TESTIMONY
OF
JACOB J. LEW
DEPUTY DIRECTOR
OFFICE OF MANAGEMENT AND BUDGET
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
January 23, 1997
Mr. Chairman, thank you for your
invitation to the Administration to testify at this hearing
today. We very much appreciate the opportunity to follow up to the
President's statement on
Tuesday regarding the Medicare savings in his balanced budget plan.
We will of course give you and your
staff a full briefing on the details of the budget after it is
transmitted to the Congress on February 6. In the meantime, I hope
you will understand that we
may have to defer answering some of your more detailed questions until
that time.
The President believes we have a
unique opportunity to balance the budget if we work
together on a bipartisan basis. He announced the broad outlines of
his Medicare policy a few days
ago because he wanted to seize the moment to work together.
The President articulated three
principles underlying the Medicare policy that will be presented
in his budget. First, it will include structural reforms that will
make the program work more
efficiently and take advantage of changes in the health care
marketplace. Second, it will meet his
goal of extending the solvency of the Medicare Part A Trust Fund for
ten years. Third, because
the Medicare policy will save $138 billion over six years, it will
meet the Congress halfway and
bring us closer to bipartisan agreement on a balanced budget.
Today I would like to provide an
overview of the policies in the Administration's Medicare
package. Because both the President and the Congress have committed
to balancing the budget
by 2002 -- five years from now -- I will describe the budget policies
in terms of their five-year
savings. Since most observers are familiar with the six-year savings
numbers from the budget
debate last year, I will present six-year savings figures as well.
As I said earlier, the President's
plan saves $138 billion from the Medicare program over six
years; the equivalent five-year estimate is $100 billion. The
savings total is net of proposed
benefit increases and does not reflect the reallocation of certain
home health care
expenditures from Part A to Part B. Overview
The 1998 budget preserves and
improves Medicare, extending the solvency of the Part A
Hospital Insurance Trust Fund into 2007. This budget, like the
President's previous two budgets,
gives beneficiaries more choices among private health plans, makes
Medicare more efficient and
responsive to beneficiary needs, and reduces provider payments.
The President's 1998 budget builds on
his 1997 budget:
- Last year, we wanted to extend the solvency of the Part A Trust
Fund by 10 years. According
to the Chief Actuary at the Health Care Financing Administration, the
Medicare policy in the
budget will extend the solvency of the Trust Fund to 2007.
- Last year, we wanted to restrain provider payments at a level
that would continue to ensure the
quality of and access to care. This year, we believe that we can
restrict provider payments --
particularly in the areas of managed care and hospitals -- more than
we did last year, without
harming quality and access.
- Last year, we wanted to protect beneficiaries from major new
out-of-pocket expenditures and
allow them to take advantage of advances in preventive care. This
year, we continue to adhere
to this principle by keeping the Part B premium at 25 percent of
program costs and by
proposing new preventive health benefits.
The Medicare policy in our 1998
budget is similar in many ways to our policy last year.
However, based on our most current analysis, there are several policy
changes of note, in
particular with regard to payment rates for managed care, outpatient
prospective payment, and
competitive bidding for laboratory services and durable medical
equipment.
Managed care
There is substantial evidence that
Medicare pays too much for managed care plans and, in fact,
loses money for every beneficiary who opts for managed care. The new
policy proposals will
reduce reimbursements to managed care plans by about $34 billion over
five years ($46 billion
over six years). Savings will come from three sources:
- The 1998 budget will propose to reduce Medicare reimbursement to
managed care plans from
its current rate of 95 percent of fee-for-service rates to 90 percent.
The reduction does not
start until 2000, and it accounts for $6 billion in savings over five
years (about $8 billion over
six years).
- There will be indirect savings of $18
billion over five years (and $25 billion over six years)
attributable to cuts in the traditional fee-for-service side of the
program. Because HMO
payments are based on a percentage of fee-for-service payments, HMO
payments are reduced
as a function of our proposed cuts in the fee-for-service side of the
program.
- Finally, the policy carves out the
medical education and uncompensated care payments from
the HMO reimbursement formula. These funds will be paid directly to
academic health centers
and to HMOs that run their own residency programs. This aspect of the
plan would reduce
direct managed care payments by $10 billion over five years (and $13
billion over six years).
Hospitals
The proposals in
the 1998 budget relating to hospitals will reduce the annual inflation
increase, or "update," for hospitals; reduce payments for hospital
capital; reform payments for
graduate medical education; and implement prospective payment for
outpatient departments while
protecting beneficiaries from increasing charges for those services.
The budget will propose to
achieve $33 billion in net savings over five years ($46 billion over
six years).
The budget will also propose to
establish new provider service networks (PSNs), which will
allow hospitals and other providers to establish their own health care
plans to compete with
current Medicare HMOs.
As I mentioned earlier, the budget
will establish a new pool of funding, about $10 billion over
five years, for direct payment to academic health centers and eligible
HMOs. These payments will
compensate academic health centers for the costs of medical education
and care for indigent
patients. We propose establishing this new pool at the same time we
remove medical education
and uncompensated care costs from the formula we use to pay HMOs. The
net hospital savings
of $33 billion reflect these payments to teaching hospitals.
Physicians
With regard to
physicians, the budget will propose to save about $7 billion over five
years
(about $10 billion over six years) through a reduction in physician
updates. This reduction is
relatively small because Medicare has been fairly effective in
constraining growth in
reimbursement to physicians.
Skilled Nursing Facilities
With regard to skilled nursing
facilities, the budget will propose to save about $7 billion over
five years ($9 billion over six years) through the establishment of a
prospective payment system.
This benefit has been growing at double-digit rates, and there is a
consensus that moving to
capitated rates will help contain costs.
Fraud and Abuse
The budget proposes strong fraud and
abuse provisions, including measures to eliminate fraud
in home health care -- such as by ensuring that home health agencies
are reimbursed based on the
location of the service, not the billing office. The budget also
would repeal several provisions in
last year's health reform law that weakened anti-fraud enforcement (e.
g., we propose repealing
the advisory opinions). The anti-fraud initiatives in the budget
would save $9 billion over five
years ($12 billion over six years).
Beneficiaries
The 1998 budget will propose a number
of changes in law that affect beneficiaries, including
new benefits, Medigap protections, and proposals to increase
beneficiary choice.
First, the 1998 budget will propose
extending current law that sets the Part B premium at 25
percent of program costs. This policy achieves $10 billion in savings
over five years ($18 billion
over six years). Without this policy, the Part B premium would drop
below 25 percent after
1998.
Second, the budget will propose new
preventive health care benefits to improve the health of
senior citizens and reduce the incidence of disease. The plan covers
colorectal screening, diabetes
management, and annual mammograms without copayments. It also
increases reimbursement
rates for certain immunizations to ensure that seniors are protected
from pneumonia, influenza,
and hepatitis. The budget will also propose a new Alzheimer's respite
benefit starting in 1998 to
assist families of Medicare beneficiaries with Alzheimer's diseases.
Total beneficiary investments
in the budget will cost $13 billion over five years ($22 billion over
six years).
Third, because of a flaw in
reimbursement methodology, beneficiaries now in effect contribute
a 50 percent copayment for outpatient visits. The 1998 budget will
propose to prevent further
increases in copayments and reduce the copayment to 20 percent over
the next decade.
Fourth, the budget will propose new
Medigap protections (such as new open enrollment
requirements and prohibitions against the use of pre-existing
condition exclusions) to increase the
security of Medicare beneficiaries who wish to opt for managed care
but fear they will be unable
to obtain Medigap insurance if they decide to return to fee-for-
service plans. I understand that
this provision is consistent with bipartisan legislation pending
before Congress.
Last, the budget will propose new
private plan choices -- through new PPO and Provider
Service Network choices -- for beneficiaries.
Structural Reform
The 1998 budget will propose a number
of structural reforms to bring the Medicare program
into the 21st century:
- We will propose establishing new private health plan options
(such as PPOs and Provider
Service Networks) for the program.
- We will propose annual open enrollment
for all Medicare plans -- with an independent
third-party responsible for informing beneficiaries of their options
and enrolling those
interested in the managed care plan of their choice.
- We will propose market-oriented
purchasing for Medicare, including the new prospective
payment systems for home health care, nursing home care, and
outpatient hospital services.
We will also propose competitive bidding authority and the use of
centers of excellence to
improve quality and cut back on costs.
- We will propose adding new Medigap
protections, such as prohibiting pre-existing condition
exclusions and requiring annual open enrollments that make it possible
for beneficiaries to
switch back from a managed care plan to traditional Medicare without
the fear that they will be
unable to obtain affordable Medigap insurance.
Home Health
Home health care has become one of
the fastest growing components of the Medicare
program, growing at double digit rates. The home health program was
originally designed as an
acute care service for beneficiaries who had been hospitalized.
However, over time, home health
care has increasingly become a chronic care benefit not linked to
hospitalization.
The budget will propose to establish
a new prospective payment system for home health and a
number of program integrity initiatives. Together, these proposals
will save $14 billion over five
years ($18 billion over six years), and are included in our total
Medicare savings estimate of $100
billion over five years (and $138 billion over six years).
The President's proposal will also
restore the original split of home health care payments
between Parts A and B of Medicare. The first 100 home health visits
following a 3- day
hospitalization would be reimbursed by Part A. All other visits --
including those not following
hospitalization -- would be reimbursed by Part B. This is the same
policy in the President's 1997
budget. It is also similar to a provision in a Medicare reform bill
the House passed last year.
There has been a great deal of public
discussion about the home health reallocation recently, so
I want to be very clear that this proposal is not scored as yielding
budget savings. The $100
billion of five-year savings and the $138 billion of six-year savings
includes no contribution from
the home health reallocation. In addition, beneficiaries will not be
affected by this restoration of
the original policy. This policy avoids the need for excessive
reductions in payments to hospitals,
physicians, and other health care providers while helping to extend
the solvency of the Part A
Trust Fund.
Part A Trust Fund Solvency
If we do not make any changes to the
Part A program, the Part A Trust Fund will become
insolvent by early in calendar year 2001. Clearly, we cannot allow
this to happen. Therefore, the
1998 budget has real Part A savings, as well as
structural reforms, that extend the solvency of the
Trust Fund to 2007:
- We reduce the growth of payments to hospitals.
- We reform the payment system for home health agencies and
skilled nursing facilities to
increase incentives for these providers to contain costs.
- We also reduce payments to HMOs from 95 percent to 90 percent of
fee-for- service costs and
reduce the growth in HMO payment rates.
Conclusion
The Medicare policies in the 1998
budget are consistent with our principles last year: to extend
the solvency of the trust fund, to reduce provider payments without
damaging quality and access,
and to protect beneficiaries. The savings we have added to this
budget -- in managed care,
outpatient payments, and competitive bidding -- bridge the gap between
the Congress and the
Administration that remained at the end of the balanced budget
negotiations last year.
We believe these Medicare proposals
are the most appropriate ones to extend the solvency of
the trust fund, protect Medicare, and reduce the deficit. We look
forward to working with the
Congress in the spirit of bipartisanship to make sure that we can keep
Medicare's promise to
current and future generations and to balance the budget by 2002.