Rates are negotiated with the national plans based primarily on their claims experience. About 93 percent of premium, or 93 cents out of every dollar, reflects benefit costs. The remaining 7 percent covers the plans' administrative costs.

The community-rated plans rate negotiations are based on a permember, per-month community rate. Adjustments may be negotiated to the base rate for a variety of reasons, including changes to their standard benefits package, the demographics of the Federal group, and the utilization of benefits by the Federal group.

Our oversight focuses on key areas of plan performance, including attention to quality, customer service, and financial accountability. Measures and expectations are built into our contracts.

Results are reported to our members in both print and electronic format. Members used the information, often in conjunction with decision support tools that we provide on our web site, to choose their health plans during the annual open season. All of our contracts include mechanisms through which profits can be adjusted based on performance.

In addition to oversight by the contracting office, all carriers are subject to audit by the independent OPM IG. As a result, we average yearly about $100 million in defective community rate findings, or unallowable administrative expense or benefit cost findings.

We administer the program in a way that mirrors other employer-based health insurance programs. While the program has a statutory and regulatory framework, key aspects of plan design such as coverage or exclusion of certain services and benefit levels are in neither law nor regulation.

Within broad parameters set by OPM, plans have the flexibility to determine both their benefits package and their delivery system. Because policy guidance is developed by OPM and provided to the plans annually prior to the start of negotiation, policy changes can be made very rapidly.

The CHAIRMAN. Let me make clear that we obviously do not people to go on forever and ever, but we do want to get information out. So is there maybe some way you can finish by summarizing, or at least finish your main points?

Ms. BLOCK. All right. Thank you.

We did, for example, this year accept a proposal from one of our plans for a new consumer-driven option that reflects developments in a fluid market. We do have special arrangements, and I think I would like to get to that point, for rural areas in particular. I think the best example I can give of that, is the Blue Cross/Blue Shield basic option which was introduced a couple of years ago.

Because that option has only an in-network benefit, it was necessary for them to demonstrate that they could, in fact, provide innetwork services in every single place in the country, and they did manage to accomplish that. So, that is an example of how you can use networks in a universal, nationwide health plan. Other plans have other arrangements. We do have a statutory provision for medically under-served areas.

In final words, I would like to say that our experience has been very useful in terms of our partnership and cooperation with the private sector and other members of the public sector, including all the members on the panel here today that I have worked very

closely with, and we strongly believe that such a public/private partnership is very useful and can work well. Thank you for inviting me today.

The CHAIRMAN. My staff is way ahead of me, but let me suggest that where you talked about rural areas, we probably will get into depth on that more in this hearing. But if we do not, I would urge my staff, and hopefully even Democrat staff members, to sit down maybe in the same room with you to get some more details on that, because that is a very important part of our concern here.

Ms. BLOCK. We would be happy to provide that information. [The prepared statement of Ms. Block appears in the appendix.] The CHAIRMAN. Now, Mr. Carrato.

STATEMENT OF TOM CARRATO, DEPUTY ASSISTANT SECRETARY OF DEFENSE FOR HEALTH PLAN ADMINISTRATION AND CHIEF OPERATING OFFICER FOR THE TRICARE MANAGEMENT ACTIVITY, WASHINGTON, DC

Admiral CARRATO. Mr. Chairman, distinguished committee members, thank you for inviting me to participate in today's very important hearing and to provide you with the Department of Defense's experience in delivering health care to a large worldwide population of military service members, their families, and military retirees and their families.

TRICARE provides health benefits to 8.7 million beneficiaries. We are a unique health care system, in that we both directly deliver health care services and also purchase a significant amount of health care from the private sector. Our total medical budget in DOD is over $27 billion, and we process almost 90 million claims per year.

Our health care system's primary mission is to provide a fit fighting force, and to be able to provide combat medical care and evacuation anywhere in the world, a mission, as you know, that is being carried out with great professionalism and success in Iraq today.

Because of our mission, our organizational structure, and our population, we are not a microcosm of the U.S. health care system. Yet, I believe that there are a number of elements of our system that can offer instruction on issues to consider in reshaping Medicare and on purchasing health care through a competitive process. First, like Medicare, TRICARE provides one of the most comprehensive health care benefits in the world in a benefit design that is determined by Congress. Second, while active duty service members are our primary customers, we also serve more than 1.5 million Medicare-eligible military retirees and their families.

Finally, with the passage of the TRICARE for Life benefits in the National Defense Authorization Act of 2001, we significantly increased the benefits for this Medicare-eligible population and included a prescription drug benefit.

As we have developed partnerships with the private sector over the past 15 years, we have learned a great deal about how to structure this relationship in a manner that first provides our beneficiaries with high-quality, accessible health care, and also provides a means for the government to cost-effectively manage this care.

Among the many lessons learned from our experience, I would like to briefly share three relevant lessons with you. One, maintaining patient choice is essential. As we migrated to a managed care system, we have always maintained a fee-for-service benefit option that allowed patients to continue with their previous benefit, if that is what they wished to do.

The new benefits we introduced, TRICARE Prime and TRICARE Extra, offered inducements such as improved access to care, highquality networks, reduced co-payments, or reduced paperwork to draw them into these latter options.

Two, partnerships with the private sector need to be collaborative rather than adversarial. We are about to enter into our third generation of contracts and we have learned a great deal since we began.

Perhaps most importantly, we have structured our newest contracts in a manner that ensures both the government and the private sector partner have shared goals that can only be achieved through a cooperative and helpful relationship. We share potential rewards and we share the risks.

Three, information systems need to be established and provide timely information to health care providers. When we introduced a TRICARE senior pharmacy benefit for Medicare-eligible persons in 2001, we were fortunate to have already implemented a worldwide pharmacy data transaction system that integrated pharmacy delivery from military facilities, retail pharmacies, and our mail-order pharmacy system.

This system has had dramatic improvements in patient quality and safety and avoided thousands of potential life-threatening drug interactions. It supports our medical surveillance programs that assist homeland security efforts, and it provides us with insight into high users of prescription drugs for whom we can develop programs to better manage their conditions.

Finally, I would like to add that our most recent efforts to procure health care services have been conducted in a very open process. We met frequently with our beneficiaries and their associations. We solicited frequent input from the health care industry. Comments and questions from potential offerers were incorporated into our contract documents and posted on an Internet site for public review.

Our program has seen ever-increasing levels of patient satisfaction, the quality of care has been sustained through this effort, and in some cases such as pharmacy, we have effectively used technology to improve.

Thank you very much.

Senator BAUCUS. Thank you, Mr. Carrato.

Mr. Bradley, please proceed.

STATEMENT OF BRUCE BRADLEY, DIRECTOR OF HEALTH PLANS STRATEGY AND PUBLIC POLICY, GENERAL MOTORS, WASHINGTON, DC

Mr. BRADLEY. Thank you, Mr. Chairman, Ranking Member Baucus, and distinguished members of the committee. I am Bruce Bradley, and it is a real pleasure to be here today to discuss pri

vate sector approaches to purchasing the delivery of high-quality, efficient health care.

I believe our approach to health care value purchasing and quality improvement at General Motors 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 especially our communities.

We strongly believe that the quality- and performance-based strategies by other purchasers, such as Medicare as a purchaser, can, and will, improve the health care system for all consumers and payors of health care.

With this in mind, we support the Employers Coalition on Medicare and bipartisan efforts to modernize and improve the Medicare program. In fact, your efforts to reform the Medicare program will have a direct effect on the continuing interest of employers in providing voluntary retiree health benefits.

General Motors provides 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, including traditional indemnity plans, HMOs, and PPOs.

We believe there is significant clinical and administrative waste in our Nation's health care system today that contributes to not only excessive expenditures, but far more important, substandard or less than optimal health care.

Moreover, nearly 100,000 Americans a year die as a result of preventable medical errors just in hospitals alone. These figures translate into the preventable deaths of one to two General Motors beneficiaries every single day.

General Motors has made a company-wide commitment to improving the health care of our employees and retirees by focusing on value. To do this, we developed and implemented performance expectations, performance measures, and real incentives for change.

First, we chose four major expectations or goals for health care delivery: high quality health care, including positive medical outcomes; patient satisfaction; effective and responsive health plan and provider service; and value and cost effectiveness.

Second, we implemented performance measurements for our health care suppliers to determine if we were achieving our goals. For example, we require proven measures that have been clinically linked to better patient outcomes, such as frequent blood testing, eye exams, and foot exams for diabetics, use of computers for prescription drug orders in hospitals, and intensive care unit staffing. We also survey our members to determine satisfaction with their plan and providers. Finally, we evaluate plan and provide cost performance.

Third, and perhaps most important, we use our measures to drive accountability. The scores that our plans, and indirectly the providers they contract with, receive are used to provide incentives for beneficiaries to move to higher quality plans, as well as to drive quality improvement in the plans.

We do so through offering lower premium contributions for higher quality plans, coupled with quality report cards. Our members vote with their feet. The best plans significantly improve their market share.

For example, over the past 6 years, enrollment in our benchmark, our very best HMOs, has increased by well over 200 percent, while enrollment in our poorest performing HMOs has declined by 63 percent. The beneficiaries have moved through the organized delivery systems that improve their performance and produce higher quality health care.

This leads our HMOs, which largely provide very similar benefit packages, to compete on the basis of quality and cost, not on the basis of who can attract the healthiest beneficiary.

Mr. Chairman, I would like to share some of the techniques we use to manage our $1.5 billion prescription drug benefit. GM has a full-time doctorate level clinical pharmacist to lead the management of our drug benefits.

To ensure we are as effective as possible, we have performancebased financial arrangements with our PBM to assure appropriate utilization, the use of quality generic drug products, and customer service.

We use drug benefit designs with multi-tier co-payments to encourage the use of the most therapeutically and cost-effective medications. We have implemented prescription drug counseling and drug utilization review programs to help ensure enrollees avoid excessive and inappropriate use of medications, and we encourage plans to contract with hospitals that use computer-based prescribing tools to ensure safer medication use. Medicare can use these practices as well.

Mr. Chairman, there are a wide range of interventions we and our health plans use that are applicable for Medicare to purchase higher quality, more cost effective health care. Likewise, private purchasers would benefit if Medicare were empowered to be a more competitive and aggressive purchasing of health care.

Traditional Medicare fee-for-service and managed care plans participating in the Medicare program could be subject to greater accountability and be rewarded for their quality performance.

When Medicare and the Federal Employees Health Benefit Plan institute changes that make the delivery system more efficient, all purchasers, including us, benefit as well.

In conclusion, we believe that we benefit a great deal from each other. While private purchasers can generally implement innovations more rapidly, we rarely have the type of positive impact on overall health care delivery that public purchasers do when they implement and improve on our work.

We look forward to continuing our collaboration with you and others in the Federal Government to ensure that all health care consumers, purchasers, and taxpayers alike receive the value they deserve from the extraordinary financial investment in our Nation's health care system.

I would be happy to answer any questions that you may have. Senator BAUCUS. Thank you, Mr. Bradley. That was very informative.