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Two, the 17-year medicare experience has been, on the whole, positive. Average life expectancy for those 65 has been extended by about 2 years in that short period of time, a very remarkable achievement.

The quality of life has improved for millions of both the elderly and seriously disabled. Health care personnel, technology, procedures, and facilities have improved both quantitatively and qualitatively.

And private health insurance has flourished, both as an administrative adjunct to, and as a supplement to, medicare.

Three, the major negatives in the medicare experience involve the unacceptable rise in costs and the precarious situation of the part A Hospital Insurance Trust Fund. I am not going to spend any time documenting these cost problems. You have already done it, Mr. Chairman, very succinctly and effectively. My husband and I have been saying this for 15 years and there is now very little disagreement.

The real disagreement, however, still involves the causes and the appropriate corrective action. In my view the cost explosion results from a combination of overlapping external and internal factors, some of which the program can address, and some of which the program has to live with but cannot directly address, but both of which should be taken to account as reform is contemplated.

The situation is far more complex than just a matter of changing financial incentives or changing the behavior of physicians or individual patients.

Externally, the principal factors include: (a) the constant improvements in and the rising costs of medical technology, resulting in what we have long called “the paradox of medical progress' That is, the more patients we save from acute illness-from dying of a heart attack, stroke, or early cancer—the more we save, the more patients there are going to be to live longer, to require longterm care, and probably to cost more over the long run; (b) the aging of the population; (c) the shift from acute to chronic disease as the principal cause of morbidity in the United States-remember, by definition, chronic disease is never cured. It is not something you die from or get well from in 2 weeks in the hospital. You live with it the rest of your life: (d) the growing proportion of women in the population, a point Mrs. Abrams addressed very eloquently; (e) declining birth rate; and (f) the shrinking American family. All of these external factors add up to a longer lived beneficiary, with more chronic disability, with fewer family supports, more expensive medical care, and reduced financial base-both for the individual patient and the program as a whole.

Internally, medicare has suffered from two major deficiencies: an almost total lack of cost controls and overemphasis on acute inpatient care at the expense of less expensive primary and long-term care.

Four, medicare reforms should be addressed simultaneously to the two programmatic deficiencies with full appreciation of the change to external environment.

Efforts should be focussed on effective cost controls, consonant with the original and continuing goals of the program; and redesign of the benefit package to fit the new pattern of chronic disease.

Obviously there are many other relevant approaches to reform, for example, the one that you have stressed this morning, Mr. Chairman-exploring new sources of revenue, such as general revenues; or one that I feel has not been mentioned-administrative consolidation of parts A and B, which could have, not only administrative, but some other important consequences. Those obviously should be included. I cannot do it for question of time.

And, in any case, it seems to me that cost control and redesign of the benefit package are basic.

That leads me to the last two points.

Five, cost controls, should be directed at both providers and consumers. Among the specific measures needed with respect to the providers: fixed rates or prices for all provider services-all, not just hospitals, but all, both institutional and individual practitioners. I realize the word "prospective" is the "in" word today. It is a euphemism, I think. The important thing is that the rate be firmly fixed for an agreed period of time.

There are numerous acceptable methodologies for establishing such rates. The DRG or per case method is certainly one. I do not think it is applicable in all cases. There are cases-long-term care, for example-where per diem is more appropriate than the per case rate.

In the case of practitioners, sometimes fee-for-service is appropriate. It is not the only culprit in the cost rise. Salary or capitation may be better in other cases. In all cases, whatever methodology is used, it must be, fixed for a definite period of time, even if it is just 1 or 2 years. And preferably, rather than being imposed by one side or the other, the ratio should be negotiated and renegotiated in the tradition of American collective bargaining by the principal provider and payer organizations.

Assignment provisions, as you have already discussed, obviously also need tightening up.

Let us turn to consumers. Reasonable cost-sharing provisions, ranging from zero deterrence or even financial inducements for certain preventive services—where societal considerations are overriding-to some degree of deterrence for certain high-technology services—which, of necessity will have to be rationed in one way or another. The artificial heart, if it ever works, is an obvious example.

Six, with respect to benefits, the existing bias toward acute inpatient care should be reversed to emphasize primary care, the latter defined to include appropriate preventive services, and long-term care—the modalities most appropriate to the new picture of chronic disease.

Specifically, the existing section 1862 prohibition on preventive and custodial-a euphemism for long-term care should be removed; the Secretary of HHS should be instructed to establish schedules of reimbursible, professionally approved periodic preventive services. Such schedules should be reviewed periodically and revised as appropriate-perhaps every 5 years.

All medicare beneficiaries should be encouraged, to undergo a health assessment by an appropriate primary care practitioner or group at the onset of medicare eligibility, and to remain in periodic contact with that practitioner or group before resorting to any specialized care.

The Secretary of HHS should be instructed to establish a schedule of reimbursible professionally approved long-term care services, both institutional and noninstitutional. Noninstitutional, of course, means primarily home care; institutional means nursing home care. Such schedules should be reviewed periodically and revised as appropriate, perhaps every 5 years.

Existing medicaid responsibilities and Federal funds now budgeted for long-term care through medicaid should be transferred to medicare for this purpose.

Objections to this approach to medicare reform may be anticipated from many who are happy with the status quo, as well as from some who would like to demolish medicare altogether. But the status quo is, as you have pointed out, financially untenable for more than a very few years, and the real medicare wreckers have no serious political support at the present time. Too many providers, as well as nearly all elderly consumers, are too dependent on the program.

The practical question then is how to put together a reform package made up of many different components which addresses the major programatic deficiencies as fairly and as painlessly as possible.

The suggested package, I submit, provides at least a pragmatic beginning for a politically and financially viable compromise which protects the idealistic vision of the original medicare program while introducing fiscal responsibility and realining benefits in keeping with changing demographic, epidemiologic, and technological developments. Thank you very much.

[The material submitted by Mrs. Somers follows:]

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RETHINKING MEDICARE TO MEET

FUTURE NEEDS*

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Anne R. Somers

Anne R. Somers is Professor of Community Medicine, University of Medicine and Dentistry of New Jersey-Rutgers Medical School.

The importance and timeliness of the topic are self-evident. Not since 1964-65 and the great debates over the King-Anderson Bill and other proposals that led to enactment of Titles XVIII and XIX of the Social Security Act has American health care policy been so completely "up for grabs" as it is today. What we do, or do not do, to Medicare in the next year or two, will have a lasting. perhaps irreversible, impact on both the U.S. health care economy and the health of the American people.

Not only is Medicare the principal source of health care financing for nearly 30 million of our most vulnerable Americansover 26 million elderly and about 3 million seriously disabled'-out it provides nearly 35 percent of total patientcare revenue for the nation's community hospitals and supports about 17 percent of the entire personal health care economy"Perhaps even more important, Medicare has become the flagship for this economy-pattern-setter, quality-assurer, life extender--and, of course, insatiable consumer of resources!

It is no wonder that, despite all the rhetoric, the responsible decision

makers have, in the final analysis, been slow to tamper extensively with this remarkable program. For, make no mistake about it, Medicare is a remarkable program, one of the most popular and effective governmental initiatives ever developed in this country.

Now, after 15 years of unprecedented and inadequately controlled or guided expansion, Medicare has developed some serious problems which must be corrected if it is to continue to play a constructive leadership role. But this is a far cry from calling for dismantlement or even curtailment. The thrust of my presentation today is precisely the opposite: I see reform and strengthening of Medicare as the Number 1 health policy priority in the U.S. today-not only for the sake of those millions of enrollees and patients, physicians, nurses, hospitals, and others directly dependent on it, but precisely because it is our flagship and pattern-setter.

Do we want to revert to the pre-Medicare days of grossly inadequate financing, rationing on the basis of ability-to-pay, and frequently mediocre quality--the days so passionately

condemned by Dr. Alan Gregg of the Rockefeller Foundation in his remarkable little book, Challenges to Contemporary Medicine, published in 1953? Or, having taken a long step toward Dr. Gregg's goal"Great Medicine" (which includes teaching, practice, and medical research, and adequate resources thereforhand having experienced some of its remarkable achievements, can we now adjust our thinking and our principal institutions to the new biochemical and demographic world that is emerging?

Most of this paper will be devoted to a brief summary of the achievements and problems associated with Medicare and related programs, followed by some suggestions for reform. But first it may be useful, before this sophisticated and prob ably somewhat cynical audience, to establish my credentials as one long-concerned with cost.

Over 20 years ago, long before Medicare, I gave a paper at the AMA in Chicago entitled "Coverage, Costs, and Controls in Voluntary Health Insurance," in which I said,

"Many experts feel that costs have become the greatest single issue facing voluntary health insurance today. ... If the price of medical care continues to rise at its current rate, and health insurance even faster as it must to keep up with the greater rise in hospital prices, the major component in insurance benefit payments, then we may find that all the additional money is absorbed in maintaining the present level of benefits.... Health insurance, originally designed to ease problems of medical costs, has actually contributed, by effect on utilization and on prices in a scarcity market, to intensification of the problem. This is not to deny the great good that insurance has already accomplished. However, if it is to continue to play a constructive role in the easing of medical costs for consumers and in the stabilization of income for producers, it must acknowledge, more forthrightly than heretofore, its influence on costs and be prepared to accept the corollary responsibilities."'S That was the last speech I delivered at AMA headquarters!

In 1967, when Medicare was less than a year old, my husband, Herman Somers, made the following statements with respect to the "reasonable costs" and "reasonable charges" provisions of Medicare:

"Even the limited knowledge we now have... is sufficient to indicate some large issues confronting not just Medicare, but the whole medical care economy, issues that demand prompt and serious attention. ... Congress, following the precedent of most Blue Cross organizations, legislated that providers should be paid 'the reasonable costs of services.

*This paper was presented by Anne R. Somers at the Government Research Corporation's Seventh Annual Leadership Conference on Health Policy, Washington, D.C., June 17, 1982.

1730 M Steet NW Washington DC 20036. Telephone (202) 857 1400

TWX 710 822 0165 GRC WSH

Many Congressmen may not have realized how elastic the concept of 'reasonable costs' could be, that it was as much an issue to be resolved by bargaining as by the data, complicated by the generally backward state of cost accounting in most hospitals. ... Important as the specific provisions of the reimbursement formula are, far more fundamental is the question of whether the basic concept of individual cost reimbursement has long-term viability. In the tense controversial atmosphere that characterized the legislative struggle, Congress probably had little practical choice.... If, however, payment of costs, whatever they turn out to be, is virtually guaranteed (and Medicare, under present regulations, is practically open-ended in that respect). where are the financial incentives for cost control, difficult enough in any case, to come from? ... In no other realm of economic life are payments guaranteed for costs that are neither controlled by competition nor regulated by public authority, and in which no incentive for economy can be discerned. ... Clearly, Medicare faces stormy days ahead in the entire field of payments to providers. ... Present arrangements are so vulnerable that it seems unlikely that they can be lived with very long. . . . Yet any basic reforms will invite strident controversy. They will be slow in coming and the expense of delay will be high."

I repeat: That paper was given in 1967 and published the next year. Red was correct in all his predictions, including the slowness of corrective action and the price of delay.

Having emphasized the seriousness of the cost problem for nearly 25 years; having been repeatedly accused of crying "wolf" too often; having, in some quarters, suffered, at least figuratively, the fate of Cassandra; perhaps you will understand why-now that cost has become a Washington obsession feel justified in warning against repetition of the same basic error-our apparent inability to concentrate on more than one problem at a time which marked the original Medicare legislation and related health programs.

Whereas they concentrated exclusively on increasing access and improving quality, with virtual disregard for cost, many of today's cost-targeted proposals appear to have totally lost sight of the continuing problems of access, quality, and appropriateness. The order of priority among these problems has changed over the years but none has disappeared. What is needed now is a balanced view of costs and benefits and a rational program for revitalization of Medicare, based on a clear understanding of its strengths and weaknesses.

Medicare and Related Programs:

Major Accomplishments

Part B. Nevertheless, the Part A ratio of administrative costs to total costs fell from 2.24 percent in 1967 to only 2.14 in 1979. Even under Part B, with its much larger number of smaller claims, the ratio fell from 8.42 in 1967 to 6.01 in 1979.

Despite initial provider and private-insurance opposition, within a couple of years this understandably changed to strong support which continues to this day. Medicare has clearly demonstrated that some form of NHI is viable even in a country of this size, heterogeneity, and extreme emphasis on individual and interest group rights. Significantly, it has also demonstrated the desirability of intermeshing responsible public and private enterprise.

2. Positive effect on Health Care Resources

The quantitative expansion of health care resources is a matter of record. From 1960 to 1978, for example, the ratio of community hospital beds/1000 population rose from 3.6 to 4.6 and then began to decline, under planning constraints. From 1969 to 1978, the ratio of nursing home beds/1000 population rose from 44.5 to 60.0.0 In 1960, there were 142 professionally active physicians/100,000 population, the same ratio as in 1950." By 1980, the ratio had increased to 202/100,000.

It is, of course, far more difficult to measure qualitative changes. The very rapid expansion of sophisticated medical technology, during this period,' is variously interpreted as an important qualitative advance or an expensive redundancy which may actually increase the risk of iatrogenic accidents. Even allowing for some technological overkill, as additional investment in this area reaches the point of diminishing returns, or what has been called the "flat of the curve" point," there can be no quarrel with the statement that, at this point at least, the average U.S. hospital and nursing home is a better place for patients than it was in 1966.

Are our doctors better today than they were in 1966? Some critics of current medical education complain of a decline in standards: perhaps there has been some leveling down along with the vast expansion of enrollment. However, the question here is more one of the appropriateness of the current specialty distribution rather than individual quality-an oversup ply of tertiary specialists and a continuing undersupply of primary physicians, a point to which I return under "shortcomings."

It is no more appropriate to credit Medicare for all the good things that took place in the health care area during the decade and a half following its enactment than to blame it for all the inflation and other cost problems. Still, as the national pattern-setter, it should carry a significant share of responsibility in both respects. The following list of achievements is presented in that spirit.

3. Major advances in clinical medicine.

Progress during the past 15 years has been especially dramatic in terms of sophisticated diagnostic techniques, surgery, anesthesia, and pharmacology. Except for out-patient drugs, these are all areas covered by Medicare. The CAT scanner, open-heart surgery in cases of left-main-coronary disease and triple-vessel disease, drug treatment of angina and other cardiovascular conditions, and cimetidine for ulcers are illustrative of literally hundreds of new diagnostic and therapeutic techniques that have been made possible, in good part, by Medicare reimbursement and associated Great Society programs. 4. Major progress in life expectancy for the elderly and disabled.

Between 1940 and 1954, the death rate for men 65 and over fell by an average annual rate of 1.1 percent." Between 1955 and 1967, it rose by an average annual rate of 0.2 percent. However, between 1968 and 1978, there was an average annual drop of 1.5 percent about 15 percent for the decade. For men 85 + the improvement was even more dramatic. Between 1955 and 1967, their death rate rose by an average of 0.9 percent per year; between 1968 and 1978, it dropped by 2.2 percent-about 30 percent for the decade. In terms of life expectancy at 65, between 1950 and 1960, there was an addi

1. Creation of a manageable national health insurance program.

For our elderly and most seriously disabled, Medicare now provides a form of national health insurance inadequate to be sure in several respects (as will be pointed out below) but universal within its own definition of eligibility and, despite great complexity, administratively viable at surprisingly low management costs. In 1979, for example, 36.4 million bills were processed under Part A;' a much greater number under

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