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Statement of Frank Clemente, Director, Public Citizen’s Congress Watch, On Breaux-Frist I and II (S. 357 and S. 358) Before the Progressive Caucus Universal Health Care Hearing

May 1, 2001

Chairperson Kucinich and Members of the Black Caucus and the Universal Health Care Task Force: On behalf of Public Citizen, I want to thank you for holding this important hearing on the problems Americans face as a result of our nation's failure to create a universal system of health insurance for all our citizens. Public Citizen has a long history of working for a universal health care system in the United States. However, today you have asked me to testify on two proposals to reform the Medicare program offered by Senators Breaux (D-La.) and Frist (R-Tenn.). We believe that both S. 357 and S. 358, commonly referred to as Breaux-Frist I and Breaux-Frist II, would undermine the Medicare program and thus take us, as a nation, further away from the goal of assuring that all Americans have access to quality and affordable health care. In order to situate my criticism of these two bills, let me first set out Public Citizen's views on the current Medicare program.

Medicare Is a Great Success Story

Before Medicare was created, approximately one half of all seniors did not have health insurance because private insurance companies either refused to offer health insurance to seniors or charged exorbitant premiums. Many seniors who lacked insurance did not seek needed medical care. Since its enactment in 1965, Medicare has provided virtually all seniors a guaranteed set of hospital and physician benefits at a set price. This has led to a dramatic improvement in seniors' access to health care services.

At the core of Medicare's success is its social insurance structure. Before Medicare, private insurance had relatively little interest in insuring the elderly because of concerns about high costs. These concerns were not without reason. Seniors use more health care services than younger people, and among seniors a small percentage account for the majority of health care spending. In 1995, 5 percent of Medicare enrollees (which includes younger disabled individuals covered by Medicare) accounted for 45 percent of all program spending. Private insurers were concerned that those with the highest costs would be more likely to buy insurance than other seniors, making it difficult for them to cover the cost of paying claims and make a profit. This is known as the problem of adverse selection. Medicare was able to remedy the problem of adverse selection, because, through generous federal subsidies, it created a health insurance program in which virtually all seniors voluntarily participate. The program then contracts with hospitals, physicians, and HMOs to provide health care benefits.

The principle shortcomings of the Medicare program are its failure to cover outpatient prescription drugs and to cap beneficiaries' out-of-pocket costs. About one-third of all seniors are fortunate to have good supplemental coverage through a former employer that fills in these gaps. But most seniors either pay high premiums to private insurance, give up their choice of doctor by joining an HMO, or simply do not have coverage for prescription drugs and high out-of-pocket expenses resulting from catastrophic medical expenses.

Breaux-Frist I: A Giant Step Backward

Under Breaux-Frist I, the Medicare social insurance program that we know would be replaced by a premium-support system. In this new system, seniors and the disabled would receive a subsidy they would use to buy health insurance on the private market or from the traditional Medicare program. The Breaux-Frist I proposal rests on two central myths that must be dispelled:

• Myth #1: Medicare beneficiaries are looking to trade in the Medicare program for private insurance and coverage by HMOs.

• Myth #2: Increasing reliance on HMOs and private insurance plans will make Medicare more efficient, allowing Medicare to save money without reducing the benefits it offers to America's seniors and disabled.

Medicare beneficiaries are not looking to trade in the Medicare program for private insurance coverage and HMOs.

The proponents of premium support proposals claim that they will improve the Medicare program by offering seniors more "choice." But seniors and the disabled do not want the kind of choice the Breaux-Frist I proposal offers, which is more opportunity to "choose" between a confusing set of HMO plans and less opportunity to choose their own doctor. It does this by creating economic incentives designed to encourage seniors to leave the traditional Medicare program and join an HMO. Joining an HMO often means that seniors must give up a relationship they have had with a trusted doctor, because their doctor is not a member of the HMO.

Most analysts agree that Breaux-Frist I would make it more expensive for beneficiaries to stay in traditional Medicare. One analysis has found that beneficiaries who remain in traditional Medicare would face premiums as much as 47% higher than under current law.¹ This is in part due to the expected segregation of sicker seniors into the traditional program and the requirement that the traditional program operate like a private insurance company -- setting its premiums at a level adequate to cover its expenses. Breaux-Frist I compromises the social insurance nature of Medicare and creates a dynamic in which healthy seniors would be attracted to low-cost HMOs in which they could save money while sicker seniors would remain in the traditional fee-for-service Medicare program, because it allows them to choose their own doctor.

The proposal allows substantial variability in benefits among plans. Therefore, beneficiaries will no longer be guaranteed access to a defined set of hospital and physician benefits at a set price. The benefits seniors and the disabled receive will depend on what plan they are able to afford, undermining a central tenet of Medicare and putting people's health at risk should they be underinsured. A prescription drug benefit will be created under Breaux-Frist I, but the generosity of that benefit will also be dependent on what plan a beneficiary is able to afford. Also, by encouraging beneficiaries to leave traditional Medicare, beneficiaries lose the ability to get the services they need, because HMOs, even though they may "cover" certain benefits, routinely deny patients benefits in order to reduce their costs.

Finally, the HMOs and private insurance plans that the Breaux-Frist I proposal relies on are unreliable. Medicare has guaranteed hospital and doctor benefits for over 30 years. In contrast, despite the fact that they are overpaid based on the populations they serve, according to the General Accounting Office and the HHS Inspector General, HMOs have been withdrawing from the Medicare program in record numbers. From 1999 to 2001, a total of 1.6 million seniors will have been forced to look for new providers after their HMO reduced or ceased to provide service under the Medicare+Choice program.

Breaux-Frist I gives seniors exactly the opposite of what they want instability in their health care insurance arrangements and less opportunity to choose their own doctor.

Reliance on private plans does not save Medicare money.

Part of the impetus for Medicare reform by Senators Breaux and Frist and others has been concern that the Medicare program's costs will rise dramatically in the future, making current benefit levels unsustainable. However claims that Breaux-Frist I will lead to dramatic savings in the Medicare program by using the magic of market competition to control costs do not bear up under scrutiny. Since 1970, the Medicare program has done a better job at controlling overall costs than the private sector. In both 1998 and 1999 Medicare's cost increases were below the rate of growth in the private sector. In 1999, Medicare reduced its spending in comparison with the previous year, while serving the highest cost populations, seniors and the disabled. By contrast, the cost of private insurance, which covers the health care of the general population, increased.²

The Breaux-Frist I proposal creates no magic efficiencies. Its reliance on private plans will mean cost controls through denial of care. The only way relying on "competition" between private plans will save Medicare money is if the private plans deliver less care, pay providers less, or demand more cost sharing by beneficiaries. There simply is no free lunch, no magic efficiencies gained from private plans. For the most part, health care is not like making a car where it is possible to increase efficiency and deliver the same product at a cheaper cost. In health care, the only way to significantly reduce costs is to deliver fewer services, limit the number of new more expensive innovations that are covered, or pay providers less to deliver health care services.

HMOs control costs through denial of care. A 1996 survey of Medicare beneficiaries conducted by the Physician Payment Review Commission found that Medicare beneficiaries enrolled in HMOs were three times more likely than those in traditional Medicare to report problems getting medical care.

The Bush administration, which supports the Breaux-Frist I model, has argued that transforming Medicare into a premium support system will save a large amount of revenue for the Medicare program. However, Senator Breaux himself has publicly disagreed with these claims by the administration.³

Breaux-Frist II: A Step Backward

The Breaux-Frist II proposal includes less dramatic changes in the Medicare program, but would encourage beneficiaries to join HMOs. Also, instead of providing a prescription drug benefit as part of the Medicare program, it would give seniors and the disabled a subsidy to buy prescription drug coverage from private insurance companies or HMOs, as did the House Republican proposal from the last Congress, H.R. 4680. In those areas where private plans would be unwilling to offer prescription drug insurance, additional government subsidies would be available to encourage them to offer that coverage.

There are several problems with the Breaux-Frist II proposal:

First, the health insurance industry has indicated that it will be reluctant to offer drug only insurance. Because of problems with adverse selection, the industry fears that only those seniors who are most in need of prescription drugs will want to buy this insurance, making any plans offered very expensive. Therefore, the industry does not see drug-only insurance as a viable line of business. The president of the Health Insurance Association of America has called the idea "an empty promise to America's seniors."

Second, few seniors will participate, because they will get poor value for their premiums. Few seniors participate in private Medigap insurance plans that currently offer prescription drug coverage. About one-quarter of Medicare beneficiaries have private Medigap insurance. And of those who have bought this insurance since 1992, only 9% elected to buy policies that included prescription drug coverage. The cost of these policies, no doubt, is an important cause of low enrollment. As a result, in part, of problems with adverse selection on average a Medigap plan that offers prescription drug coverage costs $1,000 more per year than a plan without that coverage.

Third, private insurance for prescription drugs is very inefficient. Private Medigap policies today spend approximately 35 cents out of each premium dollar on agents' fees, marketing and advertising, administration, and profits -- not on health care. This compares very unfavorably to Medicare's approximately two percent administrative costs.

Fourth, the proposal fragments Medicare's buying power, making cost control difficult and dramatic premium increases inevitable. The drug industry objects to providing drug coverage through Medicare, because it fears that Medicare would act aggressively to control the cost of prescription drugs. Conversely, a proposal like Breaux-Frist II, in which the federal government subsidizes private insurers offering insurance for prescription drugs, will mean more money will be spent to buy the drug companies' products, and the buying power of Medicare's 40 million beneficiaries would be fragmented.

This is a win-win for the drug industry, more revenue and less of a threat that Medicare would use its buying power to negotiate lower prices. The problem of escalating premiums that the Breaux-Frist II proposal will face has recently been demonstrated by the large premium increases experienced by existing private insurance plans that offer prescription drug coverage. A recent study by Weiss Ratings Inc. found that premium increases for private insurance Medigap plans that include prescription drug coverage were dramatic, averaging 37.2% from 1998 to 2000.

Fifth, Breaux-Frist II creates more bureaucracy and bewilderment for seniors. A drug benefit offered by private insurance means that beneficiaries will have to deal with another bureaucracy, causing seniors and the disabled more confusion about who is responsible for their health care coverage. If the benefit were offered through Medicare, just like hospital and physician coverage, Medicare beneficiaries' confusion would be minimized.

Sixth, Breaux-Frist II's proposed federal "fallback" mechanism is an invitation to providing corporate welfare to insurance companies. In an attempt to deal with the problem of health insurance companies' unwillingness to offer a stand-alone drug benefit, Breaux-Frist II contains a provision to offer additional subsidies in the form of increased underwriting for plans if they are willing to offer coverage in areas where other plans are not. This creates a mechanism by which insurance companies could extort additional subsidies from government by threatening to back out of the market unless their demands were met. It also would decrease the incentive for companies' to develop well thought out business plans, because they will know that if they begin to fail they can always go to the government and request additional funds.

Breaux-Frist I and II share a fundamental flaw. They both would increase the role of private companies in offering health insurance to America's seniors and the disabled. America's experience with private insurance indicates that this is simply not a good way to proceed. Unlike Medicare, private companies are not inclined to offer generous health insurance benefits at an affordable price to America's seniors and disabled. A fundamental truth about private enterprise is that it is unstable. Private businesses fail and often decide to change the products they offer. This is fine for deodorant or hairspray, but when we are choosing health care for the most vulnerable in our society, seniors and the disabled, that is a different matter. Here, continuity must be assured.

Part of the impetus behind the Breaux-Frist reform proposals have been claims that they would save the Medicare program substantial sums of money, helping to cope with the influx of baby boomer retirees. Unfortunately, as noted above, a "reform" based on private insurance companies would not only be less stable but also less effective than the Medicare program at controlling health care costs. Experience indicates that Medicare, through its contracts with doctors and hospitals to provide health care services, has done a better job than private insurance at controlling costs. If a drug benefit were offered through Medicare, instead of through private insurance, as they are in the Breaux-Frist proposals, Medicare beneficiaries would enjoy guaranteed coverage and taxpayers could be assured that the program would include effective cost control mechanisms.

¹ Jonathan Oberlander, "Medicare Reform; Is Premium Support the Right Medicine for Medicare?" Health Affairs, September/October 2000.

² Marilyn Moon, "An Analysis of Medicare and Private Expenditures," Kaiser Family Foundation, September 1999.

³ Congress Daily 3/8/01

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