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Testimony of
NANCY-ANN DEPARLE, ADMINISTRATOR
HEALTH CARE FINANCING ADMINISTRATION
on
MEDICARE GOVERNANCE
before the
SENATE FINANCE COMMITTEE
MAY 4, 2000
Chairman Roth, Senator Moynihan, distinguished Committee
members, thank you for inviting me to discuss our efforts
to strengthen and improve Health Care Financing Administration
(HCFA) management. I greatly appreciate your support in
these efforts and your concern for the management challenges
facing Medicare, which will celebrate its 35th birthday
this year. I believe we share the goals of increasing flexibility
in purchasing and management, maintaining and improving
the program's high level of efficiency, and modernizing
Medicare's benefits while ensuring access to high-quality,
accessible services for all beneficiaries.
The people who work at HCFA care deeply about serving the
39 million senior citizens and people with disabilities
who rely on Medicare for health care coverage, and I am
very proud of our record of accomplishments. HCFA is the
largest health insurer in the nation, providing coverage
for some 74 million Americans through Medicare, Medicaid,
and the State Children's Health Insurance Program, and paying
about $368 billion for health care services this year.
For Medicare alone, the agency pays more than $210 billion
in claims to some 700,000 physicians, 6,000 hospitals, and
thousands of other providers and suppliers each year. We
contract with 55 private health insurers to process nearly
1 billion Medicare fee-for-service claims each year, and
with 346 private health plans that provide managed care.
Innovations we have developed in quality improvement and
prospective payment systems that promote efficiency have
been widely adopted by other insurers.
We spend less than two percent of Medicare benefit outlays
on program management. This compares to Medicare+Choice
plan administrative costs that average 11 percent and are
sometimes 25 percent or more, and supplemental Medigap plan
administrative costs that average 20 percent and are sometimes
40 percent or more. HCFA's administrative costs still compare
favorably, even when adjusted to account for differences
such as marketing expenses, profits, and other costs that
private plans may incur.
Success and Solvency
We also have had solid success in meeting the priorities
that I articulated at my 1997 confirmation hearing before
this Committee: modernizing and strengthening Medicare,
starting with implementation of the Balanced Budget Act
of 1997 (BBA); sharpening our focus on fraud, waste, and
abuse to ensure that Medicare dollars are spent appropriately;
launching the State Children's Health Insurance Program;
and, meeting the Year 2000 computer challenge.
-- Our National Medicare Education
Program is an unprecedented enterprise designed to help Medicare
beneficiaries understand Medicare and their options under
the Medicare+Choice program, as well as the important new
preventive benefits included in the BBA.
-- We have implemented the vast majority of provisions in
the BBA, which modernizes Medicare and Medicaid and strengthens
the solvency of the Medicare Trust Fund.
-- We have approved State Children's Health Insurance Program
plans for all states and territories and enrolled 2 million
children.
-- We have made substantial progress in implementing new
prospective payment systems for skilled nursing facilities,
hospital outpatient departments, and home health care that
include incentives to provide care efficiently.
-- We have had solid success in fighting fraud, waste, and
abuse. Our Medicare payment error rate is down by about
half. We have many new tools to prevent improper payments
and keep unscrupulous providers out of our programs. And
we have a comprehensive program integrity plan in place
that will help us bring the payment error rate down further.
-- And we achieved this while successfully meeting a daunting
Year 2000 computer challenge. Despite many predictions of
failure, we met this challenge and in the process developed
what our independent verification and validation contractor
decided were best practices that they in turn recommended
to their other clients.
The BBA and our successes in fighting fraud, waste, and
abuse, have together contributed to the strongest projection
of Medicare Trust Fund solvency in the program's history.
The Part A Hospital Insurance Trust Fund, which was projected
to become insolvent in 1999 when President Clinton took
office, is instead now projected to remain solvent until
2025.
We have also tackled other long-standing challenges with
success -- improving services to beneficiaries, improving
nursing home quality, improving financial and contractor
management, and creating a more open Medicare coverage determination
process. We continue to implement management improvements
outlined in the President's FY 2000 and FY 2001 Budgets.
This initiative is specifically aimed at improving our internal
communication, increasing our flexibility to operate, and
perhaps most important, increasing accountability to our
constituencies.
-- We fostered a new focus on serving
beneficiaries in all we do through our new Center for Beneficiary
Services. This Center has improved the quality of materials
for beneficiaries, and its director is a leading member of
our Executive Council, bringing a beneficiary focus to all
senior level deliberations. And it has made advances in health
promotion, for example, by developing tear-cards for colon
cancer awareness posters so beneficiaries can take information
with them to help start difficult conversations with physicians.
We are already seeing results of this sharper beneficiary
focus, with numerous awards for our beneficiary web site,
www.medicare.gov, and a high rating for beneficiary services
in the 1999 American Customer Satisfaction Index.
-- We launched a major initiative
to improve nursing home care and safety. We tightened rules,
clarified guidance, increased surveyor training, required
prompt action on complaints alleging harm to residents, and
posted survey results on the Internet, and acted to protect
residents in facilities with financial difficulties.
-- We greatly improved internal financial management and
oversight of claims processing contractors. I am determined
to meet the same high accounting standards required of major
private corporations. This year, for the first time, we
obtained an unqualified audit opinion, which means that
auditors determined that our books and records adequately
reflect Medicare assets and liabilities. But we intend to
do even better. We are developing an integrated financial
management system to better coordinate and reconcile contractor
data. We consolidated contractor management responsibility
by appointing a Deputy Director for Medicare Contractor
Management and creating a Medicare Contractor Oversight
Board. We are determining payment error rates and developing
performance report cards for every contractor. And the President's
fiscal 2001 budget includes funding for new positions at
contractors and at HCFA to further tighten financial controls
and ensure swift, coordinated responses to fraud, waste,
and abuse.
-- We have made the Medicare coverage determination process
open and accountable. Every member of the public can request
a national coverage policy decision and submit new data
for review by our Medicare Coverage Advisory Committee.
Information on the status, evidence, and rationale for all
determinations is posted on the Internet. And there are
timeliness standards for actions on determination requests.
Preparing for the Future
Building on our success in meeting our goals and tackling
longstanding management challenges and, thanks to additional
resources Congress provided in 1999 and 2000, we are now
eagerly preparing for the future. We are conducting a comprehensive
assessment of workforce needs, bringing in new employees
with private sector experience, and enhancing training for
current staff.
We also are consulting with experts across the country
and preparing for structural reforms that Medicare will
need to address the demographic and health challenges of
this new century. We are pleased to see a bipartisan consensus
emerging on the need to modernize and strengthen the program.
As we work together to act on this consensus, we must not
only ensure that the proposals meet the goals of strengthening
and modernizing Medicare, but do not undermine the basic
commitment of guaranteed access to high-quality health services
that has made Medicare the success that it is.
The President has proposed such a plan. It includes:
-- Adding a voluntary, affordable prescription drug benefit
available to all beneficiaries. No one would design Medicare
today without a drug benefit. Pharmaceuticals are essential
to modern medicine, and no Medicare modernization package
is complete unless it ensures that a comprehensive drug
benefit is available and affordable to all beneficiaries,
both in Medicare+Choice plans and the traditional fee-for-service
program.
-- Improving access to preventive services. We need to focus
more on avoiding problems, instead of paying too much to
treat preventable problems after they occur. The President
and Congress added several important preventive benefits
and eliminated copayments for others in the BBA, but there
is much more that we can do to promote access to these services.
The President's plan would eliminate all existing cost sharing
for preventive services and evaluate coverage of additional
preventive services.
-- Creating the Competitive Defined Benefit system . The
President's plan would replace the complicated statutory
formula used to pay managed care plans with a payment system
based on price competition. For the first time, beneficiaries
would shop for a health plan based on its price and quality
by paying lower Part B premiums for more efficient plans.
Managed care plans would also benefit since their payments
would be based on what they bid and, unlike today, they
would receive an explicit payment for covering prescription
drugs.
-- Using proven private-sector purchasing tools. Primary
care and disease management programs are proven to improve
health care outcomes while controlling costs. We also need
to use bidding to determine what we pay to suppliers and
health plans, rather than fee schedules or formulas that
result in payment rates that bear no resemblance to true
market value. We know this works in the private sector,
and we are seeing substantial savings for both beneficiaries
and the program in our competitive bidding demonstrations
for medical equipment.
-- Reforming Medicare contracting rules. The plan would
bring Medicare contracting in line with standard contracting
procedures used throughout the Federal government. While
we are making strides in strengthening oversight of the
private insurance companies who, by law, process Medicare
claims, the General Accounting Office and HHS Inspector
General agree with us that we need an open marketplace so
we do not have to rely on a steadily shrinking pool of insurance
companies and can use all firms capable of processing claims
and protecting program integrity.
-- Dedicating non-Social Security surplus to strengthen
Medicare's trust fund. In addition to modernizing the basic
program structure, we must shore up its financing and prepare
for the inevitable influx of new beneficiaries as the Baby
Boom generation reaches retirement age. The President's
plan does so by dedicating $299 billion over 10 years of
the on-budget surplus to the program to help extend the
solvency of the Hospital Insurance Trust Fund through at
least 2030. It makes sense to use the budget surplus to
help prepare Medicare for the Baby Boom's retirement, since
the surplus was largely generated by the Baby Boom. It also
helps contribute towards the President's goal of eliminating
the national debt by 2013 because these dollars would be
used to buy down debt.
The details of the President's reform plan were outlined
last June, in the President's FY 2001 budget, and in legislative
language sent to Congress last month. We hope that it serves
as the basis for comprehensive reform this year.
Another Medicare reform proposal introduced recently is
the Medicare Preservation and Improvement Act of 1999, whose
primary sponsors are Senators Breaux and Frist. This plan
is the next iteration of the Breaux/Thomas plan and is,
in my view, a significant improvement over that proposal.
It no longer raises the age of eligibility for Medicare,
restricts assistance for drug coverage to low-income beneficiaries,
or includes a home health copay. It also, like the President's
plan, injects price competition into Medicare. Its focus
on the need for Medicare reform is a contribution to the
debate.
We are, however, concerned about the plan's Medicare Board
proposal, which I would like to discuss. The Administration
also has concerns about its premium support proposal, which
would have the effect of increasing premiums for the traditional
program from 25 to 47 percent, according to the independent
Medicare actuary. The GAO and CRS have also testified that
traditional program premiums would increase. The plan would
offer a 25 percent subsidy for private drug plans, which
neither guarantees that a drug option will be available
nor affordable to all beneficiaries, unlike all other Medicare
benefits. And the plan merges the Medicare trust funds and
caps general revenue for Medicare, causing this new trust
fund to become insolvent in 2008, according to the GAO.
In contrast, the President's plan would extend the Medicare
trust fund's life.
Concerns with a Medicare Board
Given the topic of this hearing, I would like to focus on
the Board proposal in the Breaux-Frist plan as well as other
options being contemplated by Congress. This Committee has
been considering proposals to fundamentally change the administration
of Medicare, including a proposal to separate administration
of original fee-for-service Medicare from oversight of Medicare+Choice
plans, and instituting a new Medicare Board to manage the
Medicare program. I believe Congress has been contemplating
such changes to solve certain perceived problems with the
way Medicare is administered today. These include the desire
to insulate Medicare from "politics," and make
it function more like a private sector company, make the
program more responsive to providers, and to address the
perceived conflict of interest that exists for a single
agency to run both the fee-for-service and Medicare+Choice
programs.
However, I believe that some of these issues can be addressed
without an overhaul of Medicare's management, and others
are inherent in the running of any major program, so that
even the most radical Medicare board would not "solve"
them. We can and should build our efforts to adopt the best
private sector management practices. We have created the
new Medicare Coverage Advisory Committee and Citizens Advisory
Panel on Medicare Education to get public and private input
on these important topics. Our reform plan would give Medicare
additional management tools that would allow it to operate
more like a private health plan. And, we continue to explore
ways to incorporate both advice and practices that have
proven successful in the private sector.
An issue that cannot be solved under either the current
structure or a Board is the influence of "politics"
on Medicare. Politics are a part of any major public or
private institution and no amount of restructuring can change
that. In a public program like Medicare, "politics"
is part of public accountability. It is appropriate for
a public program of Medicare's size and importance to be
accountable to beneficiaries and taxpayers through their
elected representatives -- Congress and the President.
Furthermore, I do not believe the alleged conflict of interest
between fee-for-service and managed care exists at HCFA.
Our "clients" are beneficiaries and the taxpayers
who support them. Our goal is to give beneficiaries and
taxpayers the best health care for their dollars, whether
it be through managed care or the traditional program. We
have worked very hard to revise regulations and take other
steps to help plans participate in the Medicare+Choice program,
and believe managed care is an important option for beneficiaries
next to the traditional Medicare program.
For these reasons, I do not think that a Medicare Board
is necessary. Moreover, as it is structured in the Breaux-Frist
plan, a Board would create significant risks to Medicare.
The Board would be a 7 member, independent group, not subject
to any civil service rules or "sunshine laws"
whose members could only be removed for cause. It would
administer the competitive premium system and oversee the
operations of all Medicare plans, including enrollment,
contract oversight, and beneficiary education; and approve
and authorize payments for all plans, including traditional
Medicare. HCFA would be reorganized into two divisions:
one that runs the new health plan operating Medicare fee-for-service
and a second that would manage graduate medical education,
Medicaid, the State Children's Health Insurance Program,
and other functions. Rather than explicitly modernizing
the traditional program, the proposal would have HCFA submit
a business plan directly to Congress every year, beginning
in 2002, for approval.
The major concern with this Board is accountability. With
the Board outside the Executive Branch, the President would
have virtually no authority over one of the most important
Federal programs. In fact, under the proposal sponsored
by Senators Breaux and Frist, the Board and its members
would be accountable to no one, including Congress. Seniors
and people with disabilities rely on their elected officials
to respond to their concerns about the care and service
they receive in Medicare. This is an extraordinary change
given that Medicare is one of the largest government programs,
accounting for up to 11 percent of the federal budget, and
is of critical importance to millions of our nation's most
vulnerable citizens.
This Board would create its own substantial conflict of
interest concerns, both with the Board and with original
Medicare. Unlike existing Federal boards, the proposal sponsored
by Senators Breaux and Frist would create a Medicare board
with virtually no conflict of interest requirements for
Board members, such as financial disclosure, limits on any
management role or financial interest in regulated entities,
or limits on member activities after service. That would
allow members to make decisions based on personal financial
interests or potential benefits from future employment with
regulated plans. The proposal sponsored by Senators Breaux
and Frist creates a potential conflict of interest for original
Medicare, as well. That is because it gives the program
a fixed annual budget and that could create undue incentives
to put cost concerns ahead of beneficiary rights, quality
concerns, and other oversight obligations.
Finally, a Board would detract from administrative efficiency.
One of Medicare's greatest strengths is its very low administrative
costs. A Board, however, would need to hire staff to perform
many duplicative functions, such as beneficiary education,
that the original program would need to continue. Under
the proposal sponsored by Senators Breaux and Frist, the
Board's staff would be hired outside the Civil Service system,
further increasing costs. Above this redundant bureaucracy
would be a top-heavy Board with seven highly paid members
which would not be more nimble than the current administrative
structure. In fact, CRS notes that "Difficulties in
administering the program are more likely to arise and produce
conflicts more difficult to resolve when a program is divided
between two distinct federal entities than when located
within one entity." Such a situation would likely not
address the concern that Medicare be more responsive to
providers or beneficiaries.
CONCLUSION
In considering how to strengthen and improve Medicare's
administration, we must carefully and honestly confront
the question of what we are trying to fix. Change for the
sake of change does not make the improvements necessary
to strengthen and modernize Medicare and its administration.
We must modernize Medicare governance with effective reforms:
injecting competition into the system; giving HCFA other
private sector purchasing tools; contracting reform; and
administrative flexibility to manage the program. We must
secure stable, adequate funding to manage the program and
meet demographic changes. We must continue to improve information
technology, staff development, and other infrastructures
for effective, efficient management. And we must work together
to give Medicare the state-of-the-art management this program,
its beneficiaries, providers, and other partners deserves.
Medicare is a complex program and its administration is
complex. On any given day, someone will disagree with a
decision or feel we were not responsive enough. In the two
and a half years that I have been Administrator, HCFA has
been the subject of more than 1100 audits and oversight
reviews by the General Accounting Office and HHS Inspector
General. We receive, on average, more than 700 letters a
month from members of Congress, and our contractors receive
thousands more. This intense oversight and interest is appropriate,
given the billions of dollars at stake and the influence
Medicare has on the lives of so many Americans. This is
an important point. I believe part of the context for the
interest in Medicare governance today has to do with our
work implementing the truly historic Balanced Budget Act
of 1997, combined with our unprecedented efforts to fight
fraud, waste, and abuse.
The BBA represented the agreement of Congress and the Administration
to slow the growth in Medicare. Reducing spending by such
an unprecedented amount in such a relatively short time
was an unequaled challenge. Virtually every hospital, physician,
home health agency, skilled nursing facility, durable medical
equipment supplier, and other health care provider in the
country has been affected, and almost all have seen an impact
on their revenues. Such significant change with such an
ambitious implementation schedule has created pressures
and dissatisfaction. And HCFA, of course, was the face of
the BBA for these providers and, as such, the focus of much
of their unhappiness.
But the BBA was the right thing to do. Medicare is now
solvent through 2025 because of it, and that gives us time
to consider other changes that should be made to further
strengthen the program for the future. I believe HCFA did
a good job, albeit not a perfect job, in implementing the
BBA given the time frames, the competing interests of program
stakeholders, and the complexity of the changes. The BBA
served to put HCFA administration in the spotlight. I do
believe, however, that we have done well in implementing
the law and remaining true to the law's intent. The past
two years have not been easy for us, providers, beneficiaries,
or members of Congress, particularly members of this Committee.
Our heightened focus on program integrity also marked a
substantial change from past dealings with providers. Moving
in just a few short years from relatively lax efforts to
a zero tolerance policy on fraud, waste, and abuse has created
its own pressures and dissatisfactions, and it has been
challenging for both us and providers.
We are proud of our record of strengthening Medicare for
beneficiaries and management of its operations. We are committed
to meeting the management challenges that lie ahead. And
we are eager to continue working with you to build upon
our achievements and further strengthen and modernize this
essential program. I thank you again for holding this hearing,
and I am happy to answer your questions.
