The Federal Employees Health Benefit Program as a Model for Medicare Reform

Grace-Marie Arnett, president of the Galen Institute, was invited to present testimony on May 22, 1999, in Sanford, Florida, on free-market options for Medicare reform. The hearing was conducted by Rep. Joe Scarborough, chairman of the Subcommittee on Civil Service of the House Government Reform Committee. Here is Grace-Marie’s testimony.

Testimony presented before the Civil Service Subcommittee of the House Committee on Government Reform
The Honorable Joe Scarborough, Chairman
Field hearing, Sanford, Florida

Thank you, Mr. Chairman, and members of the committee for inviting me to testify at this important hearing today. I am honored by the invitation and hope today to present ideas that will be useful as you and your colleagues address the considerable financial challenges facing the Medicare program.

My name is Grace-Marie Arnett, and I am president of the Galen Institute, a not-for-profit health and tax policy research organization based in Alexandria, Virginia. The Galen Institute was formed in 1995 to promote a more informed public debate over individual freedom, consumer choice, competition, and diversity in the health sector. Our goal is to expand public education about free-market ideas to invigorate a consumer-driven market for health services and increase access to affordable, privately-owned health insurance.

The Galen Institute also facilitates the work of the Health Policy Consensus Group, which is composed of more than 20 health policy experts from the major free-market think tanks. My colleagues in the Consensus Group and I believe two critical principles should govern changes to Medicare:

1) Reform of the Medicare system should expand private-sector options for beneficiaries. Beneficiaries should be able to elect to participate in traditional Medicare or to privately purchase health coverage or medical services of their choice.

2) Medicare benefits should be defined in terms of a dollar amount, not in terms of an open entitlement to covered services.

I would hope that these principles might also be useful as a guide for your deliberations as well.

I would like today to begin with a brief overview of why Medicare must be reformed, not only to solve its looming financial insolvency, but also to address the growing restrictions on coverage for today’s and tomorrow’s beneficiaries. Then I would like to address innovative reform proposals, especially one offered by the Chairmen of the National Bipartisan Commission on the Future of Medicare that uses the Federal Employees Health Benefit Program (FEHBP) as a model for reform.

Danger signs ahead

Congress and the White House established the Medicare Commission last year to provide recommendations on how to save the troubled program. In 1998, Medicare spent $214 billion to provide health services for 39 million beneficiaries, mostly Americans over age 65. The commission was created because virtually all who seriously study the program admit that Medicare’s entitlement to covered services is unsustainable. The coming influx of 77 million baby-boom beneficiaries will bankrupt the system unless it is modernized.

Medicare’s unfunded liability is nearly double that of the Social Security Trust Fund. If nothing is done to Medicare now, by the time today’s college students reach retirement age, the tax burden created by Medicare alone will nearly triple, from the current 5.35 percent of gross domestic product to almost 14 percent.1

But it is not only Medicare’s future financial collapse that must be addressed. Already today, doctors and even beneficiaries are running into walls of restrictions in Medicare. Dr. Robert Waller, former chairman of the Mayo Foundation which operates the Mayo Clinics, asked his staff to count the number of pages of government rules and regulations his facilities must follow in treating Medicare patients. Jaws dropped when he testified before the Medicare Commission that they counted 111,000 pages of rules governing every detail of what doctors can and cannot do and how they must record and report patient information. I’d like to give you a few examples of what is happening today in the Medicare program to illustrate how important it is to modernize Medicare.

Hospice Care

An article in the Washington Post two years ago2 reveals where a centralized, government-run Medicare program leads. The lead of this news article reads:

People in hospice programs are not dying fast enough to satisfy federal government auditors. Washington is conducting special reviews of hospice records and calling for repayment of money spent under Medicare for patients who lived beyond the expected six months after they had enrolled for hospice care.

The get-tough policy is part of the government’s Operation Restore Trust, a special program designed to combat waste, fraud, and abuse in Medicare.

Apparently federal auditors believe that Medicare patients living too long represents waste, fraud, and abuse in Medicare. I think that Medicare patients, and the American people, would strongly and vociferously disagree.

Fraud and Abuse Investigations

Certainly Medicare fraud is a major problem, and no one would condone fraudulent schemes that steal money from the program – and ultimately from beneficiaries and taxpayers. But the government’s fraud and abuse enforcement is creating problems of its own.

The big dragnet for “health care criminals” is threatening innocent doctors as well as creating an unhealthy climate of fear and defensiveness in the medical profession.3

An example will reveal where enforcement of the government’s 111,000 pages of Medicare rules and regulations is leading.

In Idaho, Medicare inspectors audited the practice of physician Kenneth Krell last year, reviewing 15 charts. The auditors charged that Dr. Krell had been overpaid by Medicare by $2,355.52 for some of these 15 patients whose charts they reviewed. Medicare then demanded that Dr. Krell return $81,390.02, a figure arrived at by multiplying the alleged overpayment by the total number of Medicare patients the doctor had seen in 1997.

Dr. Krell and the Idaho Medical Association protested loudly and publicly, and the federal government backed down, limiting the fines to only to the original $2,355.52. But this episode has put a chill on Idaho physicians, and on doctors everywhere. Another group of Idaho Falls internists decided after a similar audit that the risk of treating Medicare patients was too great. They were warned that another audit could lead to $10,000 fines for every instance in which they miscoded a diagnosis or treatment. The doctors decided that to save their practices, they would stop seeing Medicare patients, meaning that their former patients now must travel 45 miles to the nearest city to see a doctor. These doctors are not crooks. They are trying, as AMA President Nancy Dickey recently said, to do their best to treat their patients under Medicare rules but are finding the rules so incomprehensible, contradictory, and onerous that compliance is virtually impossible.

Dr. Russell Snow, an eye, ear, nose, and throat doctor from Caldwell, Idaho, says his colleagues are so frightened by federal enforcement provisions that many more are considering heading for the exits.

Section 4507

One of Medicare’s worst features is a provision enacted in the Balanced Budget Agreement of 1997 which has the effect of keeping persons over age 65 from contracting privately with a personal physician to receive medical services. Even British citizens in their country’s socialized health care system can see doctors and pay privately for services if they choose, but not so American seniors in Medicare.

Under the 1997 legislation, so named because it is located in Section 4507 of the law, a doctor who wishes to contract privately with a patient enrolled in Medicare Part B must remove him or herself completely from the Medicare program for a period of two years. That means that to treat one Medicare patient one time privately, that the doctor must stop seeing all of his or her Medicare patients for two years. This financial hardship effectively prohibits private contracting by all but a small number of physicians. The result: Most Americans over the age of 65 cannot spend their own money to secure the medical services or treatments they want on terms mutually agreed upon with a physician of their choice.

Privacy Intrusions

Under the pretext of regulating prices and assuring “quality” services, the Health Care Financing Administration which administers Medicare has proposed a rule that would force 9,000 home health care agencies to collect and report sensitive personal information on their patients. This information – to be collected without the patient’s knowledge and transmitted to a federal database – would include such data as patient history and personal characteristics, including race and ethnicity, living arrangements, and financial, behavioral, and psychological profiles. The detailed record also would include whether the patient had expressed “depressive feelings,” a “sense of failure,” or “thoughts of suicide,” or had used “excessive profanity” or made “sexual references.”4 Further, the clinician’s assessment would become part of the patient’s file and available to other government agencies for review.

Such abuse of the patient’s right to privacy is rooted in the top-heavy structure of the Medicare program.

Why Chairman Breaux is Right

These and other danger signals finally have convinced some political leaders that it is time for a change in Medicare. The chairmen of the Medicare commission, Democratic Senator John Breaux of Louisiana and Republican Congressman Bill Thomas of California, lived up to the name of the “bipartisan” commission in crafting a joint plan, one designed to leverage the powerful forces of market competition and consumer choice to save the program.

But politics trumped policy. Despite heroic efforts by both chairmen, the final tally in March was one short of the 11-vote super-majority that the 17-member commission had set as its threshold to issue recommendations. None of President Clinton’s appointees voted for the reform plan. The commission therefore disbanded, unable to agree on any advice for Congress and the White House.

But the plan they developed, with very competent advice of policy experts, including my colleague in the Consensus Group John Hoff, was sound and deserves consideration by Congress.

FEHPB as a Model for Free-market Reform 

Not acting, as you know so well, Mr. Chairman, is not an option. But unfortunately, Medicare is being used as a political weapon. That is bad for today’s senior citizens, for tomorrow’s retirees, and for young families who face the prospect of dramatically higher taxes into the next century for a program with an insatiable appetite for taxpayer dollars.

President Clinton has proposed earmarking one-sixth of the federal budget surplus to extend the program’s life by a few years. This may seem politically expedient, but it’s no solution. The Congressional Budget Office and the General Accounting Office both have dismissed the administration’s proposal. “The president’s proposal could introduce a sense of false complacency,” GAO head David Walker warned, adding that the White House plan would improve the “paper solvency” of Medicare “without reforms to make the underlying program more sustainable.”

The solution endorsed by the majority of the members of the bipartisan Medicare commission and by virtually all of my colleagues in the market-based health policy community is to restructure the program to put more control in the hands of beneficiaries and less in the hands of bureaucrats. We believe that citizens will get the best quality and services at the best price through the competitive marketplace. Getting there means redefining Medicare in terms of a fixed dollar amount for each individual instead of the current entitlement to a list of government-determined products and services.

Under the proposal offered by Chairmen Breaux and Thomas, beneficiaries would have the choice of staying in traditional Medicare or receiving financial assistance that they could use to purchase their own health coverage in the private marketplace. The “premium support” model they offered would move Medicare away from the current crushing system of price controls, regulatory bottlenecks, and restrictions on coverage to give seniors money they could use to choose their own health care arrangements in a competitive system.

Their plan was modeled after the successful Federal Employees Health Benefit Program, over which your committee, of course, has jurisdiction and which provides health coverage for members of Congress and their staffs, the White House staff, and 10 million other federal employees, retirees, and their families. This very popular program has been extremely successful in providing a wide array of choices for participants, while holding down premium costs. You and the members of your committee are to be congratulated for demonstrating the effectiveness of a light-handed approach to legislative direction of FEHBP.

This viable, successful program can serve as a model for transformation and modernization of Medicare to provide a broad array of private-sector choice of health plans for Medicare beneficiaries. Under FEHBP-style Medicare reform, the government would negotiate with participating private insurers – as it does now on behalf of federal workers – to ensure that each private plan offers a core set of benefits, possibly including prescription drugs. As my Consensus Group colleague, Bob Moffit of the Heritage Foundation points out, seniors would be empowered to “hire” or “fire” a particular health plan. They would be free to select anything from an inexpensive basic plan to a more costly option with broader benefits. Health insurers would have a greater incentive to tailor their plans to meet the needs of seniors. Free-market pressures, namely consumer choice and competition, would control program costs without compromising high quality care.

Under the premium support system, Medicare beneficiaries would receive a contribution to the cost of their chosen plan, but that contribution could be adjusted – or indexed – each year to reflect the market price of plans providing the core set of benefits. In this way, the elderly would be assured that they could afford the costs of standard coverage, but they would have a strong incentive to choose a cost-effective plan because the premium support they receive would be limited.

Stuart Butler of the Heritage Foundation describes how the new premium support mechanism contrasts with the current system of allowing Medicare beneficiaries to participate in managed care plans:5 Medicare today uses a complex formula to determine its payments to managed care plans serving beneficiaries. Through legislation and regulation, the government tries to create a payment schedule that will work in all parts of the country and that takes into account local conditions. But as is typical of attempts by government to set payments by formula, these schedules rarely match the actual market, which is constantly changing. As a result, policymakers and health care providers grumble constantly that the formula systematically and wastefully overpays some plans and underpays others. As we have seen, many managed care plans have opted out, saying that they would lose money under federal payment schedules.

By contrast, in the FEHBP, a “call letter” is sent each spring to health plans to ask them to submit proposals for providing a broadly defined set of benefits to federal workers, their dependents, and federal retirees. The plans must state the services they propose to cover as well as the premium they intend to charge. After these proposals are received, the White House’s Office of Personnel Management (OPM), which is responsible for running the FEHBP, engages in rounds of negotiations with plans until a final proposal is made and accepted.

The negotiations between the OPM and the plans involve the design and scope of benefits, the premiums, the geographic area in which the plan will operate, and other conditions under which services will be delivered. Through this negotiation system, a set of benefits and prices is determined. After the negotiations are complete, the OPM sends out standardized information on all plans to federal workers and retirees late in the fall each year, and individual FEHBP beneficiaries choose the plan in which they wish to enroll for the following year.

In this system, plans feel pressure to compete with one another; they also feel pressure from the government and federal workers to provide the best services for the price. Unlike a system of pricing based on formulas, plans cannot easily profit by exploiting a regulation or a poorly designed pricing formula; neither is the government required to overpay or underpay simply because of a legislated rule.

If Medicare were run on similar principles, the government could negotiate payment levels for plans that reflected local market conditions and avoid the chronic overspending or underpricing (which leads to poor quality or fewer plans) that is endemic to the current formula system. The government also could negotiate special prices and services for particular categories of special-needs beneficiaries and in other ways provide a better and more cost-effective service to seniors.

The negotiation approach would allow Medicare gradually to modify benefits in line with medical developments. Moreover, it would permit experimentation with “risk adjustment” mechanisms to raise or lower total payments to plans depending on the health status of beneficiaries choosing each plan.6

FEHBP as a Model for Long-term Care Insurance

On a related matter, you also are providing leadership, Mr. Chairman, in using FEHBP as a model for long-term care insurance. The legislation you have introduced, cosponsored by Mr. Mica, could lead to similar polices in the private sector.

Your Civil Service Long-Term Care Insurance Benefit Act would direct the Office of Personnel Management to establish and administer a program through which Federal employees and annuitants may obtain group long-term care insurance for themselves, a spouse, or, to the extent permitted under the insurance contract terms, any other eligible relative. Your legislation takes a blessedly hand-off approach, letting beneficiaries, and not bureaucrats, decide the shape of the insurance policies.

Tomorrow’s senior citizens must begin thinking today about coverage for their own non-acute medical needs. Your proposal would go a long way toward establishing a program in the FEHBP that could guide the development of these products in the private marketplace.

Choice and Freedom in Medicare Reform

In conclusion, I would hope that serious consideration would be given to using an FEHBP model for Medicare reform. This approach would give seniors much more choice and freedom in obtaining health care, and it would save taxpayers $500-$700 billion a year by 2030. I understand that Senator Breaux and Congressman Thomas are working to gain congressional consideration of their proposal in this Congress. It failed to gain the endorsement of the full Medicare Commission because of political, not policy, considerations. The American people deserve to hear the details of this attractive option and to participate in the debate.

But members of Congress should be forewarned as the legislation moves forward: Free-market reform can be derailed in the legislative process through hostile amendments that seek to impose on private insurers the same excessive rules and regulations that the Clinton administration tried to impose on private-sector health plans. There’s no point to introducing patient choice for seniors if lawmakers allow that choice to become meaningless. For serious Medicare reformers, though, the path is clear. If a superior system of patient choice and competitive private plans is good enough for Congress and the White House staff, it should be good enough for America’s seniors.

Under a modernized Medicare, instead of appeasing regulators and health police, patients would be free to make their own choices of doctors and care arrangements. Seniors looking out for their own interests and pocketbooks will spend much more wisely the $6,000 Medicare spends on the average beneficiary each year. The market will provide more attractive options for a variety of products and services.

If allowed to function without government shackles, competition will facilitate continued innovation in products and service delivery. The result: taxpayers will be protected, consumers will get better value, and Medicare would become solvent for decades to come.

Thank you, Mr. Chairman and members of the Committee, for the opportunity to make this presentation today, and I look forward to your comments and questions.

Footnotes

1. Saving, Thomas R. and Rettenmaier, Andrew J. “Saving Medicare.” National Center for Policy Analysis, Dallas, TX. January, 1999.

2. Rosenblatt, Robert A. “Government auditors question Medicare payments for Long-Term Hospice Care,” Washington Post, March 16, 1997.

3. Arnett, Grace-Marie. “How bureaucracy invites health care fraud and why complex rules guarantee the abuse of physicians,” Forthcoming.

4. Moffit, Robert E. “HCFA’s latest assault on patient privacy,” Executive Memorandum #580, The Heritage Foundation, March 22, 1999.

5. Butler, Stuart. “Principles for a bipartisan reform of Medicare,” Backgrounder No. 1247, The Heritage Foundation, Washington, D.C., January 29, 1999.

6. This is a crucial feature of a negotiation model, according to Butler. There are legitimate concerns about giving flexibility to plans to vary benefits for fear that this would allow plans to “cherry-pick” good health risks. But “correcting” that risk with standardized benefits would lead to rigidity and discourage plan innovation. Negotiation, however, would permit varied benefits to be subjected to review–to check for cherry-picking–before they could be offered to seniors.

Grace-Marie Arnett is president of Galen Institute, a public policy research organization based in Alexandria, Virginia. She is the editor of Empowering Health Care Consumers through Tax Reform, published in 1999 by the University of Michigan Press.

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About the author

Grace-Marie Arnett, president of the Galen Institute, was invited to present testimony on May 22, 1999, in Sanford, Florida, on free-market options for Medicare reform. The hearing was conducted by Rep. Joe Scarborough, chairman of the Subcommittee on Civil Service of the House Government Reform Committee. Here is Grace-Marie’s testimony.

Testimony presented before the Civil Service Subcommittee of the House Committee on Government Reform
The Honorable Joe Scarborough, Chairman
Field hearing, Sanford, Florida

Thank you, Mr. Chairman, and members of the committee for inviting me to testify at this important hearing today. I am honored by the invitation and hope today to present ideas that will be useful as you and your colleagues address the considerable financial challenges facing the Medicare program.

My name is Grace-Marie Arnett, and I am president of the Galen Institute, a not-for-profit health and tax policy research organization based in Alexandria, Virginia. The Galen Institute was formed in 1995 to promote a more informed public debate over individual freedom, consumer choice, competition, and diversity in the health sector. Our goal is to expand public education about free-market ideas to invigorate a consumer-driven market for health services and increase access to affordable, privately-owned health insurance.

The Galen Institute also facilitates the work of the Health Policy Consensus Group, which is composed of more than 20 health policy experts from the major free-market think tanks. My colleagues in the Consensus Group and I believe two critical principles should govern changes to Medicare:

1) Reform of the Medicare system should expand private-sector options for beneficiaries. Beneficiaries should be able to elect to participate in traditional Medicare or to privately purchase health coverage or medical services of their choice.

2) Medicare benefits should be defined in terms of a dollar amount, not in terms of an open entitlement to covered services.

I would hope that these principles might also be useful as a guide for your deliberations as well.

I would like today to begin with a brief overview of why Medicare must be reformed, not only to solve its looming financial insolvency, but also to address the growing restrictions on coverage for today’s and tomorrow’s beneficiaries. Then I would like to address innovative reform proposals, especially one offered by the Chairmen of the National Bipartisan Commission on the Future of Medicare that uses the Federal Employees Health Benefit Program (FEHBP) as a model for reform.

Danger signs ahead

Congress and the White House established the Medicare Commission last year to provide recommendations on how to save the troubled program. In 1998, Medicare spent $214 billion to provide health services for 39 million beneficiaries, mostly Americans over age 65. The commission was created because virtually all who seriously study the program admit that Medicare’s entitlement to covered services is unsustainable. The coming influx of 77 million baby-boom beneficiaries will bankrupt the system unless it is modernized.

Medicare’s unfunded liability is nearly double that of the Social Security Trust Fund. If nothing is done to Medicare now, by the time today’s college students reach retirement age, the tax burden created by Medicare alone will nearly triple, from the current 5.35 percent of gross domestic product to almost 14 percent.1

But it is not only Medicare’s future financial collapse that must be addressed. Already today, doctors and even beneficiaries are running into walls of restrictions in Medicare. Dr. Robert Waller, former chairman of the Mayo Foundation which operates the Mayo Clinics, asked his staff to count the number of pages of government rules and regulations his facilities must follow in treating Medicare patients. Jaws dropped when he testified before the Medicare Commission that they counted 111,000 pages of rules governing every detail of what doctors can and cannot do and how they must record and report patient information. I’d like to give you a few examples of what is happening today in the Medicare program to illustrate how important it is to modernize Medicare.

Hospice Care

An article in the Washington Post two years ago2 reveals where a centralized, government-run Medicare program leads. The lead of this news article reads:

People in hospice programs are not dying fast enough to satisfy federal government auditors. Washington is conducting special reviews of hospice records and calling for repayment of money spent under Medicare for patients who lived beyond the expected six months after they had enrolled for hospice care.

The get-tough policy is part of the government’s Operation Restore Trust, a special program designed to combat waste, fraud, and abuse in Medicare.

Apparently federal auditors believe that Medicare patients living too long represents waste, fraud, and abuse in Medicare. I think that Medicare patients, and the American people, would strongly and vociferously disagree.

Fraud and Abuse Investigations

Certainly Medicare fraud is a major problem, and no one would condone fraudulent schemes that steal money from the program – and ultimately from beneficiaries and taxpayers. But the government’s fraud and abuse enforcement is creating problems of its own.

The big dragnet for “health care criminals” is threatening innocent doctors as well as creating an unhealthy climate of fear and defensiveness in the medical profession.3

An example will reveal where enforcement of the government’s 111,000 pages of Medicare rules and regulations is leading.

In Idaho, Medicare inspectors audited the practice of physician Kenneth Krell last year, reviewing 15 charts. The auditors charged that Dr. Krell had been overpaid by Medicare by $2,355.52 for some of these 15 patients whose charts they reviewed. Medicare then demanded that Dr. Krell return $81,390.02, a figure arrived at by multiplying the alleged overpayment by the total number of Medicare patients the doctor had seen in 1997.

Dr. Krell and the Idaho Medical Association protested loudly and publicly, and the federal government backed down, limiting the fines to only to the original $2,355.52. But this episode has put a chill on Idaho physicians, and on doctors everywhere. Another group of Idaho Falls internists decided after a similar audit that the risk of treating Medicare patients was too great. They were warned that another audit could lead to $10,000 fines for every instance in which they miscoded a diagnosis or treatment. The doctors decided that to save their practices, they would stop seeing Medicare patients, meaning that their former patients now must travel 45 miles to the nearest city to see a doctor. These doctors are not crooks. They are trying, as AMA President Nancy Dickey recently said, to do their best to treat their patients under Medicare rules but are finding the rules so incomprehensible, contradictory, and onerous that compliance is virtually impossible.

Dr. Russell Snow, an eye, ear, nose, and throat doctor from Caldwell, Idaho, says his colleagues are so frightened by federal enforcement provisions that many more are considering heading for the exits.

Section 4507

One of Medicare’s worst features is a provision enacted in the Balanced Budget Agreement of 1997 which has the effect of keeping persons over age 65 from contracting privately with a personal physician to receive medical services. Even British citizens in their country’s socialized health care system can see doctors and pay privately for services if they choose, but not so American seniors in Medicare.

Under the 1997 legislation, so named because it is located in Section 4507 of the law, a doctor who wishes to contract privately with a patient enrolled in Medicare Part B must remove him or herself completely from the Medicare program for a period of two years. That means that to treat one Medicare patient one time privately, that the doctor must stop seeing all of his or her Medicare patients for two years. This financial hardship effectively prohibits private contracting by all but a small number of physicians. The result: Most Americans over the age of 65 cannot spend their own money to secure the medical services or treatments they want on terms mutually agreed upon with a physician of their choice.

Privacy Intrusions

Under the pretext of regulating prices and assuring “quality” services, the Health Care Financing Administration which administers Medicare has proposed a rule that would force 9,000 home health care agencies to collect and report sensitive personal information on their patients. This information – to be collected without the patient’s knowledge and transmitted to a federal database – would include such data as patient history and personal characteristics, including race and ethnicity, living arrangements, and financial, behavioral, and psychological profiles. The detailed record also would include whether the patient had expressed “depressive feelings,” a “sense of failure,” or “thoughts of suicide,” or had used “excessive profanity” or made “sexual references.”4 Further, the clinician’s assessment would become part of the patient’s file and available to other government agencies for review.

Such abuse of the patient’s right to privacy is rooted in the top-heavy structure of the Medicare program.

Why Chairman Breaux is Right

These and other danger signals finally have convinced some political leaders that it is time for a change in Medicare. The chairmen of the Medicare commission, Democratic Senator John Breaux of Louisiana and Republican Congressman Bill Thomas of California, lived up to the name of the “bipartisan” commission in crafting a joint plan, one designed to leverage the powerful forces of market competition and consumer choice to save the program.

But politics trumped policy. Despite heroic efforts by both chairmen, the final tally in March was one short of the 11-vote super-majority that the 17-member commission had set as its threshold to issue recommendations. None of President Clinton’s appointees voted for the reform plan. The commission therefore disbanded, unable to agree on any advice for Congress and the White House.

But the plan they developed, with very competent advice of policy experts, including my colleague in the Consensus Group John Hoff, was sound and deserves consideration by Congress.

FEHPB as a Model for Free-market Reform 

Not acting, as you know so well, Mr. Chairman, is not an option. But unfortunately, Medicare is being used as a political weapon. That is bad for today’s senior citizens, for tomorrow’s retirees, and for young families who face the prospect of dramatically higher taxes into the next century for a program with an insatiable appetite for taxpayer dollars.

President Clinton has proposed earmarking one-sixth of the federal budget surplus to extend the program’s life by a few years. This may seem politically expedient, but it’s no solution. The Congressional Budget Office and the General Accounting Office both have dismissed the administration’s proposal. “The president’s proposal could introduce a sense of false complacency,” GAO head David Walker warned, adding that the White House plan would improve the “paper solvency” of Medicare “without reforms to make the underlying program more sustainable.”

The solution endorsed by the majority of the members of the bipartisan Medicare commission and by virtually all of my colleagues in the market-based health policy community is to restructure the program to put more control in the hands of beneficiaries and less in the hands of bureaucrats. We believe that citizens will get the best quality and services at the best price through the competitive marketplace. Getting there means redefining Medicare in terms of a fixed dollar amount for each individual instead of the current entitlement to a list of government-determined products and services.

Under the proposal offered by Chairmen Breaux and Thomas, beneficiaries would have the choice of staying in traditional Medicare or receiving financial assistance that they could use to purchase their own health coverage in the private marketplace. The “premium support” model they offered would move Medicare away from the current crushing system of price controls, regulatory bottlenecks, and restrictions on coverage to give seniors money they could use to choose their own health care arrangements in a competitive system.

Their plan was modeled after the successful Federal Employees Health Benefit Program, over which your committee, of course, has jurisdiction and which provides health coverage for members of Congress and their staffs, the White House staff, and 10 million other federal employees, retirees, and their families. This very popular program has been extremely successful in providing a wide array of choices for participants, while holding down premium costs. You and the members of your committee are to be congratulated for demonstrating the effectiveness of a light-handed approach to legislative direction of FEHBP.

This viable, successful program can serve as a model for transformation and modernization of Medicare to provide a broad array of private-sector choice of health plans for Medicare beneficiaries. Under FEHBP-style Medicare reform, the government would negotiate with participating private insurers – as it does now on behalf of federal workers – to ensure that each private plan offers a core set of benefits, possibly including prescription drugs. As my Consensus Group colleague, Bob Moffit of the Heritage Foundation points out, seniors would be empowered to “hire” or “fire” a particular health plan. They would be free to select anything from an inexpensive basic plan to a more costly option with broader benefits. Health insurers would have a greater incentive to tailor their plans to meet the needs of seniors. Free-market pressures, namely consumer choice and competition, would control program costs without compromising high quality care.

Under the premium support system, Medicare beneficiaries would receive a contribution to the cost of their chosen plan, but that contribution could be adjusted – or indexed – each year to reflect the market price of plans providing the core set of benefits. In this way, the elderly would be assured that they could afford the costs of standard coverage, but they would have a strong incentive to choose a cost-effective plan because the premium support they receive would be limited.

Stuart Butler of the Heritage Foundation describes how the new premium support mechanism contrasts with the current system of allowing Medicare beneficiaries to participate in managed care plans:5 Medicare today uses a complex formula to determine its payments to managed care plans serving beneficiaries. Through legislation and regulation, the government tries to create a payment schedule that will work in all parts of the country and that takes into account local conditions. But as is typical of attempts by government to set payments by formula, these schedules rarely match the actual market, which is constantly changing. As a result, policymakers and health care providers grumble constantly that the formula systematically and wastefully overpays some plans and underpays others. As we have seen, many managed care plans have opted out, saying that they would lose money under federal payment schedules.

By contrast, in the FEHBP, a “call letter” is sent each spring to health plans to ask them to submit proposals for providing a broadly defined set of benefits to federal workers, their dependents, and federal retirees. The plans must state the services they propose to cover as well as the premium they intend to charge. After these proposals are received, the White House’s Office of Personnel Management (OPM), which is responsible for running the FEHBP, engages in rounds of negotiations with plans until a final proposal is made and accepted.

The negotiations between the OPM and the plans involve the design and scope of benefits, the premiums, the geographic area in which the plan will operate, and other conditions under which services will be delivered. Through this negotiation system, a set of benefits and prices is determined. After the negotiations are complete, the OPM sends out standardized information on all plans to federal workers and retirees late in the fall each year, and individual FEHBP beneficiaries choose the plan in which they wish to enroll for the following year.

In this system, plans feel pressure to compete with one another; they also feel pressure from the government and federal workers to provide the best services for the price. Unlike a system of pricing based on formulas, plans cannot easily profit by exploiting a regulation or a poorly designed pricing formula; neither is the government required to overpay or underpay simply because of a legislated rule.

If Medicare were run on similar principles, the government could negotiate payment levels for plans that reflected local market conditions and avoid the chronic overspending or underpricing (which leads to poor quality or fewer plans) that is endemic to the current formula system. The government also could negotiate special prices and services for particular categories of special-needs beneficiaries and in other ways provide a better and more cost-effective service to seniors.

The negotiation approach would allow Medicare gradually to modify benefits in line with medical developments. Moreover, it would permit experimentation with “risk adjustment” mechanisms to raise or lower total payments to plans depending on the health status of beneficiaries choosing each plan.6

FEHBP as a Model for Long-term Care Insurance

On a related matter, you also are providing leadership, Mr. Chairman, in using FEHBP as a model for long-term care insurance. The legislation you have introduced, cosponsored by Mr. Mica, could lead to similar polices in the private sector.

Your Civil Service Long-Term Care Insurance Benefit Act would direct the Office of Personnel Management to establish and administer a program through which Federal employees and annuitants may obtain group long-term care insurance for themselves, a spouse, or, to the extent permitted under the insurance contract terms, any other eligible relative. Your legislation takes a blessedly hand-off approach, letting beneficiaries, and not bureaucrats, decide the shape of the insurance policies.

Tomorrow’s senior citizens must begin thinking today about coverage for their own non-acute medical needs. Your proposal would go a long way toward establishing a program in the FEHBP that could guide the development of these products in the private marketplace.

Choice and Freedom in Medicare Reform

In conclusion, I would hope that serious consideration would be given to using an FEHBP model for Medicare reform. This approach would give seniors much more choice and freedom in obtaining health care, and it would save taxpayers $500-$700 billion a year by 2030. I understand that Senator Breaux and Congressman Thomas are working to gain congressional consideration of their proposal in this Congress. It failed to gain the endorsement of the full Medicare Commission because of political, not policy, considerations. The American people deserve to hear the details of this attractive option and to participate in the debate.

But members of Congress should be forewarned as the legislation moves forward: Free-market reform can be derailed in the legislative process through hostile amendments that seek to impose on private insurers the same excessive rules and regulations that the Clinton administration tried to impose on private-sector health plans. There’s no point to introducing patient choice for seniors if lawmakers allow that choice to become meaningless. For serious Medicare reformers, though, the path is clear. If a superior system of patient choice and competitive private plans is good enough for Congress and the White House staff, it should be good enough for America’s seniors.

Under a modernized Medicare, instead of appeasing regulators and health police, patients would be free to make their own choices of doctors and care arrangements. Seniors looking out for their own interests and pocketbooks will spend much more wisely the $6,000 Medicare spends on the average beneficiary each year. The market will provide more attractive options for a variety of products and services.

If allowed to function without government shackles, competition will facilitate continued innovation in products and service delivery. The result: taxpayers will be protected, consumers will get better value, and Medicare would become solvent for decades to come.

Thank you, Mr. Chairman and members of the Committee, for the opportunity to make this presentation today, and I look forward to your comments and questions.

Footnotes

1. Saving, Thomas R. and Rettenmaier, Andrew J. “Saving Medicare.” National Center for Policy Analysis, Dallas, TX. January, 1999.

2. Rosenblatt, Robert A. “Government auditors question Medicare payments for Long-Term Hospice Care,” Washington Post, March 16, 1997.

3. Arnett, Grace-Marie. “How bureaucracy invites health care fraud and why complex rules guarantee the abuse of physicians,” Forthcoming.

4. Moffit, Robert E. “HCFA’s latest assault on patient privacy,” Executive Memorandum #580, The Heritage Foundation, March 22, 1999.

5. Butler, Stuart. “Principles for a bipartisan reform of Medicare,” Backgrounder No. 1247, The Heritage Foundation, Washington, D.C., January 29, 1999.

6. This is a crucial feature of a negotiation model, according to Butler. There are legitimate concerns about giving flexibility to plans to vary benefits for fear that this would allow plans to “cherry-pick” good health risks. But “correcting” that risk with standardized benefits would lead to rigidity and discourage plan innovation. Negotiation, however, would permit varied benefits to be subjected to review–to check for cherry-picking–before they could be offered to seniors.

Grace-Marie Arnett is president of Galen Institute, a public policy research organization based in Alexandria, Virginia. She is the editor of Empowering Health Care Consumers through Tax Reform, published in 1999 by the University of Michigan Press.

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