MMr. Chairman and members of the committee, I am Mary Nell Lehnhard, Senior Vice President of of Policy and Representation at the Blue Cross and Blue Shield Association. BCBSA representsBCBSA represents 52 independent Blue Cross and Blue Shield Plans throughout the nation that collectively together provide health coverage to 71.4 million Americans. I appreciate the opportunity to testify on some of the key issues in Medicare reform.

The BCBS systemBlue Cross and Blue Shield (BCBS) Plans have a unique point of view because they are is a major presence in all aspects of the Medicare program. Collectively, BCBS PlansBCBS Plans provide Medicare HMO coverage to over more than one million Medicare beneficiaries, which makes the Blue systemmaking them the second largest Medicare+Choice (M+C) provider in the country. In additionOn the fee-for-service side of Medicare, BCBS Plans process 90 percent of Medicare Part A claims and about 57 percent of all Part B claims. Finally, BCBS Plans are also a trusted source of Medigap and Medicare Select coverage, which provides supplemental coverage of Medicare fee-for-service benefits.

BCBSA supports Medicare reforms that will assure that the program remains financially stable and secure so that it can successfully serve both current and future beneficiaries. As the Finance Ccommittee debates the future direction of the Medicare program, I would urge that you consider these key points:

• First, any reform should harness the power of the private sector to bring Medicare beneficiaries the types of choices and innovations that many working-age Americans now enjoy. Accomplishing this will demand a fundamental changes in how the government partners with the private health plansbehaves towards private health plans.

• Second, Congress should view the Medicare+Choice program asshould be the foundation of any broader private -sector based such reform. Therefore, TCongress should assure a strong working relationship between the government and the assure the confidence ofraise t tprivate sector’s confidence by making Medicare+Choice payments more reasonable and predictable, and by reducing excessive regulatory mandates.

Congress should preserve and strengthen the Medicare+Choice program before proceeding to Medicare Reform;

Medicare Reform should follow five principles – establishing a level playing field, providing stable and predictable payment rates, transforming the government to operate like a private sector health care purchase, making the program easy to understand, and designing a well structured transition.

• Third, because a substantial number of beneficiaries are likely to stay in fee-for-service Medicare for the foreseeable future, it is vital that Congress must protect maintain the viability of Medigap and, ensure assure the proper administration of the Medicare fee-for-service program.

• Finally, eCongress should fforts to develop a drug benefit for Medicare should look to and learn from the experience of the private sector in efforts to develop a prescription drug benefit for Medicare beneficiaries.

Over the last two decades, a wave of innovation and vitality has swept through much of the private health -care industry. Today, the market offers more choices of products and , benefits, and medical management strategies than ever before. Medicare+Choice, created in 1997, was meant to infuse the Medicare program with this innovation and vitality. Unfortunately, this has not happened. Because of heavy-handed, unnecessarily complex fFederal regulations, a high level of business risk, and unpredictable and inadequate and unreasonable payment rates, the private sector has not played as great an expanded role as the Congress envisionedagedionagee when it created Medicare+Choice.

We believeThus, the success of Medicare reform will depend on a fundamental changes in the government’s relationship with the private sector:

• The government must act less like a heavy-handed regulator and more like a private sector purchaser and partner with plans;

• The government must provide for reasonable and predictable payments; and

• The government must assure that any reform will be fair and workable.

Since Congress enacted Medicare+Choice, the Health Care Financing Administration (HCFA) has issued hundreds upon hundreds of pages of regulations and literally thousands of detailed conditions, including (e.g., the 800+ page "mega-reg," 98 operational policy letters, and the Quality Improvement System for Managed Care (QISMC)., etc.). HCFA’s massive regulations – unheard of in the private sector – sets out detailed requirements for virtually all aspects of a health plan’s operations creates a highly dysfunctional degree of business risk and complexity. . Given the tremendous changes still to come in health care, in medicine, technology, pharmacy, electronics, and organization, you name it, the government must abandon this highlyeavy-handed regulatory approach and act more like a private sector purchaser, partnering not micromanaging.

Private sector purchasers treat health plans as their business partners and establish clear performance expectations and payments in advance. They do not, however, becomet care to be involved in every aspect of a health plan’s operations. They focus oncare about the broader, critical goals such as the price they pay, the satisfaction of their employees, and the quality of service.

Let me provide you with two examples of requirements that would never be imposed by private purchasers:

• CreatingE excessive business risks: The Medicare+Choice program requires that health plans agree to aan exceptionally high level of compliance with the numerous, complex and detailed rules. The risk of unintentionally failing to comply with a particular requirement is immense. For example, health plans are asked to certify that all the data they submit, including data developed by providers, are 100 percent accurate. Penalties for non-compliance are extremely severe. These penalties could ultimately put youra plan’s entirepartent entire corporation, including itsyour private business, at risk and expose your senior officials to the possibility of criminal penalties. This is clearly unreasonable, especially when one realizes that no claims operation is set to achieve a 100 percent accuracy rate.

• Rigid and unreasonable "one-size-fits-all" quality standards: In recent years, private sector purchasers have worked closely with health plans and private accrediting organizations to develop workable models for quality measures for HMOs. Instead of using these private standards, HCFA has developed their own quality standards for Medicare+Choice plans that are far more stringent, arbitrary and more rigid than the "gold" standard" used in the private sector for HMOs. Moreover, HCFA unilaterally applied these HMO standards to PPOs, a very different type of health plan option, making it extremely difficult for PPOs to participate in Medicare+Choice. To date, the program offers virtually no PPO options.

Acting like a private sector purchaser means, for example, not creating intolerable business risks. Yet under Medicare+Choice, the government forces health plans to put their entire corporate structures at risk if they fall short of 100 percent data accuracy – even when a third-party is responsible – and the government denies health plans the chance to fix any possible compliance problems before they must report them. This is not the basis for an acceptable business partnership. This is, instead, an invitation to strife and failure. In a program as complex as Medicare – where, as Harry Cain stated to this Committee 2 weeks ago, the aggregate complexity of Medicare policy-making is beyond anyone’s ability to grasp – the risk of unintentionally failing to comply with particular requirements is immense. This is no way to harness the power of the private sector in partnership with the government.

Acting like a private sector purchaser also means not setting rigid and unreasonable standards. In recent years, for example, private sector purchasers (especially large employers) have worked closely with health plans and private accrediting organizations to develop useful models for quality. Yet, HCFA has developed quality standards for Medicare+Choice plans (including PPOs as well as HMOs) that are more stringent, more arbitrary, and more rigid than even the most rigorous private sector standards for HMOs. No wonder Medicare beneficiaries lack the same access to PPOs as many working Americans. Again, this is no way to harness the power of the private sector.

Transforming the government’s regulatory mindset is essential for long-term Medicare reform. But it must be also be accompanied by appropriate payment rates to ensure private sector interest in Medicare. Payments to private plans should trackkeep pace with changes in spending in the government-run fee-for-service program. If payments to private health plans fall significantly below deviate negatively by too great an amount from spending per person spending in the Medicare fee-for-service programMedicare – as is currently projected underappears to be happening in Medicare+Choice – then plans will have difficulty introubleattracting sufficient numbers and types of providers to their networks and in providing the Medicare benefit package. Plans will also be unable to continue offering attractive benefit plans with minimal premiums.

While adequate payments to health plans are critical, stability and predictability in future year payments are just as important. Blue Cross and Blue Shield Plans are committed to a "retention strategy.". In other words, our Plans place a high priority on both attracting new beneficiaries and keeping current beneficiaries satisfied over the long term. One of the most important ways of retaining members is to avoid large increases in premiums and instability in benefits. Significant increases in premiums can trigger "shopping" by individuals who will look for a better price and better benefits. The way to avoid the disruption of this "churning" is to assure that payments do not fluctuate significantly from one year to the next..

A key element of predictability is having sufficient information in order to price premiums properly. This means that all the requirements for a given year must be spelled out in advance. This doesn’t happenIt is especially problematic when the government demands big "change orders" in the middle of the year, increasing the expenses of the plan, without providing a corresponding increase in payment levels. Such actions will invariably require plans to adjust their premiums in future years simply to catch up with the government’s actions in the previous year. This is a recipe for market instability.Moreover, health plans must have sufficient information to predict their revenues and expenses accurately, and so price their premiums properly. But this will not happen if the government demands big "change orders" in the middle of the year (perhaps because the rules were not spelled out in advance), or if the government varies capitation payments using flawed and irreproducible risk adjusters. Plans will invariably have to adjust their premiums each year simply to catch up with the government’s actions the previous year, which is a recipe for market instability.

If Medicare reform is to engender widespread private sector participation, then it must assure that all players are treated fairly, the reforms are workable, and that the steps to full implementation are well designed and practical.orkable.

Today’s most discussed model for reform is Senator Breaux’s and Congressman’s Thomas’ "premium-support" proposal. Fashioned, in part, after the Federal Employees Health Benefits Program, and building on the current Medicare+Choice structure, the premium-support proposal would replace the replace the government-set formula payments now used to pay private plans with a new competitive pricing model. It would also include the ject competitive pricing into traditional fee-for-service (FFS) Medicare program in the competitive pricing formula. Private plans and the government-run FFS plan would submit annual bids bid for the basic Medicare package. The, and the government would contribute a setsome percentage of the national weighted average of bids of all plans’ bids (adjusted for geography, demographics and health status); beneficiaries would be responsible for pick up the remaining premiums. A brand-new "Medicare Board" would oversee this process, and possibly negotiate premiums.

While the details of this proposal are now being developed, many design issues, such as the following, shouldresolution of issues, such as the following, will be key to the success of the programthe Committee should consider the following issues, which must be resolved to assure the success of the program:.

• How can adverse selection be minimized? The premium- support proposal envisions a nationally priced government-run fee-for-service program competing against locally or regionally priced private plans (e.g., PPOs and HMOs). Private plans will have an incentive to compete in low cost areas, where they can offer lower premiums than the nationally priced fee-for-service plan. This is likely to increase the cost of the governmentMedicare program. Alternatively, if the government fee-for-service program is locally priced, consistent with private plans, equity and political issues are raised. For example, beneficiaries could pay twice as much for the fee-for-service program in high cost areas thanas in low cost areas. (For example, in 1996, Medicare fee-for-service per capitabeneficiary costs ranged from $3,199 in rural Nebraska to $6,592 in urban Louisiana).

• How will plan bids compare to the government contribution? The proposal calls for the government contribution to be a percentage of the weighted average of all bids across the country. Actual payments to plans will be the government contribution, adjusted by a new geographic index. Is it possible that if some areas of the country tend to submit relatively higher bids than other parts of the country, the government contribution will be significantly less valuable in some areas than others? .

• How will the new government contribution rates compare to current Medicare+Choice payments? This will be especially significant in the first year of the program, where major changes in the government contribution and, therefore, premiums to beneficiaries could cause major upheaval in the marketplace. Transitional issues are critical to stability in the marketplace, not just for plans but primarily for beneficiaries.

• Can the Medicare Board handle a nationwide annual competition, all at once?

• Can the Social Security Administration, whowhich currently handles collection of the Medicare Part B premiums, handle deducting the new premiums (that will replace the Part B premium and will vary by beneficiary) from Social Security checks and sending the appropriate share to plans? (A portion of these premiums will needhave to be deposited in the Medicare trust fund and the balance will needhave to be mailed to private plans.)

• What would happen if plans’ bids significantly exceed projected Medicare estimates?

• What happens if Medicare fee-for-service outlays in a given year significantly exceed the government’s bid? Would beneficiaries have to pay more? How would this effect private plan payments?

Will premium support be fair? As the saying goes, God is in the details, and the premium support idea is still evolving. Whether fair competition is possible will depend, to cite but one detail, on how prices are set. If the government-run FFS plan is nationally priced and competes against locally-priced plans, the resulting adverse selection could be destabilizing. Pricing the government-run FFS plan on the basis of local costs might reduce adverse selection, but it also would force beneficiaries in high-cost areas to pay more than beneficiaries in low-cost areas for their basic Medicare benefits (e.g., Annual FFS costs per person range from $3,199 in parts of Nebraska to $6,592 in parts of Louisiana).

Given

Will premium support be workable? In a program of Medicare’s complexity and importance to its beneficiaries, as well as the health care system overall, the reforms should be designed phased in carefully so that all stakeholders – beneficiaries, private plans, and providers – understand the new program and that unintended consequences are avoided. are well-informed about programmatic changes. This calls for a detailed, multi-year transition plan. Congress may want to consider phasing in the program, such as by staon a geographic basis or with newly eligible beneficiaries. te or by new enrollees. that addresses a number of issues, for example:

• How will new federal contribution rates compare to current M+C payments?
• What will happen if plans’ bids significantly exceed projected Medicare estimates?
• Will beneficiary premiums increase dramatically depending on where they live?
• Should the program be phased in by state or by new enrollees?
• Can SSA handle deducting the new premiums (that vary by beneficiary) from Social Security checks?

A detailed, workable transition plan is critical to the success of private sector involvement in Medicare reform.

1. STRENGTHEN MEDICARE+CHOICE AS THE FOUNDATION FOR MEDICARE REFORM

Medicare+Choice is and must continue to be the foundation of any future Medicare reform. should be. Medicare+Choice was designed to "enable the Medicare program to utilize innovations that have helped the private market contain costs and expand health care delivery options" (H.R. Conf. Rep. No. 105-217, p. 585). Unfortunately, for reasons alluded to earlier in my testimony, Medicare+Choice has fallen short of expectations.

If Medicare+Choice is to serve as a stepping stone to future reform, then it is vital that Congress garner the private sector’s confidence in the program.

HCFA’s highly regulatory approach has not inspired confidence. Nor have current trends in payment levels for Medicare+Choice plans. As you know, in the first two years of Medicare+Choice all health plans (except for those serving "floor" counties) were capped at annual payment increases of 2 percent. A substantial number of plans (enrolling more than one-third of beneficiaries) will stay at 2 percent next year and into the foreseeable future. By 2004 this trend will open up a yawning gap, with these Medicare+Choice plans receiving less than 75 percent of the amounts spent per person in traditional fee-for-service Medicare.

Compounding the trend in payment levels is the uncertainty introduced by HCFA’s new risk adjustment methodology, scheduled to begin in 2000. In many areas, the risk adjuster could lead to severe reductions in plan payments that will result in higher premiums and reduced benefits for beneficiaries. HCFA estimates that risk adjusters will reduce payments to M+C plans by 7 percent, or $11 billion between 2000 and 2004, and by an additional 7.5 percent from 2005 through 2009. The Congressional Budget Office has said this cumulative reduction is not sustainable for the program.

A major success of managed care has been reducing hospital costs through prevention and expansion of outpatient treatments. Yet HCFA’s new risk adjustment method will penalize plans that keep people out of the hospital because it only gives "credit" for members with selected inpatient hospital stays of two or more days (i.e., the method pays plans higher amounts only for patients who have been hospitalized). It defies good medical and business planning: according to the American Academy of Actuaries, "A plan which manages care [and keeps beneficiaries out of the hospital] may be paid less than a plan which does not manage care for exactly the same type of patient."

HCFA does plan eventually to incorporate selected outpatient data, but it will be several years before this happens and the exact effects cannot be predicted. Even over the next couple of year, plans face the prospect of wide and unpredictable swings in payment because HCFA will phase in the hospital-based risk adjuster (i.e., 10 percent in 2000, 30 percent in 2001, etc.) and the switch to yet another methodology in 2004. As I mentioned earlier, significant changes in premiums will undermine efforts by plans to attract new beneficiaries and keep them satisfied over the long term.

We urge Congress to delay enactment of the risk adjusteor. This step is essential to the viability of the Medicare+Choice program; it will give HCFA and industry the time to [spell out the advantages]. develop a proper risk adjuster that offers thewith the right incentives; and time to test to provide care for outpatient chronic care as well as inpatient care. Delay will also allow Plans and HCFA time to test a a new system and avoid thethe serious data and systems problems currently plaguing plans. Finally, delay would allow Congress and HCFA to assessTHE MEDICARE+CHOICE PROGRAM IS THE FOUNDATION OF MEDICARE REFORM

Medicare reform is needed to assure that the program will remain financially stable and secure to serve both current and future beneficiaries. When considering your options for Medicare reform, we urge you to continue to look to the private sector for providing high quality care to Medicare beneficiaries. We believe that it is critical that Medicare provide beneficiaries with the same type of private plan options offered to working Americans. In 1997, when Congress created Medicare+Choice under the Balanced Budget Act of 1997 (BBA), BCBSA was supportive of the effort to expand significantly the types of private health plan options available to Medicare beneficiaries. Medicare+Choice was intended to reflect the health benefit design, delivery, and cost containment innovations of the private sector health market. We believe that the Medicare+Choice program will serve as the stepping stone for the future Medicare program. However, M+C must remain stable and viable in order for it to evolve into a future model for serving Medicare beneficiaries. a proper phase-in timeline, thus preventing large and destabilizing swings in payment.

and overprescriptive r[give examples?].We are concerned that the current upheaval in the market does not provide a stable foundation for any proposal intended to provide long term stability to Medicare. Therefore, we urge Congress to take the appropriate steps to ensure the viability of Medicare+Choice before enacting widespread changes to the Medicare program. Primarily, we urge Congress to delay enactment of the risk adjuster. Implementing the risk adjuster at this time is contrary to achieving stability and predictability in the program. Beneficiaries need to trust that their health plan will be available in the future. Introducing a mechanism that will severely reduce payments to M+C plans will not provide the security that seniors seek.

The risk adjuster will upset an already delicate program, and could lead to severe reductions to plan payments that will result in higher premiums and lower benefits for beneficiaries. HCFA estimates that risk adjusters will reduce payments to M+C plans by 7 percent, or $11 billion between 2000 and 2004, and by an additional 7.5 percent from 2005 through 2009. Even the Congressional Budget Office has said this level of cuts is not sustainable for the program. Ultimately, this will lead to fewer plans in the market and fewer plan choices for beneficiaries. This is not the direction that Medicare should be moving prior to considering large scale Medicare reform.

HCFA’s risk adjustment method is fundamentally flawed because it relies only on inpatient data. It penalizes plans that have successfully achieved one of the key objectives of managed care – to keep people out of the hospital through prevention and expansion of outpatient treatments. The April 1999 American Academy of Actuaries’ Report to Congress on risk adjusters stated that a "system relying on inpatient data may penalize plans which more efficiently manages health care….A plan which manages care may be paid less than a plan which does not manage care for exactly the same patient."

Although the risk adjuster in phased in, we estimate that with the other BBA payment reductions, payments to certain M+C plans in 2004 will only be 75% of what is spent for Medicare beneficiaries in fee-for-service. This disparity would make it very difficult for plans to negotiate payments rates with providers, jeopardizing their ability to attract a sufficient number and types of providers in their networks.

We urge Congress to delay implementation of risk adjusters in order to prevent the large and destabilizing swings in payment. ules have stymied the ability of the private sector to develop new health care delivery options for Medicare beneficiaries.

2. MEDICARE REFORM SHOULD FOLLOW FIVE PRINCIPLES

BCBSA supports reform that assures the stability and long term solvency of Medicare. To achieve successful reform, we suggest following the following five principles:

A level playing field for all players is critical to providing Medicare beneficiaries access to a diverse set of coverage options. We recommend that Congress model a program that allows all private sector players to participate if they meet the rules of entry, as is done today in Medicare+Choice. We would oppose a system that limits the number of players like the Federal Health Employee Benefit Program (FEHBP). Under FEHBP, only a limited number of national plans can offer coverage to federal employees. However, the program does not limit the number of local HMOs that wish to participate. These artificial limits have the effect of reducing access to a diverse set of choices.

Stable and predictable payments to private plans are essential to achieving successful long term Medicare reform. As seen in the Medicare+Choice program, appropriate reimbursement levels are necessary to ensure private sector interest in Medicare and maintain beneficiary access to multiple health plan options.

Payment levels for private health plans cannot deviate from payments made under normal fee-for service Medicare. For private plans to continue to attract high quality providers in their networks, plans cannot have the fee-for-service program outbidding them for provider reimbursement levels.

Medicare reform should create a program that makes government act more like a private sector health care purchaser rather than a regulator. Private health plans should be able to operate under a minimal number of regulations and without excessive micromanagement. Medicare currently operates under the dictate of over 800 pages of regulations. Medicare+Choice plans are not only subject to these regulations, but also conditions outlined in 98 operational policy letters and in their contract. This level of specificity and micromanagement is unheard of in the private sector. We urge Congress to avoid new burdensome and costly regulations on health plans and providers that would deter participation.

The private sector also operates under predictable rules and without placing the health plan under unwarranted risk. HCFA’s current requirement for attestations and compliance plans outline the business risk that plans currently face for participating in M+C. Indeed, all BCBS Plans are committed to complying with all applicable laws and regulations and many have voluntarily adopted compliance programs. But because of the proscriptiveness of certain requirements, current and potential M+C plans have to seriously consider the risk of unintentionally failing to comply with every requirement. A new Medicare program must avoid placing plans into the precarious position of facing unworkable business risk.

We also urge Congress to consider the advances made by private sector firms in the area of quality when evaluating reform proposals. Although Congress allowed the Secretary to deem private sector organizations for the evaluation and confirmation of plan performance, HCFA has yet to identify any external organization that could meet its standards under QISMC. HCFA set its standards beyond anything that is currently occurring in the private sector. We do not mind that the bar has been set high. But we question why set the bar beyond anything that has been established by the private sector. Industry standards set in today’s market through the National Committee for Quality Assurance (NCQA) and the American Accreditation HealthCare Commission/Utilization Review Accreditation Commission (AAHC/URAC) should be the model for future quality assurance programs.

I have already described the volume of regulations, and policies M+C plans must currently follow to participate in Medicare. A new program must create simple and understandable rules for plans to follow. The rules should be practical and not contrary to normal business practices. Unfortunately, some of the rules from HCFA’s interim final rule are anything but simple and straight forward.

In addition, a new program must be easily understood by beneficiaries. Beneficiaries must have access to information that describes the new program and easily lays out the participation rules. Beneficiaries must also be able to understand their financial responsibilities and benefits.

It will be critical to assure that all Medicare reforms are phased in carefully and that all stakeholders – beneficiaries, private plans, and providers – are well-informed about any programmatic changes. As always, the devil is in the details. The most well thought out proposal is only as good as its transition plan.

In analyzing Senator Breaux’s premium support proposal, we have identified several issues where the transition plan will be critical. We look forward to working with Senator Roth, Senator Breaux and the members of the Committee to minimize the concern plans and beneficiaries have over a transition to a new Medicare program.

As the Congress decides to reform Medicare, it is highly likely that many beneficiaries will continue to receive coverage through Medicare’s traditional, fee-for-service program, at least for the foreseeable future. That makes it important that beneficiaries continue to have access to affordable Medigap policies, and that the administration of the fee-for-service program receives adequate support.

’,As Congress debates Medicare reform, it will be important not to undermine the existing Medicare supplemental programs that serve 12 million seniors. Medigap plans offer Medicare beneficiaries valuable protection from Medicare’s cost-sharing requirements, and they are very popular in the marketplace. A July 1998 report from the Department of Health and Human Services Inspector General found that 88 percent of beneficiaries are satisfied with their Medigap coverage. Any future Medicare program must ensure that Medicare beneficiaries continue to have access to affordable supplemental health coverage. Medigap offers older American’s valuable protection from Medicare’s cost-sharing requirements and they are very popular in the marketplace. A July 1998 report from the Department of Health and Human Services Inspector General found that 88 percent of beneficiaries are satisfied with their Medigap coverage.

One serious risk to the affordability of Medigap is the possibility of a federal mandate for all Medigap options to cover drugs.

BCBSA opposes mandating drug coverage in all Medigap options as this will significantly increase Medigap premiums. Tampering with Medigap, such as expanding guarantee issue, community rating, and prescription coverage would have the unintended consequence of significantly increasing Medigap premiums. Of the 10 current standardized Medigap packages, only three include prescription drug coverage (H, I, and J). A study recently released by BCBSA and the Health Insurance Association of America found that mandated drug coverage could increase all Medigap premiums by $1,000 or more a year. Such increases would force many Medicare beneficiaries to Seniors may be forced to drop coverage, thus leaving them to bear the full cost of and could face financial difficulties in paying Medicare copays and deductibles. As you consider reforming Medicare, I would urge that you keep Medigap affordable.

A study recently released jointly by BCBSA and the Health Insurance Association of America highlights the unintended consequences of this proposal. Mandated drug coverage could increase Medigap premiums by $1,200 a year. We urge Congress

to consider the impact on Medigap when debating Medicare reform proposals.

Inadequate administration of fee-for-service Medicare could wreak havoc with overall reform plans. Fee-for-service Medicare will always need to pay claims timely and accurately, provide high quality customer service to providers and beneficiaries, handle numerous appeals and hearings, and fight fraud, waste, and abuse. But the contractors who administer these activities must receive adequate financial support because they can perform required functions only when their payments for such tasks are adequate.

It takes experienced, efficient, and properly funded contractors to limit improper Medicare payments. With adequate funding, contractors can act effectively as Medicare’s first line of defense against fraud and abuse. Indeed this year’s Inspector’s General’s report shows that recent strides in rooting out fraud, waste, and abuse have brought about a drastic reduction in improper Medicare payments.

In 1996, Congress strengthened contractors’ ability to fight fraud and abuse by establishing a separate funding source for specific fraud and abuse initiatives through the Medicare Integrity Program (MIP). Claims processing activities continue to be funded in the program management account.

Unfortunately, HCFA is proposing (as part of contractor reform) to break up program management activities and fraud and abuse among different organizations. We believe this will undercut urge Congress to reject this proposal because it would hamper fraud and abuse detection efforts. P; program management and fraud and abuse are not autonomous services;, they require constant coordination and communication. Nearly all program management activities – including educating providers on how to bill correctly, determining appropriate payment amounts, and detecting duplicate claims – safeguard the Medicare trust funds and are closely integrated with fraud and abuse activities.

BCBS Plans have served as Medicare contractors since the inception of the program. Given that over 80 percent of beneficiaries still receive services through the traditional program, we believe that the need for experienced efficient administrators of the Medicare program is critical to the short term success of a reformed Medicare program. We urge Congress to consider the impact of any Medicare reform proposal on Medicare contractors. We also urge Congress to ensure that Medicare contractors are properly funded for their activities.

Medicare contractors have made recent strides in rooting out fraud, waste, and abuse in the program, as demonstrated in this year’s IG report indicating a drastic reduction in the Medicare error rate. We plan to continue these efforts in the next generation of the program. However, we would caution Congress not to follow a path sought by the Administration to disjoint the fraud and abuse detection efforts of the contractors. Due to the historical and functional integration of claims processing, customer service, and fraud and abuse activities, separating claims processing and anti-fraud and abuse functions represents potential trouble for future fraud and abuse detection. These are not autonomous services and require constant coordination and communication in a rapidly changing Medicare program.

The final topic I would like to address is adding a prescription drug benefit under the Medicare program, whether constructed as a government-financed program or as a mandatory offering by Medicare+Choice and Medigap plans. BCBSA shares the Congress’s concern that beneficiaries have access to affordable drug coverage. We recognize that since Medicare’s inception, prescription drugs have assumed an increasingly important role in improving and maintaining the quality of health care. However, we would urge Congress to proceed with caution in developing any drug benefit because drug costs are the fastest-growing segment of health care.

Private sector experience suggests that a Medicare drug benefit would be costly:

• Private insurance payments for drugs increased 18 percent per year over the past 3 years; overall annual growth rate in private insurance payments was less than 4 percent.

• For many health plans, prescription drugs now account for 11 percent to 14 percent of total medical expenses, up from 7 percent a few years ago.

• One Northeastern BCBS Plan experienced an increase in its prescription drug spending from just over 10 percent of premium in 1996 to more than 16 percent last year. This Plan now spends more on prescription drugs than it does on primary medical care. A Midwestern Plan spent more last year on prescription drugs than on either inpatient hospital or physician spending: 25 percent of premium versus 24 percent each for inpatient hospital and physicians.

Given the potentially high costs, any Medicare drug proposal would have to include incentives for appropriate drug utilization as well as cost management provisions. In fact, many health plans and employers have responded to double-digit increases in drug costs by

redesigning their prescription drug benefits. Many health insurers are now assessing the usefulness and cost-effectiveness of prescription drugs and developing lists of drugs that they will cover (i.e., formularies). In instances where the only difference in a particular therapeutic category is that one drug costs less than the other, it makes sense for plans to free up money by covering the less expensive drug. In other instances, where studies prove that one drug is more effective than another, plans will promote those drugs even though they may be more expensive than the other drugs in the therapeutic category.

Plans are also introducing innovative three-tier benefit systems to address cost concerns, as well as consumer demands for flexible coverage. These new systems provide varying levels of coverage for generic drugs (e.g., a $5 copay), for brand-name formulary drugs (e.g., a $15 copay), and for drugs that are not on the formulary (e.g., a $30 copay).

Even with these cost-containment tools, prescription drug costs continue to rise in the private sector. Congress must confront the challenge of managing costs and an adequate benefit design if it moves toward a Medicare drug benefit.

I’d like to turn now to the issue of a prescription drug benefit under the Medicare program, whether constructed as a government financed program or as a mandatory offering by Medicare+Choice contractors and Medigap carriers. While we understand the motivation behind these initiatives – namely, to assist seniors coping with high drug utilization and the high cost of prescription drugs – there are a number of reasons why Congress should pursue these proposals with caution.

Many seniors already have some level of coverage for prescription drugs, either through their Medicare+Choice plan or Medigap policies. A government-financed benefit thus would substitute federal dollars for private contributions currently made by employers and individuals. In addition, given the significant cost of this proposed new benefit, such proposals also must be designed to provide incentives for appropriate drug utilization, and must include appropriate cost management provisions to contain run-away costs in this already expensive benefit.

These lessons currently are being played out in the private market, where prescription drug trends in the high double digits have necessitated that many health plans and employers overhaul their Rx benefit design as well as their pharmacy cost management programs. The objective of these initiatives is to introduce tools to sensitize enrollees to the cost of prescription drugs (such as triple tier copays) and to ensure appropriate utilization. Two examples of recent trends in prescription drug costs illustrate the need for such strategies. One Northeastern BCBS Plan experienced an increase in its prescription drug spending from about 10-11% of premium in 1996 to 16-18% last year. This Plan now spends more on prescription drugs than it does on primary medical care. Another, Midwestern Plan spent more last year on prescription drugs than on either inpatient hospital or physician spending: 25% of premium versus 24% each for inpatient hospital and physicians.

The very issue that is driving this debate – the cost of prescription drugs – is the same issue that may price benefit packages that include prescription drug coverage out of the reach of some seniors. Most Medicare+Choice plans today already offer some level of prescription drug coverage as a way to attract seniors. Many of these plans, which were driven by competition to offer expanded benefits at zero premium , are now moving back toward supplemental premiums, in part to offset the rising cost of prescription drug benefits and reduced payments. An analysis we conducted last year illustrates this point. We examined one health plan’s decision to increase its prescription drug coverage level from $800 to $1000. We found that the overall increase in medical costs following the expansion was three and a half times higher than what could be attributed to the added cost of the benefit expansion alone. This is an indication that the improved prescription drug benefit was attracting poorer-risk seniors who generated higher overall medical costs.

The implications of all of these types of factors need to be fully understood to ensure that any movement towards a Medicare prescription drug benefit has only the desired affects on seniors, health plans and the federal government.

Reforming In conclusion, reforming Medicare poses monumental challenges. First and foremost, Congress must stabilize the Medicare+Choice program. If a future Medicare program is to harness fully the power of the private sector, the Congress should act now to make the Medicare+Choice program a true partnership with the private sector: this includes providing stable and predictable payment rates and sensible regulatory rules. Expanded participation by the private sector will also raise beneficiaries’ confidence in the Medicare+Choice program, which is important for the program to withstand the stresses of change. BCBS Plans are committed to providing high quality health care and customer service to Medicare beneficiaries. Before proceeding to enact full scale Medicare reform, Congress must act to improve and stabilize the Medicare+Choice program. In addition, Congress should Beneficiary confidence in the program must be strong before it can withstand large changes.

Congress should consider five principles when crafting a long term reform initiative:

• Creating a level playing field for private plans;
• Providing stable and predictable funding to plans;
• Administering the program like a private sector purchaser;
• Keeping the rules and information simple to understand; and
• Designing a well planned transition.

Let me reiterate that Congress should not enact reform that would undermine thesupport both existing Medicare supplemental programssupplemental programs that serve Medicare beneficiaries. Congressand the contractors who administer the should also be mindful of the impact of any reform proposal on the administration of the traditional fee-for-service program. BCBS plans are proud of their role as Medicare contractors and look forward to a continued successful partnership with the government. Finally, we caution Congress to consider the increasing drug cost trends the private sector is experiencing when designing a Medicare drug benefit.

We look forward to working with this Committee as you craft a stronger Medicare program for the 21^st century.