Medicare: Options for Reform

Published by the Government Accountability Office on 1999-05-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Committee on Finance, U.S. Senate

For Release on Delivery
Expected at 10:00 a.m.
Wednesday, May 26, 1999

                          Options for Reform
                          Statement of William J. Scanlon, Director
                          Health Financing and Public Health Issues
                          Health, Education, and Human Services Division

Medicare: Options for Reform

              Mr. Chairman and Members of the Committee:

              We are pleased to be here today as you discuss efforts to reform the
              Medicare program. In March 1999 testimony before this Committee, the
              Comptroller General noted an emerging consensus that substantive
              programmatic reforms are necessary to put the Medicare program on a
              sustainable footing for the future. Budget projections show that health
              care is consuming ever larger shares of the federal dollar, thus threatening
              to crowd out funding for other valued social and economic activity. In
              addition, deliberations by the National Bipartisan Commission on the
              Future of Medicare as well as recent testimony before this Committee
              reflect public concern about the adequacy of Medicare’s benefit package
              and the potential for erosion in the face of future budgetary pressures.

              Over the past several months, this Committee has held a series of hearings
              on Medicare reform issues to determine the nature and extent of
              modernization needed and invited us to discuss the array of reform
              options. To that end, my remarks today will focus on a conceptual
              framework for considering the various possible combinations of reform
              options and lessons about implementing reforms learned from recent
              Medicare experience.

              In brief, options to reform Medicare have two major dimensions:
              (1) expansion of Medicare’s benefit package and (2) cost containment
              through financing and other structural transformations. Two commonly
              discussed benefit expansions are the inclusion of a prescription drug
              benefit and coverage for extraordinary out-of-pocket costs, known as
              stop-loss, or catastrophic, coverage. The financing reforms are reflected in
              three models: fee-for-service modernization, Medicare+Choice
              modernization, and a premium support system fashioned after the Federal
              Employees Health Benefits Program (FEHBP). Each of these models is
              designed, to different degrees, to alter program incentives currently in
              place to make beneficiaries more cost conscious and providers more

              As the various reform options come under scrutiny, the importance of
              design details should not be overlooked. Our work on efforts to implement
              reforms mandated in the Balanced Budget Act of 1997 (BBA) is instructive
              regarding reform specifics. The principal lessons drawn from recent
              experience include the following:

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                               Medicare: Options for Reform

                           •   The particulars of payment mechanisms largely determine the extent to
                               which a reform option can eliminate excess government spending while
                               protecting beneficiary access to care.
                           •   Revisions to newly implemented policies should be based on a thorough
                               assessment of their effects so that at, one extreme, they are not unduly
                               affected by external pressures and premature conclusions or, at the other
                               extreme, they remain static when change is clearly warranted.
                           •   For choice-based models to function as intended, consumer information
                               that is sufficiently comparable to create competition based on cost and
                               quality is essential.

                               The future of an unreformed Medicare program includes a likely scenario
Background                     in which an increasing population of seniors and technology
                               advancements consume ever-growing shares of the nation’s health care
                               resources and federal budget. A growing consensus, which includes the
                               trustees of the Medicare Hospital Insurance Trust Fund, notes that BBA
                               took strong steps toward addressing this problem, but additional reforms
                               are needed.

Medicare Spending              Medicare’s rolls are expanding and are projected to increase rapidly with
Pressures Impel Need for       the retirement of the baby boom generation. For example, today’s elderly
Major Reform                   make up about 13 percent of the total population; by 2030, this group will
                               comprise 20 percent as the baby boom generation ages. Individuals aged
                               85 and older make up the fastest growing group of Medicare beneficiaries.
                               Thus, in addition to the increased demand for health care services due to
                               sheer numbers, the greater prevalence of chronic health conditions
                               associated with aging will further boost utilization.

                               Compounding the cost pressures of serving a larger and needier Medicare
                               population are the costs associated with the scientific breakthroughs for
                               treating medical conditions and functional limitations. Technological and
                               treatment advances have resulted in more services being provided to more
                               beneficiaries. These services can restore health, reduce pain, increase
                               functioning, and extend lives. At the same time, certain high-tech services
                               may be of limited clinical value or fail to meaningfully improve the quality
                               or length of life. Nevertheless, technological advances fuel the public’s
                               expectations that more health care is better.

                               The actual costs of health care consumption are not always fully
                               transparent to consumers. Third-party payers generally insulate patients

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                      Medicare: Options for Reform

                      and providers from cost-of-care decisions. In traditional Medicare, for
                      example, beneficiaries are required to contribute 20 percent of the
                      payment for physician visits and other services and a significant
                      deductible for inpatient hospital care. These cost-sharing requirements are
                      designed to give beneficiaries direct financial incentives to curb
                      inappropriate care or services of marginal value. Yet the impact of the
                      cost-sharing provisions is muted because about 87 percent of beneficiaries
                      have some form of supplemental health care coverage (such as Medigap
                      insurance) that pays these costs.

                      While demographics and technology drive up health care utilization,
                      pressure is mounting to update Medicare’s outdated benefit design. At
                      present, Medicare leaves beneficiaries without coverage for important
                      services and at risk for large out-of-pocket costs due to coverage
                      limitations. In 1965, when the program was first created, outpatient
                      prescription drugs were not nearly as important a component of health
                      care as they are now. Used appropriately, pharmaceuticals can cure
                      diseases, improve quality of life, and sometimes substitute for more
                      expensive services. Further, the Medicare benefit does not provide truly
                      catastrophic coverage for those requiring lengthy hospitalizations. Nor are
                      there any limits to the copayments required of beneficiaries needing
                      extensive care from physicians and other providers. While Medicare
                      coverage limits do not affect many beneficiaries, the limits can prove
                      devastating for the few who exhaust the benefit without any supplemental
                      coverage. Most private insurance options and Medicaid programs provide
                      prescription drug and catastrophic coverage. Many individuals seek to
                      similarly modernize Medicare’s benefits. The cost implications, however,
                      could be enormous. Their consideration needs to take account of the
                      future unsustainability of the current program and its financing gap, which
                      already greatly exceeds that of Social Security.

BBA Took Bold Steps   Enacted in 1997, BBA set in motion significant changes toward
Toward Modernizing    modernizing Medicare.
                      The act’s combination of constraints on provider fees, increases in
                      beneficiary payments, and structural reforms is expected to lower
                      program spending by $386 billion over the next 10 years. Because certain
                      key provisions have only recently or have not yet been phased in, the full
                      effects on providers, beneficiaries, and taxpayers wrought by BBA will not
                      be known for some time.

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                                        Medicare: Options for Reform

                                        Of particular significance was BBA’s creation of the Medicare+Choice
                                        program, which furthered the use of a choice-based model of providing
                                        Medicare benefits. Medicare+Choice expanded Medicare’s managed care
                                        options to include, in addition to health maintenance organizations
                                        (HMO), health plans such as preferred provider organizations,
                                        provider-sponsored organizations, and private fee-for-service plans. As
                                        part of this expanded consumer choice program, BBA provisions placed a
                                        dramatic new emphasis on the development and dissemination of
                                        comparative plan information to consumers to foster quality-based plan
                                        competition. Other BBA provisions were designed to pay health plans
                                        more appropriately than Medicare had done under the previous HMO
                                        payment formula.

                                        BBA also made historic changes to traditional Medicare. It is gradually
                                        eliminating, for the most part, cost-based reimbursement methods and
                                        replacing them with prospective payment systems (PPS). The intent is to
                                        foster the more efficient use of services and lower growth rates in
                                        spending for these providers, replicating the experience for acute care
                                        hospitals following the implementation of Medicare’s PPS for hospitals,
                                        which began in the mid-1980s. BBA mandated phasing in PPSs for skilled
                                        nursing facilities (SNF), home health agencies (HHA), hospital outpatient
                                        services, and certain hospitals not already reimbursed under such

                                        Concerns continue to be voiced about the obvious gaps in protections for
Dimensions of Reform                    Medicare beneficiaries, which contrast with what is available for most
Include Benefit                         individuals with private employer-based coverage. At the same time,
Expansions and                          competing concerns remain about the need to dramatically check
                                        Medicare’s cost growth, even without adding new benefits. In response, a
Financing Changes                       range of proposals has been made, each seeking to update Medicare’s
                                        benefit package, restructure the program to constrain cost escalation, or
                                        both (see table 1).

Table 1: Major Dimensions of Medicare
Reform, by Option                                                                Financing and organizational change
                                        Updated benefit package options          options
                                        — Coverage for outpatient prescription   — Fee-for-service modernization
                                        drugs                                    — Medicare+Choice modernization
                                        — Limit on beneficiary liability         — FEHBP-type premium support

Benefit Expansion                       Medicare’s basic benefit package largely reflects the offerings of the
Reforms                                 commercial insurance market in 1965 when the program began. Although

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Medicare: Options for Reform

commercial policies have evolved since then, Medicare’s package—for the
most part—has not.1 For example, unlike many current commercial
policies, Medicare does not cover routine physical examinations or
outpatient prescription drugs or cap beneficiaries’ annual out-of-pocket
spending. Some beneficiaries can augment their coverage by participating
in the Medicaid program (if they are eligible), obtaining a supplemental
insurance policy privately or through an employer, or enrolling in a
Medicare+Choice plan. However, these options are not available or
affordable for all beneficiaries. Furthermore, to the extent that Medicaid
and supplemental policies provide first-dollar coverage of services, the
beneficiary population’s sensitivity to service costs is dulled, contributing
to some continued excess utilization. Consequently, many reform
advocates believe that Medicare’s basic benefit package should be brought
into line with current commercial norms.

Two benefit reforms under discussion by policymakers are the inclusion
of prescription drugs and stop-loss coverage that caps beneficiary
out-of-pocket spending. Each involves a myriad of options, and assessing
the merit of these reforms would depend on the specifics that may be
included. For instance, a Medicare prescription drug benefit could be
designed to provide coverage for all beneficiaries; coverage only for
beneficiaries with extraordinary drug expenses; coverage only for
low-income beneficiaries; or coverage for selected drugs, such as those
deemed to be cost beneficial. Such coverage decisions would hinge on
understanding how a new pharmaceutical benefit would shift to Medicare
portions of the out-of-pocket costs borne by beneficiaries as well as those
costs paid by Medicaid, Medigap, or employer plans covering prescription
drugs for retirees. How would these new program costs be shared between
taxpayers and beneficiaries through premiums, deductibles, and
copayments? Would subsidies be provided to help low-income,
non-Medicaid eligible beneficiaries with these costs? The administration of
the benefit raises other questions, such as, Who would set and enforce
drug coverage standards among the private health plans participating in
Medicare? and, for traditional Medicare, How would reimbursable prices
be set? Price-setting options include using a formula based on market
prices, negotiating directly with manufacturers, or contracting with a
pharmaceutical benefit management company. A catastrophic, or
stop-loss, coverage benefit would similarly entail its own set of design
permutations, variables, and related consequences.

 Some Medicare benefits have changed. For example, BBA added or expanded coverage for screening
mammograms, prostate cancer screening tests, bone mass measurements, and several screening or
preventive services.

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                                        Medicare: Options for Reform

Financing and Other                     Many Medicare reforms are designed to slow spending growth to keep the
Structural Reforms                      program viable for the nation’s growing aged population. Although the
                                        various proposals differ from one another in concept, they all include
                                        mechanisms to make beneficiaries more cost conscious and incorporate
                                        provider incentives to improve the efficiency of health care delivery. The
                                        various financing and structural reforms are organized around three
                                        general models: fee-for-service modernization, Medicare+Choice
                                        modernization, and a premium support system fashioned after FEHBP
                                        (see table 2).

Table 2: Medicare Reform: Options for
Financing and Structural Change                         Fee-for-service           Medicare+Choice         FEHBP-type
                                                        modernization             modernization           premium support
                                        Pending         — Prospective payment     — Health-based risk
                                                        systems (HHAs, hospital   adjustment of rates
                                                        outpatient departments,   — Annual enrollment
                                                        and others)               and lock-in
                                                                                  — Competitive
                                                                                  pricing demonstration
                                        Potential       — Selective purchasing — Plan savings             — Premium based on
                                                        — Negotiated pricing     shared with program      offered or negotiated
                                                        — Case management for                             price
                                                        complex and chronic                               — Beneficiary
                                                        conditions                                        contribution based on
                                                        — Utilization                                     plan cost
                                                        management                                        — Traditional
                                                        — Medigap and                                     Medicare included
                                                        beneficiary cost-sharing                          but with enhanced
                                                        reforms                                           flexibility and

Fee-for-Service Modernization           BBA improved the efficiency of Medicare’s traditional fee-for-service
                                        program by substituting a variety of PPSs and other fee changes for the
                                        cost-based reimbursement methods and outdated fees that existed.
                                        Nevertheless, Medicare is still not an efficient purchaser. Adjusting its
                                        systems of administered prices and fees up or down to ensure beneficiary
                                        access or to capture potential savings as the market changes poses an
                                        overwhelming, if not impossible, challenge. Medicare largely remains a
                                        passive bill payer, exercising no meaningful control over the volume of
                                        services used. Proposals to modernize fee-for-service Medicare aim at
                                        providing flexibility to take advantage of market prices and introducing
                                        some management of service utilization.

                                        Preferred provider arrangements, whereby insurers select certain
                                        providers because of their willingness to accept lower fees and their
                                        efficient style of practice, have become commonplace in the commercial

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                  Medicare: Options for Reform

                  insurance market. By accepting negotiated or competitively bid fees that
                  fall below the usual levels, selected providers and the beneficiaries using
                  their services would be afforded certain advantages. The selected
                  providers with lower fees may experience increased demand, while
                  beneficiaries using their services could be subject to lower cost sharing.
                  Comparable arrangements have been proposed for fee-for-service
                  Medicare. Testing of this concept has been under way in the Health Care
                  Financing Administration’s (HCFA) Centers of Excellence demonstrations,
                  where hospitals and physicians agree to provide certain procedures for
                  negotiated all-inclusive fees. BBA also allowed for testing of competitive
                  bidding for medical equipment and supplies with high bidders being
                  excluded from serving Medicare beneficiaries.

                  About 87 percent of beneficiaries in traditional Medicare face little cost
                  sharing in the form of deductibles or copayments for services by virtue of
                  their eligibility for Medicaid or their enrollment in a supplementary
                  insurance plan. While increases in cost sharing have been common in
                  private insurance to make beneficiaries sensitive to the value and cost of
                  services, it has been a cost-containment tool largely unavailable to
                  Medicare. Protecting low-income beneficiaries from financial barriers to
                  care remains a critical concern. However, changes in allowable
                  supplementary coverage could restructure cost sharing to heighten
                  beneficiary sensitivity to the cost of services while removing catastrophic
                  costs for those who have extreme medical needs.

                  Private indemnity insurers have moved to incorporate certain utilization
                  management techniques into their policies, such as prior authorization of
                  some expensive services and case management for persons with serious
                  chronic conditions. Though such techniques are increasingly common
                  among private insurers, their impact and effectiveness on the unique
                  population Medicare covers is unknown.

Medicare+Choice   Medicare+Choice signaled a new phase in efforts to transform Medicare.
Modernization     Built on the program that allowed beneficiaries to enroll in participating
                  managed care plans, Medicare+Choice expands options available to
                  beneficiaries and substantially changes plan payment methods. By raising
                  payments in certain areas and allowing additional types of entities to
                  contract with Medicare, Medicare+Choice is intended to boost plan
                  participation and beneficiary enrollment. Payment changes are designed to
                  adjust the per capita rates to more accurately reflect expected resource
                  use of enrollees and slow the growth of spending over time.

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                             Medicare: Options for Reform

                             Among other payment changes, BBA required HCFA to implement by
                             January 1, 2000, a methodology to adjust plan payments to reflect the
                             health status of plan members. Favorable selection—that is, the tendency
                             for healthier beneficiaries to enroll in managed care plans—has resulted in
                             payments that are higher than warranted. The new risk adjustment method
                             developed for Medicare will more closely align payments to the expected
                             health care costs of plans’ enrollees. This will help produce the savings
                             originally envisioned when managed care enrollment options were offered
                             to Medicare beneficiaries and will foster competition among plans on the
                             basis of benefits and quality rather than enrollment strategies.

                             The design of the Medicare+Choice program does not, however, allow
                             taxpayers to benefit from the competition that currently occurs among
                             health plans. If a plan can provide the Medicare package of benefits for
                             less than the Medicare payment, it must cover additional benefits, reduce
                             fees, or both.2 Plans that offer enriched benefit packages—such as,
                             including coverage for outpatient prescription drugs or routine physical
                             examinations—may attract beneficiaries and gain market share. Medicare,
                             however, pays the predetermined price even in fiercely competitive

                             The Medicare+Choice program could be modified, through new
                             legislation, to require that taxpayers and beneficiaries both benefit from
                             health plan competition. The Congress could require that when payments
                             exceed a plan’s cost of services (including normal profit), part of the
                             savings be returned to the program and the rest be used to fund additional
                             benefits. Another alternative would be to set plan payments through
                             competitive bidding. In fact, BBA mandates a competitive pricing
                             demonstration. However, setting the parameters of a competitive pricing
                             system is a formidable task. Furthermore, this payment setting approach
                             may be best suited to urban areas with high concentrations of managed
                             care members.

FEHBP-Type Premium Support   Although modernizing traditional Medicare and Medicare+Choice could
                             improve control of program spending, several incentives would remain
                             unaltered. For example, beneficiaries would remain partially insulated
                             from the cost consequences of their choices. They would not benefit
                             directly from selecting plans capable of delivering Medicare-covered
                             benefits less expensively since the premiums they pay may well remain
                             constant. Program payments to plans would continue to be established

                              Alternatively, plans can contribute to a stabilization fund that would allow them to provide additional
                             benefits or lower fees in future years. Before BBA, health plans also had the option of accepting a
                             lower capitation payment. In practice, plans preferred to add benefits to attract beneficiaries.

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Medicare: Options for Reform

administratively. The Bipartisan Commission and others have accordingly
discussed the adoption of an FEHBP-type of premium support for
Medicare. Such a reform would raise the sensitivity of both beneficiaries
and providers to the costs of services.

The two defining elements of an FEHBP-type of premium support are
(1) the establishment of premium levels for plans through negotiations
between the program and plans and (2) the linking of beneficiaries’
contributions to the premiums of the plans they join. This system makes
transparent to beneficiaries which plans operate less expensively and can
therefore charge lower premiums. In principle, it encourages competition
because plans that can deliver services more efficiently can lower
premiums and attract more enrollees. In practice, some caveats remain.
Differences in premiums can reflect more than variation in efficiency.
Plans may achieve savings through narrower provider networks that,
while capable of providing Medicare-covered benefits, could cause
beneficiaries to experience inconveniences and delays in accessing
services. Providing beneficiaries adequate comparative information on
plans’ expected performance becomes even more critical.

Since most beneficiaries participate—and are expected to continue to
participate—in traditional fee-for-service Medicare, its incorporation into
the FEHBP-type system is seen as important. Under current arrangements,
the only premium for participating in the traditional program is the fixed
monthly amount that beneficiaries voluntarily pay to receive coverage for
part B (physician, outpatient, and other services and supplies) or to be
eligible to enroll in a Medicare+Choice plan. Because the premium amount
represents a fraction of the program’s cost and is deducted from
beneficiaries’ monthly Social Security payments, participants are less
aware of the cost of the traditional Medicare program. The Bipartisan
Commission discussed incorporating traditional Medicare as another plan
under an FEHBP-type premium support system. Traditional Medicare
would propose and negotiate premiums like any other plan and be
expected to be self-financing and self-sustaining. Recognizing the
challenge the latter requirement creates, the commission would also
provide traditional Medicare more flexibility to manage costs using tools
similar to proposals for fee-for-service modernization.

Incorporating traditional Medicare as another plan puts all plans on equal
footing and maximizes beneficiary awareness of costs. However, the sheer
size of the traditional program creates questions. How much flexibility can
be granted to traditional Medicare given its market power? What will it

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                        Medicare: Options for Reform

                        mean for a public plan to be self-sustaining and self-financing? Can it
                        generate and retain reserves as a protection against future losses? How
                        will losses be managed? Today’s hearing is precipitated in part by the fact
                        that the self-sustaining Hospital Insurance Trust Fund is projected to
                        become insolvent. That prospect is intolerable. Similarly, insolvency of
                        traditional Medicare, which may continue to enroll the majority of
                        beneficiaries and may be the only plan serving many areas of the country,
                        is not acceptable. The dilemma of how to guarantee traditional Medicare’s
                        solvency in the context of an FEHBP-type premium support system needs
                        to be addressed.

                        An FEHBP-type premium support system increases the importance of
                        effective program management and design. In particular, the ability to risk
                        adjust premiums to reflect the variation in health status of beneficiaries
                        joining different plans becomes paramount. Participating plans that attract
                        a disproportionate number of more seriously ill and costly beneficiaries
                        would be at a competitive disadvantage if their premium revenues are not
                        adjusted adequately. In turn, enrollees in those plans may find services
                        compromised by the plans’ financial situation. Inadequate risk adjustment
                        may be a particular problem for the traditional Medicare plan, which may
                        function as a refuge for many chronically ill persons who find selecting
                        among plans challenging and opt for something familiar.

                        Our analyses of efforts to design and implement BBA reforms suggest
Recent Medicare         several lessons as reform options come under closer scrutiny. Highlights
Reform Experience       from our recent studies on new payment methodologies, provider
Illustrates the Need    behavior in evolving markets, and Medicare+Choice information initiatives
                        are instructive.
for Careful Attention
to Reform Specifics
Engineering Payment     The particulars of payment method reforms can affect whether reforms
Mechanisms to Achieve   promote or deter unnecessary spending, ensure or impede access to
Desired Outcomes        appropriate health care, and facilitate or frustrate implementation efforts.
                        Experience implementing BBA provisions mandating prospective payment
                        systems and new payment rules for capitated managed care plans
                        illustrates that design details matter.

                        Our review of the recently implemented PPS for SNF care is a case in
                        point.3 Under PPS, SNFs receive a payment for each day of care provided

                         BBA phased in PPS for SNF care beginning on July 1, 1998.

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Medicare: Options for Reform

to a Medicare beneficiary. Since not all patients require the same amount
of care, this amount—called a per diem rate—is “case-mix” adjusted to
take into account the nature of each patient’s condition and expected care
needs. In general, a PPS gives SNFs an incentive to provide daily services
efficiently and judiciously because SNFs with costs higher than the
adjusted per diem rate are at risk for the difference between their costs
and the payments. The case-mix adjuster incorporated into the new PPS,
however, allows a SNF to increase its payments by manipulating the
services provided and thus bypass the need to become more efficient.
Furthermore, whether a SNF patient is deemed eligible for Medicare
coverage and how much will be paid are based on a facility’s assessment
of its patients. HCFA’s ability to monitor these assessments, however, is
limited. If SNFs manipulate service use to raise payments or make
inappropriate patient assessments, expected savings from PPS could be
threatened. Monitoring these assessments and determinations will be key
to realizing the expected savings from PPS.

The Medicare+Choice payment rules established by BBA—in essence,
reforming Medicare’s previous HMO payment rules—similarly illustrates
the need for effective design and adequate oversight. Currently, health
plans that participate in Medicare+Choice receive a predetermined
amount, known as a capitation payment, for each beneficiary they enroll.
Because health plans are not paid for each service they provide, they have
no incentive to oversupply services. In fact, the incentive is reversed;
health plans may—at least in the short run—earn greater profits if they
inappropriately withhold services or avoid enrolling beneficiaries who
have above-average health care needs.

To reduce the undesired incentives of capitation, BBA mandated the
implementation of a new Medicare risk adjustment methodology based on
individuals’ health status. The new risk adjuster is intended to reduce
overall excess payments and improve the fairness of payments to
individual health plans.4 Although this new methodology has its own
shortcomings, it represents an important improvement, particularly given
health plans’ limited ability to supply comprehensive health data on their
members. HCFA anticipates that health plans soon will be able to supply
more comprehensive data so that the agency can implement a more
refined risk adjustment methodology in 2004.

Medicare Managed Care: Better Risk Adjustment Expected to Reduce Excess Payments Overall While
Making Them Fairer to Individual Plans (GAO/T-HEHS-99-72, Feb. 25, 1999).

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                         Medicare: Options for Reform

                         Adequately adjusting payments—either prospective rates in fee-for-service
                         Medicare or capitation amounts under managed care—becomes more
                         important as Medicare improves its cost-containment efforts. Previously,
                         there was little need to account for variations in patient needs when
                         payment methods reimbursed the total cost of providing Medicare services
                         or when rates were overly generous. Absent these wide margins for error
                         and an increased emphasis on efficiency, case-mix adjustment and risk
                         adjustment become increasingly important. When adjustment methods are
                         inadequate, providers may be motivated to increase revenues by skimping
                         on essential services, selecting healthier beneficiaries to serve, or both.
                         Such behavior would thwart the twin goals of controlling spending while
                         providing beneficiaries access to benefits.

Understanding Provider   Medicare experience also illustrates that an incomplete assessment of a
Behavior in Evolving     new policy’s effects can lead to potentially premature calls for action.
Markets                  Recently, the introduction of certain BBA reforms caused the affected
                         provider communities to assert that immediate remedies were needed.
                         Last fall, nearly 100 managed care plans decided to terminate their
                         Medicare contracts or reduce the geographic areas they served—actions
                         they attributed to payment changes mandated by BBA.5 As a result,
                         approximately 407,000 beneficiaries (7 percent of the managed care
                         population) had to choose a new managed care plan or switch to

                         Determining the extent to which BBA inappropriately precipitated the
                         withdrawals is difficult, however. Managed care plans’ participation
                         decisions appear to be associated with a variety of factors. Indeed, our
                         recent review suggested that a portion of the plan withdrawals occurred
                         because plans decided they could not effectively compete in certain areas.
                         Moreover, 40 managed care plans have recently applied (and some of
                         these applications have already been approved) to serve Medicare
                         beneficiaries. Medicare is not unique in experiencing changes in plan
                         participation. In each of the past several years, FEHBP has seen new
                         health plans participate while others have dropped out. This year,
                         approximately 90,000 FEHBP beneficiaries had to switch plans because
                         their original plan withdrew from the program.

                         As another example, between October 1, 1997, and January 1, 1999, over
                         1,400 HHAs closed. Providers have attributed these changes to BBA

                         Medicare Managed Care Plans: Many Factors Contribute to Recent Withdrawals: Plan Interest
                         Continues (GAO/HEHS-99-91, Apr. 27, 1999).

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                      Medicare: Options for Reform

                      payment and other reforms. After several years of large increases in home
                      health expenditures, BBA mandated stricter limits on HHA payments,
                      making it difficult for some agencies with expensive treatment patterns or
                      those located in areas with many other HHAs to maintain current
                      practices. Our recent analysis of HHA closures indicated that almost half
                      of the closures occurred in just four states—three of which had previously
                      experienced agency growth well above the national average. This pattern
                      suggests that the closures could be a result of market corrections for
                      recent overexpansion as much as a response to Medicare’s efforts to
                      control its spending on this benefit. Further, we found little evidence of
                      beneficiary access problems due to closures, thus raising questions about
                      industry calls for relaxing payment limits to help HHAs remain open.

                      It is clear, however, that payment and other reforms—even when
                      correcting a poor policy of the past—have the potential to be disruptive for
                      both beneficiaries and providers. Avoiding sudden, dramatic changes may
                      be the key to minimizing disruptions and ensuring any reform’s success.
                      HCFA has wisely taken this approach, for example, in its decision to phase
                      in the new managed care risk adjustment methodology over a period of
                      several years. Nonetheless, it is not possible, or even desirable, to
                      eliminate completely the natural disruptions that result from voluntary
                      plan and provider participation decisions. The impact of these disruptions
                      on beneficiaries needs to be ameliorated. Reforms that are accompanied
                      by such safeguards are likely to receive greater public support.

Shaping Consumer      Enabling beneficiaries to make better, more efficient health care choices
Involvement in        underlies the majority of the reform options. Such improved
Choice-Based Models   decisionmaking hinges on beneficiaries having the necessary information
                      to accurately assess their choices. BBA took significant steps to foster the
                      success of the new choice-based managed care option by mandating
                      improvements in Medicare’s consumer information. The mandated
                      initiatives were designed to help beneficiaries decide whether to choose
                      traditional Medicare or an available Medicare+Choice plan. Prior to BBA’s
                      enactment, comparative information about health plan options was not
                      systematically available to Medicare beneficiaries, as we reported in 1996.6
                      Now, post-BBA, Medicare has a toll-free information telephone number, a
                      web site, and plans to include some limited comparative information in its
                      mass mailing of handbooks.

                       Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better HMO Performance
                      (GAO/HEHS-97-23, Oct. 22, 1996).

                      Page 13                                                                 GAO/T-HEHS-99-130
                    Medicare: Options for Reform

                    Despite these gains, substantial improvements are needed to enable
                    Medicare seniors to become discriminating consumers. Recent analysis
                    indicates that many beneficiaries poorly understand traditional Medicare
                    and comprehend less about their managed care options. At present,
                    Medicare beneficiaries must continue to rely largely on plan-supplied
                    information, which currently lacks adequate standardization and
                    reliability. In our recent study of plans’ marketing and contract approval
                    materials, we found information that was inaccurate, incomplete, or
                    otherwise misleading, reflecting weak federal oversight of industry
                    marketing efforts.7 Information on the relative performance of health plans
                    is also lacking, but the field of performance measurement is in its infancy,
                    as experts struggle to reach consensus on which health outcome measures
                    would be meaningful to consumers in general and Medicare beneficiaries
                    in particular.

                    In his March 10 testimony to this Committee, the Comptroller General
Considerations in   enunciated several criteria for assessing the merits of reform proposals
Weighing Future     that bear summarizing here: (1) affordability: reforms should address the
Options             current program’s incentives inhibiting effective cost containment;
                    (2) equity: reforms should not impose a disproportionate burden on
                    particular groups of beneficiaries or providers; (3) adequacy: reforms
                    should account for the need to foster cost-effective and clinically
                    meaningful innovations, furthering Medicare’s tradition of technology
                    development; (4) feasibility: reforms must provide for such administrative
                    essentials as implementation and monitoring; and (5) acceptance: to make
                    program costs more transparent to the public, reforms must provide for
                    sufficiently educating the beneficiary and provider communities to the
                    realities of trade-offs required when significant policy changes occur. Most
                    importantly, reforms need to address the sustainability of the program and
                    ensure it does not consume an unreasonable share of our productive
                    resources and does not encroach on other public programs or private
                    sector activities. An incremental approach to changes of the magnitude
                    likely required would enhance both their feasibility and acceptance.

                    The lessons learned in implementing BBA reforms touch on aspects of
                    these five criteria. For example, payment mechanisms designed to achieve
                    frugal program spending must avoid fostering perverse incentives for
                    providers to skimp on services as a way to maximize revenue. In addition,
                    interest group pressure to swiftly undo newly implemented reforms should

                     Medicare+Choice: New Standards Could Improve Accuracy and Usefulness of Plan Literature
                    (GAO/HEHS-99-92, Apr. 12, 1999).

                    Page 14                                                                   GAO/T-HEHS-99-130
           Medicare: Options for Reform

           not overwhelm policy decisions, as misdiagnosed problems can lead to
           misguided solutions. Finally, consumer information can create stronger,
           quality-based competition when the information made available is
           sufficiently standardized and complete to make cost, benefit, and
           performance comparisons easy.

           To apply these lessons in a fashion so that reforms meet the five criteria
           for success, implementation of reforms must be done with effectiveness,
           flexibility, and steadfastness. Effectiveness must include the collection of
           necessary data to assess impact—separating the transitory from the
           permanent and the trivial from the important. Flexibility is critical to make
           changes and refinements when conditions warrant and when actual
           outcomes differ substantially from the expected ones. Steadfastness is
           needed when particular interests pit the primacy of their needs against the
           more global interest of preserving Medicare.

           Mr. Chairman, this concludes my prepared statement. I will be happy to
           answer any questions you or other Members of the Committee might have.

(101847)   Page 15                                                     GAO/T-HEHS-99-130
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