[The prepared statement of Mr. Bradley appears in the appendix.]

Senator BAUCUS. Ms. Quam?

STATEMENT OF LOIS QUAM, CEO, OVATIONS, UNITED HEALTH GROUP COMPANY, MINNETONKA, MN

Ms. QUAM. Good morning, Senator Baucus and members of the committee. It is a privilege to be here with you today.

I speak to you from the breadth of experience that United Health Group has providing health care services to 48 million people, with clients as diverse as half of the Fortune 100, to the British National Health Service.

The part of United I am responsible for provides services to Medicare beneficiaries. We provide services to 6 million Americans who benefit from the Medicare program, and our involvement is di

verse.

We provide the Nation's largest fee-for-service offering in Medicare, the Medigap program we provide for AARP, which is offered in all 50 States and has substantial enrollment in the States represented by the members of the committee, to a specialized health plan for the frailest Medicare beneficiaries, called EverCare, to Medicare+Choice, HMO, and PPO offerings.

Finally, personally, I am a rural Minnesotan by birth. I came to my profession because of an interest in expanding health care in rural areas. As the committee knows, we have some work left to do there.

I would like to share three ideas for you, and I appreciate the committee's interest in this policy hearing today.

The first, is a better Medicare for consumers would, in fact, be a less costly Medicare. Not because it would cut benefits or it would cut payments to plans or payments to providers, but because it would significantly improve care for chronically ill Medicare beneficiaries.

Second, competition can contribute to this goal if it is well structured. Competition does not work automatically. The details here are important.

Third, Medicare deserves its own competitive model. It can benefit from learning from others, and we hope from all of us on the panel today, but its size and its importance requires a tailored competitive model.

So, if I may expand briefly on these points. My first, is that a better Medicare can be a less costly Medicare, not by cutting what Medicare is, but by responding to those beneficiaries who have the greatest needs.

Five percent of Medicare beneficiaries consume fully one-half of the whole Medicare budget. They are the frailest and sickest Medicare beneficiaries.

Congress has fostered demonstration projects that do a very good job of improving care to these beneficiaries, but those programs are small and they should be expanded much more rapidly.

Those programs invest in primary and preventive care and reorganize the delivery of services, working with existing practitioners and families. We operate one of the largest demonstration projects

in these areas, and I would be happy to answer your further questions.

Second, competition can truly contribute to this goal if it is well structured. As we, in preparation for this hearing, reviewed our experience with our contracts, we focused on three conditions where competition operates well.

The first, is it needs to focus on consumers. That means that consumers need to have the opportunity to choose rather than simply the agency. Second, it needs to be tailored to the needs of the program it serves. So in the case of Medicare, it needs to focus greatly on people with significant chronic conditions, with people towards the end of life, and with people living in the whole varied geography of the United States.

One organization we are very proud to work with who has done this well in many cases, and I would commend to you, is, in fact, the State of Arizona.

The second condition, is that service improvement needs to be a part of how competition works. It is important that competition is not designed such a way that it is so overly prescribed by the agency that there is not an opportunity to make improvements during the course of the work together.

Innovation can also be driven by setting aside resources and an avenue for innovation to occur. Public programs are so big that all of the focus of the agency can go to the existing program and what works within it.

It is very important that a fast track for innovation is established so that good ideas and improvements can be made. GM, who we are very privileged to work with, does this well. An example of a public system that we are just beginning to work with that has recently made massive changes to try to do this well, is our new work with the British National Health Service.

Finally, aligned incentives are an important condition to competition. The parties need to benefit from the same results, and performance standards, we find, do this well rather than overly prescribed standards.

Finally, Medicare deserves its own system. The average age of an employer program that we cover is 37. Employer programs have people with far fewer serious and chronic conditions, and many fewer people at the end of life. Organizations like TRICARE have the very important missions around the direct delivery system.

Having said that, Medicare can benefit much from the model of choice that FEHBP has provided, from the multi-year contracts that TRICARE has provided, and from the way that both of these offerings have the ability to exclude plans that do not participate effectively.

So in summation, members of the committee, there is a great opportunity here. Competition can work if well structured, but the details are important. There is a very significant opportunity in Medicare to improve services for those people who are chronically ill. Thank you for the opportunity to speak with you today. Senator BAUCUS. Thank you very much, Ms. Quam.

[The prepared statement of Ms. Quam appears in the appendix.] Senator BAUCUS. Ms. Block, I would like to ask you a question about the degree to which preferred providers, under FEHBP actu

ally do provide access to people in all parts of the country. You mentioned in your statement that under Blue Cross/Blue Shield, one of your plans, that every single place in the country is provided service.

My question really goes to, is that the same service? Does everyone have the same access to service in all parts of the country or not?

Ms. BLOCK. Well, everybody has the same access, given the availability of providers in a geographic area. So in an urban area, a person might have to drive less than a mile to get to a physician.

In some of the rural areas, it may be 50 miles or more. But that is not because we do not have a provider in the network, it is because that happens to be the closest provider in that geographic

area.

Senator BAUCUS. But is it true that all providers are in that network, or, because it is a PPO, that all providers are not members of that network, so that it exacerbates the distances that somebody may have to travel.

For example, there might not be an orthopedic surgeon in the plan. There may not be an OBGYN in the plan. There might not be another kind of specialist in the plan. There may be some other doctors, but only a couple of doctors.

Ms. BLOCK. I think that we can demonstrate that there are not only primary care physicians, but specialists available. In preparation for this hearing, what I did was just go up on the web. All of our health plans have a web site, and on their web site they have an area where you can enter a zip code and get a list of network providers in that geographic area.

What I found, although there are certainly differences among the plans, and as I suggested earlier, Blue's basic is probably the best simply because of the structure of that plan. It was necessary for them to make special arrangements to have access absolutely everywhere.

Our other fee-for-service plans may not have as broad access, but they have reasonably good access, I must say. Where there is not a network provider for those other plans, there is an out-of-network benefit which does have slightly higher out-of-pocket costs, but access to a provider is definitely available.

Senator BAUCUs. Right. But I am just trying to establish, is it true or is it not true, when we see a fee for service under FEHBP and Blue Cross, we are actually talking about PPOs. We are not talking about fee for service as it is commonly understood in the country.

Ms. BLOCK. For Blue Cross/Blue Shield, and particularly in the basic option, we are talking about strictly PPO.

Senator BAUCUS. That is correct.

Ms. BLOCK. That is an in-network only plan.

Senator BAUCUS. We are talking about PPOs. We are not talking about fee for service.

Ms. BLOCK. That is right.

Senator BAUCUS. So it is really a PPO plan, not a fee-for-service plan.

Ms. BLOCK. That is right.

Senator BAUCUS. Now, again, I want to get the facts here. Because it is a PPO plan, preferred provider plan, that means that in some parts of the country-or in all parts of the country, probably-there are some doctors available, maybe next door, but who may not be a provider that is in the network, that is in the plan. Ms. BLOCK. Well, the way that generally works, is in urban areas where there are more providers available, some may not be in the network. But typically in areas where there are fewer providers available, virtually every provider is in the network because that is the only way you can arrange in-network service in every geographic area.

Senator BAUCUS. I guess the question is the word "virtually." It is just finding out the degree to which that is actually the case. Even so, do people in rural areas, under the Federal plan, not have to pay more? It is more expensive.

Ms. BLOCK. No, it is not. Our premiums are the same everywhere in the country in the national plans.

Senator BAUCUS. What about co-payments and deductibles? Are they the same every place in the country, too?

Ms. BLOCK. They are absolutely the same everywhere in the country in the national plans. It is a national benefit package with a national premium.

Senator BAUCUS. But the problem really is availability. It is access, then.

Ms. BLOCK. Yes.

Senator BAUCUS. Again, it is a factual question we are going to have to find the answer to. It is 100 percent participation. If it is not 100 percent participation by providers, then to what degree is it not 100 percent? It is just a factual matter that we would have to find the answer to, because clearly those people who are not members are going to have to drive and go much greater distances. That is, those people who are looking for doctors that are not in the plan are going to have to go a lot further to try to find that doctor. Is that not the case?

Ms. BLOCK. I do not believe that that is the case in the Blue's basic option because of the design of that plan and because of the standards that we have in place in terms of access. The closest providers would be part of the network. There would not be a site that I can think of where there was a doctor 10 miles away, and the network provider would be 50 miles away. That would not meet our access standards.

Senator BAUCUS. All right. Not to be critical, but you use words which make me believe there is a little, not intentional fudge, but there is something funny going on there, and I just have to find the answer to it.

Ms. BLOCK. We would be happy to work with you to find that information.

Senator BAUCUS. Again, I do not mean to be critical, but it sounds like it is not as cut and dried as some would like it to be. Thank you.

Senator Thomas?

Senator THOMAS. Thank you. I appreciate your comments. I come from probably the most rural State in the country, and I have to tell you that it works well. PPOs are organized a little differently.

They are not formal PPOs. But every provider, basically, in Wyoming operates as a PPO.

So we have some real problems with rural health care in terms of reimbursement and how they are paid, and all these things, hospitals, and so on. But I think, in terms of having these private services available, they are just as available in the rural areas as they are anywhere else.

Now, obviously you have a system in the State. Not every little town has an orthopedic surgeon. That is just the way it is. But, in any event, I appreciate what you are doing.

How do you manage to control the costs? What is your technique for controlling costs? Usually when you have a contract, why, you have a way because of the volume you have. I would like all of you, very briefly, to comment on that. How do you control the costs?

Ms. BLOCK. Well, there are several ways. Of course, one of the primary things that controls cost is the fact that competition in the FEHBP program is at the retail level. Every year, our members have the opportunity to elect a new health plan, and they are very, very cost conscious. We see a migration virtually every year.

In fact, in our calculation of rate increase our actuaries are now able to estimate that the potential rate increase in any given year, on average, is reduced by about 1 percent every year as a result of people moving to lower cost plans.

Senator THOMAS. Providers that you submit to your members or to your participants, they have choices. I can choose one that is less expensive.

Ms. BLOCK. Exactly.

Senator THOMAS. Admiral?

Admiral CARRATO. There are a variety of techniques to control cost through the contracting mechanism. In our current contracts, we have a shared risk mechanism, so our private sector partners, Humana, Sierra, TriWest, Health Net, they share the risk in any cost overruns, and they also share the reward with us if we beat our targets.

Senator THOMAS. I see. I see. So we have contractual mechanisms to do that, so the consumer does not make the choice as much as they do in the other one.

Admiral CARRATO. The consumer also has choice. We have three options. We have an enrolled HMO and then we have a PPO option, and a fee-for-service option. Each one of those is not enrolled. We believe the best choice for our beneficiaries is the enrolled option. We provide financial incentives for the consumer to make that election. We also try and take advantage of our direct health care system, which is our system of military hospitals.

Senator THOMAS. Which is unique.

Admiral CARRATO. It is unique to our system. I guess the simple way of saying it is, we try and promote things that will keep our people healthy. We use disease management programs. If you can use effective preventive measures and make sure people stay healthy, that is also a way. Again, we have a unique advantage because our folks tend to

Senator THOMAS. We tried that. For years, HMOs were doing that, and now they are not.

Mr. Bradley?