However, we are also proposing recognition of the recent legislation just passed to postpone the increase in the part B premium that is scheduled for July 1983 until January 1984. We would then set the part B premium to cover 25 percent of the projected expenditures, and then beginning in January 1985, we would increase the percentage covered by the premium by approximately 2.5 percentage points each year until it reached 35 percent. And we would then hold at that particular level. We also would establish a hold-harmless clause in order to prevent a reduction in anybody's social security checks from what they had received the previous year. An additional component is to recognize that the value of the part B deductible has eroded over time. We propose to index the part B deductible to the annual changes in the national medicare economic index, so that we can maintain the constant dollar value of the deductible, to use it as a deterrent to unnecessary utilization. Under current law, regular increases in the deductible are not provided and thus the initial beneficiary liability has been reduced in real terms. In fact, you could say the shift has been returning the cost to the general taxpayer through general revenues by lack of having the deductible indexed. And, then, finally, I would like to mention one other proposal, which, although it is not within the health care financing legislative proposals, it is a proposal of this administration. The proposal would put a tax exclusion or tax cap limit on the amount of taxfree insurance that every individual pays. It is suggested that we would set an insurance cap of $175 per month for a family or $70 per month for an individual. Currently, the monthly average insurance cost for most individuals is running at $132 or $53 for an individual. Roughly about 30 percent of all individuals are covered by hospital insurance that is above the amount that we would have a tax cap on. And what we are proposing is that individuals would still be free to purchase that type of insurance, but the excess above the cap could be included in the employee's taxable income. For example, I simply want to point out that this is a progressive cap: the higher the salary of the individual, the more the tax would be on the premium above the cap. And the average individual who is receiving a salary income of $10 to $20,000 a year would be paying less than $2 a month in additional taxes, if he so chooses to continue to have a high cost plan. The consumer's other option, of course, would be to look for a lower cost plan, and in doing so, we hope the plans would be giving their attention to decreasing the overall outlays in their program. In conclusion, then, I would simply like to say that we think the proposals that we have initiated for consideration by Congress this year are to enhance cost awareness for all parties, because if you look at the health care industry, it is really divided into three parts: the patients, the providers, and the third-party payers. We are trying to effectively change behavior of all three groups and to enhance the cost awareness of all of them. We want to improve the structural financing of the medicare program through reimbursement and coverage changes and provide for catastrophic coverage. s important also to continue to stimulate competition. I feel a strong responsibility as the administrator and of the Hospital Insurance trust fund to continue to search nd better opportunities to make the medicare program ient and more effective, without compromising the availthe needed services to our beneficiaries. tand ready to work with this committee, as well as others, forward to our continuing dialog together. I think the portant thing is to recognize we do have time. That the d at this moment is solvent until the end of this decade, does give us some time to change behavior. repared statement of Dr. Davis follows:] PREPARED Statement of Carolyne K. DAVIS, PH. D. ry happy to appear today to discuss issues related to long-term financing dicare Hospital Insurance Trust Fund and some of our key reform propos are aware, the prospective payment bill, a major and critical piece of the ration's 1984 legislative proposal package, is only one step from becoming uld like to talk about this important bill for a moment, since I believe that of today's hearing is particularly appropriate. Much of the thinking that o our prospective payment proposal came from what we learned from New experience. 5, New Jersey began setting payment rates for Blue Cross and Medicaid. owing year, the Department of Health signed a contract with Medicare to ent with approaches to measuring patient case tax. In 1978, the New Jersey ve enacted a bill which established the framework for adopting a statewide tive payment system. One provision of the law extended the state's authority rol hospital reimbursement of all payors. The Health Care Financing Adminn granted New Jersey authority to waive Medicare's cost reimbursement les and establish prospective rates. Jersey's payment rates are based on diagnosis related groups (DRGs). This was developed at Yale University he early 1970s. As you know, the DRGs are a method of classifying patients in to reflect differences in the cost of treatment. The DRGs have been improved ntially in recent years to better measure differences in the cost of and case f patients. liminary results from our study of New Jersey indicate that the state's prohas had a positive effect upon hospital resource management. Hospitals now a financial incentive to control both routine and ancillary costs and a standard hich to measure themselves. As a result, many hospitals have actively underformal programs to identify and eliminate unnecessary costs in specific dements. Additionally, physicians have become more sensitive to the cost aspects ospitalization and now consider more carefully the services they order. urther, the New Jersey Hospital Rate Setting Commission has reported that Jersey hospitals have become more efficient in a number of important respects. otal operating expenses of New Jersey hospitals increased by 13.8 percent in compared to a National increase of 17.4 percent; he increase in hospital inpatient costs per capita was 11.5 percent for New sey; 17.7 percent for the rest of the nation; and 'he number of admissions and inpatient days declined in New Jersey while they e in the result of the country. After reviewing New Jersey's system, particularly its use of DRGs, we found that e system held considerable promise for a national program. While we did not opt your State's use of reviewing individual hospital's budgets, much of the Adinistration's prospective payment legislation builds upon the experience of New rsey. I believe it is unnecessary to recite the data that show vividly how much hospital osts have risen over the past fifteen years. I believe it is important to point out hough that a part of the reason for the huge increase in hospital costs-far above ne national rate of inflation-has been a retrospective cost reimbursement system hat rewards inefficiency. In constructing our prospective payment legislation, we 22-020 0-83--2 d to remove the disincentives of the cost-based system and substitute instead a -em which: easy to understand and simple to administer; an be implemented in the near future; nsures predictability of government outlays and hospital revenues; stablishes the Federal Government as a prudent buyer of services; ssures that Medicare expenditures for inpatient hospital services are no greater n the amount that would be spent if the present system of retrospective cost reursement with limitations were continued; rovides incentives for hospital management flexibility, innovation, planning, trol, and efficient use of hospital resources; educes over time to cost reporting burden on hospitals; and ontinues to assure beneficiary access to appropriate quality care. lthough the bill passed by the Congress differs from ours, we believe that it still The passage of prospective payment, when coupled with the enactment of the Na- However, I have attached recently developed HI Fund projections using a variety here are several reasons for these current law projections to be different from se provided in April of 1982: he Tax Equity, and Fiscal Responsibility Act of 1982 (TEFRA) made significant he HI Trust Fund loaned $12.4 billion to the Old-Age and Survivors Insurance s you know, the quadrennial Advisory Council on Social Security is currently RE A n propo consci pense need Un spell dens given cost-sh hospit The tives f patien the fi cent o spell reduc ary ha ed hos In spell curre any 1 the fi URED MEDICARE COST SHARING AND HOSPITAL CATASTROPHIC COVERAGE lement in the Administration's plan to correct system incentives is the restructure Medicare cost-sharing. This proposal would promote costecisions while protecting beneficiaries against catastrophic hospital ext importantly, it would put the protection where Medicare beneficiaries C. e current system, Medicare hospital coverage is limited to 90 days per ess and 60 lifetime reserve days. This places the greatest financal bure sickest patients. Less severely ill patients, and their physicians, are incentive to keep their hospital stays as short as possible because patient g, other than paying the deductible, does not begin until the 61st day of tion. ninstration's proposal would change Part A cost-sharing to create incenvings where those incentives can work and to better protect the Medicare eding long hospitalization. Under the proposal, the beneficiary would pay ay deductible provided for under current law and would then pay 8 perat amount-about $28 in 1984—for days 2 through 15 of hospital care in a Iness. For days 16 through 60 in a spell of illness, this amount would be o 5 percent of the deductible-or about $17.50 per day. After the beneficipaid for 60 days of cost-sharing in a calendar year, there would be unlimital days without additional cost-sharing. 1, the proposal would cost a beneficiary $1,530 in out-of-pocket costs for a lness with 150 hospital days compared with the $13,475 it would cost under Medicare provisions (even assuming the beneficiary had not previously used ime reserve days). The proposal would provide Medicare beneficiaries, for time, with catastrophic hospital coverage. OPTIONAL MEDICARE VOUCHER year, Congress, with the support of the Adminstration, amended the Meditute to permit payments on a risk basis to HMOs and other competitive plans. This year we propose to expand this provision. The optional voucher on would build on current law by allowing Medicare beneficiaries to use re benefits to enroll in a wider array of private health plans, Medicare would ute an amount equal to 95 percent of what it would have cost to care for the iary if he or she had elected traditional Medicare coverage. If a beneficiary a private health plan that costs more than Medicare's contribution, the benemust pay the difference. It the private plan costs less than Medicare's contrithe beneficiary would qualify for a cash rebate. Enrollment in a private plan would be voluntary. Once a year beneficiaries would have the opportuo switch private health plans or to elect traditional Medicare coverage. A ied health plan may be an HMO, an indemnity insurer, or a service benefit At a minimum, all private plans must cover the services provided under Parts B of Medicare and must participate in a coordinated annual open enrollment st-sharing for Medicare-covered services may not exceed comparable out-of et expenses under Medicare. so no beneficiary could purchase coverage less exve than that provided by Medicare. FREEZE MEDICARE PHYSICIAN REIMBURSEMENT FOR 1 YEAR edicare physician expenditures, the second largest component of Medicare ading, have been increasing at highly inflationary rates. In 1982, they increased percent and are expected to rise 19 percent in 1983. Because of these large inases and because physicians have been largely unaffected by the cost control proons of TEFRA and the Omnibus Budget Reconciliation Act of 1981, we propose reeze Medicare's physician reimbursement levels for 1984 at 1983 levels. Physins, too, must share the burden of slowing the rise in health care costs. INCREASE MEDICARE PART B PREMIUM IN STAGES As part of our restructuring of the Medicare financing system, we propose to odify the timing and rate of increase in the Part B premium. The intent of this oposal is to move closer to the original balance between premium and general revue financing of Part B, and to coordinate the timing of future premium increases th the date of annual Social Security payment increases. When Medicare was established, premiums covered half of the estimated costs of art B, with the remainder financed from general revenues. This balance has |