PURCHASING HEALTH CARE SERVICES IN A

COMPETITIVE ENVIRONMENT

THURSDAY, APRIL 3, 2003

U.S. SENATE,
COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 9:18 a.m., in room 215, Dirksen Senate Office Building, Hon. Charles E. Grassley (chairman of the committee) presiding.

Also present: Senators Thomas, Santorum, Baucus, Rockefeller, Breaux, Conrad, and Lincoln.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. I thank all of you for being so prompt, because this is kind of an unusual starting time for a committee. Usually we would do this at 10:00. We accommodate more members by starting at 10:00 rather than 9:15, but today's early start is because, as I told some of the witnesses privately, later on I am going to have to go down the hall here and probably spend most of the time of this hearing in the Judiciary Committee, where there is a piece of legislation that I have worked hard on for about 5 years that is going to be up for consideration in that committee.

So I welcome not only the witnesses, but obviously I welcome everybody who has come to our hearing, and particularly for the time that it takes our witnesses to prepare for testimony and to help us in what might appear to be an inconsequential subject. But it is very basic to some of the legislation that this committee will be considering during the month of June that is very, very comprehensive.

Making health care in general, and Medicare in particular, more competitive has been a goal of many legislators over the years from both sides of the aisle.

And just to mention two members of this committee that have been involved in that. Senator Breaux, for one, and Senator Frist, the Majority Leader, for another, are just two examples of 100 Senators-well, I am not saying 100 Senators are interested in making Medicare more competitive, but at least a large number of people have been.

I believe that competition in Medicare, if done right, has the potential to change the lives of patients by improving benefits and increasing quality.

What this hearing is about, is gathering information so that that can be done in the right manner. Today, our witnesses, all of whom

have had experience purchasing health care services in a competitive environment, will tell us what it takes to do this job right.

Before I turn to their introduction, I would like to again acknowledge the bold commitment of President Bush in putting $400 billion on the table this year to strengthen and improve Medicare.

Besides putting $400 billion on the table, the President, at a meeting I had with him in roughly the December 10th time frame, also said that he was willing to expend political capital on bringing about bold changes in Medicare, along with a very prominent prescription drug program for that.

The President's principles include adding prescription drugs and this is very important-making the program stronger and better for beneficiaries. That means improved benefits and higher quality care, more in synch with what is available in private insurance today, like we in the Federal employees' plan have. The President's principles look to the Federal employees' plan as a model for Medicare.

In the Federal employees' plan, all workers, even those in rural States, including even the postmaster in my hometown of 650 people called New Hartford, Iowa, all of these have a choice of health plans. Employees choose among competing plans for one that best suits their own needs.

Why should seniors living in the same town of New Hartford or any other rural community not have the same choice? Unfortunately, our attempts to bring those kinds of choices to seniors in Medicare have failed, especially in rural areas like mine, where insurance companies have given Iowans a firm no, even after we have given these companies bonuses and raised their base payments, which I think now, under Medicare, would be $490 per month, which is well above what fee-for-service pays within our State.

As a result, Iowa seniors then have few, if any, choices beyond fee-for-service Medicare. The environment is anything but competitive. So I will be especially interested in the views from our panelists who have made competition work for their beneficiaries, as I understand it, both urban as well as rural and how we can replicate some of those successes, and obviously we want to avoid failures in Medicare.

Our first witness, Abby Block, serves as Senior Advisor, Employee and Family Policy at the Office of Personnel Management. OPM administers the Federal Employees Health Benefit Plan, which requires plans to submit bids each year so that beneficiaries can measure a plan's value themselves.

Next, is Rear Admiral Thomas Carrato, who serves as Deputy Assistant Secretary of Defense for Health Administration, overseeing TRICARE, the system that serves our Nation's active and retired military, as well as their families. TRICARE is also based on a competitive model.

Third, Bruce Bradley, who serves as director of Health Plans Strategy and Public Policy, General Motors. This is one of the largest private purchasers of health benefits in the country and it provides competitive health plan choices to its 1.2 million employees. Finally, we have Lois Quam, chief executive officer of Ovations, United Health Group Company, addressing her own company's ex

perience with competition, providing us with a plan's perspective on what works and what does not, and particularly when it comes to competition in health care.

I am going to call on Senator Baucus for opening comments. Senator Baucus, I indicated to them, which I think you know, that I may be called out of here to handle a bill at Judiciary and I have been informed that you would be willing to chair the meeting. OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman. I appreciate the to opportunity to explore these issues, particularly the issue of purchasing health care services in a competitive environment.

This is a little bit different from some of our other hearings. This is more of a "big think" hearing. this is more of a policy hearing. I hope that it enables us to kind of stand back a little bit in a little more perspective and try to figure out how to improve various systems, particularly as we try to enact a Medicare drug benefit, and perhaps reform Medicare as well.

We have the opportunity here to learn more about the competitive bidding structure that large purchases of health care currently use. I think this is very important, because the President recently has put forward a Medicare reform proposal, or at least the outline of a plan that emphasizes choice and competition among private health plans.

We are not here to pick at the administration's proposal. That is not the purpose. Rather, we are here to think about how a competitive model might or might not work for Medicare.

As I see it, there are many lessons here, both for the current Medicare+Choice program, as well as for traditional fee-for-service. In particular, some of the questions I hope our witnesses will help answer include, is it necessary to have losers in a bidding process like the TRICARE system, or is competition possible when essentially all bidders are accepted, like the FEHBP program?

How can quality be incorporated in a competitive purchasing system as GM has done? What are the challenges of bringing in PPOs to serve all parts of the country. Is a PPO model any less expensive or more efficient in a rural area than traditional Medicare?

My sense is that, with higher administrative costs, profits, and risk load, combined with an inability to contract with preferred providers in remote areas, that PPOs would actually be more expensive than traditional fee-for-service Medicare.

As I understand it, CBO happens to agree with this assessment. They also believe that getting regional PPOs to participate in Medicare will be very costly. At any rate, increased enrollment in PPOs certainly will not improve Medicare's solvency.

This leads to my last questions. Are these competitive systems truly transferrable to Medicare, and to what degree, to what degree not? Perhaps more importantly, are there lessons from these systems that we could apply to traditional Medicare, not just to private plans?

It is important to keep in mind that almost 90 percent of seniors are enrolled in traditional Medicare, and I do not see that ratio changing anytime soon. My State of Montana does not have any co

ordinated care plans. We have a private fee-for-service plan in Medicare, but only 146 enrollees have signed up.

As we have tried to make improvements to Medicare, modernizations, reforms, or whatever you want to call them, we must think carefully about whether a competitive model truly can flourish in all areas of the country.

My colleagues on the committee know full well that I am skeptical that competition is the answer for seniors in my home State. That is why one of the biggest priorities is making sure that traditional fee-for-service Medicare remains a strong option for beneficiaries in Montana, as well as in other States.

These beneficiaries should have access to the same level of drug benefits as those who choose to enroll in private plans. We should spend just as much time, if not more, exploring ways to ensure that the fee-for-service program is operating efficiently, and think about other improvements we can make.

I am interested in hearing from our witnesses, learning more about how competition currently operates in other parts of the government and in the private sector, and how we might be able to apply these experiences to the Medicare program.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Baucus.

Normally, just the two leaders speak. But since Senator Thomas represents a group called The Rural Health Caucus in the Senate, I would like to turn to him for a few comments, if he would like to make them, at this point.

Senator THOMAS. Thank you, Mr. Chairman. I did not come to make a statement. I am very pleased that you are having this hearing, however, because I am committed to the idea that we can better distribute health care through the private sector in a competitive way, and we have to find a way to do that.

I am also pleased that we are talking about it at this time in policy. That is where we ought to be in the first place, is deciding where we want to be and then get into the great details of how you get there.

So I think this is a great opportunity and appreciate each of you being here. I hope that you will give some thought as you give your comments as to how we might be able to provide these services through these kind of techniques.

So, thank you, Mr. Chairman.

The CHAIRMAN. I want to add to just what you say, though, and follow up on a strong point that Senator Baucus made that I think we all have to agree with. If we can do what Senator Thomas said, all three of us share the view that Senator Baucus made, that we want to make sure that it can be delivered in rural areas, and not find a way not to make it work, but to find a way that it would work. If we do it, we want to make sure it works.

Senator THOMAS. Well, we deliver services there now.

The CHAIRMAN. All right. Point well made. I do share Senator Baucus' comments, though, that we want to make sure that rural America is treated fair with urban America on this.

Now we will go to Ms. Block. Then we will hear from all four panelists, and then we will ask questions. Also, let me suggest that

all of your comments, if they are longer than the time allotted, will be included in the record, so we ask you to summarize.

Also, members who are here, and as well as for sure members who might not be able to come, might have questions for answer in writing. We would ask you to respond accordingly.

Would you start out, Ms. Block?

STATEMENT OF ABBY L. BLOCK, SENIOR ADVISOR FOR EMPLOYEES AND FAMILY POLICY, OFFICE OF PERSONNEL MANAGEMENT, WASHINGTON, DC

Ms. BLOCK. Thank you, Mr. Chairman and members of the committee. I did submit a longer statement which I hope will be included in the record.

The CHAIRMAN. Yes. Absolutely.

Ms. BLOCK. I am pleased to be here today to discuss the Federal Employees Health Benefit Program. During the more than 40 years that the FEHBP program has been in operation, the Office of Personnel Management has developed widely recognized expertise in the complexities of arranging health care coverage with more than 100 private health sector plans for a covered population of more than 8 million people. That includes 2.2 million employees, 1.9 million retirees, and members of their families. In 2002, the plan accounted for $24 billion in annual premium revenue.

The program relies heavily on market competition and consumer choice to provide our members with comprehensive, affordable health care. In 2003, 188 discrete options are being offered by 133 health plans.

An important and distinctive feature is nationwide availability. All members may choose from among a dozen options offered by nationwide fee-for-service preferred providing organization plans that are open to all.

Some members may elect one of the six nationwide plans limited to members of sponsoring organizations, and many may choose HMOs in their local geographic area. About 3 million Federal enrollees are in fee-for-service PPO plans, and 1 million are in HMOs.

There is an opportunity to enroll in the program, change plans, or change enrollment status at least once a year during the 4-week annual open season that begins in November.

Although all participating plans offer a core set of benefits broadly outlined in the statute, benefits vary among plans because there is no standard benefit package. Even where coverage is nearly identical, cost sharing provisions may differ significantly.

While benefits and rates are negotiated annually, OPM does not issue a request for bids. Instead, we issue a call letter to participating carriers in the spring that provides them guidance for the upcoming negotiations.

Plans remain in the program from year to year unless they choose to terminate their contracts for business reasons, including failure to reach agreement with OPM on benefits and rates for the coming year.

Under current law, the window for new plans to enter the program is limited to HMOs. Unlike the 1980's when we were flooded with applications in the current market, we average about six new plans a year.