July 27,2000

Committee Reviews Revised Medicare/Drug Proposal

Press Briefing at 1:30 pm Today in 215 Dirksen

WASHINGTON -- Members of the Senate Finance Committee met today to review a revised Medicare proposal from Chairman William V. Roth, Jr. (R-DE). The proposal is a modified and more detailed description of the original draft Medicare Expanded Option plan proposal. The modifications further strengthen the Medicare+Choice stabilization and premium competition reforms, enhance competitive contracting options for the administration of the drug benefit, and improve the benefit modernization reforms on Parts A and B of the Expanded Option plan. A summary of the revised version is attached.

Roth informed members that he hopes to mark up legislation in September, if a bipartisan consensus can be reached. The Chairman announced that he has submitted a short list of options, based on his discussions with members, for the Congressional Budget Office to estimate. Roth has requested that CBO score five selected reform options, four permutations of the earlier expanded option plan, and a proposal addressing low income assistance (see below). A copy of the letter requesting the scores from the Congressional Budget Office is attached.

Roth also unveiled another plan, in response to the feedback received from several committee members. This plan would only be considered if it became clear that a bipartisan consensus on more fundamental Medicare reforms cannot be achieved and signed into law this year. The new plan would extend prescription drug coverage to low income seniors, and, at state option, those facing catastrophic levels of spending on prescription drugs. The proposal would be a short-term intervention, operated outside of Medicare.

Roth made clear that this approach does not replace comprehensive reform but instead makes targeted relief immediately available to the most vulnerable populations until fundamental Medicare reform is signed into law. The new program would target Medicare beneficiaries with incomes too high to permit Medicaid eligibility, but low enough that drug costs are burdensome. The plan would operate in a similar fashion to the State Children's Health Insurance Program but with a federally administered fall-back option should states choose not to participate in this voluntary program. A summary of this plan is attached.


Chairman's Medicare statement

Description of revised Medicare Expanded Option plan

Letter to Congressional Budget Office

Summary of Low Income proposal

# # #

A press briefing on these issues will be held today at 1:30 pm in room 215 of the Dirksen Senate Office Building. The briefing is open to members of the press and Senate staff only.

Chairman's Medicare Statement 

July 27, 2000


On July 12, 2000, I chaired a bipartisan meeting of the Senate Finance Committee to discuss a draft plan to reform the Medicare program. Since that meeting, I have received numerous comments on the proposal and ideas from Members regarding how best to proceed over the limited time remaining in this legislative session. This report summarizes the comments I have received from individual Members over the last two weeks and discusses next steps to be taken over the August recess.

First, it is my intent to provide Members with a modified version and more detailed description of the original draft Medicare Expanded Option plan proposal to consider over the August recess (see Attachment 1). The modifications further strengthen the Medicare+Choice stabilization and premium competition reforms, enhance competitive contracting options for the administration of the drug benefit, and improve the benefit modernization reforms on Parts A and B of the Expanded Option plan.

Second, private discussions with Members have revealed important areas of agreement and disagreement. Every Member agrees that seniors facing an undue financial burden in paying for their prescription drugs should receive assistance. However, some Members have raised concerns over the complexity of reforming Medicare and acting on a comprehensive drug benefit this session, indicating that it will be difficult to achieve a bipartisan consensus. I have sought to incorporate the areas of agreement and will discuss areas of disagreement below.

Third, I have submitted a short list of options (see Attachment 3), based on my discussions with Members, for the Congressional Budget Office to estimate. Such estimates are essential for determining both the overall plan's cost as well as beneficiaries' costs. I have requested that CBO score five selected reform options -- four permutations of the earlier expanded option plan and a proposal addressing low income assistance (see Attachment 2) -- and make the results available to the Committee immediately upon our return from the August recess.

The balance of this statement discusses issues raised by Members in my talks with them on the original proposal. Not only do these address that proposal, but they go to the heart of the debate over Medicare reforms more broadly.

It continues to be my strong preference to act on a comprehensive package and I will continue to work towards that goal.

Perspectives on Medicare Reform

First, I believe that the Medicare program is a fundamental part of our Social Security system and of enormous importance to the financial and health security of millions of Americans. However, it is clear as the program's costs and enrollment exceed all expectations that the program is under fiscal, administrative, and benefit design strains that must be addressed soon in a responsible, bipartisan fashion.

Two key concerns have been raised with respect to Medicare competition reforms and how best to provide access to outpatient prescription drug benefits to Medicare beneficiaries. They relate to the role that private insurers might play in competing to offer drug benefits, and the future of the Medicare+Choice program. Reconciling the different views I have heard from many Members will be the Committee's major challenge.

Role for the Private Sector in Providing Plan Choices in Medicare

There is a potential role for the private sector to participate in Medicare to help offer improved benefits at lower cost. This was the intent behind the Medicare+Choice program which was designed to permit private health plans to compete for enrollment by offering attractive and comprehensive benefits at an affordable price. Unfortunately, the rules under which such plans participate in Medicare are highly arcane and incompatible with the established business models by which private health plans compete to offer coverage through employer plans and other non-Medicare government programs. Consequently, about 151 plans have withdrawn from the Medicare+Choice program over the past three years, and approximately 1.7 million beneficiaries have found their enrollment and coverage disrupted.

These nationwide problems have been widely discussed and publicized, leading to a lack of public confidence in the ability or willingness of private insurers to partner successfully with the government in Medicare. Indeed, many withdrawing health insurance firms have said that it is the government that has been the more unreliable partner. Regardless of problems in the past, it is incumbent on the Congress to provide an appropriate business and competition model under which private health plans and Medicare can cooperate successfully. Many Members on the Finance Committee have urged that we take the following steps. These build upon the reforms embodied in the Breaux-Frist 2000 effort.

A New Health Plan Competition and Choice Model for Medicare

The draft proposal would establish a new business model for Medicare+Choice by adding new funding to stabilize the program, by closing the five-percent average spending gap between Medicare+Choice plans and the government-run fee-for-service system over a short period, and by introducing a premium competition model for plans. In addition, this program would be removed from the Health Care Financing Administration and run instead by a new federal Medicare Competitive Benefits Office in a model similar to what occurs today under the Federal Employees Health Benefit Plan. I am confident that these reforms will go far to restoring the promise of the Medicare+Choice program for providing beneficiaries with innovations in benefits and lower premiums, but it will take time to repair the damage that has been done to the public's confidence in private insurers partnering with Medicare.

My personal preference is for the private sector to contribute as much as possible to providing Medicare services, including a new prescription drug benefit. Many have proposed that insurers can partner successfully with government to offer drug-only plans to Medicare beneficiaries. I certainly support competition in principle and am open-minded to this concept. However, I think three tests need to be met in order to proceed successfully along these lines.

First, Members need to be reasonably assured that any business model proposed for this partnership role is one that the insurers and other qualified firms indicate they can and will widely accept for participation in Medicare.

Second, Members must also agree that such models will have the confidence of all the participants in Medicare, most notably beneficiaries, as the means by which their drug benefits will be delivered. I have proposed that a comprehensive and universal drug benefit be included in the Medicare program. This is due in part to reservations over whether proposed business models for firms offering drug-only plans will be embraced by those firms and whether they will be attractive and acceptable to beneficiaries.

However, please note that I am proposing major contracting reforms applicable to the future administration of all Medicare benefits, including any drug benefit. This contractor reform would permit an array of private firms that are currently prevented from competing to manage Medicare benefits to do so. It would also require the government to move away from "cost-based" contracting and instead to introduce innovations such as "incentive-based" and "shared-risk" contracts, leading to greater competition and efficiency in Medicare benefit management. With respect to the drug benefit proposal, this would permit pharmacy benefit managers (PBMs), insurers and other qualified firms to compete to manage the government drug benefit in a cost effective way. Under this approach, such firms are not competing directly for enrollment of individual beneficiaries, but are competing on price and service to win contracts to manage the government benefit.

Some are concerned that a basic, universal government drug benefit plan would not provide sufficient choice in drug benefit design. First, the Medicare+Choice program allows private plans to introduce choice in benefit design relative to the underlying plan offered by the government. However, the key new distinction that is sought after by advocates of drug-only plans is that we also permit drug-only plans to enter the program to compete directly for enrollment on a premium basis, not just for the right to provide effective drug benefit management services to the government plan. I am engaged in discussions with interested Members on how to create such direct enrollment drug-only plan opportunities, provided we can assure Medicare beneficiaries that in providing voluntary drug-only plan choices, a guaranteed drug benefit will be available throughout the country.

Third, Members should consider the relationship between free-standing drug-only plans and the objectives and design of the Medicare+Choice program to ensure they would not conflict with or undermine the future of the reformed Medicare+Choice program. A long-standing requirement in the Medicare+Choice program is that the underlying Medicare benefit plan offered by the government is the core set of benefits all plans, at a minimum, must offer. Since Medicare today does not cover outpatient prescription drugs, drugs are not required to be offered by Medicare+Choice plans, nor are they reimbursed by the program when they choose to do so. In that instance, plans offer drugs out of their own internal operating margins. The draft proposal would rectify this problem by including a core drug benefit in the underlying program and in turn, use that as the basis for reimbursing Medicare+Choice plans at higher levels than under current law. This is what happens with hospital, physician and other Medicare+Choice benefits today.

Under my proposed new Medicare+Choice model, plans could enhance the drug benefits, fill-in cost sharing liabilities, offer premium rebates and continue to introduce other benefit innovations over time. Most important, the drug benefit would be offered as an integral part of comprehensive benefit plans. Therefore, premium-based competition for Medicare enrollees is organized around comprehensive benefits and not any single benefit in isolation. This helps to stabilize premiums and permits improved coordination of drug benefits with other medical services provided by the health plan. In general, this has been the traditional model for competition in healthcare in employer and other federal and state government programs.

Some Members have suggested that outside of the Medicare+Choice model, there are still advantages in competition and benefit innovation with respect to drugs that could be served by providing an opportunity in Medicare for firms to offer drug-only plans. Questions have arisen, however, over how such plans would relate to the Medicare+Choice program. Discussions are ongoing to resolve those questions. As I indicated above, I am willing to consider an option to permit such opportunities provided there also is a government plan that beneficiaries can rely upon if that fails, and it is agreed that such approaches will complement, not undermine, our planned Medicare+Choice program competition reforms.

Commitment to Bipartisan Reforms in Medicare

In closing, I am impressed, as always, with the commitment my colleagues on the Finance Committee show towards Medicare and the other major social programs which we are privileged to oversee. The debate we are engaged in now over the form and substance of modernizing the Medicare program for the 21st century is a healthy and important one. Despite the challenges that have emerged, I will continue to seek bipartisan consensus on a comprehensive package of reforms in Medicare, including access to outpatient prescription drug coverage.

Staff Document Attachment 1

A Draft Proposal to Modernize and Secure the Medicare Program for the 21st Century 

Prepared by the Staff of the Senate Committee on Finance 

July 2000

Purpose: To provide a draft proposal to Members of the Senate Committee on Finance for modernizing the Medicare program.


Section 1. Medicare+Choice and Health Plan Competition Reforms

Section 2: The Medicare Expanded-Option Plan: Benefit Design Improvements Within the Current Law Standard Package, Including Access to Outpatient Prescription Drug Coverage and Enhanced Hospital Benefits

Section 3. Fee-for-Service Plan Management Modernization

Section 4. Medicare Governance

Section 5. Medicare Solvency Standards

Section 1. Medicare+Choice and Health Plan Competition Reforms

Present Law

Medicare+Choice plans are private insurers that contract with the Medicare program to offer Medicare beneficiaries privately-administered health plans that, at a minimum, provide the full range of Medicare benefits. Medicare+Choice plans compete against the government-administered plan and against each other to attract Medicare beneficiaries into their plans.

A Medicare+Choice plan can be a coordinated care plan (such as a health maintenance organization (HMO) or preferred provider option), a high deductible plan offered with a Medicare+Choice medical savings account, or a private fee-for-service plan. At the current time almost all Medicare+Choice (M+C) plans are HMO's. As of April 2000, there were 262 M+C plans, serving 6.2 million beneficiaries.

For each enrolled beneficiary, Medicare pays Medicare+Choice contractors a prospectively determined monthly capitation payment. These monthly rates are equivalent to a government-administered premium, the level of which is set largely by formula in the Medicare law. This rate is set at the highest of three amounts, calculated annually for each payment area in which a plan is approved to market M+C coverage to beneficiaries (generally a county): (a) a blended rate, which is the sum of a percentage of the annual area-specific Medicare+Choice capitation rate for the year for the payment area, and a percentage of the input-price adjusted national Medicare+Choice capitation rate for the year; (b) a minimum floor rate; or (c) a minimum percentage increase or hold-harmless rate, which is 102% of the previous year's payment.

These federal payments/premiums represent a complete shifting of financial liability or insurance risk from the government to the M+C insurers with respect to the covered health care costs of the individuals who choose to enroll in the M+C plan. Unlike other HCFA contractors that provide administrative support-only services to HCFA on the fee-for-service plan, the M+C insurers hold full financial risk for the provision of all Medicare benefits to the beneficiaries enrolled in their plan. In exchange, M+C plans must provide all necessary covered services for beneficiaries who enroll in their plan and are at risk if the cost of those services exceeds the premium payment they received. Under the traditional fee-for-service plan, the government holds all the financial liability for claims expenses of individuals covered by that program.

The major differences between the current Medicare+Choice program and one envisioned by reform advocates, is the way the premium payment to health plans is derived, and to what extent beneficiaries face different premium levels for different plan choices that may influence their enrollment decisions from year-to-year. Currently, Medicare+Choice plans receive an administered, county-based premium derived from a formula that is built upon Medicare fee-for-service expenditures in each county. For a variety of reasons, it is very difficult under such pricing formulas to create premiums that are reasonably consistent with what would have been produced by premium bidding and negotiation approaches. Premium formulas can lead to both overpayments and underpayments to plans. Bidding and/or negotiation are the more customary ways for health plans to operate in employer-based and other government-sponsored health plan systems.

Some proponents of change believe that premiums derived from health plan bids submitted to Medicare or other approaches more consistent with that of other major payers (e.g., employers, including the Federal Employee Health Benefit Plan) would be more efficient than an administered premium, because it would ensure that Medicare is paying an amount closer to a plan's actuarially based estimate of the anticipated costs of providing services to beneficiaries, plus administrative costs and retention margins (the latter are relevant to both for-profit and not-for-profit health plans.)

In addition, it is argued that such models provide a framework for beneficiary choices among plans that could introduce an element of price-sensitivity in their plan choices that is not achievable in today's Medicare+Choice program, for a variety of reasons. In all models of competing private health plans, attention must be given to tools for minimizing the negative effects of adverse selection, i.e., the effects on premiums due to certain plans systematically drawing enrollment of high-cost cases that are not offset by sufficient enrollment of persons who are average and below average users of services.

Reason for Change

While it has provided increased choice of Medicare-sponsored benefit designs for many Medicare beneficiaries, the Medicare+Choice program has not been without its problems. In the past, these have included plan pull-outs, reductions in service-areas, variation in benefit offerings from year-to-year, and uncertainty in beneficiary premiums. While the majority of beneficiaries have a Medicare+Choice plan available to them in their area (69%, according to MedPAC), there are large sections of the country without a Medicare+Choice option. Moreover, market-based issues such as provider contracting difficulties, drug and medical price inflation, and insufficient market share also affects plan participation. Still, it has been argued that allowing plans to adopt a more flexible, competitive business model, one that is more consistent with how they operate both in the private sector and in other government programs, would positively address many of these difficulties.

In confronting the problems of the Medicare+Choice program, those problems fall into two categories: Short-term efforts to stabilize the program and long-term reforms to improve the level of competition, quality and efficiency.

Determining the overall premium - This proposal, as does most reform proposals, including that of the Chairmen of the Bipartisan Commission on the Future of Medicare, the President's, and both Breaux-Frist proposals, recommends moving to a system where instead of "taking or leaving" a government-set premium set for a given market, plans develop and submit to the government their actuarially based premium reflecting the benefits they plan to offer, the population they expect to enroll, and the geographic areas in which they intend to offer their plan. These proposed premiums and benefit offerings would be reviewed by the government taking into consideration factors such as quality assurance, actuarial soundness, and plan solvency.

Determining the government contribution - Under current law, the government's contributions to Medicare+Choice plans are set in law and these rates are not negotiable. Further, the beneficiary sees no change whatsoever in his/her Part B premium contribution to Medicare, meaning that there may not be a clear price consideration for beneficiaries when deciding between remaining in the FFS plan versus enrollment in a Medicare+Choice plan. Even when a beneficiary chooses a Medicare+Choice plan, the government continues to collect the Part B premium, and then in a manner not discernable to beneficiaries, makes Medicare revenue allocation decisions between the traditional program and the Medicare+Choice system. In effect, the Medicare+Choice premium formulas can be thought of as the means by which the Medicare program distributes Medicare revenues behind the scenes to health plans.

This system tends to insulate beneficiaries from the principal purpose of premiums in a multi-plan system, which is to introduce price sensitivity to consumer choices, and to encourage choices that reward the most efficient plans with increasing enrollment. Reform advocates have proposed two major options to making these premium relationships more evident to beneficiaries. Linking the government contribution to the average premium in the system, or linking the government contribution to the cost of the fee-for-service plan. They differ principally over the extent to which the government's contribution exposes the traditional FFS plan's premium to direct competition with Medicare+Choice plans' premiums.

This proposal uses an approach similar to both the Breaux-Frist-2000 proposal and the Administration's approaches, which links the government contribution to the fee-for-service plan and in effect, trades off some efficiency gains for greater protection of traditional FFS premiums. The calculation of the beneficiary FFS premium remains unchanged. Private plans would receive a contribution based on a percentage of FFS costs. Beneficiaries in private plans would pay the difference between the total plan premium and the government contribution. Private plans would have the ability to offer additional benefits and/or reduced premiums, including premium reductions below the cost of the Part B premium. This approach leaves unchanged the current system for calculating Part B premiums, but permits Medicare+Choice plans to offer lower premiums or premium rebates. Beneficiaries would share in savings below FFS costs and the government would also benefit from lower, more efficient pricing.

 Determining the amount of benefit variation - The Bipartisan Commission Chairmen's, the President's, and the Breaux-Frist proposals use the current benefit package as the core benefit requirement and only allow variation that is more generous than current benefits. The amount of variation that is allowed is a matter of degree. The President's proposal allows the least benefit variation, especially in the proposed drug benefit. Coinsurance, benefit limits, etc. would be specified by statute. The Bipartisan Commission Chairmen's and the Breaux-Frist approaches allow the most variation. 

This proposal would retain the fee-for-service plan as the minimum benefit package that may be offered by Medicare+Choice Plans. This proposal establishes a new, voluntary Expanded Option fee-for-service plan with a modernized benefit design and a prescription drug benefit (see Section 2). This allows the M+C plans two different benefit designs to base their benefit offering upon, the Medicare Standard plan, and the Expanded Option plan. This approach allows more variation than the President's proposal, but still has specific minimum benefit parameters that the M+C plans must meet.

Explanation of Provisions

These provisions are designed to first stabilize the current Medicare+Choice program, and then initiates a major, new competitive premium system. They also eliminate a persistent and significant payment differential that exists today between Medicare+Choice plans and the government-administered plan to create a "level playing field" among all the plans.

 Phase 1 - Provisions to stabilize the current program:

Section 201 - Increase in National Per Capita Medicare+Choice Growth Percentage in 2001 and 2002.

This provision would restore the decrease in the annual update factor, equal to adjusted growth in Medicare fee-for-service expenditures per capita. Under current law, the annual update factors will be reduced by 0.5% in 2001 and 0.3% in 2002. This provision would eliminate the 0.5% reduction in 2001 and the 0.3% reduction in 2002.

Effective date. January 1, 2001

Section 202. Removing Application of Budget Neutrality in 2002. 

This provision eliminates the budget neutrality provision that results in counties with blended rates being reduced to levels equal to the minimum update (2%) or the floor payment rate. This provision would be applied to Medicare+Choice payment rates effective for payments in 2002.

Effective date. January 1, 2002

Section 203. Increasing Minimum Payment Amounts.

The minimum payment amount or floor payment would be raised to $450 in 2002 for aged beneficiaries, an equivalent percentage increase for both disabled and ESRD beneficiaries. After 2002, the floor payment would grow at the same percentage as the Medicare fee-for-service per capita growth rate.

Effective date. January 1, 2002

Section 204. Allowing Movement to a 50:50 Percent Blend in 2002.

Plans are currently being phased into a payment rate that is based 50% on local rates and 50% on national rates. The phase-in will be complete in 2003. This provision would allow plans the option of moving to the 50%:50% blend one year early. This is particularly helpful to plans operating in low payment areas.

Effective date. January 1, 2001

Section 205. Increased Update for Payment Areas with Only One or No Medicare+Choice Contracts.

This provision allows plans in certain counties a 2.5% minimum update, rather than the current law 2% minimum update, in years 2002 through 2003. This increased minimum payment would be available only in counties with one other, or no other M+C plan.

 Effective date. January 1, 2002 

Section 206. Modified Phase-in of Risk Adjustment.

The BBRA of 1999 established that the phase-in of risk adjustment on payments would have reached 20% of the total plan payment by 2002. This provision would hold the phase-in at 20% for 2003. Beginning in 2004, a health risk adjuster based on data from multiple settings is scheduled to replace the current risk adjuster, which is based only on data from inpatient settings. This provision would replace the old risk adjuster over a two year period, 2004 and 2005. In 2004, overall 30% of the plan payment would be risk-adjusted, 10% based on the new risk adjuster and 20% based on the old risk adjuster. In 2005, overall 40% of the plan payment would be risk-adjusted, 30% based of the new risk adjuster and 10% based on the old risk adjuster. In 2006 and beyond, the payment would only be based on the new risk adjuster and be phased-in in 10% annual increments until fully phased-in.

Effective date. January 1, 2003

 Section 207. Lifting the Ban on ESRD Beneficiaries Entering M+C Plans.

Beneficiaries with end-stage renal disease are permitted to enroll in a Medicare+Choice plan, pending the establishment of a separate health risk adjuster by the government which takes into account a beneficiary's specific health needs based on delivery of care in all settings. 

Effective date. Upon enactment. 

Phase 2 - Provisions to modernize and make the program more competitive:

Section 208. Competitive Medicare+Choice Program.

This provision establishes a new competitive system for Medicare+Choice plans, creating an environment where plans can compete with the traditional Medicare program based on price, benefits, and quality.

Beginning in 2003, a benchmark amount is determined for each county as the higher of the current payment rate (floor, minimum update, or blend) or 96% of the costs of delivering current Medicare benefits to beneficiaries in that area (county-specific monthly per capita costs(1)), adjusted for demographic factors, risk, and geography as required under current law. All payment factors impacting payment rates shall be published in advance during the same calendar year.

The benchmark amount set at 96% of current Medicare costs would grow over the next five years, until the government contribution to Medicare+Choice plans is equal to the government contribution towards the traditional plan.

Plans must submit an adjusted bid for the delivery of all current Medicare benefits and any additional benefits and services, to the government. Plan proposals must indicate whether they intend to offer coverage based on the standard Medicare benefit package without drugs, or the enhanced option Medicare benefit package, which includes drugs. Plan proposals must include information on the service area and plan type for each plan; the enrollment capacity (if any) in relation to the plan and area; the monthly plan bid for the provision of benefits; the actuarial value of the reduction in cost-sharing for benefits under Title XVIII and a description of the cost-sharing for these benefits; the actuarial value of any additional benefits and a description of cost-sharing of such benefits; the actuarial value of supplemental benefits; the monthly supplemental premium for such benefits; and any assumptions about the particular mix of beneficiaries they expect to select their plan.

Plans are paid the negotiated adjusted bid in full. Twenty-five percent of any difference between the plan's adjusted bid and the benchmark shall be returned to the Medicare Hospital Insurance Trust Fund, while 75% of the difference shall be returned to beneficiaries in the form of either reductions in premiums (including current Part B premiums), a rebate, reductions in cost-sharing, the offering of additional benefits and services (including outpatient prescription drugs) or a combination of any of the above. Any premiums associated with benefits and services exceeding the benchmark amount, including prescription drugs, shall be paid in full by the beneficiary in the same manner as beneficiary premiums are collected under Part B.

For purposes of determining the county-specific monthly per capita costs, the government shall establish these costs based on the formula for determining average adjusted per capita costs (section 1876 under Title XVIII), excluding indirect and direct graduate medical education costs. 

Effective date. January 1, 2003.

Section 209. Beneficiary Education Campaign.

Section 522 of the BBRA of 1999 established that each Medicare plan, public or private, would contribute to the beneficiary education campaign based on the percentage of all Medicare beneficiaries enrolled in their plans. This provision would allow the Secretary of HHS to use funds from the Part A (HI) trust fund to finance the Administration's share of the Medicare Beneficiary Education Campaign attributable to the Administration under section 522 of the BBRA.

Effective date. January 1, 2001.

Section 2. The Medicare Expanded-Option Plan: Benefit Design Improvements Within the Current Law Standard Package, Including Access to Outpatient Prescription Drug Coverage and Enhanced Hospital Benefits 

 Present Law 

The Medicare program has a complex benefit structure specified in considerable detail in statute since the program's inception in 1965. Medicare, authorized under Title XVIII of the Social Security Act, provides health insurance for over 38 million people aged 65 years and over and certain disabled individuals. Part A, Hospital Insurance, provides premium-free coverage for people who paid the Medicare payroll tax, for inpatient hospital care and care provided by skilled nursing facilities, home health agencies, and hospices. Part B, Supplementary Medical Insurance, is optional, and requires a premium payment. It covers physician services as well as services provided by certain non-physician practitioners, and such other items and services as durable medical equipment, clinical laboratory tests, and ambulance services. Beneficiaries are subject to cost sharing charges for most services. Part C provides private Medicare plan options for beneficiaries who are enrolled in both Parts A and B.

Among the structural changes to the Medicare program made by the Balanced Budget Act of 1997 was the creation of a new Part C, the Medicare+Choice (M+C) program. It expands the health plan options of Medicare beneficiaries to include the traditional fee-for-service program as well as several types of managed care plans. Not all of these options are available in all areas. Under current law, the standard benefit package outlined in the law is the package that M+C programs must offer as well. They have limited authority to enhance benefits, such as adding drug coverage or reducing cost-sharing in the standard package, but are not permitted to increase cost-sharing or otherwise restructure standard benefits, even where evidence suggests benefit design or efficiency might be improved.

With respect to drug coverage, Medicare beneficiaries who are inpatients of hospitals or skilled nursing facilities may receive drugs as part of their treatment. Medicare payments made to the facilities cover these costs. Medicare also makes payments to physicians for drugs or biologicals which cannot be self-administered. This means that coverage is generally limited to drugs or biologicals administered by injection. However, if the injection is generally self-administered (e.g., insulin), it is not covered.

Despite the general limitation on coverage for outpatient drugs, the law specifically authorizes coverage for the following:

Immunosuppressive Drugs. Drugs used in immunosuppressive therapy (such as cyclosporin) during the first 36 months following discharge from a hospital for a Medicare covered organ transplant. There is a temporary extension of the 36 month limit for persons otherwise exhausting their coverage in 2000-2004. In each of these calendar years there is an extension specified by the Secretary. Total expenditures over the 5-year period cannot exceed $150 million.

Erythropoietin (EPO). EPO for the treatment of anemia for persons with chronic renal failure who are on dialysis.

Oral Anti-Cancer Drugs. Oral cancer drugs used in cancer chemotherapy providing they have the same active ingredients and are used for the same indications as chemotherapy drugs which would be covered if they were not self-administered and were administered as incident to a physician's professional service. Also included are oral anti-nausea drugs used as part of an anti-cancer chemotherapeutic regimen.

Hemophilia clotting factors. Hemophilia clotting factors for hemophilia patients competent to use such factors to control bleeding without medical supervision, and items related to the administration of such factors.

The program also covers the following immunizations:

Pneumococcal pneumonia vaccine. The vaccine and its administration to a beneficiary if ordered by a physician.

Hepatitis B vaccine. The vaccine and its administration to a beneficiary who is at high or intermediate risk of contracting hepatitis B.

Influenza virus vaccine. The vaccine and its administration when furnished in compliance with any applicable state law. The beneficiary may receive the vaccine upon request without a physician's order and without physician supervision.

Payments for these drugs and immunizations are made under Medicare Part B. The program generally pays 80% of Medicare's recognized payment amount after the beneficiary has met the $100 Part B deductible. The beneficiary is liable for the remaining 20% coinsurance charges. These Part B cost sharing charges do not apply for pneumococcal pneumonia or influenza vaccines.

Finally, Medicare also pays for the following drug categories: (1) an injectable osteoporosis drug approved for treatment of post-menopausal osteoporosis provided by a home health agency to a homebound individual whose attending physician has certified suffers from a bone fracture related to post-menopausal osteoporosis and the individual is unable to self-administer the drug; and (2) supplies (including drugs) that are necessary for the effective use of covered durable medical equipment, including those which must be put directly into the equipment (e.g., tumor chemotherapy agents used with an infusion pump).

Reason for Change 

The Medicare benefit package has not kept pace with changes and improvements that have occurred in health insurance benefits design in the private sector. Not only does it omit significant benefits, but the premium, deductible and other cost-sharing aspects of the benefit could be designed to better promote appropriate utilization of services, and to bring the Medicare benefit package more closely into alignment with what is customary in other major insurance programs in government and in the private sector. Some payment obligations, such as the inpatient hospital deductible currently set at $776 per hospital admission, are viewed as quite high relative to what is customary in private health plans, where annual deductibles of $500 or less are more customary. Alternatively, the Part B deductible has risen to only $100 from its initial level of $40 in 1966, although Part B spending has increased many times over during the same period.

Medicare has a spell-of-illness concept for inpatient hospital services that can lead to payment of the inpatient hospital deductible multiple times in any given year depending on the timing of repeat hospitalizations. Further, Medicare does not cover catastrophic hospital stays, compared to most private health insurance which covers 365 days of inpatient care, where medically necessary. Coinsurance and copayment amounts for a variety of other current benefits have not been reassessed and recalibrated in accordance with the latest information on levels and use of services for many years. Also, private health plans typically contain annual limits on out-of-pocket spending to protect enrollees from excessive costs due to a catastrophic illness. Medicare's current package does not contain such protections.

Throughout the Senate Finance Committee's series of hearings on Medicare reform, experts have testified consistently that if the Medicare program were designed today, drug coverage would no more be excluded from the standard benefit package than would any other major component of medical care, such as coverage for hospitalization or physician services. However, in the absence of Medicare outpatient drug coverage, 69 percent of Medicare beneficiaries have secured some form of prescription drug coverage outside of the program principally through Medicaid, employer retiree health benefits, or individually purchased Medigap supplemental plans. The remaining 31 percent who lack any prescription drug coverage can face significant out-of-pocket costs, especially when those expenses are evaluated relative to the beneficiaries' level of income.

The Committee took testimony from the Congressional Research Service (CRS) indicating that the average beneficiary with drug benefits filled 5 more prescriptions per year than those without coverage (21 versus 16 per person in 1996). Drug spending is two-thirds higher for those with coverage than for those without ($769 per capita in 1996 versus $463 for those without). CRS also testified that persons in higher income brackets tend to have higher levels of supplementary coverage while the lowest levels of other sources of coverage are for those between 100 percent and 200 percent of poverty.

The Committee believes fundamental program reforms are needed to make drug coverage available to Medicare beneficiaries.

Medigap. Private insurance carriers marketing supplemental (i.e., Medigap) policies are permitted to sell policies that permit existing deductibles and cost sharing obligations to be insured against for a premium cost to the beneficiary. While it is widely held that individuals should be free to purchase insurance against risks of any cost they prefer not to incur, this is a practice that has been found to increase costs in the underlying Medicare program and in some instances, may not be cost-effective for beneficiaries. Currently, there are 12 model Medigap plans permitted for sale to beneficiaries. These plans are designed to dovetail with the benefit structure of the standard package, and changes to the standard package would require reassessment of and modifications to the approved Medigap models, as well. (Note: The National Association of Insurance Commissioners (NAIC) was consulted in 1990 over the original "policy forms" that could be sold in the Medigap market. The NAIC has recently initiated an effort to review these plans in order to make recommendations in 2001 to the Congress for updating and improving the Medigap market.)

Prior Congressional Action. The Congress began to address some of these benefit design problems under the Medicare Catastrophic Benefit Act of 1988 (see Tab 4). However, when that law was repealed in 1989, the standard benefit package improvements (other than the drug benefit) that had been part of that law were repealed as well. More recently, the Bipartisan Commission on the Future of Medicare, authorized in the Balanced Budget Act of 1997, examined a number of possible changes to the standard benefit package to bring it into conformance with what is more typical of widespread health insurance coverage in the under-65 population. This effort included consideration of combining the Parts A and B deductibles into one single deductible, modifying cost-sharing on selected services, expanding inpatient hospital coverage to 365 days per year, and adding an annual limit on catastrophic out-of-pocket beneficiary costs (for example, not to exceed $3,000 per year). Lastly, in its hearings, the Committee took testimony from a number of witnesses indicating that the standard Medicare package is long overdue for a comprehensive reassessment and modernization effort. For all of these reasons, it has been argued, independently of matters such as the addition of outpatient prescription coverage, that the standard Medicare benefit package should be updated in a number of areas.

Explanation of Provision 

Establishment of the Medicare Expanded Option Plan 

Program Design - In General. A new, modernized fee-for-service plan, called the Medicare Expanded Option plan, would be made universally available to all Medicare beneficiaries, along with the current Medicare fee-for-service benefit package, and the Medicare+Choice program.

The current Medicare benefit package would remain in place for any beneficiary who chooses to be enrolled in that plan, including any supplemental insurance such beneficiaries may obtain from other sources, such as employer-based health benefits or supplemental policies purchased in the Medigap market. However, for purposes of distinguishing among plans, the current Medicare fee-for-service program would be named the Medicare Standard Option plan. The current supplemental (Medigap) plans permitted in the law today would remain for the Medicare Standard Option plan. There would be no major changes made to the existing plan. Instead, the Medicare

Expanded Option plan would be offered to beneficiaries as an enrollment alternative on a voluntary basis.

The Medicare Expanded Option plan would incorporate two significant basic benefit improvements that would distinguish it from current coverage in the Medicare Standard Option plan: federally guaranteed outpatient prescription drug coverage and enhanced inpatient hospitalization benefits.

The Medicare Expanded Option plan would include a single annual deductible for

Parts A and B services and a separate drug deductible. To assist in managing program costs, with one exception, these deductibles could not be filled in by another insurer, though insurers could create products to otherwise wrap around the Medicare Expanded Option plan. The exception would be provided to low-income beneficiaries through the subsidy structure on the premise that such financial assistance is important to avoid access problems and outweighs the broader considerations of appropriate benefit design.

Chart Summary of Key Benefit Differences Between Standard and Expanded Option Plans. Following is a chart describing the proposed benefit and cost sharing differences in the Expanded Option plan relative to current law Part A and Part B benefits in the Medicare Standard Option plan. The details of the proposed outpatient prescription drug benefit in the Expanded Option plan appear in the section following the chart.

Major Benefit Areas


Current Medicare Plan


Expanded Option Plan

Plan Deductible $776 Part A deductible (per hospital admission)


$100 Part B deductible (for most Part B services)

$500 deductible for all Part A and Part B services (separate rules for drug benefit - see attachment)
Maximum Out-of-Pocket None None
Inpatient Hospitalization After deductible, $194 copayment for days 61 to 90; $388 copayment for days 91 to 150


No coverage for days beyond 150 for regular inpatient hospitalization, and the 60 reserve days may be used only once

365 days with no coinsurance, after deductible is met
Skilled Nursing

(100 day limit on coverage)

0-20 days = 0 cost-sharing


21-100 days = $97 per day for 2000 (1/8 the hospital inpatient deductible).

0 - 10 days = 10% of national average per diem Medicare payment ($25 for 2000)


11-30 days = 20% ($50)

31-100 days = $97 for 2000

Home Health Services 0% for home health and 20% for durable medical equipment (DME) $5 copayment per visit, with annual maximum of $100 per beneficiary. 20% for durable medical equipment.
Outpatient Hospitalization and Doctor Visits 20% after $100 deductible 20% coinsurance of allowed charge, after deductible is met
Outpatient Mental Health 50% coinsurance after $100 deductible 50% coinsurance, after deductible is met
Imaging/Clinical Laboratory Services


0% for clinical lab services (also not subject to Part B deductible)


Imaging and x-ray - 20% after $100 deductible

20% coinsurance of claims costing $50 or more, after deductible is met
Prescription Drugs Not covered with limited exceptions See following section

Outpatient Prescription Drug Benefit in the Medicare Expanded Option Plan

Program design: The drug benefit is an integral part of the Expanded Option plan. It is universally available to all Medicare beneficiaries through their voluntary election to join this particular plan. The drug benefit would be designed to provide more comprehensive coverage as beneficiaries' total drug spending increases. This design targets the most generous coverage to those who face the highest levels of total spending on prescription drugs, but still provides more modest assistance for front-end drug costs. It also provides the most generous coverage to those with low and middle incomes, but still provides some assistance to those with higher incomes. Low-income beneficiaries would benefit from lower cost-sharing and a higher premium subsidy.

Scope of benefit: The specific design of the drug benefit is still under consideration. Refer the Congressional Budget Office (CBO) scoring request for examples of the type of options under consideration.

Subsidies to Ensure Access for Low-Income Beneficiaries: Lower-income beneficiaries would be subsidized through modifications in the current qualified Medicare beneficiary/specified low-income Medicare beneficiary (QMB/SLMB) programs. Current Medicaid programs provide both premium and cost-sharing assistance for Medicare beneficiaries below 100 percent of poverty and premium assistance through 120 percent of poverty. In addition, some individuals with incomes between 121 percent and 135 percent of poverty receive premium assistance. This basic subsidy structure remains unchanged as it relates to the delivery of all benefits, with the exception of outpatient prescription drugs.

A new subsidy structure will be created, building on existing models, to provide beneficiaries with assistance in meeting costs associated with a new drug benefit. Any increase in premiums due to the drug benefit will be fully subsidized for all individuals with incomes up to 135 percent of poverty. Individuals with incomes between 136 and 150 percent of poverty would receive a subsidy for 50 percent of the beneficiaries' share of the total premium responsibilities. Other cost-sharing obligations will be fully subsidized for the dually eligible and QMB populations. Individuals with incomes above 100 percent of poverty but below 150% will have modest coinsurance responsibilities.

New subsidy assistance associated the new drug benefit would be 100 percent federally funded for subsidy-eligible individuals with incomes above 100 percent of poverty. For the dually eligible and QMB populations, the existing Medicaid match rate will apply.

Administration of the Drug Benefit: The new Medicare Competitive Benefits Office, described in Section 4 and separate from the Health Care Financing Administration, will provide for the administration of the prescription drug benefit through contracts with private sector entities, such as insurers and private pharmaceutical benefit managers (PBMs), for enrolled individuals residing in designated service areas. The Medicare Competitive Benefits Office would be required to contract with a number and array of contractors to achieve national coverage, and that is sufficient to ensure continuing competition and that no individual firms dominate the contract award process. The Medicare Competitive Benefits Office will competitively award contracts in a manner consistent with the broader Medicare contracting reforms described in Section 3.

The government will be required to actively seek and enter into shared risk or incentive-based arrangements with contractors selected to carry out pharmaceutical benefit management functions. Medicare+Choice plans competing to offer private plans assume full risk for all benefits offered under those plans.

MedPAC shall formulate recommendations related to contracting options that would stimulate competition between multiple PBMs in a given service area, with the goal of giving beneficiaries a choice between two or more benefit managers. Those recommendations shall be made to the Medicare Competitive Benefits Office and the Committee on Finance in the Senate and the Committees on Ways and Means and Commerce in the House of Representatives within one year of enactment. No subsequent legislation will be necessary for the Medicare Competitive Benefits Office to implement demonstration programs to test a more competitive system based on the MedPAC recommendations, but those recommendations would require legislation to be fully implemented nationwide.

Benefit management contracts could include incentives for cost and utilization management, such as bonuses or partial retention of savings achieved.

Functions of the benefit manager would include (as specified by the Medicare Competitive Benefits Office) some or all of the following functions: (1) negotiating prices for prescription drugs; (2) entering into participation agreements with pharmacies;

(3) tracking enrolled beneficiaries, coordinating benefits, drug utilization review, fraud and abuse control, and other activities as necessary to insure proper implementation of the program; and (4) administering and overseeing the beneficiary protections including implementing confidentiality safeguards and providing grievance and appeal procedures.

Benefit Integrity: In order to ensure as firm a financial underpinning as possible under the drug benefit into the future, all deductibles and other so-called "inside limits" defining the scope and average value of the drug benefit would be adjusted annually to grow at the same rate as the average per capita cost of the drug benefit. This would avoid the problems of either "benefit erosion" or "benefit creep" over time.

Premiums. The premium calculation for Part B spending attributable to enrollment in and spending for services provided under the Expanded Option plan would follow the current law model. For beneficiaries in the Expanded Option plan, the Part B premium would be added to the separately calculated beneficiary share of the premium expense attributable to the drug benefit and the sum would be the published premium for beneficiary obligation purposes.

Enrollment. In general, enrollment in the Expanded Option plan would follow the current law model with the following exceptions. First, the Medicare Expanded Option plan is not available to beneficiaries enrolled only in Part A of Medicare. Unlike under the Medicare Standard plan, there would be no Part A only enrollment permitted under the Expanded Option plan.

Second, in the year prior to the initial availability of the Expanded Option plan (January, 2003), the Secretary would be required to conduct an extensive, national, beneficiary education campaign to inform beneficiaries of their enrollment choices and to conduct an open enrollment season of at least three months duration during which current beneficiaries would be permitted to switch to the Expanded Option plan. Newly eligible beneficiaries would generally follow the current law model with the exception that they would now have the added choice of enrollment in the Expanded Option plan.

Entering or exiting the new option would parallel the voluntary nature of Part B. As under current law for Part B, beneficiaries would be given a choice of accepting or rejecting the new option,(2) when they first become eligible for the program. Again, like Part B they could drop out of the program at any time and return to the standard fee-for-service option. They also could pay a penalty determined by the Chief Actuary and join the program later. Under certain circumstances, they could join later without penalty for example, following the death of a spouse or the loss of employer-based coverage.

Effective Date.  The Expanded Option plan would be effective January 1, 2003.

Section 3. Fee-for-Service Program Management Modernization

A. - Contractor Reform

Present Law

The Secretary has the authority to use independent health insuring organizations to perform claims processing and other administrative functions for the Medicare Part A and Part B programs. The statute also contains a provision that allows for provider nomination for selection of an intermediary (Part A contractor) where the professional organizations of hospitals and certain other institutional providers choose claims processing contractors on behalf of their members. Medicare law generally requires intermediary and carrier (Part B contractor) contracts to be based on cost reimbursement. Contractors are paid for the necessary, allowed costs of carrying out Medicare activities but are not permitted to make a profit.

Reason for Change

As the Committee considers the option of moving the traditional fee-for-service program into an enhanced plan competition model, Committee Members expressed concern over whether the traditional fee-for-service plan has adequate contracting flexibility and benefit management tools to constrain costs and improve quality assurance under an increasingly competitive program orientation. These provisions are intended to provide the fee-for-service program flexibility to contract with entities performing crucial program support tasks under contract, such as claims processing, audit, beneficiary education, provider information and other responsibilities, in a more efficient, cost-effective manner. In addition, these provisions significantly expand the array of firms providing specialized and innovative health insurance benefit management services that will be eligible to contract with the Secretary to carry out needed functions in the fee-for-service plan options.

Explanation of Provision

The proposal establishes reforms to provide for increased flexibility in contracts with Medicare fiscal intermediaries (entities that process claims under Part A of the Medicare program) and carriers (entities that process claims under Part B of the Medicare program), including contracts with entities that perform both intermediary and carrier functions.

The Secretary would be permitted to enter into contracts with entities that are not health insurers. This section also includes a number of provisions to provide greater flexibility and accountability in contracting, including:

1) replacing the current system of nominating fiscal intermediaries with one under which the Secretary could contract with agencies or organizations to perform functions such as, (A) implementing appropriate payment amounts due to providers of services; (B) providing consultative services to enable entities to establish fiscal records and otherwise to qualify as providers of services; (C) serving as a communication point for Medicare beneficiaries and providers of services; and (D) performing audit functions with respect to provider records;

2) ensuring fiscal intermediaries would act as a single point of contact for providers; make their services sufficiently available to providers to ensure the efficient and effective administration of the program; and help resolve any issues raised by providers under Part A;

3) permitting the Secretary, in evaluating the performance of fiscal intermediaries, to solicit comments from providers of services;

4) replacing current requirements for standards and criteria (for fiscal intermediaries and carriers) with contract performance requirements and replacing references to "agreements" with references to "contracts"; and

5) clarifying the Secretary's authority to execute combined Part A and Part B contracts.

The proposal also would eliminate special requirements for termination of contracts with fiscal intermediaries and carriers.

Provisions would repeal requirements that fiscal intermediary standards include the extent to which the intermediary's determinations are reversed on appeal. The legislation would instead refine current contractor standards to include whether requests for exemptions, exceptions and adjustment to target amounts (for hospitals not under the prospective payment system) are processed within a specified number of days.

The requirement that fiscal intermediaries and carriers be paid on a cost reimbursement basis would be repealed.

Contracts would be subject to the competitive requirements that apply generally throughout the Federal Government. However, the Secretary would be permitted to renew contracts from term to term for fiscal intermediaries and carriers that have been performing satisfactorily, and functions to be transferred among fiscal intermediaries and carriers, without competition. The first round of fiscal intermediary and carrier contracts under the new provisions could be entered into without competition.

All contracting reforms affecting Parts A and B of the Medicare program would apply for all services under both the Medicare Standard plan and the Medicare Expanded plan, including drug benefits, described in Section 2.

Before implementation of the authorities granted under this proposal, the Secretary shall issue a strategic plan for administration of these provisions. The strategic plan shall be developed through negotiated rulemaking, and shall be issued for public review and comment.

Effective Date: The Secretary will be required to implement these changes within two years from the date of enactment. However, within one year of enactment, the Secretary is required to issue a negotiated Notice of Proposed Rulemaking for public comment, as required by the proposal.

B.- Increased Personnel Flexibility for the Health Care Financing Administration.

Current Law

The Administrator of the Health Care Financing Administration is authorized to employ staff according to Title 5 Civil Service provisions governing appointment. At present, the Administrator is at Executive Level IV of the Senior Executive Service. The Deputy Administrator is appointed by the Secretary of Health and Human Services. The heads of departments and agencies generally have authority over the various programs carried out by units under them, and are responsible for the appropriate coordination of those programs.

Reason for Change

Committee Members expressed concern over whether the Health Care Financing Administration has the appropriate flexibility in personnel policies to attract top candidates. Such candidates would enhance program modernization by bringing new professional qualifications to meet the changing management requirements of the Medicare program.

Explanation of Provision

This section would specify that the Administrator of the Health Care Financing Administration (HCFA), with the approval of the Secretary, would be authorized to employ staff in a flexible manner without regard to the Title 5 Civil Service provisions governing appointment (5 U.S.C. 51 and 53). Personnel modernizations also would raise the Administrator of HCFA to Executive Level III for a term of 5 years.

The Administrator would be required, not later than March 31 of each year, to submit a report covering the administration of programs overseen by the Health Care Financing Administration during the previous fiscal year to Congress and the President.

Effective Date: Upon enactment.

 Section 4. Medicare Governance Reforms

Present Law

The Administrator of the Health Care Financing Administration (HCFA) is delegated authority from the Secretary of the Department of Health and Human Services (HHS). When HCFA was created in 1977, it was authorized to have about 4,000 staff members and was responsible for administering the Medicare and Medicaid programs. However, in recent years, HCFA has assumed a significant increased workload related to the administration of Medicare, including both fee-for-service and managed care programs, Medicaid, the State Children's Health Insurance Program (SCHIP), oversight of clinical laboratories (CLIA), oversight of Medicare Supplemental (Medigap) insurance, certification and survey activities for nursing homes, and responsibility for issuing default regulations for the individual and small group health insurance markets applicable to states that do not follow federal minimum standards (HIPAA). HCFA currently employs 4,437 employees nationwide to carry out these varied tasks.

All major legislative, budgetary and regulatory initiatives of the Agency go through a review and approval process within the Department of Health and Human Services, with additional subsequent review and approval by the executive office of the President.

Reason for Change

Many believe that major reforms are required to modernize the Medicare program and keep it viable. Enormous fiscal and benefit design pressures will be exerted by the doubling of the beneficiary population, to over 80 million individuals, that will occur as Baby-Boomers retire. In less than twenty years, it is estimated that fully one-fifth of all Americans will be enrolled in Medicare.

It is crucial that there be governance structures in the Executive Branch that will effectively and efficiently manage the Medicare program. It has been twenty-three years (1977) since HCFA was assembled from its predecessor agencies, the Bureau of Health Insurance in the Social Security Administration and the Social and Rehabilitation Services Agency. Certain reforms under consideration, such as health plan competition and prescription drug benefits, may require resources, flexibility, and expertise that do not exist in HCFA today. In fact, it is possible that such proposals could more than double the current workload assigned to HCFA. Many question whether it is possible to instill the changes in HCFA that would be required to effectively manage these changes and instead have suggested other management approaches.

By contrast, others argue that multiple, conflicting assignments from Congress and an inadequate delegation of fiscal and human resources may better explain any perceived difficulties in HCFA's programmatic oversight.

Explanation of Provision

This section would establish a new agency, the Medicare Competitive Benefits Office (MCBO), within the Department of Health and Human Services.

The MCBO would be headed by a Director who would report directly to the Secretary of Health and Human Services. The Director would be appointed by the President to a fixed five-year term of office, subject to the advice and consent of the Senate, at Executive Level III. When the term expires, the Director could continue on until a successor was appointed. Anyone appointed to complete an unexpired term could be appointed only for the remainder of the term. The Administrator would become an ex officio member of the Board of Trustees of the Medicare Trust Funds.

The Director would be responsible for the exercise of all powers and the discharge of all duties of the MCBO, could establish and reorganize units within the administration, could prescribe rules and regulations under the Administrative Procedures Act, and could delegate authority to his or her subordinates.

The Director would manage Medicare+Choice health plan competition reforms and oversee the competition components of the Medicare Expanded Option program, particularly as they relate to competitive contract procurement approaches to managing the drug benefit. The Director's authority would include negotiating, entering into, and enforcing contracts with those entities choosing to offer competitive benefits to Medicare beneficiaries. The Director also would be authorized to carry out demonstrations related to programs under the MCBO authority, as well as the programs of all-inclusive care for the elderly (PACE), social health maintenance organizations (SHMOs), and Evercare. The Director would be required, not later than March 31 of each year, to submit a report covering the administration of programs overseen by the MCBO during the previous fiscal year to the Congress and the President.

A Deputy Director would be appointed by the Director to a fixed five-year term of office, When the term expires, the Deputy Director could continue in office until a successor was appointed. Anyone appointed to complete an unexpired term could be appointed only for the remainder of the term. The Deputy Director is to perform the duties and exercise the powers delegated to him or her by the Director.

The Director of the MCBO, with the approval of the Secretary, would be authorized to employ staff in a flexible manner without regard to the Title 5 Civil Service provisions governing appointment (5 U.S.C. 31) and pay (5 U.S.C. 51 and 53).

The Secretary of HHS would ensure appropriate coordination between the Director of the MCBO and the Administrator of the HCFA in carrying out the Medicare program.

The Secretary also would establish an appropriate transition of responsibility to redelegate the administration of Part C of Medicare (the Medicare+Choice program) from the Administrator of the HCFA to the Director of the MCBO. The Secretary also would ensure that information and data in the possession of the HCFA Administrator that is needed by the Director of the MCBO to carry out his or her duties will be transferred to the latter, or made routinely available under interagency agreements that ensure the efficient and effective administration of all aspects of the Medicare program.

Effective Date. Upon enactment, except that the Director and the Deputy Director cannot be appointed before March 1, 2001. Responsibility for Medicare Part C and related demonstration programs will be migrated to the MCBO effective October 1, 2001 and responsibility for Expanded Option benefits will become effective on October 1, 2002.

  Section 5. Solvency Provisions  


Present Law 

Each year, the Medicare Trustees publish reports on the financing status of the Part A Health Insurance program, and the Part B Supplementary Insurance program. For reasons of program design, the HI Trust Fund has become the principal focus each year of the discussion on the financing viability of the Medicare program, including projections for the date the trust fund will become insolvent. The 1997 report stated that under the Trustees' intermediate assumptions, the fund would become insolvent in 2001. Subsequent reports significantly delayed the projected insolvency date. The 2000 report (as amended) projects that the fund will become insolvent in 2025. The improvements can be attributed to a number of factors including improvements in the economy as a whole (which are reflected in higher payroll tax revenues), lower rates of growth in program expenditures, and the effects of administrative actions in areas such as deterring fraud and abuse.

A key factor was the enactment of the Balanced Budget Act of 1997 (BBA 97). This legislation provided for the transfer of a portion of home health spending (which at the time was the fastest growing component of Part A expenditures) from Part A to Part B. It also included additional provisions to stem the growth in Part A expenditures. These provisions included the implementation of new payment limits for home health services, a prospective payment system for skilled nursing facility services, and limits on increases in hospital payments. BBA 97 also established the Medicare+Choice program and modified the calculation of payments to managed care entities.

Following enactment of BBA 97, a number of observers claimed that the actual savings achieved by BBA 97 were larger than was intended when the legislation was enacted. In part as a result, legislation was enacted in 1999, the Balanced Budget Act of 1999 (BBRA 99), which mitigated the impact of BBA 97 on providers. Notwithstanding enactment of BBRA 99, the 2000 Trustee's report (as amended) delays the trust fund insolvency date an additional 10 years over that projected in the 1999 report (from 2015 to 2025).

The 2000 report states that the fund meets the Trustees' test of short-range financial adequacy for the first time since 1991. The projected long-range actuarial balance is moderately improved, but a substantial long-range deficit remains. The Trustees note that future operations will be very sensitive to future economic, demographic, and health cost trends and could differ substantially from the intermediate projections. In addition, they continue to raise serious concerns over growth in Part B spending which does not raise the same degree of "solvency" consideration because of the design which permits growing infusions of premium income and general revenue financing to meet program costs.

Reason for Change

The latest Trustees' report presents an improved but still troubled picture for Medicare. Although major constraints in Medicare payment rates were enacted as part of the Balanced Budget Act of 1997 (P.L. 105-33), HI's rapid growth is projected to continue indefinitely. Those changes and improved economic outlook extended the HI Trust Funds' projected insolvency point by 24 years (from 2001 to 2025), and cut the average 75-year deficit by almost one-half (from 2.10% to 1.21%); however, the remaining

deficit is large. On average, HI's costs would be about 37% higher than its income. By 2070, its costs would be nearly 2 times as large as its income. This pessimistic outlook reflects a generally aging population, the impact of the post-World War II baby boomers' retirement early in the next century, the persistent high rate of inflation in the health sector of the economy, and growth in the quantity of services provided. Most significant are the looming demographic shifts. Where there are about 4 workers supplying revenues to the program per beneficiary now, there will be only an estimated 2.3 workers helping to support each beneficiary in 2030.

Since SMI is financed with general revenues and premiums that are determined and reset annually, it does not have an explicit financing problem like HI. However, inflation and the rising demand for medical care as society ages are causing its expenditures to rise even faster than HI's. Projections show that SMI's expenditures as a share of GDP would double by 2025 (rising from .94% today to 1.95% in 2025). From 2000 to 2070, the combined costs of HI and SMI are projected to rise from 2.33% of GDP to 5.19%.

One of the key concerns about Medicare's financial solvency is the lack of an effective measure of overall program financial viability. Part A solvency is generally understood by the public and media and therefore provides an effective measure of Part A's financial well-being. But, Part B has no easily understood measure of financial viability. The automatic infusion of general revenues that keeps Part B solvent, also fails to provide an adequate measure of the program's increasing reliance on general revenues as a source of funds. An increasing reliance of general revenue financing, and the resulting decreased reliance on work-related financing, may be well within Congress' policy preferences, but discussions during the Bipartisan Commission revealed concerns about the "automatic pilot" characteristic of Part B general revenue financing.

One way to address such concerns, but still ensure a reliable flow of funds, would be through a more effective measure of Medicare's financial well-being. Such a measure would make Medicare's overall financial viability and shifting reliance on different revenue sources more apparent and easily understood.

Explanation of Provision

A new financial viability measure would be established and reported upon annually by the Medicare Trustees. The Trustees would report on the progress of the Medicare program assuming the HI and SMI Trust Funds were combined into a single trust fund, called the "Medicare Solvency Assessment Account". This combined account would show the various revenues coming into the Medicare program, e.g., payroll taxes, Part B premiums, general revenues, interest income. It would also show the various expenditures under the Medicare program by major benefit categories, e.g., hospital payments, physician payments, and prescription drug expenditures. It would indicate how Medicare finances were growing based on actuarial and demographic assumptions about the Medicare population and the economy as a whole. As with the current Trustees reports, projections would be made about the inflow of payroll taxes and Part B premiums.

Unlike other measures developed by the Trustees, this measure would show the combined Part A and Part B financial status, as well as an indexed measure(s) of the inflow of general revenues. For measurement purposes only, the assumed "government contribution" to the combined account would not be tied to actual Part B spending, instead it will be set at the contribution in 2000, indexed to some reasonable growth rate, such as the growth rate of health insurance in the private sector, the growth rate of employment-based health insurance in both the public and private sectors, or the Gross Domestic Product (GDP). It is important to note that none of this would in anyway affect the current process for calculating beneficiaries' premiums. The measure would indicate the ability of the program to operate within its current resources and serve as an early warning to the Congress and Administration if the program was about to require a significantly greater infusion of general revenues than it had it the past.

Effective Date. Upon enactment.


July 26, 2000

Mr. Dan Crippen
Director, Congressional Budget Office
405 Ford House Office Building
Washington, DC 20515

Dear Mr. Crippen,

The Senate Finance Committee is actively engaged in an effort to come to bipartisan agreement on Medicare reform legislation which would include outpatient prescription drug assistance to aged and disabled Medicare beneficiaries. Under my direction, the Committee began its formal deliberations early in July through consideration of a draft Medicare competition reform and Expanded Option plan proposal. The reform package would add funding to and initiate a premium competition model in the Medicare+Choice program. The Expanded Option portion of the draft plan would make available to all beneficiaries, on a voluntary enrollment basis, a fully modernized Medicare benefit package that includes a comprehensive drug benefit.

In taking comments on the draft proposal from the Members on the Finance Committee, important questions have arisen about how best to address issues of drug benefit design and cost for both taxpayers and beneficiaries. Therefore, I request that the Congressional Budget Office prepare detailed scoring information on our proposed Medicare program reforms, paired with selected drug benefit options. The options are described in the attachment to this letter. This will permit the Committee to have an informed discussion about the options from a beneficiary impact and overall budgetary standpoint.

I understand that this is complex work and may require a few weeks to complete. Therefore, I ask that it be done during the August recess and be ready for the Committee's consideration immediately upon our return in early September. I thank you in advance for your efforts and cooperation.


William V. Roth, Jr.



 Attachment 2 


  • Program Design: As Congress continues to work toward a consensus on incorporating a universally available drug benefit within a reformed Medicare program, a short-term intervention, operated outside of Medicare, could be enacted this year. This approach does not replace comprehensive reform but instead makes targeted relief immediately available to the most vulnerable populations until fundamental Medicare reform is signed into law. This targeted benefit is designed to sunset in 4 years or as soon as Congress passes comprehensive reform.
  • Eligibility: The new program would target Medicare beneficiaries with incomes too high to permit Medicaid eligibility, but low enough that drug costs are burdensome. At their option, states could cover populations with incomes up to 150% of poverty. States that have already expanded coverage could design programs to cover populations 50 percentage points beyond current eligibility levels. Furthermore, states would also have the option of extending eligibility to individuals with state-defined catastrophic drug expenditures relative to their incomes.
  • Administration: As with the state children's health insurance program (SCHIP), states would have the option of participating in a new program making funds available to provide benefits to lower-income populations. Under this model, states or groups of states would be given flexibility in program design, within federally-established parameters. Unlike SCHIP, there would be a default system in place to ensure coverage is available to individuals in nonparticipating states. This default option would give a new drug Board, outside of HCFA, authority to contract with a pharmaceutical benefits manager (PBM) to deliver a package of benefits based on one of the benchmark plans.
  • Scope of Benefit: Just as under SCHIP, states could design the benefit package within federal guidelines. For example, states could base the new drug benefit on Medicaid's benefit, on an existing state-only drug assistance program, on the drug benefit included in the most popular health plan afforded to state employees, on the drug benefit included in the FEHBP Blue Cross Standard Option, or on another model that secures approval from the Secretary of Health and Human Services.
  • Maintenance of Effort: Several states have created their own targeted assistance programs for lower-income senior citizens. Given the federal priority attached to making assistance available to lower-income Medicare beneficiaries, states will be able to access new federal matching funds for individuals already eligible for existing state-only programs.
  • State Match: Full federal funding will be available for the cost of providing drug coverage for eligible individuals with incomes up to 135% of poverty. States that choose to extend coverage beyond 136% of poverty would receive the enhanced federal matching rate currently used in the SCHIP program.

1.  In some counties, the FFS beneficiary population can have very different per capita costs from year-to-year, due to a small population or other circumstances. In these cases, the program's administrators could offer an alternative method of adjusting county-specific monthly per capita costs.

2.   This would also include access to M+C plans designed based on the enhanced option model.