RESPONSES TO QUESTIONS FROM SENATOR LINCOLN

particular problem in rural areas? Do rural beneficiaries typically have to go "out hours. I understand that PPOs don't contract with providers in all areas. Is this a to visit his local hospital, and to stay in network, he would have to drive many kansas recently told me that he would have to go out of his PPO network in order for "out-of-network" health care services. A federal employee residing in rural Arally preferred provider organization (PPO) networks that charge higher cost-sharing Question 1: It is my understanding that all FEHBP fee-for-service plans are actu

of network" to receive care from their local providers (and thus pay higher copays and deductibles?) How does this compare to traditional Medicare?

Answer: Since the fee-for-service plans introduced preferred provider networks into the Federal Employees Health Benefits (FEHB) Program in the 1980s, we have always made clear in our informational materials that the preferred provider benefit is an enhancement over the standard non-network benefit offered by the plans. In a typical network arrangement, the provider agrees to accept a rate of payment lower than billed charges in exchange for advantages such as more potential patients, expedited reimbursement, and other services offered by the plan. Often plans monitor the services provided in-network to ensure that their providers are well informed about current practice patterns and new developments in health care delivery. The plan, in turn, can pass on the benefits it derives from provider participation in the network to members in the form of lower out-of-pocket costs when they use a preferred provider. Those lower costs are offered as an incentive to members to choose in-network services when they are available. We have never guaranteed in-network coverage except in the Blue Cross Blue Shield (BCBS) Basic Option. Since Basic is an Option in a nationwide plan and it provides no coverage for outof-network services, we negotiated special provisions to ensure that coverage would be available everywhere in the country. While the other nationwide plans, such as GEHA and Mail Handlers, make a concerted effort to keep expanding their_networks, they do not guarantee in-network coverage everywhere in the country. However, GEHA and Mail Handlers members have access to all of the providers available in the community. But for those providers that have not agreed to accept a discounted payment rate, the member does not get the advantage of reduced out-ofpocket costs. Information on provider availability is available during the annual open season, and members make their plan election based on that information as well as other factors that help them determine which plan best suits their needs and the needs of their family.

For BCBS nationwide, 97 percent of inpatient claims, 93 percent of outpatient claims, and 93 percent of professional claims are for in-network services. For GEHA, the percentages are 80 percent, 80 percent, and 74 percent. For the Mail Handlers Benefit Plan, the overall percentage is 69. We do not have a breakdown by type of service. While access to network providers may be a reason members go out-of-network for services, the biggest reason is that they have an established relationship with an out-of-network doctor. The BCBS outside network access standard for a preferred provider is 75 miles in rural areas. BCBS data for Arkansas indicates that the standard of 30 miles for both primary care physicians, including internal medicine, general practice, pediatrics, family practice, and obstetrics and gynecology and for hospitals is met, as well as the standard for key specialties, including cardiology, gastroenterology, orthopedic surgery, otolaryngology, and urology. There are situations where no provider is available within the standards. If only a non-network provider is available, in special provider access situations, members in Basic Option may use the case by case exemption process available to them by contacting their Local Plan.

Question 2: I've looked at the health plan offerings in my home state of Arkansas. Nearly everyone is enrolled in Blue Cross/Blue Shield because there are no local options or HMOs for federal employees in Arkansas. The last HMO to be offered to Arkansas FEHBP members pulled out of the program in 2000. Similarly, the last Medicare HMO (in the Medicare+ Choice program) pulled out in 20001. I see a trend here. In recent years, how many enrollees have been forced to change insurance plans because they withdrew from the program? Are local options (HMOs) hard to come by?

Answer: BCBS is the most popular plan in the FEHB Program nationally, as well as in Arkansas. It is the most popular health insurer in Arkansas not only for Federal members, but for all lines of business. Nevertheless, more than one-third of Federal employees and annuitants in Arkansas have chosen to enroll in one of the other ten options available to them. Although the number of HMOs available nationally has declined in recent years as a result of mergers and consolidations in the industry, they are still widely available in some areas of the country. However, in some areas, including rural areas, health plans have less economic leverage because there are few competing providers. Over all, although the FEHB Program has lost 178 HMOs in the past 5 years, the number of enrollees affected has been relatively small. In 2002, 27,000 enrollees were affected. In 2003, the total was 27,461. These numbers represent well under one percent of the total FEHB enrollment. Question 3: In Arkansas, 78 companies have withdrawn from the Arkansas health insurance market since 1992. 66 of these withdrawals have taken place within the last five years! Additionally, in Arkansas and ten other states, there are no HMO plans available to FEHBP beneficiaries. The claim by the President is that remod

eling Medicare based on FEHBP would increase choice for beneficiaries. But, what kind of choice does FEHBP really offer in Arkansas and the other states that offer only fee-for-service (really PPO) plans? What would be different for Medicare beneficiaries in these states if they were moved into an FEHBP-like system? It seems that the only difference is that they would be giving up Medicare's choice of doctor at a guaranteed price for a PPO program in which they would face unknown outof-pocket costs for seeing the doctor or hospital of their choice.

Answer: Most people in Arkansas are enrolled in plans offered by a few large carriers. While this is generally true in other states as well as in the FEHB Program, many enrollees can and do take advantage of choice. Overall, about 27 percent of FEHB members are enrolled in HMOs. The percentage of active employees is higher at 36 percent. The disparity in our Program, in part, is the result of coordination mechanisms unique to the FEHB Program that would not be true in an expanded choice system such as the President proposes. For FEHB enrollees, the out-of-pocket costs associated with seeing a non-network provider are fully disclosed in every plan brochure so that our members are not facing unknown costs.

The current economic and regulatory environment in Arkansas has had the result you cite. We understand that the situation is so dire that Governor Huckabee recently signed a law allowing small employers access to the Medicaid system via a waiver. Despite this upheaval in the Arkansas insurance market, Federal employees continue to enjoy a broad range of coverage options through the FEHB Program. No national open enrollment plan has withdrawn from the Program since 1996. Federal employees enrolled in these plans can choose their own doctors and also pay less out of their own pockets for medical care than do Medicare beneficiaries when they receive care from network providers. As I understand it, the President's proposal would make similar plans available to Medicare beneficiaries.

Question 4: Blue Cross/Blue Shield covers over 50% of FEHBP enrollees nationwide, and about 67% of FEHBP enrollees in Arkansas. What if Blue Cross/Blue Shield pulled out of the FEHBP program? I understand that this was a real possibility in 2002, when Blue Cross threatened to withdraw from FEHBP. What did OPM do to keep the in the program? Since this plan covers most FEHBP enrollees, doesn't it—and not the OPM-have the upper hand in negotiations? How does this affect your ability to negotiate benefits and premiums and run an efficient program? Answer: While BCBS does have over 50 percent of the enrollment in the FEHB Program, that has not limited our ability to negotiate benefits and premiums and run an efficient Program. Several factors contribute. First, the national FEHB enrollment in BCBS makes us their largest customer. We pay them about $10 billion in premiums each year, no small change even to the largest insurer in the country. About 97 percent of that amount covers the cost of claims. Administrative expenses are carefully monitored by both the contracting office and the independent OPM Inspector General. The service charge or profit available is negotiated annually based on a regulated formula and is well under 1 percent of premium. The plan has every incentive to keep its rates as low as possible since the FEHB Program is a competitive market. Second, OPM staff carefully monitors the performance of all the plans in the Program, including the BCBS plan. Since the inception of the Program, the Association has established a special office to administer our account. We deal with that office daily to ensure that customer service levels meet our requirements.

In regard to the threatened pull-out at the end of 2002, the issue involved application of the Cost Accounting Standards. FEHB Plans have been exempted from the standards by statute for the past 4 years. However, as we were closing negotiations and gearing up for the annual open season, continuation of the statutory exemption was not certain. Therefore, the Director of OPM, Kay Coles James, used her statutory authority to waive coverage for all affected FEHB contracts. She made that determination with the certainty that adequate oversight provisions were in place to monitor the financial operations of the plans.

Question 5: I understand that active federal workers, who are typically younger, are more likely to choose an HMO than retirees. Also, a recent article in Health Af fairs shows that most Medicare beneficiaries aren't interested in joining a Medicare HMO. Do you think federal retirees are more likely to choose less restrictive feefor-service/PPO plans because they have the ability to better choose their own providers?

Answer: Federal retirees are more likely to choose fee-for-service plans because of unique features of FEHB and Medicare that allow them to use those plans as a Medicare supplement, resulting in broad coverage with very low levels of cost sharing. Typically, retirees who used an HMO delivery system extensively before they retired remain in those plans. For that reason, the California Kaiser plan has an unusually large FEHB retiree enrollment. Others who used the fee-for-service/PPO system prior to their retirement tend to remain in those plans.

For active workers, the PPO option has long been an attractive alternative. This mirrors the trend in private insurance markets away from tightly managed care and toward more open provider networks. As I understand the President's proposal, he would make these same sorts of networks broadly available to Medicare beneficiaries. The Health Affairs article you cited lists several reasons for the recent decline in Medicare+Choice enrollment, including a slowdown in Federal payments to plans. Supplemental coverage is another reason mentioned in the article. Because Medicare offers coverage that is less generous than that typically offered by private plans, the vast majority of Medicare beneficiaries need supplemental coverage. Some qualify for public programs like Medicaid and veterans benefits. About on-third have coverage through their former employers. Others purchase their own supplemental private insurance policies, which tend to be fairly expensive. Because Medicare+Choice plans generally require lower copayments than Medicare and usually cover more services, the plans are very popular among beneficiaries who do not have supplemental coverage. The article reports that 39 percent of beneficiaries who live in a county with a Medicare+Choice plan and who do not get supplemental coverage through a former employer or Medicaid are enrolled in a Medicare+Choice plan.

Question 6: Public programs like Medicare and Medicaid are a significant source of revenue for health care providers in Arkansas. Some hospitals in my state have expressed reservations about the President's plans to privatize Medicare because, in their experience, Medicare HMOs paid a lot less than Medicare. Can you comment on the experience of health care providers in the FEHBP program? What would happen to these providers if we were to privatize Medicare? If they are shut out of PPO networks, won't they financially suffer?

Answer: I do not interpret the President's proposal as an attempt to privatize Medicare. His proposal clearly stipulates that beneficiaries will retain the option to enroll in traditional Medicare fee-for-service, but adds a new option that would give Medicare beneficiaries the same sorts of choices among private plans that Federal workers have now.

It is hard to understand why providers believe that a private option for Medicare beneficiaries would change their revenue stream. While the rates paid by private health plans are negotiated, and providers can refuse to contract if the offered rate is not satisfactory, Medicare reimbursement is set by regulation and Medicare is so large that few hospitals can choose not to participate. In our experience, Medicare DRGs are not generally higher than negotiated network rates. Thus, hospitals should not suffer diminished revenues from contracting with private insurers. Question 7: A January 2002 report by the Congressional Research Service on the FEHBP program explains that in general all FEHBP plans limit enrollees' choice of providers. In PPO plans, CRS found that enrollees do not know what the coinsurance rate will be for seeing an out-of-network provider and face great difficulties in determining what those costs will be. Do you know what the average out-of-pocket coinsurance rate is in FEHBP plans, and what that amount is in Arkansas?

Answer: The FEHB fee-for-service/PPO plans do not limit the choice of providers. Except for the Blue Cross Blue and Shield Basic Option, members have a complete choice of providers, since all the other national plans offer an out-of-network benefit. Of course, the basic concept of PPO networks is to give members an incentive to use network providers by reducing their out-of-pocket costs if they do so. PPO networks have saved the FEHB Program and therefore both the taxpayers and the members millions and millions of dollars since their inception in the late 1980s and early 1990s. We disagree that members do not know the coinsurance rate for seeing an out-of-network provider since the out-of-network benefits are spelled out explicitly in the plan brochures. We know precisely the coinsurance rates for out-of-network services for every plan in the Program since we negotiate those benefits with every plan annually. The rates are the same in Arkansas as anywhere else in the country. The out-of-pocket dollar costs for out-of-network services will depend upon the billed charges and plan allowance for a particular service.

Question 8: I've noticed that the number of HMOs participating in FEHBP nationwide has fluctuated from 470 in 1996 to less than 200 today. In Arkansas, we have no HMOs participating in FEHBP. The commercial HMOs in Arkansas that used to participate in FEHBP pulled out because they say they suffered huge losses. Is this a nationwide trend that you think will continue?

Answer: It is true that many HMOs changed marketing strategies and left some markets. In some cases it was because of financial losses. In others it was an estimate that the risk was too great. In some cases, it was related to business problems that led to corporate bankruptcies or restructuring. The HMOs seem to have reversed the loss problems that many faced during the last few years. However, there are areas of the country where cost pressures are making it increasing difficult for

HMOs to negotiate the provider rates they need to offer their types and ranges of benefits.

PREPARED STATEMENT OF BRUCE E. BRADLEY

Mr. Chairman, Ranking Democratic Member Baucus, and distinguished Members of the Finance Committee, my name is Bruce Bradley. I am director of Health Plan Strategy and Public Policy for General Motors and it is a pleasure to be before you today to discuss private sector approaches to purchasing the delivery of high quality, efficient health care. This is an issue that has been a focus of my professional career including nearly two decades of managing health plans and community-based health maintenance organizations, as well as my responsibility for developing and implementing value-based health care purchasing over the past twelve years at GTE and General Motors.

I am particularly proud of General Motor's commitment to improve health care by focusing on value oriented purchasing with an emphasis on accountability for high quality care and positive medical outcomes. We believe our work not only benefits our employees, retirees and our stockholders, but also makes a contribution to improving the overall health care system by encouraging health care delivery changes that benefit other patients, purchasers and communities as well.

Not surprisingly, we strongly believe that quality and performance based strategies by other purchasers, such as the Medicare program, can and will improve the health care system for all consumers and payers of health care. With this in mind, we support the Employer's Coalition on Medicare and bipartisan efforts to modernize and improve health care delivery within the Medicare program, including— but not limited to the eventual enactment of a meaningful and universal Medicare prescription drug benefit within the broader context of reform. We therefore greatly appreciate the opportunity to share GM's experience driving quality improvement and health care delivery reforms that could potentially be applied to Medicare on behalf of the program's beneficiaries and the taxpayers who support it.

GM Experience

At General Motors, we provide health care coverage for over 1.2 million employees, retirees and their dependents at an annual expense of over $4.5 billion. We are self-insured and provide numerous plan choices for our beneficiaries. We offer traditional indemnity plans and contract with over 160 HMOs and PPOs. GM spends over $1.5 billion a year on prescription drugs alone. We manage this drug benefit quite aggressively and I will detail some of these efforts in short order. However, we are also very committed to competitively oriented management of all our health care plans and all the services they provide.

We believe that there is significant clinical and administrative waste in our nation's health care delivery system that contributes to not only excessive expenditures, but far more important, substandard care. One cannot come to any other conclusion when studies find that billions of dollars are wasted in unnecessary and inappropriate health care diagnostics and interventions, that hundreds of thousands of lives are put at risk and countless unnecessary and expensive hospitalizations ensue as a result of medication errors, and that nearly 100,000 Americans a year die as a result of preventable medical errors just in hospitals. These figures really strike home when you recognize that they could translate to the deaths of one to two GM beneficiaries a day. This is unacceptable to us and should be intolerable for all public and private plans.

GM's Value-Based Purchasing Approach. Recognizing the quality and cost problems within the health care system and how they negatively affect us, GM has made a company-wide commitment to improving health care and utilizing the best of value-oriented principles of health care delivery to improve the care our employees and retirees receive. To effectively do this it is necessary to develop and implement performance expectations, measures of success and failure, and real incentives for change. At GM, we have done all three.

First, we chose four major expectations or goals for health care delivery: (1) high quality care, including positive medical outcomes, (2) patient satisfaction, (3) effective and responsive health plan and provider service delivery, and (4) value and cost effectiveness. All four goals are critically important, as we believe they contribute to a healthier and productive workforce and health care at a more affordable cost. At a time when health care costs per employee in this nation far more than double that of our worldwide competitors, we have no choice. More importantly, though, it is the prudent management course of action to take.