Testimony for the Record Barbara B. Kennelly, President and CEO National Committee to Preserve Social Security and Medicare

United States Senate Committee on Finance Hearing on "Private Fee for Service Plans in Medicare Advantage: A Closer Look"

January 30, 2008

Mr. Chairman and Members of the Committee:

I am Barbara Kennelly, President and Chief Executive Officer of the National Committee to Preserve Social Security and Medicare, and I appreciate the opportunity to submit this statement for the record. With millions of members and supporters across America , the National Committee is a grassroots advocacy and education organization devoted to preserving and promoting the financial security and health of maturing Americans.

Over the coming weeks, Congress and the American public will hear many experts talk about the strains that growing health care costs place on our nation's budget. Part of this discussion will occur due to a provision in the Medicare Modernization Act of 2003 that placed an arbitrary cap on the use of general revenue financing for Medicare. This cap, which was triggered with the release of the last Trustees report, requires the President to submit and Congress to consider proposals to reduce Medicare spending this year. The primary purpose of this cap was to make it easier for Congress to enact cuts in Medicare. This singling out of the program comes despite the fact that Medicare spending is rising for the same reasons health care costs are skyrocketing for workers and their employers.

It is impossible to effectively slow Medicare spending without addressing the problems plaguing our nation's health care system. However, I do believe there are some steps that we can take to more efficiently spend Medicare's precious dollars. One particularly egregious example of Medicare overspending occurs in the Medicare Advantage program. Private health plans, now called Medicare Advantage plans, were first allowed to participate in Medicare because policymakers believed they could provide better services at a lower cost than traditional Medicare. In fact, because it was anticipated private plans would be so efficient, the government initially paid them five percent less for each beneficiary they enrolled than it would have cost to cover that same beneficiary in traditional Medicare.

Medicare now pays private plans significantly more than it would cost to cover the same beneficiaries through traditional fee-for-service Medicare. Today the government pays an average of 13 percent more to cover a beneficiary in a private Medicare Advantage plan than it would cost to cover that same beneficiary in traditional Medicare. In simple dollar terms, Medicare pays about $1,000 more a year to cover a beneficiary in a private plan than it would cost to provide care to that same beneficiary under traditional Medicare.

All beneficiaries, whether they enroll in a private plan or not, subsidize payments to private companies by paying higher Part B premiums. Today, these premiums are almost $50 per year higher per couple than they would be absent the subsidies to private plans. This number will continue to grow exponentially in future years. These increases are in addition to the record-setting increases in Part B premiums beneficiaries have already experienced - and which are expected to continue - as a result of increases in the cost of health care.

In addition to adding costs for individual beneficiaries, subsidies to Medicare Advantage plans result in higher costs to the federal government. Medicare's actuaries estimate that eliminating these subsidies would add two years of solvency to Medicare's hospital insurance trust fund. According to the Congressional Budget Office (CBO), paying private plans at the same rate as traditional Medicare would save $54 billion over the next five years and $149 billion over the next ten years.

For all of these reasons, I support the Medicare Payment Advisory Commission's (MedPAC) recommendation that payment policy should be built on a foundation of financial neutrality between payments in the traditional fee-for-service program and payments to private plans. We should be using taxpayer dollars to promote efficiency and quality in Medicare, instead of bestowing unwarranted subsidies on inefficient private plans that serve a fraction of Medicare beneficiaries.

Mr. Chairman, today's hearing focuses on Private Fee-For-Service (PFFS) plans, which are the most highly subsidized type of Medicare Advantage plan. On average, the government pays PFFS plans 17 percent more than would be paid per beneficiary under traditional Medicare coverage. And according to MedPAC, half of the subsidy to PFFS plans goes to administrative costs, marketing and profits, rather than to additional benefits for beneficiaries.

The excessive subsidies to PFFS plans are driving enrollment in Medicare Advanta g e to historically high levels despite the absence of any hard evidence they are providing better care than traditional Medicare. Currently about 20 percent of all Medicare beneficiaries (or nine million people) are enrolled in Medicare Advantage plans. The CBO projects that enrollment in Medicare Advantage will grow at an annual average rate of about seven percent over the next 10 years - reaching 26 percent of total enrollment by 2017. PFFS plans have experienced substantial growth under the Medicare Advantage program. At the end of 2005, only 200,000 beneficiaries were enrolled in PFFS plans. Currently, there are over 1.9 million beneficiaries enrolled in PFFS plans. And the CBO projects that by 2017, there will be over five million beneficiaries (one-third of all Medicare Advantage enrollees) enrolled in PFFS plans.

Despite receiving these excessive subsidies, PFFS are inefficient and largely unregulated by the government. For example, PFFS plans are purposefully enrolling beneficiaries in areas where they can receive the highest payment benchmarks from the Centers for Medicare and Medicaid Services (CMS). And although they are the highest paid type of Medicare Advantage plan, PFFS plans do not have to coordinate care, provide prescription drug coverage, or collect data on quality of care. PFFS plans are also exempt from CMS review and monitoring requirements that apply to other MA plans.

The insurance industry makes the dubious claim that PFFS plans can serve Medicare beneficiaries all over the country. A beneficiary is able to see any provider that is willing to accept the plans terms of payment. However, since PPFS plans are not required to build networks of physicians, hospitals and other providers, many beneficiaries are experiencing difficulties finding doctors and hospitals that will treat them. I have heard countless stories from our members and supporters across the country who have been denied access to doctors because they were enrolled in a PFFS plan.

Many of our members who are Michigan public school retirees have experienced problems with their PFFS plan when they retired to another state. Two of our members, a married couple aged 90 and 87, live in Florida and are unable to find a general practitioner in the area who will accept their PFFS plan. They are unable to use their health care plan because they cannot drive far distances to find a physician who will accept it. Another one of our members retired to North Carolina and is unable to find any physicians who will accept her PFFS plan. As a result, she has forgone some medical tests because she cannot afford the out-of-pocket costs.

Unfortunately, the experiences of National Committee members are not unique, and the plans in which beneficiaries are experiencing the most difficulty are also the most excessively subsidized and least regulated. Mr. Chairman, on behalf of the members and supporters of the National Committee to Preserve Social Security and Medicare, I encourage the Senate to level the playing field and remove the unfair advantage of PFFS plans. Instead of being paid more than traditional Medicare, PFFS plans should be paid at a rate equal to the costs of traditional Medicare in every part of country. In addition, the Senate should also establish additional monitoring requirements for PPFS plans and require them to build a network of providers, similar to the requirements expected of other Medicare Advantage plans.

Mr. Chairman, thank you for holding this hearing today. As you know, the vast majority of Medicare beneficiaries remain in the traditional program. In a time of budgetary challenges, we cannot continue to reward inefficient and inferior plans with taxpayer and beneficiary-funded subsidies. I look forward to working with you and other members of this committee to restrain excessive spending in the Medicare Advantage program and to ensure that traditional Medicare is preserved for generations to come.

The National Committee is a nonprofit, nonpartisan organization that acts in the interests of its membership through advocacy, education, services, grassroots efforts and the leadership of the board of directors and professional staff. The work of the National Committee is directed toward developing a secure retirement for all Americans.