIC has recently initiated an effort to review these plans in order to make recommendations in 2001 to the Congress for updating and improving the Medigap market.)
Other Medicare Implications. Medicare provider payment methods, and the resulting payment levels, such as for inpatient hospital care, are founded in part on the underlying scope of the benefit that relates to the service. Significant changes to the scope of particular benefits could require adjustments to certain provider payment policies. This is a relatively recent issue to surface to the Committee in this area and requires further investigation.
Prior Congressional Action. The Congress began to address some of these benefit design problems under the Medicare Catastrophic Benefit Act of 1988 (see Tab 4). However, when that law was repealed in 1989, the standard benefit package improvements (other than the drug benefit) that had been part of that law were repealed as well. More recently, the Bipartisan Commission on Medicare Reform, authorized in BBA 97, examined a number of possible changes to the standard benefit package to bring it into conformance with what is more typical of widespread health insurance coverage in the under-65 population. This effort included consideration of combining the Parts A and B deductibles into one single deductible, modifying cost-sharing on selected services, expanding inpatient hospital coverage to 365 days per year, and adding an annual limit on catastrophic out-of-pocket beneficiary costs (for example, not to exceed $3,000 per year). Lastly, in its hearings, the Committee took testimony from a number of witnesses indicating that the standard Medicare package is long overdue for a comprehensive reassessment and modernization effort. For all of these reasons, it has been argued, independently of matters such as the addition of outpatient prescription coverage, that the standard Medicare benefit package should be reviewed and updated in a number of areas.
Explanation of Option (s)
Option 1. Enact a new standard benefit package for Medicare - illustration follows.
The Congressional Research Service has developed the capacity to model changes to the Medicare benefit package, and has under contract, the services of a major actuarial consulting firm known as the Hay Group. CRS was asked by the Committee to prepare an illustrative, modernized Medicare package to help identify the key areas where changes are recommended. CRS was also asked to confer with the Medicare Payment Advisory Commission, which in recent years, has recommended selected changes in benefit structure. An illustrative model package will be distributed.
This option assumes readiness on the Committee to address this session some of the key problems that have been identified and discussed in the Medicare package, as illustrated in the handout. The Committee would direct certain changes to be made, with an effective date not sooner than 2003 to permit corresponding changes to be made to the Medicare supplemental plan offerings and Medicare+Choice markets.
Option 2. Seek expert evaluation of and recommendations on Medicare standard benefit package design and related program implications prior to legislative action.
Modifying the Medicare standard benefit package is a complex undertaking. Any changes could a) affect beneficiary and taxpayer costs in the future, b) influence payment for and utilization of services across different sites of care, c) require revamping of the standardized plans permitted to be offered in the Medicare supplemental market, and d) require changes in the rules governing benefit offerings by Medicare+Choice plans.
This option assumes the Committee would prefer to seek a comprehensive, expert reevaluation of the Medicare benefit package, with recommendations concerning the package and related implications or changes needed for the Medigap and medicare+Choice markets. This work could be conducted by Medpac, in consultation with the CRS, the American Academy of Actuaries, the NAIC and other benefit experts.
Option 3. Incremental change.
It is possible to consider programmatic change and benefit expansion in the absence of comprehensive benefit reform described in Option 1 (above). While an integrated approach may address member concerns about legislative clarity and benefit design, it is often the case that Medicare programmatic changes take place in a more incremental fashion. The benefit options considered by the Committee in the past, now before the Committee, or those recently proposed by the administration, are sufficiently well developed to warrant independent consideration if members choose to adopt an incremental approach.
Option 1. Index Part B deductible to inflation. Medicare's Part B deductible of $100 would be indexed annually to some agreed-upon measure of inflation beginning in 2002 (increasing the deductible initially by $2-3).
Option 2. Eliminate cost-sharing for preventive benefits. The Administration has proposed to waive the Part B deductible and 20 percent coinsurance for preventive services for which cost-sharing is not already waived under current law.
Option 3. Additional preventive benefit changes. These may include proposals by the Administration to further support prevention education and outreach. Moreover, Members have proposed additional prevention benefit enhancements that the Committee may wish to consider.
Option 4. Co-pays for laboratory services. The Administration has proposed to conform payment policy for clinical laboratory services with most other items and services reimbursed under Part B by applying a 20 percent coinsurance beginning in 2002.
Option 5. Income relating of the Part B benefit. The Committee's decision in 1997 to income-relate the Part B premium would have tied cost of services more closely to ability to pay.
Option 6. Amend Medigap laws to conform to changes the Committee may adopt. Changes the Committee may adopt would alter the current Medigap offerings. The proposal would request the Secretary to consult with the National Association of Insurance Commissioners to better conform Medigap offerings with the decisions the Chairman's mark may enact into law. Moreover, the Administration has requested authority to update Medigap with respect to a more rational cost-sharing than occurs under the current standardized plans.
Option 7. Medicare buy-in for seniors age 55-64. The Administration has proposed allowing older Americans age 62-64 to "buy in" to Medicare. The proposal also provides displaced seniors ages 55-62 who involuntarily lose their jobs and health coverage a similar Medicare buy-in option. Finally, the Administration proposes to extend COBRA continuation coverage for Americans age 55 and older.
Option 8. Advisory committees for HCFA. The Administration has requested a number of advisory committees for the Health Care Financing Administration, including panels to address management, Medicare coverage, and Medicare education. In addition, other members have expressed interest in a proposal by the National Academy of Social Insurance to create a panel within HCFA to oversee and develop fee-for-service modernizations.
Section 5. Access to Outpatient Prescription Drug Coverage
Present Law
Medicare beneficiaries who are inpatients of hospitals or skilled nursing facilities may receive drugs as part of their treatment. Medicare payments made to the facilities cover these costs. Medicare also makes payments to physicians for drugs or biologicals which cannot be self-administered. This means that coverage is generally limited to drugs or biologicals administered by injection. However, if the injection is generally self-administered (e.g., insulin), it is not covered.
Despite the general limitation on coverage for outpatient drugs, the law specifically authorizes coverage for the following:
Immunosuppressive Drugs. Drugs used in immunosuppressive therapy (such as cyclosporin) during the first 36 months following discharge from a hospital for a Medicare covered organ transplant. There is a temporary extension of the 36 month limit for persons otherwise exhausting their coverage in 2000-2004. In each of these calendar years there is an extension specified by the Secretary. Total expenditures over the 5-year period cannot exceed $150 million.
Erythropoietin (EPO). EPO for the treatment of anemia for persons with chronic renal failure who are on dialysis.
Oral Anti-Cancer Drugs. Oral cancer drugs used in cancer chemotherapy providing they have the same active ingredients and are used for the same indications as chemotherapy drugs which would be covered if they were not self-administered and were administered as incident to a physician's professional service. Also included are oral anti-nausea drugs used as part of an anti-cancer chemotherapeutic regimen.
Hemophilia clotting factors. Hemophilia clotting factors for hemophilia patients competent to use such factors to control bleeding without medical supervision, and items related to the administration of such factors.(2)
The program also covers the following immunizations:
Pneumococcal pneumonia vaccine. The vaccine and its administration to a beneficiary if ordered by a physician.
Hepatitis B vaccine. The vaccine and its administration to a beneficiary who is at high or intermediate risk of contracting hepatitis B.
Influenza virus vaccine. The vaccine and its administration when furnished in compliance with any applicable state law. The beneficiary may receive the vaccine upon request without a physician's order and without physician supervision.
Payments for these drugs and immunizations are made under Medicare Part B. The program generally pays 80% of Medicare's recognized payment amount after the beneficiary has met the $100 Part B deductible. The beneficiary is liable for the remaining 20% coinsurance charges. These Part B cost sharing charges do not apply for pneumococcal pneumonia or influenza vaccines.
Reason for Change
Throughout the Finance Committee's series of hearings on Medicare reform, experts have testified consistently that if the Medicare program were designed today, drug coverage would no more be excluded from the standard benefit package than would any other major component of medical care, such as coverage for hospitalization or physician services. However, in the absence of Medicare outpatient drug coverage, 69 percent of Medicare beneficiaries have secured some form of prescription drug coverage outside of the program principally through Medicaid, employer retiree health benefits, or individually purchased Medigap supplemental plans. The remaining 31 percent who lack any prescription drug coverage can face significant out-of-pocket costs, especially when those expenses are evaluated relative to the beneficiaries' level of income.
The Committee took testimony from the Congressional Research Service (CRS) indicating that the average beneficiary with drug benefits filled 5 more prescriptions per year than those without coverage (21 versus 16 per person in 1996). Drug spending is two-thirds higher for those with coverage than for those without ($769 per capita in 1996 versus $463 for those without). CRS also testified that persons in higher income brackets tend to have higher levels of supplementary coverage while the lowest levels of other sources of coverage are for those between 100 percent and 200 percent of poverty.
The Committee believes fundamental program reforms are needed to make drug coverage available to Medicare beneficiaries - although difficult issues related to timing, structure and costs to taxpayers and beneficiaries will have to be resolved.
Explanation of Option (s)
Preface. - An array of proposals have emerged this session of Congress to extend outpatient prescription drug coverage to Medicare beneficiaries. Staff review of these proposals suggest that the following questions are particularly relevant to consider in evaluating and discussing preferences:
1) Should Medicare provide coverage of outpatient prescription drugs? If yes, what other reforms should be included in a Medicare reform/modernization package?
2) Should drug coverage be offered to beneficiaries on a mandatory or voluntary enrollment basis?
3) Should drug coverage be offered to all beneficiaries (universal access) regardless of income or drug expenses incurred by the individual?
4) Should drug coverage be targeted based on income levels or especially high drug expenses relative to income, or a combination of both?
5) Should drug coverage be offered all at once to all beneficiaries or phased-in in some fashion?
6) Should the scope of drug coverage be oriented more towards first-dollar, front-end coverage, or towards catastrophic drug expenses?
7) How should premium and cost-sharing levels be structured to balance benefit design and affordability concerns for beneficiaries and taxpayers?
8) Should drug coverage be incorporated directly into the existing Medicare package or should it be offered as a free-standing benefit?
9) Should there be explicit policies in any new drug benefit to address crowd-out concerns related to existing sources of drug coverage many beneficiaries have in the private sector, such as employer-based retiree health benefits?
10) Should the government or the private sector bear the insurance risk associated with providing drug coverage to Medicare beneficiaries? That is, should drug coverage be offered by private insurers on a risk-assumption basis under government supervision, or should it be offered directly by the government (who would bear the risk) contracting with private insurers to administer the benefit, or a combination of both?
11) For whatever role you would assign to government relative to a Medicare drug benefit, would you have those responsibilities carried out by the Health Care Financing Administration or a different federal entity? If the former, what changes would you expect to occur in HCFA to accommodate the new responsibilities? If the latter, what characteristics would you expect that entity to have ranging from it's location in the Executive Branch, to it's organization and staffing?
12) What is appropriate to spend on a Medicare drug benefit, balancing beneficiaries needs, and short and long-term program solvency and budgetary concerns?
Following is a summary of the key drug coverage proposals offered in this Congress, as of the time this document was assembled. The descriptions are based on information generally available in the public sector. For any proposal, it must be kept in mind that they may be works-in-progress from the standpoint of legislative sponsors and that sponsors could change (or may have already changed) some of the parameters described below. The purpose of these descriptions is simply to illustrate the array of ideas and to stimulate discussion over Member preferences in the Finance Committee. A further note on administration of a drug benefit - in some cases, the role of government versus the private sector is clearly based on the sponsor's descriptions of their proposals. In some cases, it is possible for either of two major administrative routes to be taken, direct government management through contractors, versus supervision of private health plan offerings to Medicare beneficiaries. In those instances, that has been noted. Finally, for purposes of this discussion, the term "universal" refers only to the offering of coverage, not to the question of affordability.
Option 1 - The Breaux-Frist Proposal
Program design: The primary focus of this proposal is to allow the purchase of prescription drug coverage through either M+C plans or private supplemental plans (for beneficiaries remaining in FFS). Any entity, such as an insurer or PBM willing to bear risk would be allowed to offer the supplemental plans pending approval by the Medicare Agency.
Eligibility: The new drug benefit would be available on a voluntary basis to all Medicare beneficiaries. As under current law for Part B, beneficiaries would be given a choice of accepting or rejecting drug coverage within the first six months of eligibility for the program, and could join the program at a later date following the death of a spouse or the loss of employer-based coverage with no penalties.
Scope of benefit: Plans are allowed maximum flexibility in the benefit design to offer lower cost-sharing (co-pays or coinsurance), lower premiums, and vary deductibles, while meeting an actuarial value of approximately $800. All plans must guarantee stop-loss protections beyond a specified amount and all plans must ensure negotiated price discounts on drugs are extended to beneficiaries during any gaps in coverage. Federal dollars are set aside each year into a reinsurance pool, which is used to help insurers with high-cost cases and help keep premiums affordable. Low-income beneficiaries would receive subsidized coverage.
Option 2 - The President's Proposal
Program design: the primary focus of this drug benefit is to provide an approach that satisfies the condition of universal coverage by emphasizing front-end coverage. About 15 percent of program funds are targeted to provide coverage for high cost "catastrophic" drug spending. The benefit would be administered by HCFA using Pharmaceutical Benefit Managers (PBMs) to provide the actual benefit.
Eligibility: the new drug benefit would be available on a voluntary basis to all Medicare beneficiaries. As under current law for Part B, beneficiaries would be given a choice of accepting or rejecting drug coverage when they first become eligible for the program, and they could join the program at a later date following the death of a spouse or the loss of employer-based coverage.
Administration: the program's administrative agency will select one PBM per geographic region to manage the benefit.
Scope of benefit: there would be no deductible. The beneficiary would be responsible for 50 percent of drug spending between $0 and $5,000 along with a 50% per-capita premium. The beneficiary would be responsible for 100 percent of drug spending over $5,000, until the catastrophic limit is reached. The catastrophic limit was not specified, but $35 billion was made available over the next ten years for a benefit starting in 2006. CBO has not estimated what the $35 billion will fund, but HCFA's Office of the Actuary's preliminary estimate would place the catastrophic limit at about $4,000 of beneficiary drug spending or about $6,500 of total drug spending. Lower-income beneficiaries would receive additional subsidies to reduce out-of-pocket costs.
Option 3 - Universal High Deductible Benefit
Program design: the drug benefit would be designed to provide more comprehensive coverage as beneficiaries' total drug spending increases. This model targets the most generous coverage to those who face the highest levels of spending this would focus coverage on catastrophic drug expenses and include a high-deductible at the front-end, with relatively generous coverage beyond that point. Low-income beneficiaries would face lower deductibles and a higher premium subsidy.
Eligibility: the new drug benefit would be available on a voluntary basis to all Medicare beneficiaries. As under current law for Part B, beneficiaries would be given a choice of accepting or rejecting drug coverage when they first become eligible for the program, and they could join the program at a later date following the death of a spouse or the loss of employer-based coverage.
Administration: the program's administrative agency will administer competition either between private insurers or PBMs, depending on which alternative is selected, who would bid to participate in the program on an annual basis. Plans would compete for beneficiaries in a manner similar to the way private plans compete in the Federal Employees Health Benefits Program (FEHBP).
Scope of benefit: there would be a $2000 deductible, with a 20 percent beneficiary coinsurance payment for drug costs above $2000.
Option 4 - Universal Step-Up Benefit
Program design: the drug benefit would be designed to provide more comprehensive coverage as beneficiaries' total drug spending increases. This model targets the most generous coverage to those who face the highest levels of spending but still provides more modest assistance for front-end drug costs. It also provides the most generous coverage to those with low and middle incomes, but still provides some assistance to those with higher incomes by income-relating the premium (no one is income-related out completely - a 25 percent subsidy is maintained for higher-income seniors).
Eligibility: the new drug benefit would be available on a voluntary basis to all Medicare beneficiaries. As under current law for Part B, beneficiaries would be given a choice of accepting or rejecting drug coverage when they first become eligible for the program, and they could join the program at a later date following the death of a spouse or the loss of employer-based coverage.
Administration: Administered by multiple PBMs in each region to contract with HCFA to administer and deliver the benefit, to promote competition and choices. In each geographic region, multiple PBMs would be allowed to use the full range of tools currently used in the private sector to encourage cost-effective behavior. A pharmacy and therapeutics advisory committee, composed primarily of physicians and pharmacists, is established to make recommendations on clinical guidelines, formulary standards, procedures for evaluating bids, etc.
Scope of benefit: For example, there would be a deductible of $250, and a premium equal to 50 percent of per-capita program costs. After that deductible is met, the beneficiary would be responsible for 50 percent of drug spending between $251 and $4000, 25 percent of drug spending between $4001 and $5000, and after $5000 the beneficiary would be fully covered, with no additional beneficiary cost-sharing. Lower-income beneficiaries would receive additional subsidies to reduce or eliminate out-of-pocket costs.
Option 5 - Combined Deductible
Program design: Medicare's separate Part A and Part B deductibles would be merged into a single annual deductible. This combined deductible could not be covered by a Medigap plan. The savings that result from this "no first dollar coverage" policy would be used to finance a Medicare drug benefit. A unified deductible will result in higher out-of-pocket costs for beneficiaries with spending concentrated in Medicare's Part B, and lower out-of-pocket costs for beneficiaries with spending concentrated in Part A.
Eligibility: the new drug benefit would be available on a voluntary basis to all Medicare beneficiaries. As under current law for Part B, beneficiaries would be given a choice of accepting or rejecting drug coverage when they first become eligible for the program, and they could join the program at a later date following the death of a spouse or the loss of employer-based coverage.
Administration: the program's administrative agency would be instructed to contract with pharmacy benefit managers on a regional basis to administer the benefit and negotiate volume discounts on behalf of beneficiaries.
Scope of benefit: the Medicare program would pay 50 percent of the cost of prescription drugs, up to an annual maximum of $2,500, after the combined deductible is met.
Option 6 - Part B Expansion
Program design: the drug benefit would be designed to expand Part B coverage to include outpatient prescription drugs. The Part B premium would increase to reflect the cost of the new drug benefit. Beneficiaries would be protected from front-end drug costs up to a specified amount, with a discrete stop-loss limit that becomes effective at a somewhat higher amount.
Eligibility: the new drug benefit would be available on a voluntary basis to Medicare beneficiaries who choose to join Medicare Part B. Participation rules are those applicable to Part B beneficiaries.
Administration: Overseen by the Health Care Financing Administration, selecting multiple PBMs to manage the benefit (with at least two in each region). Medicare+Choice would offer comparable benefits to their enrollees.
Scope of benefit: Medicare would pay a beneficiary's costs for the first $1700 of drugs in a year (after an annual $200 deductible was met), subject to a maximum coinsurance of 20% (participating entities can vary under that limit to effect behavior, e.g., incentives for mail-order, generics, etc.). Medicare would pay 100% of covered drug costs once a beneficiary reaches $3000 in annual out-of-pocket spending for prescription drugs. Lower income beneficiaries would receive additional subsidies to reduce or eliminate out-of-pocket costs. The proposal includes subsidies to encourage employer-sponsored plans to maintain equivalent or greater coverage, an opt-out for beneficiaries who have equivalent or greater coverage, and continued drug price discounts when drug costs fall between basic and catastrophic coverage.
Option 7 - Targeted, Low-Income Benefit
Program design: a short-term intervention operated outside of the Medicare program to make targeted relief available to the most vulnerable populations until fundamental Medicare reform is signed into law and implementation has begun.
Eligibility: targets Medicare beneficiaries with incomes too high to permit Medicaid eligibility, but low enough that drug costs are burdensome. At their option, states could cover populations with incomes up to 200 percent of poverty, or, for states that have already undertaken expansions, 50 percentage points beyond current eligibility levels.
Administration: as with the state children's health insurance program (SCHIP), the states would have the option of participating in the new program. If states choose not to participate, there would be a federal default system in place to ensure coverage is available to eligible individuals in non-participating states.
Scope of benefit: as under SCHIP, states could design the benefit package within federal guidelines. For example, states could base the new drug benefit on Medicaid's benefit, on an existing state-only drug assistance program, on the drug benefit included in the most popular health plan afforded to state employees, on the drug benefit included in the FEHBP Blue Cross Standard Option, or on another model that secures approval from the Secretary of Health and Human Services.
Section 6. Governance of Medicare
Present Law
The Administrator of the Health Care Financing Administration (HCFA) is delegated authority from the Secretary of the Department of Health and Human Services (HHS). When HCFA was created in 1977, it was authorized to have about 4,000 staff members and was responsible for administering the Medicare and Medicaid programs. However, in recent years HCFA has been charged with increasing tasks including administration of Medicare, including both fee-for-service and managed care programs, Medicaid, State Children's Health Insurance Program (SCHIP), oversight of clinical laboratories (CLIA), oversight of Medicare Supplemental (Medigap) insurance, certification and survey activities for nursing homes and responsibility for issuing regulations for the individual and small group health insurance markets (HIPAA). HCFA currently employees 4,437 employees nationwide to carry out these varied tasks.
All major legislative and regulatory initiatives of the Agency go through a review and approval process within the Department of Health and Human Services, with subsequent review and approval by the executive office of the President.
Reason for Change
Many Members believe that major reforms are required to modernize the Medicare program and keep it viable. Enormous fiscal and benefit design pressures will be exerted by the doubling of the beneficiary population, to over 80 million individuals, that will occur as Baby-Boomers retire. In less than twenty years, it is estimated that fully one-fifth of all Americans will be enrolled in Medicare.
It is crucial that we have governance structures in the Executive Branch that will effectively and efficiently manage Medicare. It has been twenty-three years (1977) since HCFA was assembled from its predecessor agencies, the Bureau of Health Insurance in the Social Security Administration and the Social and Rehabilitation Services Agency. Certain reforms under consideration, such as health plan competition and prescription drug benefits, may require resources, flexibility, and expertise that do not exist in HCFA today. In fact, it is possible that such proposals could more than double the current workload assigned to HCFA. Many Members question whether it is possible to instill such changes in HCFA and instead have suggested other management approaches.
By contrast, other members argue that multiple, conflicting assignments from Congress and an inadequate delegation of fiscal and human resources may better explain any perceived difficulties in HCFA's programmatic oversight.
Explanation of Option (s)
Option 1 - Assignment of New Functions and Resources to HCFA.
No change to federal governance structures.
HCFA oversees all changes, including those related to plan competition, Medicare+Choice, and a prescription drug benefit. New functions assigned to HCFA would be joined with corresponding resources and flexibility to ensure the Agency's ability to appropriately carry out new functions.
Option 2 - Oversight Board.
Discernable changes to federal governance structures - HCFA oversees all changes.
Establishes Board (IRS model) within HHS to advise on management and operations, as well as inject private sector expertise into the majority of HCFA's policy and operational decisions.
Option 3 - Operational Board.
Moderate changes to federal governance structures; more significant changes to HCFA.
Medicare+Choice staff and resources transferred to new entity. Prescription drug benefit administration assigned to new entity.
Option 4 - HCFA Re-engineering.
Potentially significant longer-term restructuring of HCFA and federal governance structures.
Reassignment of selected non-Medicare functions within Executive Branch. For example, similar functions, such as state-based programs, to be grouped with other state-based functions and housed in same entity.
Option 5 - Redefining Congressional Oversight.
Governance entity could be required to submit an annual "business plan" to Congress. This plan could include a comprehensive payment and management plan for all aspects of offering core benefits, information about partnership arrangements with private entities with which the program contracts, and recommendations for benefit coordination and improvements. Committees of jurisdiction would hold hearings on the business plan and Congress could choose to approve the plan under a "fast track" up or down vote approval process. This is a cross-cutting option that could be applied with any of the other alternatives in this section.
Section 7. Solvency Provisions
Present Law
Each year, the Medicare Trustees publish reports on the financing status of the Part A Health Insurance program, and the Part B Supplementary Insurance program. For reasons of program design, the HI Trust Fund has become the principal focus each year of the discussion on the financing viability of the Medicare program, including projections for the date the trust fund will become insolvent. The 1997 report stated that under the Trustees' intermediate assumptions, the fund would become insolvent in 2001. Subsequent reports significantly delayed the projected insolvency date. The 2000 report (as amended) projects that the fund will become insolvent in 2025. The improvements can be attributed to a number of factors including improvements in the economy as a whole (which are reflected in higher payroll tax revenues), lower rates of growth in program expenditures, and the effects of administrative actions in areas such as deterring fraud and abuse.
A key factor was the enactment of the Balanced Budget Act of 1997 (BBA 97). This legislation provided for the transfer of a portion of home health spending (which at the time was the fastest growing component of Part A expenditures) from Part A to Part B. It also included additional provisions to stem the growth in Part A expenditures. These provisions included the implementation of new payment limits for home health services, a prospective payment system for skilled nursing facility services, and limits on increases in hospital payments. BBA 97 also established the Medicare+Choice program and modified the calculation of payments to managed care entities.
Following enactment of BBA 97, a number of observers claimed that the actual savings achieved by BBA 97 were larger than was intended when the legislation was enacted. In part as a result, legislation was enacted in 1999, the Balanced Budget Act of 1999 (BBRA 99), which mitigated the impact of BBA 97 on providers. Notwithstanding enactment of BBRA 99, the 2000 Trustee's report (as amended) delays the trust fund insolvency date an additional 10 years over that projected in the 1999 report (from 2015 to 2025).
The 2000 report states that the fund meets the Trustees' test of short-range financial adequacy for the first time since 1991. The projected long-range actuarial balance is moderately improved, but a substantial long-range deficit remains. The Trustees note that future operations will be very sensitive to future economic, demographic, and health cost trends and could differ substantially from the intermediate projections. In addition, they continue to raise serious concerns over growth in Part B spending which does not raise the same degree of "solvency" consideration because of the design which permits growing infusions of premium income and general revenue financing to meet program costs.
Reason for Change
The latest Trustees' report presents an improved but still troubled picture for Medicare. Although major constraints in Medicare payment rates were enacted as part of the Balanced Budget Act of 1997 (P.L. 105-33), HI's rapid growth is projected to continue indefinitely. Those changes and improved economic outlook extended the HI Trust Funds' projected insolvency point by 24 years (from 2001 to 2025), and cut the average 75-year deficit by almost one-half (from 2.10% to 1.21%); however, the remaining
deficit is large. On average, HI's costs would be about 37% higher than its income. By 2070, its costs would be nearly 2 times as large as its income. This pessimistic outlook reflects a generally aging population, the impact of the post-World War II baby boomers' retirement early in the next century, the persistent high rate of inflation in the health sector of the economy, and growth in the quantity of services provided. Most significant are the looming demographic shifts. Where there are about 4 workers supplying revenues to the program per beneficiary now, there will be only an estimated 2.3 workers helping to support each beneficiary in 2030.
Since SMI is financed with general revenues and premiums that are determined and reset annually, it does not have an explicit financing problem like HI. However, inflation and the rising demand for medical care as society ages are causing its expenditures to rise even faster than HI's. Projections show that SMI's expenditures as a share of GDP would double by 2025 (rising from .94% today to 1.95% in 2025). From 2000 to 2070, the combined costs of HI and SMI are projected to rise from 2.33% of GDP to 5.19%.
Explanation of Option(s)
Option 1 - The Bipartisan Commission Chairmen's Proposal -
The Bipartisan Commission Chairmen's proposal, as well as the first Breaux-Frist proposal, had a provision that would trigger congressional action when the share of total Medicare spending financed from general revenues exceeded 40 percent. Currently general revenues make up about 35 percent of total Medicare spending. The general revenue percentage is projected to go to about 60 percent by 2035. The 40 percent trigger is designed to focus congressional and public attention on the financial health of the Medicare program and to highlight the shift of Medicare away from being a work-related entitlement. As is the case should the HI (Part A) Trust Fund become insolvent in a given year, the practical consequences of such a trigger mechanism for day-to-day Medicare operations are unclear (but possibly significant).
Option 2 - The President's Proposal -
The President is proposing to extend the solvency of the Part A trust fund by using $299 billion of the surplus over the next ten years. This would extend the HCFA actuaries' insolvency date for ten additional years.
The $299 billion would be fully financed from the surplus. There are no further details available on what type of budget mechanism might by used, e.g., a Medicare 'lock box". The majority of these fund transfers would occur in 2006 and beyond, but the proposal does have $15B and $13B, transferred in 2001 and 2002, respectively.
Option 3 - Proposal for a more effective measure of financial viability.
One of the key concerns about Medicare's financial solvency is the lack of an effective measure of overall program financial viability. Part A solvency is generally understood by the public and media and therefore provides an effective measure of Part A's financial well-being. But, Part B has no easily understood measure of financial viability. The automatic infusion of general revenues that keeps Part B solvent, also fails to provide an adequate measure of the program's increasing reliance on general revenues as a source of funds. An increasing reliance of general revenue financing, and the resulting decreased reliance on work-related financing, may be well within Congress' policy preferences, but discussions during the Bipartisan Commission revealed concerns about the "automatic pilot" characteristic of Part B general revenue financing.
One way to address such concerns, but still ensure a reliable flow of funds, would be through a more effective measure of Medicare's financial well-being. Such a measure would make Medicare's overall financial viability and shifting reliance on different revenue sources more apparent and easily understood.
A new measure could be provided annually by the Medicare Trustees. The Trustees would report on the progress of the Medicare program assuming the HI and SMI Trust Funds were combined into a single trust fund, called the "Medicare Solvency Assessment Account". This combined account would show the various revenues coming into the Medicare program, e.g., payroll taxes, Part B premiums, general revenues, interest income. It would also show the various expenditures leaving the Medicare program, e.g., hospital payments, physician payments, drug expenditures. It would indicate how Medicare finances were growing based on actuarial and demographic assumptions about the Medicare population and the economy as a whole. As with the current trustees reports, projections would be made about the inflow of payroll taxes and Part B premiums.
Unlike other measures developed by the Trustees, this measure would show the combined Part A and Part B financial status, as well as an indexed measure(s) of the inflow of general revenues. For measurement purposes only, the assumed "government contribution" to the combined account would not be tied to actual Part B spending, instead it will be set at the contribution in 2000, indexed to some reasonable growth rate. (The current process for calculating beneficiary's premiums would be unaffected.) The measure would indicate the ability of the program to operate within its current resources and serve as an early warning to the Congress and Administration if the program was about to require a greater infusion of general revenues than it had it the past.
1. This rate is set at the highest of three amounts, calculated annually for each payment area in which a plan is approved to market M+C coverage to beneficiaries (generally a county): (a) a blended rate, which is the sum of a percentage of the annual area-specific Medicare+Choice capitation rate for the year for the payment area, and a percentage of the input-price adjusted national Medicare+Choice capitation rate for the year; (b) a minimum floor rate; or (c) a minimum percentage increase or hold-harmless rate, which is 102% of the previous year's payment.
2. Medicare also pays for the following drug categories: (1) an injectable osteoporosis drug approved for treatment of post-menopausal osteoporosis provided by a home health agency to a homebound individual whose attending physician has certified suffers from a bone fracture related to post-menopausal osteoporosis and the individual is unable to self-administer the drug; and (2) supplies (including drugs) that are necessary for the effective use of covered durable medical equipment, including those which must be put directly into the equipment (e.g., tumor chemotherapy agents used with an infusion pump).